Angel investor is really getting started on China

The flamboyant founder of 500 Startups brings his Silicon Valley zeal to Asia in the hunt for innovative businesses to replicate his US success

PUBLISHED : Friday, 07 June, 2013, 12:00am
UPDATED : Friday, 07 June, 2013, 3:46am

Dave McClure of 500 Startups embodies Silicon Valley's famous casualness right down to the frayed hems of his jeans and flip-flops he wears to give a talk at Cocoon, a co-working space for start-ups in Tin Hau. And when he sits down for this interview at the InterContinental hotel to talk about tech entrepreneurship in China, he slips his shoes off under the table and chats with a drink in hand.

"He tried to walk into China Club in flip-flops and they wouldn't let him in," laughs his venture partner Rui Ma. Ma is the first 500 partner to be based in China and is tasked with scouting early-stage companies in the region for the seed fund to invest in.

The addition of Ma six months ago and this trip down the coast of China - Beijing, Shenzhen and Hong Kong - is all part of a pivot to Asia and non-US markets. Twenty per cent of the companies that 500 Startups funds are now outside the United States and it is clear that McClure sees a lot of investing potential in Asia's tech scene.

It is his eighth trip to China in the past four years and his children -- a young son and daughter - have been learning Mandarin through a nanny essentially since birth.

McClure is one of the most high-profile angel investors in the world - partly for his investments in companies like,, and Wildfire, which was later acquired by Google; and partly for his straight-talking blog 500 Hats (one of the most widely read sites on venture capital) which showcases his sailor mouth and unusually blunt advice like "don't suck!".

The company has invested in 9Gag, a website which shares memes or viral internet photos - the most successful start-up from Hong Kong. Recently, it injected funds into another local start-up Spottly, a social platform that makes it easy for people to create and curate location recommendations - similar to the Pinterest platform, but for places.

McClure has his eyes set firmly on the region, saying there's a gap of experienced angel investors and seed funds relevant to the amount of opportunity. Hong Kong is not short on capital and it even has investors with entrepreneurial experience but they often lack internet savvy.

"There might be too much dumb money," says McClure. The concentration of equity ownership in just a few hands also contributes to the angel investor shortage.

He recalls how a small distribution of stock in PayPal allowed him to get his start as an investor. "I was employee number 250 or 300 but I actually got a small stake of equity that turned out to be slightly less than a million dollars, a third of which I put into companies that I invested in. I don't think I'd ever be able to do that had I not had some type of equity ownership stake. But outside the founders or executive managing team, it's much less common to distribute stock here," he says.

That said, he feels the asymmetry will resolve itself over time. He's pushing ahead with international plans, though he's a bit more cautious in China compared with other developing markets like Brazil and India. That's because mainland China online is so vastly distinct to the rest of the world in terms of back-end platforms.

"With other geographies even though they may be outside the US there are similar back-end platform services being used, so whether you're in Latin America, Southeast Asia, Europe, you're still probably using Google for search, Facebook and Twitter for social, Apple and Android for mobile," he says.

"For a lot of those companies we have very strong relationships - 10 to 20 years of experience operating with those folks in the valley. In China, it's quite different. It's Tencent, Alibaba, Baidu. There's also probably a significant difference in culture that'll take us time to get familiar with." Hong Kong, meanwhile, presents its own conundrum for start-ups. With a population of seven million, the local market doesn't provide a high enough level of profits to entice investors. Historically, the city has been a physical gateway to doing business on the mainland, but McClure is not so sure there is an internet parallel to that.

"Obviously [Hong Kong] is a financial centre. It's a shipping and logistics centre," he says. "Potentially it's a gateway to China but from an internet perspective it doesn't help so much. My advice to someone who is interested in the Chinese market is to go to Beijing, not stay here. The shipping and logistics business is more a physical business, not internet.

"Aside from financial technology solutions or logistics and shipping software, I don't see that there is a unique brand or opportunity from Hong Kong that's differentiated."

Essentially, he says, if entrepreneurs in Hong Kong want a shot at making it big they need to develop products for English or Mandarin as these languages open the door to much larger markets.

Though if there's one thing start-ups should be wary of, it's embracing failure too much like a badge of honour. Not because McClure himself didn't have several failures. For about two decades, McClure felt as if he was "lost in the forest".

His first start-up, a technology consulting firm, was a painful process riddled with mistakes. "I spent five to seven years of my life, had a couple of friends bail on me, was on the verge of personal bankruptcy," he says.

These were valuable lessons learned but he says many people are too glib about their failures, probably because they haven't had a really hard failure yet.

"It costs you money. It costs you love. It costs you blood, sweat, tears. There are consequences to screwing up your personal credit rating or screwing up a marriage or having someone who has been your friend for 10 years call you up and say you're an a**hole and they don't want to work with you anymore," he says.

"This … lightweight failure of running out of money and having to get another job? That's easy. I don't think people have enough reverence for failure. There's a bit of cultishness around start-ups like creating a rock band."