Dave McClure, founder of Practical Venture Capital and co-founder of 500 Startups, dives deep into the growing role of secondaries in venture capital. Dave explains how today’s longer startup cycles and liquidity droughts have created opportunities (and confusion) around secondary markets. He breaks down what secondaries actually are, how Practical VC operates, and key trends shaking up the system. With his trademark candor, Dave also shares hard truths for both founders and VCs navigating this next chapter of private markets.
Dave McClure, founder of Practical Venture Capital and co-founder of 500 Startups, dives deep into the growing role of secondaries in venture capital. Dave explains how today’s longer startup cycles and liquidity droughts have created opportunities (and confusion) around secondary markets. He breaks down what secondaries actually are, how Practical VC operates, and key trends shaking up the system. With his trademark candor, Dave also shares hard truths for both founders and VCs navigating this next chapter of private markets.
In this episode, you’ll learn:
[03:55] Dave’s journey to becoming an investor
[06:30] The early evolution of accelerators and why “lots of little bets” took off
[09:50] How cloud, open source, and low CAC changed the startup funding game
[12:49] Why startup liquidity timelines have doubled—and what that means for founders and LPs
[14:56] What secondaries really are (hint: not just one thing)
[19:31] Does venture’s illiquidity attract the right kind of investors—or just the most patient?
[22:06] The discipline of public markets vs. the opacity of private ones
[26:37] What Practical VC looks for in a secondary opportunity (and the $50M–$100M revenue rule)
[29:14] How Dave screens funds and companies for possible exits
[33:37] What’s exciting (and worrying) about secondaries, stablecoins, and emerging markets
The nonprofit organization Dave is passionate about: New Story
About Dave McClure
Dave McClure is the founder of Practical Venture Capital, a firm focused on liquidity through venture secondaries. Previously, he co-founded 500 Startups, one of the world’s most active early-stage venture funds. A PayPal alumni and self-described nerd turned investor, Dave has worked across engineering, marketing, and venture roles, investing in hundreds of startups globally. He’s known for his honest insights and bold bets on opportunities before they’re ‘cool’.
About Practical Venture Capital
Practical Venture Capital is a Silicon Valley-based VC secondary firm providing liquidity to GPs, LPs, and founders through targeted secondary investments. Specializing in fund-level and company-level secondaries, Practical VC aims to shorten the venture capital time horizon by backing mature, revenue-generating companies with clear exit paths. The firm focuses on portfolios nearing liquidity and brings a flexible, creative approach to valuation, pricing, and structure.
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"A lot of people jumped into venture capital and jumped into investing in companies before they really understood how long things take. Advance that clock 5, 7, 10 years and people are still waiting for their investments to return and, and then I think you see people starting to face reality and the need for other things in their lives.
What do you know? Secondaries becomes an interesting topic for everybody who hasn't seen those returns come back to them right away." - Dave McClure
[00:00:33] Gopi Rangan: You are listening to The Sure Shot Entrepreneur - a podcast for founders with ambitious ideas. Venture capital investors and other early believers tell you relatable, insightful, and authentic stories to help you realize your vision. Welcome to The Sure Shot Entrepreneur. I'm your host, Gopi Rangan. My guest today is Dave McClure. Dave is the founder and managing partner at Practical Venture Capital. Dave is a very, very well known person and one of the most experienced investors and technology leaders in Silicon Valley. He goes all the way back to the PayPal days. He's part of that PayPal mafia, and he was the co-founder of 500 Startups. And he's had many such interesting roles throughout his career. Today we're gonna talk a lot about secondaries. Why is that important? What is happening in that sector and how does it fit with the overall trends that are shaping up in the venture capital and startup ecosystem? But before we jump into all those details, let's start with Dave.
Dave, welcome to The Sure Short Entrepreneur.
[00:01:43] Dave McClure: Thanks for having me, Gopi.
[00:01:45] Gopi Rangan: Let's start with you. Where are you from? You are not from Silicon Valley, but you've made a home here. You're originally from West Virginia.
[00:01:53] Dave McClure: I'm a hillbilly from West Virginia. Grew up in West Virginia in Maryland, went to school at Hopkins in Baltimore, and then came out west in 89.
So I've been out here for over 30 years at this point, more than half my life.
[00:02:06] Gopi Rangan: What brought you to Silicon Valley?
[00:02:08] Dave McClure: Pretty much computers and Frisbee. I think those were probably the main things. Actually at the time I came out here, I think I was planning to head to Japan because at least in the late eighties, early nineties, Japan seemed to be taking over in terms of technology.
So I was planning to come out here, learn Japanese, and then moved to Japan, but in the early nineties, a bit of that world blew up a little bit in Japan. And along the way made a lot of friends with geeks here in the valley and got really interested in entrepreneurship and technology and investing, and found it was hard to leave.
So I've been here ever since.
[00:02:43] Gopi Rangan: What do you like about technology and startups and venture capital so much?
[00:02:48] Dave McClure: Well, I guess I've always been a nerd. I was an engineer by training. Most of my college education was probably mathematics and computer science. So always been interested in technology and programming.
I don't think I was really aware of entrepreneurship until I got here, so that was exposure to a lot of different folks who were starting companies. Many of them were geeks and technologists who maybe didn't have traditional business background or training. I actually spent a good bit of time with the TiE group when it was just getting started in the nineties and made some friends there.
Actually started my first company with some other South Indian folks who had come over from Coimbatore and started doing some consulting with Intel and Microsoft, and I guess the rest is kind of history. So gradually transitioned from being a nerd and an engineer into being an entrepreneur and then later into being an investor.
[00:03:40] Gopi Rangan: The world has changed a lot in the tech side since then. By the way, I went to college in Coimbatore, so I see the connection there. But I'm curious to hear your perspective. How have things changed? What is different now compared to the nineties?
[00:03:55] Dave McClure: Well, pretty much everything I guess. The internet for sure.
I think when we were just getting started with a consulting company I was putting together, we were initially doing client server programming, mostly with SQL Server backends, little bit of visual basic and power builder front ends, if you remember those days. But right as we were getting started, I think the early versions of web browsers were just coming out.
In fact, it was really a pain in the ass to get on the internet at that time. There were probably a very small number of websites. You could actually imagine visiting most of the websites in the world in the early nineties, at least 1992 and 1993 when I was getting started. But that was really pretty amazing and pretty exciting. Venture capital itself was going through a pretty big heyday in the middle nineties, and certainly in the late nineties it got way outta hand and then everything blew up in 2000. I had the opportunity to join and work with the folks at PayPal around 2001. And that was a little bit before the IPO. Through the IPO and through the subsequent acquisition by eBay, just got to work with some really amazing folks there, people who later started LinkedIn and YouTube and Yelp and a bunch of other companies. I got to play around with all kinds of, internet marketing tech, so email marketing, search marketing, blogs, social networks. So it a big explosion of all kinds of tools and services, mobile platforms and e-commerce and everything.
It was a pretty fun and pretty amazing experience, I guess. And working with the folks at PayPal, I got the bug for investing initially, angel investing, and then later venture. I don't know there was any particularly planned path, but I was always curious about technology and entrepreneurship and one thing led to another.
[00:05:37] Gopi Rangan: The way I see the venture world is that in the nineties leading up to the.com boom and bust, it was largely VCs working with incredibly brilliant engineers who didn't know how to build a business and..
[00:05:51] Dave McClure: Well, VCs, VCs didn't know how to build the businesses either. There were a lot of companies that had no revenue and certainly weren't profitable that were going public.
And that probably ended poorly for many of the investors in those companies.
[00:06:04] Gopi Rangan: That's true. Not that VCs were experts in how to build businesses, but at least they brought that acumen on customers and markets and things like that. But yes, soon after that, 2005 to about 2015, 20 ish, that phase of venture capital was about working with founders who knew how to build businesses, how to build products, but the platforms that were created really gave a lot of resources to founders. And that was also around the time when the startup cycle kind of expanded and there were earlier stages of funding, like the accelerators and families and friends and those kind of things that didn't really exist in the nineties.
An accelerator was a very big portion of how the ecosystem evolved. And you were a leader in that space when you created 500 Startups? Is that a fair way to assess?
[00:06:55] Dave McClure: I don't think I was the first wave. I probably came in early, but there were definitely other folks like YC and Techstars that came before us, and even Bill Gross and Idea Lab a little bit before them.
Some of the earliest internet incubator companies were actually started in the mid, late nineties. And, and some of those even went public and. Subsequently blew up a little bit, but I think probably the structural changes that really happened, you had the advent of cloud computing and open source computing, and so a lot of things that were very expensive to build in the nineties became a lot less expensive to build in the two thousands period.
So even though we were in the aftermath of a nuclear winter between maybe 2001 to 2004, a lot of companies were built very cheaply, at least on a relative basis. They were built much less expensively. And one of the things that I think started happening was a lot of people, well there had always been a lot of angel investors in the valley, even back into the sixties and seventies, but I think the whole nineties craze, even though it did crash, a lot of people became aware of internet companies and the opportunity to invest, even if they weren't really very rich. And so this combination of lower cost for building companies, certainly lower cost for acquiring customers via search, social and mobile channels, all of that resulted in people doing a lot of experiments whether they were doing them at accelerators or seed stage. Those experiments could be done for probably less than a million dollars.
In the past, maybe angel investors were joining rounds that were led by venture capitalists. Now you actually have angel investors really financing these companies first you know, 6, 12, 18 months on maybe just a quarter million, half a million dollars. That trend of really financing companies on less than a million dollars was fairly new, and then people doing that at scale was also pretty new; probably initially started maybe by Ron Conway and SV Angel, and then later maybe First Round Capital and a few others. I think when we started, you know the name itself, 500 Startups, was intentionally a little crazy. People used to laugh at us when we said that name, but we certainly intended to build very large portfolio, several hundred companies per fund. That was fairly new at the time and certainly the ability to do that on a small budget was new. I think that was the main story that was happening probably between 2005 to 2010 and then certainly taking off after 2010 was lots of little bets. That's even the name of a book by someone at the time.
[00:09:31] Gopi Rangan: As a result of all these changes, what used to be the first round of funding, series A, has now become the fourth or fifth round of funding, right? Right. There's seed round. There's pre-seed round, and there's a proper full angel round and there's an accelerator round, right?
There's a family and friends round. Many things have happened and now the market is in a very different place.
[00:09:52] Dave McClure: Yeah, quite a bit different, I think, now.
[00:09:54] Gopi Rangan: What is happening?
[00:09:55] Dave McClure: Well, at least here in Silicon Valley and probably in several other places around the world, there is a lot of capital available for startups that wasn't always the case, certainly wasn't the case in many other parts of the country and many other parts of the world.
But even in Silicon Valley I don't think there was a ton of capital prior to the nineties anyway. But probably after 2005 and certainly after 2010, it seemed like almost anybody could raise capital. And maybe that's a little bit of optimistic remembering of the past, but certainly we saw the number of startups being launched start to scale up dramatically, and we also saw the number of VCs begin to scale up dramatically. That probably accelerated even further probably in the 2015 to 2020 period.
It seemed like anyone and everyone was starting a company or starting a fund. The soundbite that I think you used to hear was it became more popular to start a startup than to start a band. Perhaps, at least for nerds here in the Valley I think that was probably true. In addition to the 2000 to 2001 dot com blow up, we had kinda the global financial crisis in 2008/9. That wasn't really a venture capital cause of the crisis, but certainly the lack of capital availability bled over into the venture capital markets. But that was really fairly short. It was really only about a year and a half, two years when that happened. That was actually when I started working, at least professionally, in venture capital. I started working with Founders Fund with Sean Parker and Peter Thiel and some other folks that I used to work with at PayPal.
For me that was really an amazing time to get started. It was maybe tough for a year and a half there, but we got to invest in some really great companies at some very low prices. And with only a budget of maybe $2 million or $3 million, I was kinda like a kid in a candy store. And I think a lot of the concepts that we came up with for 500 Startups were really incubated there. And perhaps also I got the chance to run the Facebook fund program for summer of 2009 as well. So it was really a terrific opportunity. I owe Sean certainly a big thank you, and Peter and other folks there too, for getting the chance to get started in venture when I didn't have a traditional background in finance at all, but at least I had a chance to get my hands dirty on the engineering side and a little bit on the marketing side at PayPal.
[00:12:14] Gopi Rangan: So now where we are in the startup cycle is what used to be a six, seven year cycle for innovation with startups. The early part got stretched out and then the later part also got stretched out because companies stay private longer and longer, cost of going IPO has become much higher. This cycle has now more than doubled. 10 plus years, 15 years staying private is quite common, and some companies we don't even know if they will go public ever, like Stripe and others.
So it's a very different world today from the investing side, and secondaries is becoming very, very important.
[00:12:49] Dave McClure: Yeah, I think you're correct that certainly perhaps due to the success of startups and venture capital, a lot more capital poured into private markets.
That probably reached its peak with the SoftBank Vision Fund and Masayoshi Son raising a hundred billion dollars fund, which at the time was just an insane amount of money.
We might have jumped the shark a little bit there, but I think what was happening was people realized that, hey, there's these companies going public that are still in very fast growth mode, and if we raise enough money on private capital side, these companies maybe don't have to go public as soon. So we can keep and capture that growth in the private markets for maybe another 3, 4, 5 years, perhaps even longer. And so you saw kind of mean time to IPO probably go from maybe five to seven years to more like 10 years. We've seen the requirements to go public increase substantially.
We used to think of like companies that were doing maybe 10, 20, 30 million in revenue valued at a hundred million or more going public. Now it's more like companies have to have several hundred million in revenue. Some people maybe even say a billion in revenue in order to go public. And companies that aren't even $10 billion in market cap might be considered small these days. As a result of that, there's a long period of illiquidity. The investors are tied up in both the companies and the funds; companies for longer than 10 years and funds probably even 15 years or more.
I think that for many people who are planning on liquidity on a faster timeframe, we certainly haven't seen that in the last three years. So after the more recent downturn in 2022, there have been a very few number of companies that have gone public. We probably haven't had that much M&A activity either up until maybe just recently.
So I wouldn't say that secondaries are necessarily just for down markets. There's needs for secondaries in both up and down markets, but in the last three years, there's been a significant lack of liquidity. And as a result, I think we've seen more and more people start to pay attention to secondaries as an alternative path to liquidity instead of IPOs and acquisitions.
[00:14:49] Gopi Rangan: What role does secondaries play and how is Practical Venture Capital playing a role in this trend?
[00:14:56] Dave McClure: Yeah, well, I think sometimes the word secondary gets thrown around as if it's just one thing. And I would argue that actually there's many different strategies in the secondary market as there are in the primary market. Historically, the secondary market really started in private equity back in the eighties and nineties. It certainly has grown a lot since then. When we're talking about private equity secondary, usually that's happening at the fund level, but also the other thing that's different is the companies themselves are much larger. They usually have substantial revenue. Probably most of them are even profitable. And so when you're underwriting those companies and trying to understand where they're at, there really are a lot of fundamental metrics to look at for those companies.
The growth of the secondary market and private equity, I believe now it's probably $150 billion or more. It became a lot more common to do private equity trading, and so the discounts for a lot of those companies became less and less, and in some cases they might even trade at a premium. In venture capital when we talk about secondary, most of the time people are talking about direct secondary in companies. That's typically when either early investors or possibly early founders or employees of a company are selling their shares in one company to another person who's picking up those shares. And there may be a number of reasons why those folks might be selling. They might be selling because they're buying a house or putting kids through college. It could be maybe a medical emergency. If you're talking about family offices, sometimes they'll go through death, divorce, maybe restructuring. Sometimes they'll wanna rotate out of one set of assets into another. If we're talking about corporate VCs and corporate investors in venture capital a lot of times their strategies may change over a five to 10 year period. You might have a new CEO or a new CFO and something that was strategic for them to invest in maybe five, 10 years ago isn't so strategic today.
So those particular groups are probably the ones that we focus on more. I'm excluding the institutional market, but there's certainly a need for institutional actors to have secondaries as well. That happened during the downturn in 2008/2009. It happened even previously during the.com boom, and it probably will be happening again now.
There's one thing that's really happened a lot in venture capital, which is even though venture capital is probably still dominated by institutional investors, pension funds, endowments, foundations, a whole bunch of other smaller investors have jumped into venture capital as well. Certainly we've seen corporate venture capital investors over the last 20 years really expand, but I think particularly you've seen family offices and individuals jump into venture capital. Both companies and funds probably really didn't understand the structure of venture capital and certainly they probably didn't expect it to take as long as it has.
That's the area we focus on more: these folks who are not institutional size or patients. And particularly for us, we tend to focus a lot on people who trade or who sell at the fund level. I talked about the fact that most of the secondary market adventure is at the company level. Certainly we hear a lot about companies like SpaceX and OpenAI and others that are very popular, but there's also a secondary market for investors in funds. And that might be the limited partners who are investors in those funds, might be the general partners who run those funds. And they might do transactions which are kind of a strip sale across the entire portfolio. Or they might, if you're talking about the general partner, they might also sell secondary in their companies to generate liquidity. They're certainly waiting for liquidity to be able to send dollars back to their investors and to show their performance as they're raising new funds. So there's a number of different people and actors and entities who might have a need for liquidity. And when we're in a period where there aren't very many IPOs or other exits, those needs go up. And we're seeing a resurgence in a lot of those areas in the last few years. Secondary seem to be on almost everybody's lips lately.
[00:18:52] Gopi Rangan: I see that there are many different types of VCs entering the market, and there are also many different types of LPs who have entered the market.
Let's take a step back and I have a more fundamental question. One of the shortcomings of the public market is that everything is short term; quarter to quarter. One of the beauties of venture capital that it's long term, but when long term gets longer term, when those seven year cycles become 10 plus year cycles, I can see why illiquidity can bother people, but doesn't it naturally attract only very long-term investors, and that's a good thing?
[00:19:31] Dave McClure: Well, I think people tend to talk about illiquidity in venture capital as if it's a feature, not a bug, and they generally say that that's a good thing because it forces this long term mentality. I don't really agree with that. I think while you may be critical of public markets because they're short term, we're familiar with public markets being either relatively liquid and at least to some extent transparent in terms of the metrics and information about the companies. That's really quite different in private markets. There often isn't enough liquidity. There's not always a match of buyers and sellers for private assets. They're not always available to buy and sell. I would say the information is generally very limited for people who are not the VCs who sit on the boards of those companies. That said, everybody has gotten excited about investing in startups and private companies. Certainly over the last 20 years, it's become very popular.
I don't know if it had the same awareness in the retail investors' mind prior to the 2000s but in those late nineties periods, people got very excited about what was happening. They maybe got their enthusiasts dampered a little bit after the dotcom boom, but that still came back again in 2005. Companies like Google and Apple and Facebook really entered the mainstream conversation. A lot of these platforms became consumer services that everybody used on a daily basis. Certainly for search and for social platforms and for mobile platforms they became very common. So people were aware of these companies. They got excited about the potential for investing in them. Many people have invested in these companies, and over the last 10 years you've seen the magnificent seven or whatever group of companies that are now trillion dollar market caps and people who invest in those companies have done quite well.
So I think everybody sort of got the bug, whether it was a good or bad thing that investing in tech companies was great and was easy, and maybe those things weren't really true, but a lot of people jumped into venture capital and jumped into investing in companies before they really understood how long things take. Advance that clock 5, 7, 10 years and people are still waiting for their investments to return. And then I think you see people starting to face reality and the need for other things in their lives and what do you know? Secondaries becomes an interesting topic for everybody who hasn't seen those returns come back to them right away.
[00:21:50] Gopi Rangan: Staying private also lacks transparency and rigor on how to keep the company on the right path. And now that sometimes can be helpful staying private, but quite often that doesn't result in good outcomes for everybody.
[00:22:06] Dave McClure: I think there's different opinions on that. Certainly for companies that maybe don't have a mature business model, they may want to wait until they have, more predictability in their revenue and growth and more profitability before they go public.
But we probably went a little too far. I think Bill Gurley was probably one of the biggest critics of companies staying private for too long. There is a certain amount of discipline that public markets and quarterly reporting impose upon companies. For some folks who run private companies, they maybe aren't ready for that level of public discipline or public visibility. There's certainly other people, I might argue, who don't want to run their companies publicly. They want more control, and sometimes running them private does give them more control. So, you know whether or not you feel like every company should go public or not, I think the prevailing trend has been, it's taking longer for these companies to go public.
While people are waiting for liquidity from traditional paths, secondaries has become an alternative path at least for some of those companies and some fund investors as well.
There's definitely a tale of two markets or a tale of two cities. A very small number of companies right now make up the majority of secondary sales. That really is a little bit of a different story than the rest of the market, which might be 99% of the companies, but maybe only half of the overall secondary market that isn't the biggest visibility names and stories.
[00:23:33] Gopi Rangan: So what's your advice to founders? What's your advice, especially to seed stage, pre-seed stage VCs? How should they prepare for second reason? How should they plan to make sure that they can be ready for liquidity even though the market is not ready available for long time?
[00:23:51] Dave McClure: Well, I think there's a lot of misperceptions of the secondary market being almost very much like the public market, and I would say it's actually quite different. Even though there might be retail platforms for investors, like equities at and Hive and Forge and others where people can buy and sell secondary interests in companies. You don't have the same availability of public market information and accounting and quarterly reports. So many times you're trading blind in these companies. It's maybe hard to understand what valuations are appropriate. One of the biggest challenges in venture capital right now is we had a period of really, I would say, pretty irrational pricing for these companies that happened in 2020/2021, large, largely due to an easy money environment, a low interest rate environment that happened, post COVID. And there's a ton of money that was being pumped into the market. But we really got, outta whack in terms of fundamentals with how companies were valued.
And we're still today, even three, four years later. Probably suffering from hangovers from those vendors that we went on, and there's many, many companies that are, that are still using pricing and valuations from three, four or five years ago, which probably are not accurate. I think, companies in those times were being valued maybe three or four times, possibly even more than that, what they were worth.
So I think now when people are looking at buying secondary, particularly retail investors, they probably don't have all the information they really need to make informed decisions. And I think you're seeing a lot of momentum style investing where people aren't really, they're not buying and selling based on fundamentals and valuation from, future cash flow extrapolation. They're really just looking at, Hey, this thing looks like it's going up. Let's buy now before it gets even more expensive, and we can make a whole bunch of money. And sometimes that works. But I would say that's not, that's not really a very Warren Buffet style of investing.
And, sometimes I, I worry that things are getting a little out of hand with. People who don't really have a fundamental grasp of what these companies are worth. So it does, it does make me a little bit nervous. And I think we've seen that, both in traditional companies in 20 and 21. We've seen that with crypto companies in a few years after that.
Now we're seeing it with the AI companies as well. So I'm not, I'm not sure we've really learned any of these lessons. It seems like we're still, we still get very excited about the next crazy wave of technology and certainly some companies are probably going to end up being. Successful in justifying those valuations, but usually, usually the majority of them are not.
[00:26:32] Gopi Rangan: There's still a lot of experimentation. So what is a good secondary opportunity for you?
[00:26:37] Dave McClure: I guess one thing we should talk about is when do secondaries really start happening and I think probably we would say we are looking at companies that are doing 50 million to a hundred million in revenue and up, maybe a few years in the past that bar might have only been 30 million in revenue, but we're still talking about at least large series B or probably more likely even series C or later stage companies. There may be secondary opportunities in companies that are earlier than that, but it's not very typical. You don't usually see secondary sales happening at the series A or earlier stages. It's not even really that common at Series B, unless it's a very large series B, or the company's already doing a significant amount of revenue. Part of this is really just a function of what does it take to go public.
So when we are looking at companies doing 50 to a hundred million in revenue, what we're really thinking to ourselves is, can these companies go public or get acquired within three to five years? That's our window for our investors. We look at a normal venture capital fund and we think, Hey, if we could just cut that fund in half and buy the back half, maybe most people might think that's five years, but it's really more like seven to 10 years, we could really shorten the time horizon for when our investors are illiquid.
Instead of having to wait 15 years. 12 to 15 years for liquidity. We are really aiming to wait, not more than three to five years. That requires that you start looking at companies that are much larger. You can't buy a secondary company that's only doing 10 million in revenue and expect that company to go public in just five years. It's usually gonna take longer than that unless it's really growing fast.
The first awareness is that, hey, we are really talking about companies that are already somewhat mature and have a product and a proven business model. Hopefully the unit economics of that business are profitable, if not the overall company, and we can really see this path to the company getting to maybe three to 500 million in revenue and, probably 30 to 50% year over year growth and profitability in the next few years.
That's a small group of companies. I would, I would say, if we look at the overall number of unicorns out there, probably 700 plus unicorns, I doubt more than a third of them meet that criteria, probably even less than that. So, we're talking about a universe of maybe a couple hundred companies, but it's not several thousand companies.
And so it's still a fairly small universe of companies that are in the realm of possible for secondary opportunities.
[00:29:02] Gopi Rangan: You see hundreds of companies, if not thousands. Out of those companies, you only choose to invest in a very small portion. What's your most common reason to say no?
[00:29:14] Dave McClure: I used to see thousands of companies a year when I was running 500 Startups 'cause we were doing two to 400 investments per year, and we would see several thousand companies collectively, we being all the people who invested there.
I think these days when we're looking at secondaries, we do probably three levels of screening. That first level of screening, whether we're looking at a company or a fund is, does this have a shot at all of going public or getting liquid? There are many companies, even ones that you know might be successful at Series B or C, which we don't think are going to make it. And if we look at funds, I would say we're even more skeptical about the funds because there's probably a variety of companies in those funds, most of which are not going to be IPOs, but there has to be at least one company that we think is gonna be a big win or a big outcome in order for us to even do any amount of work on underwriting or diligence.
The next screen we look at is, okay, if we do think this company can go public, or we do think this fund has winners in it, what are the drivers for that growth and how well is this company doing in terms of revenue growth in margins?
If we're looking at, a portfolio of assets, then we're trying to do what we call a three bucket method, where we look at high, medium, and low probability of exits. And usually that means unicorn or IPO size expectations for that first group where they really are doing hundreds of millions of revenue, or could be.
The second group is maybe not IPOs that might still be large exits. Even there, we're looking for companies that are doing at least tens of billions of dollars of revenue and have potential to be acquired at say north of a hundred million, a couple hundred million of value.
The third bucket is really the companies that are, again, not gonna get there. They're either too small or not growing fast enough. And in many portfolios that could be 20, 30, 40 percent of the value, sometimes even more. They really just don't meet that criteria of ever going to get to an exit. So, the second step is kind of like checking under the covers, looking at these companies and looking at these portfolios and really trying to assess what do we think the value is. And then once we get a handle on, the value and the growth potential, then we start a process of probably negotiating with the seller about what we think we would want to pay and what they're willing to sell at. And, again, things can fall out of bed at any of those three phases.
[00:31:33] Gopi Rangan: Exciting times and you're looking at a lot of creative solutions.
[00:31:37] Dave McClure: Well that's, that's actually what's really interesting about secondaries and what's pretty different from the primary market. In the primary market, the people who are raising capital for the company are talking to multiple investors. They're trying to get an optimal price. And in some sense, there's an auction going on in the market with multiple buyers where they're trying to get a premium for their shares that they're selling. In the secondary market, you're not always talking to a group, investors acting in an auction. You might be talking to isolated investors who have a very different need for liquidity and the price that you reach isn't necessarily gonna be reflective of the value of the company. It might be reflective of the need for liquidity by the seller. And so when we're talking with an individual seller, they might be willing to sell at a much lower price than maybe someone who is more patient with that company. And so that's where you can get a really interesting dynamic. We would look at that from a buyer's perspective and say, Hey, can we find an asset that's really undervalued or underpriced because the seller needs liquidity? If we can't necessarily close the gap between what the seller wants and what we would be willing to buy, then we might introduce structure and additional terms that can help us get there to close that gap. So it's often a lot more creative in pricing and structure than the primary market where you have more competing actors.
Some types of secondary it's not always very competitive and you might be able to be more imaginative with the structure of the deal.
[00:33:00] Gopi Rangan: Dave, you are one of the few people who has a full spectrum experience all the way from the early evolution of tech. And you played a role in marketing there in many places. You were one of the pioneers of building large venture fund portfolios.
You worked with many of the who's who in Silicon Valley, and you are one of those as well. And you have seen how the ecosystem has shaped up. You're also an LP in many funds and you're looking at the secondary market very, very seriously. This is I think going to be an important trend for the next 10, 20 years.
I'm curious to hear from your perspective, since you've seen so much, what is one thing that you're very excited about and what's one thing that you're scared of?
[00:33:40] Dave McClure: Well, I'm certainly interested in seeing that secondaries is growing in awareness and popularity. I'm a little bit nervous that now that everybody's talking about secondary. When secondaries are boring, I felt like, Hey, there's an opportunity that people aren't aware of. Now that everybody seems to be talking about it, I'm like, maybe I should be a little bit more cautious and fearful about all this.
I do worry that we have these two separate markets. We have a momentum driven market where people are extremely optimistic about valuations and companies like Open AI and Anthropic and others. While they're very exciting because of the AI technology and how fast they're growing, I do worry that valuations are a little crazy. And you know, investors in those companies might not get the returns they're hoping for.
On the other side of that, I think there are interesting opportunities that are being overlooked because they're not necessarily on everybody's radar and lips. We've been looking at the Latin American market for secondaries because there's a lot of secondary activity in Mexico and Brazil and some of these other markets, but the overall Latin American market is actually a fairly large economy. But for whatever reason there hasn't been a lot of capital availability there for startups. And so we've a woman on our team in Argentina, we've seen some really great opportunities at relatively inexpensive valuations. If you look at Mexico and Brazil in particular, and maybe a few other countries, Columbia, Argentina, Chile, they're generally pretty fast growing economies. They're pretty young populations and we're still seeing a ton of e-commerce and FinTech adoption in these markets.
So for us, I think, on a regional basis, we're pretty excited about emerging markets secondary, even though that's not the focus of our business. think over the next five to 10 years, you're gonna see a lot more adoption of secondary markets in these other emerging economies, not just Latin America, but India, Southeast Asia. Eventually, I think Africa and probably the Middle East, and that's probably, half the population of the planet really. It may not be half the GDP of the planet yet, but we're probably on that path. We will gradually see secondaries expand in different parts of the world. I'm probably a little fearful of these companies are on everybody's radars that people are paying attention to right now.
People are, are very excited about AI. They're very excited about space tech. Defense tech seems to be happening a lot there. There's certainly more awareness of people blowing things up with drones and missiles, and so I think defense tech has become pretty popular in a lot of places as well.
I guess on a more positive area, this isn't so much a focus on secondaries, but I think we are seeing a real use case for crypto in stable coins, and I that has maybe been an under the radar story for the last couple of years, but if you look at the growth of stablecoin volume, although it took a little bit of a dip in 2022, 2023, it's really been growing pretty substantially in the last two years and with the Circle IPO now, I think it's started to become more visible. Tether and Circle are the major players there but I think there's a lot more people looking at stable coins as an alternative to traditional banking. Probably following in the heels of that defi lending particularly, I think that's probably an old business and people might think that's really boring but the expansion of credit globally and to different actors, whether those are individuals or small business. I think once you have a digital platform for money that is maybe not quite as volatile as Bitcoin and other cryptocurrencies, then I think a lot of other plumbing and things can be built on top of that.
The ability to offer capital to people all over the globe and really even people who are not necessarily rich countries. I think that is a great opportunity to lift the entire economy and the entire society.
[00:37:31] Gopi Rangan: This is a wealth of knowledge. You've shared so many different trends and so many important topics that would be relevant for us in the near future.
We're coming towards the end of our conversation, and I want to ask you about your community involvement. Is there a nonprofit organization you are passionate about? Which one?
[00:37:49] Dave McClure: I think one that I'm really excited about is called New Story Homes. New story homes.org is the URL and it's a really great organization. Brett Hagler a few other folks started the company. They help people build homes. They're particularly focused on the Latin American market, primarily in Mexico right now, but other parts of Latin America too.
One of the things they do is trying to turn basically unfinanceable land into financeable land. And what that really means is can people get mortgages for this land?
And a lot of land is undeveloped; where people try to build houses, might not have roads, might not have infrastructure like power or water or utilities or plumbing or internet. And so what they do is they try and prepare that land to become financeable by adding those things. And so a lot of it is really helping provide, power and water and sewage and internet and then helping families save money so that they can prepare for a down payment. And then using mortgage finance, which you know, has been around in the US for probably 70, 80 years, but it's still very I would say new and not very widely available in much of the second uh, world market in a lot of these merchant economies.
[00:39:09] Gopi Rangan: Dave, thank you very much for spending time with me. Thanks for sharing such detailed perspectives on how you view the startup and the venture capital ecosystem with specific examples based on your own experiences. I look forward to sharing your nuggets of wisdom with the world.
[00:39:26] Dave McClure: Thanks a lot, Gopi.
[00:39:29] Gopi Rangan: Thank you for listening to The Sure Shot Entrepreneur.
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