The Seed Fund That Returned 60x: How Dave McClure Found Twilio, Lyft, and Credit Karma

I used to get laughed out of the room a lot of times when I said the name. Literally people would laugh in my face when I said 500 Startups. I think the thinking came out of the early days of my angel investing and then later when I worked at Founders Fund a little bit. I kind of started doing angel investing the last few years I was at PayPal. We had made a little bit of money from the IPO. Folks like Peter and Reed were very active angel investors. There's a whole bunch of us at PayPal who kind of followed in their footsteps and started doing angel investing really when we didn't know what the hell we were doing. I had a background in engineering and programming and then a little bit in marketing. So I kind of felt like I had some insights that were interesting and that got me into some deal flow. I really did not know very much about investing or the structure of deals and certainly screwed up a lot of the early investments that I made. Gradually I started investing alongside some other really great people. Got to get into some deals with Ron Conway and Josh Capman at First Round and Jeff Clevy and Aiden Senit and some others. You learn by doing in many cases. But my first 15 to 20 investments, most of them failed. And even when I was working at Founders Fund, although I had a really great portfolio that returned 60 to 80x, I made a lot of investments that didn't work. And so my takeaway from a math background was, well, I need more shots on goal. You do see outliers, but you see them very infrequently. And so I felt like most people's early stage portfolios were just really undersized. I started to see what Ron Conway was doing at SV Angel and Josh Koffman at First Round and then Paul Graham at YC and later Naval at AngelList and they all kind of independently came to this idea of doing lots of little bets. Part of that was also because the cost of computing and doing startups was coming down and that happened with the advent of AWS and open source computing and just a lot of other models that happened between say 2005 to 10 maybe. And so the cost of building startups was coming down and so the ability to do small tickets into a large number of companies was actually a lot more doable than it had been ever in the past. So kind of all those things happened around the same time and we came up with a name. It's kind of funny actually, Katon Shaw was actually a friend of mine who helped me come up with a name. I helped name his company which was Kissmetrics at the time. He helped name my company because I'd been doing 500 Hats. But it really was just like, yeah, let's make a lot of bets and we know that only a few of them are going to get to the next level.

Well, I think the idea was, if you're familiar with the term product-market fit, which kind of got started around that day, there was a lot of us who were doing metrics-related thinking. Eric Ries in particular, Steve Blank, Katon Shaw, several others. We actually did a conference called Startonomics way back in the day, I think 2007 or 2008 or something. I ended up teaching a class at Stanford. We taught a class on Facebook apps, which is kind of crazy, strange also. But it was all about thinking about distribution and lots of experiments. But specifically we decided, hey, we would make a lot of bets on companies and people pre-product-market fit when we could see a little bit of the product and maybe some users and maybe some revenue, but often not much. And then if they got to sort of product-market fit evidence based on usage or retention or monetization or growth in any one of those areas, then we would double down on it. And that was kind of the basic idea. Lots of little bets, probably a few of them will scale up and work, and then we'll double down on those. And that was kind of the idea.

Twilio, Lyft, which at the time was called Zimride, SendGrid, and Credit Karma, and then Life360, which took a longer road to get there. Basically did about 40 investments when I was working with Founders Fund. About 2 million of their money and a little bit more from Excel because I had run the Facebook fund program for a little bit. But out of those 40 investments, we got four, eventually five unicorns. Kind of crazy returns. I invested about 2.5 million and returned about 180 to 200 million. Okay, just depending on the math. Took a long time. You didn't know at the beginning, but we kind of got lucky that hit rate of 10% seed stage to unicorns was pretty good, over 100x returns on four of those.

By the way, I don't think I'll ever be that good again. That was like a moment in time. I think the combination of being in that nuclear winter period, 2008 to 10, was when I made those investments. Working at Founders Fund, which had a great brand, a lot of visibility, and just my access to a lot of nerds on the ground, gave me a unique opportunity to invest early. All four or five of those companies were done at valuations below 5 million. I think we got lucky and found some smart people in the right moment in time. But it did take for some of those investments over 10 years.

Twilio in particular was just an amazing story because Jeff Lawson is and was a fantastic entrepreneur. I think he's working on nuclear fusion these days. But I remember distinctly multiple people referred me to Jeff because I'd been doing developer marketing at PayPal and he was working on developer APIs and evangelism. And I just thought, hey, I don't know about telephony. This isn't my gig. So I kind of didn't take the meeting the first couple of times. And finally Mitch Kapoor, who I'd been wanting to get invested in my fund, said, 'Dave, take the meeting and meet him.' This is before I joined Facebook. I think Jeff said on the first meeting with him, I fell asleep like three times. For some reason, I'd been up all night the night before, but I literally fell asleep on him during the meeting. But I gave him some feedback and then the next day he had taken my advice and then did way more than what I had suggested. In 24 hours he turned around some deck or slide and made it a whole bunch better. And I was like, 'Wow, this guy's really sharp.' I do remember looking at some hand-drawn slides on my living room floor with my kids who I think at the time were probably like three or four years old and Jeff with two of his founders was there. And then later this company has thousands of people and goes public. Ground floor opportunity to see what a world-class entrepreneur looks like in the early days.

I like making money. I don't have any problem with that part of it. There are faster and easier ways to make money than investing in early stage venture capital. We're still waiting for the Canva IPO. It's been almost 15 years since I made that investment. Talks was also, I think, 14 or 15 years ago. I certainly have perspective now having done a couple thousand investments. The ones that do win often take 10 years or more than 10 years.