Dave McClure on angel and VC bubbles

Founder of 500 Startups says seed-stage valuations are double what they were 18 months ago

Investor interview by Bambi Francisco Roizen
December 8, 2010
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If there is one area along the investment spectrum that's getting a lot of attention, it's the seed- to early-stage. Look no further than the recent entrants into this space, including traditional VCs, newly-minted millionaires and Super Angels. Greylock recently launched its Discovery Fund to invest as little as $25,000 into startups, and ex-Googlers, including Thomas Korte, are gearing up to put some $25,000 of their own money into each startup enrolled in AngelPad's 10-week incubator program. And, Super Angels, like Aydin Senkut, are raising funds.

Everyone's getting into the game and is making investing challenging for investors, like Dave McClure, prolific-angel-investor-turned-venture-capitalist. Dave, an investor in Mint (sold to Intuit), SendGrid, Crowdflower and Slideshare, to name a few, is the founder of 500 Startups, which is earmarked to be a $30-million fund.

"Prices are higher," said Dave, in our interview. The pre-money valuation range for seed deals are going for $3 million to $6 million, compared to $2 million to $3 million just 18 months ago. The reason that prices are getting bid up is because there are more people involved in the ealier stages, he said. Making matters worse, angel investors are not as price sensitive as VCs, and less concerned with the relative perspective on valuation and returns, said Dave.

He'd know. Prior to managing his fund, he'd consider himself one of those less-disciplined angel investors.

But fund managers, like himself, who invest between $25,000 and $250,000 of other people's money need to "maintain some financial discipline in terms of valuation in order to achieve target returns for their investors."

They also need a hook.

Unlike a lot of investors who seek to hit homeruns, or invest in hyper-growth stories targeting big macro markets, Dave's approach to investing is atypical and perhaps heretical in the Valley, but quite frankly commonsensical, given the shift in corporate R&D strategies.

"Our fund is more open to potentially smaller market-sized opportunities," he said, explaining that more non-tech companies will be looking to acquire new technologies. And Dave's bet is that his startups will be ripe for sale.

Finally, while prices are high in the earlier stages of investing, Dave points out that over the past three months, he's also starting to see inflation in the prices for Series A and B rounds. This may be even more disconcerting he said as his portfolio companies may actually get those prices in their next rounds/

Why is this bad? These high valuations put startups on this "rocket ship of high expectations," he said.

And, when you're on that rocket ship, you're expected to reach the moon.

(Watch our next interview as Dave shares more details about his investment philosophy. Also, stay tuned for our upcoming Vator Box segment, in which Dave and Thomas Korte analyze Tripping and Everloop.)

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