Dave McClure launches $10M fund to help startups get to Series A... but is it enough?
500 Startups is doing something novel in reaction to the mythical Series A crunch. Instead of whining about it or writing some grandiose blog post about whether or not there actually is a growing trend of seed stage companies not being able to get funding, the micro VC/accelerator is actually taking action.
Today, 500 Startups announced a new $10 million carveout fund, called the DistroFund, aimed at helping early stage companies with both financial backing and some support services at what is usually a critical juncture for a company’s growth.
Through the DistroFund, 500 Startups plans to invest between $100,000 and $250,000 in 25 post-seed and pre-Series A startups over the next year-and-a-half. Looking down the road, about half of the new fund will be reserved for follow-on rounds for the most promising companies backed by the DistroFund. As 500 Startups founder Dave McClure explained, the company will invest, primarily to help companies as they try to scale, allowing them to show enough growth to raise a larger second investment round.
"Hopefully some of those companies will get to a Series A," McClure explained, "and then we can double down and invest another $250,000 to $500,000 for those companies that get their Series A term sheets figured out."
But, 500 Startups is offering a bit more than just financial support through the new fund. Part of each investment, $50,000 to be exact, must be used for for growth and marketing purposes. Additionally, DistroFund will further help its companies to scale by offering Distro Camp growth accelerators. According to 500 Startups, the 1-month programs, which it piloted at the 500 Startups Malaysia program last year, will give startups the type of marketing experience that would normally take six months to a year to gain.
While many other firms do “bridge” funding rounds, to help post-seed companies get to a Series A, the range of the DistroFund is well below the amount many Silicon Valley companies would need, and often get, to give them runway between follow-ons. While $50K seems like a big number out of context, using it to invest in a marketing campaign to push from seed to Series A might be a challenge. That the program was piloted in Malaysia, and, with 500 Startups global footprint, makes it seem plausible that the DistroFund may be more impactful for early stage startups that are outside the U.S.
The new fund will invest in both existing 500 Startups companies and outside startups in need of way to escape the Series A crunch. Already, the DistroFund has invested in three companies: Cleanify, Pijon and one as-yet-to-be-revealed company.
McClure said that they are looking at e-commerce, B2C, and even some B2B startups. "We are targeting the most promising companies, those that already have a strategy that looks like its scaling," McClure said.
As for 500 Startups, it is quite interesting that McClure, who often railed against the venture capital establishment in the past, once even saying, “VCs are “insufferable, arrogant, fucking assholes,” is now leading a firm that he describes as a "micro VC that also runs an accelerator." When I asked if 500 Startups, and his own opinions of venture capital, has evolved to match the current investment climate in Silicon Valley, McClure said, "I think we are still basically executing on the same strategy... a lot of folks call me an angel investor, although we are a fund and we invest on others behalf."
For McClure, the sticking with smaller investment amounts, separates 500 Startups from other firms.
"There are a lot of VCs out there that will write five, ten, or twenty million dollar checks. And I think that’s fine, once [a company] has the unit economics down and once [they've] got a growth strategy it’s fine to take a bunch of venture rocket fuel," he said.
"I think it’s not so great for founders and entrepreneurs who do that before they are really ready," McClure added. "I don’t think many companies need more than $1 million or $2 million in the first couple of years. Normally they’re costs are pretty minimal."
McClure’s strategy differs greatly from some other micro VCs, super angels, and early stage venture firms. Some, won’t even acknowledge the difficulty of moving from the seed stage to a Series A. As Sarah Lacy pointed out in a recent piece, some folks, like Jeff Clavier, believe the best approach is to throw more and more money at the problem - a strategy that just happened to be used to satirized the current state of venture capital in last night’s episode of Silicon Valley.
(In the middle, between Clavier and the lean VC approach of McClure, I would put Josh Kopelman, who acknowledges the Series A crunch, thinks companies should do everything they can to put themselves in a good position for a follow on round, but still suggests raising as much funding as possible.)
I asked McClure whether or not he thinks 500 Startups strategy is working. He said that its volume strategy is greater than other VCs; they invest in more startups, and also get in at a lower valuation. The measurement for success for any firm, VC or angel, is the results it is seeing for its backers. "I think we are kicking ass," McClure said. "On the first fund we returned 20 percent, our second was 30 percent, and our third is trending towards 30 percent."
Does that go against some of this comments about VCs in the past? "I’ve got a big mouth and I’m not afraid to speak my mind and that occasionally gets me into trouble," McClure said. “Maybe I’ve said some stupid shit," he added, "but I don’t really regret the general strategy. What I think I’ve been criticizing is companies raising too much money before they’ve demonstrate growth strategies."
The new DistroFund puts some money where McClure's mouth is, literally trying to carry companies that are on the cusp of growth, through funding and mentorship, across the finish line to a Series A.