Prior to this interview, I had never heard of McClure who is “an entrepreneur and prominent angel investor based in the San Francisco Bay Area, who founded and runs the business incubator 500 Startups. He is often described as one of the super angel investors.” Well, things, can’t be that bad when you’re a super angel. But McClure was a late bloomer, in the sense that it took time for him to build up the right set of skills for the right moment in time. He mentions this explicitly in the interview when he says that timing matters quite a bit. Paypal, for example, at one time was going to make mobile payment systems. Only just now is that coming to the market and the original design was for a company that no longer exists.
McClure has found his success running 500 Startups where he learned, “the biggest companies are often outliers.” It’s hard – maybe impossible – to sniff out the next big thing. Even McClure, who has decades of Silicon Valley experience (and remember that Silicon Valley has only been called that since the early 80’s) makes mistakes. He missed investing in Uber and calls it “the single biggest fuck-up of my investing career.”
That career in technology started when he sold his own company, then moved on to Microsoft, and eventually the Director of Marketing at PayPal. At these places he rubbed shoulders with some of the most successful entrepreneurs in technology but faced “a lot of mental challenges.” It’s hard to be around the best, see what they are doing, and then not compare yourself. Well, that’s an ultra-FWP (first world problem), you’re thinking. We’d do anything to be in his shoes. Maybe. It really depends on where you’re sitting to begin with.
Writing in the LA Time, Michael Shermer explains:
Would you rather earn $50,000 a year while other people make $25,000, or would you rather earn $100,000 a year while other people get $250,000? Assume for the moment that prices of goods and services will stay the same. Surprisingly — stunningly, in fact — research shows that the majority of people select the first option; they would rather make twice as much as others even if that meant earning half as much as they could otherwise have.
What? Yup. It turns out that when we think about things, we often compare them to some baseline/normal/traditional level rather than absolute level. The woman with one million today feels great if yesterday she had half a million but awful if yesterday she had ten.
H.L. Mencken noted this in his definition of wealth: “Wealth – any income that is at least one hundred dollars more a year than the income of one’s wife’s sister’s husband.”
Rather, don’t look at what other people do or have done:
“If you look at someone from the outside and they have a successful business or blog and a podcast and you’re like wow, there’s no way I could do that. I felt exactly the same way…. but jump in anyway.”” – Ramit Sethi (episode # 36)
McClure kept working, and looked for “an areas I’m actually doing well at.” Then a stroke of “luck” when Sean Parker asked McClure to join Founders Fund. He did.
Then in 2010 he stared 500 Startups, their boilerplate reads:
“We’re based in Silicon Valley, but you can find the #500Strong family of mentors, investors, and founders all over the globe. In the last 4 years, we’ve invested in over 700 companies in more than 40 countries. We have offices in Mountain View, San Francisco, New York City, and Mexico City.”
500 Startups began, McClure says, because of his particular set of skills. “I had both the engineering and marketing side and there weren’t that many people doing investing that had both disciplines.” McClure had what Scott Adams articulates as the right combination of skills.
“I’m a perfect example of the power of leveraging multiple mediocre skills. I’m a rich and famous cartoonist who doesn’t draw well. At social gatherings I’m usually not the funniest person in the room. My writing skills are good, not great. But what I have that most artists and cartoonists do not have is years of corporate business experience plus an MBA from Berkeley’s Haas School of Business.” – Scott Adams
But wait, there’s more!
McClure had also taught a class at Stanford University and had been organizing community events. He also had some “very interesting experiences that have served me well.” His intersection of skills included teaching, business, coding, and communal. Tim Ferriss had a similar path, using community as a tool to connect. Ferriss got involved with Silicon Valley Association of Start-up Entrepreneurs and began taking any job they offered. Soon he was organizing conferences and consequently meeting the speakers. One of which, was Jack Canfield (episode #90).
Toward the middle of their conversation James notes that “nothing is predictable” and McClure chortles, like an east coaster just told him that Californian has wonderful weather.
He explains the iterations that PayPal alone went through. “There was two year with three to five business models, shifting strategies and iterations before they found something that caught fire” McClure says. “That’s pretty typical.”
How then can you know what to invest in? James asks. MCClure says it’s hard. “It’s hard to know the person.” At 500 Startups they look to whatever track record might exist, what school they went to, and what they’ve made in the past.
Once someone gets in, they only succeed about 15% of the time. McClure sounds pretty reasonable and realistic when he explains that number, which isn’t often the case. What usually happens is we negelct the base rate. For example, “John is a man who wears gothic inspired clothing, has long black hair, and listens to death metal. How likely is it that he is a Christian and how likely is it that he is a Satanist?”
Duh, John has his wallet hooked to a chain. Guaranteed. Au contraire mon ami. Think instead of how many Christians (2B) there are and how many Satanists (~15K) there are. It is far more likely that John is a Christian with an affinity for black (which does go with everything). What we did there was take the sample in front of us and think deeply about that rather than thinking widely. These examples are fun, let’s do another:
Linda is 31 years old, single, outspoken, and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in anti-nuclear demonstrations.
Which is more probably, Linda is a bank teller or Linda is a bank teller and is active in the feminist movement? Wikipedia has the deeper answer and if you like these sorts of things, add David McRaney’s You are Not So Smart podcast to your list of ones to listen to.
Bringing this back to McClure, we could expect that he would exhibit some bias toward expecting a higher success rate because he’s involved with a company. We typically overestimate this for a few reasons. One is that he succeeded in the past. If I can build and sell company X then I can build and sell company Y the thinking goes.
Another reason, Economist Daniel Kahneman explains is that from the inside of a group we miss the view from the outside, we are overly optimistic, and we underestimate how long things will take.
This part of the notes is so long because it’s so important. This is a bias that it appears McClure has recognized and taken into his calculations. Like a chef might rework the menu because of a lack of lobster, McClure has reworked an investing philosophy. It’s not that no one will order lobster (that McClure will always avoid mistakes), it’s just that there’s some safeguards against everyone ordering the lobster (McClure making the same mistakes over and over).
James asks for suggestions about what might be one of the next big things, and McClure guesses home automation (just not yet), hardware and software combinations, and SAAS for busines. Steven Kotler (episode #10) had his own predictions.
About new business, McClure thinks that the ideas are new, but maybe not the technology behind them. “There’s nothing technically new about those businesses (Uber, AirBnb).” Rather it’s the synergy of ideas. PayPal was ready for mobile payments, but mobile wasn’t. Mitch Lowe (episode #67) had built a prototype of the Redbox rental machines for VHS, but the technology wasn’t there. A current example is Alex Blumberg’s (episode #70) Gimlet media which is increasing their pace because of the success Serial had. But Blumberg wouldn’t have a podcasting company without a mobile way for people to download them. I was listening to podcasts in 2005 and in a decade, we’ve come a long way. Timing matters for technology.
One bit of parting advice from McClure is to write about what you’re doing. Austin Kleon advocated for this in his interview with James and it’s something Gary Vaynerchuk (episode #2) has been shouting, whispering, and vining from every possible channel. (And your channel and message matters.) If nothing else, it’s a great way get your message out without relying on the press, said Jason Calacanis (episode #77).
Thanks for reading. If I nixed, neglected, or narrowed my focus too much, let me know: (559) 464-5393, @mikedariano, or in the comments. Plus, our book club begins soon. Sign up here.
One final story that didn’t fit. Uber comes up a few times in this conversation and a story about founder Travis Kalanick comes up around the 14:00 mark of this StartUp episode. Understanding it, will help you understand Uber.
McClure also had this reading suggestion:
@mikedariano see “Lots of Little Bets”
— Dave McClure (@davemcclure) March 18, 2015