Q&A: Dave McClure of 500 Startups on the State of Private Markets
Atish Davda | April 20, 2016
Looking back at the first quarter of 2016, the
public equity markets have been defined by a fair amount of volatility, and
have followed a “V” shape, ending the quarter close to the levels at which is
started. At the same time, mid-stage
private technology companies are focusing on “revenue and profitability”
instead of just “growth and capital raising”. Amidst all of the reasonable
caution, there is opportunity.
S&P500 through March 2016, source: Google Finance
In order to investigate these recent market
trends, and in order to try and understand what may lie ahead, EquityZen is
starting a series of interviews with informed professionals in the private,
Since EquityZen is a proud member of the
500 Startups family, it felt fitting to begin the series with 500 Startups
founder, and self-proclaimed geek, Dave
McClure. 500 Startups has invested in over 1,500
companies across 50+ industries, including many household names like Twilio, Credit Karma, and Udemy. Prior to founding 500 Startups,
Dave managed early-stage investments for Founders Fund, led the Facebook fbFund
and was as a member of the PayPal
Without further ado, here is a summary of my
interview with Dave:
Atish M Davda:
How has the funding environment changed in the last 12 months for companies?
McClure: Most of the changes in the past 12 months have actually happened
in the last 3-4 months. Investments in later stage companies have come down,
especially Series B and Series C companies that jumped up in valuation. Non-traditional venture investors, such as public
funds and corporate investors, wanted to get exposure to this part of the
investment universe and began paying up for it.
We’re now seeing them mark their books down as they would public
How big are the markdowns that you’re seeing on the private side?
stage valuations have come down around 20%. Late stage companies are being
marked down by around 30%.
advice would you share with investors that may be new to the space?
focus too much on valuations going up and down in a short period of time, since
it’s really all about the holding period. Some companies that have gone public
after 12 months are down, but that’s what happens in a public market – there
tends to be a lot more movement than before the IPO.
the goal is to buy and hold, does this short-term volatility matter?
If the company is building a good business, the day-to-day ups and downs don’t
matter as much. Many companies have a lot to prove, but being able to identify
the long-term winners from the losers is ultimately what investing is all about.
some companies still able to raise capital in the private side?
will definitely be a flight to quality, or perceived quality. A lot more
attention is being paid to negative cash flows and the overall quality of the
business. That just means those companies that can raise right now may end up
cleaning up. Good investors will still compete over those deals.
it fair to say that a large capital raise today is more of a positive signal than
it was last year?
yes - absolutely. Companies that can get deals done are going to be standouts.
new venture investors have never seen the market take a turn. As they see a
business cycle, something that is quite common, how should they approach
simply means that it could be the right time for some to buy and for some to
sell. There are certainly a lot more sellers now on the secondary market, and
with pricing pressure working against them, it may present an opportunity to
investors who have been paying attention.
area of focus for both early stage and late stage investors should be finding
platforms that provide both liquidity and investment opportunities in more established
companies. At 500 Startups, we pay attention to this because investing is all
about portfolio management and dollar-cost averaging.
A personal thank you to Dave McClure for taking
time to share his thoughts on private markets. Have another question related to
venture investing? Ask in the comments below or tweet at us @EquityZen.
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