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Lean Investing Best Practices from Dave McClure

Earlier this month, Dave McClure joined us at AngelSummit 2016 in Dublin, Ireland. Dave imparted some wisdom (and candid cautions) on the audience of aspiring and experienced investors, community leaders, and entrepreneurs. If you’ve ever wondered how to approach angel investing — and how some best in the business approach it — here’s a snapshot of the 500 Startups investing strategy:

Think like a lean investor.
– Start out with many small experiments
– Filter out failures and small wins
– Double-down on things that are working

The 500 strategy – “make lots of little bets.”
– Get on board with startups in their earliest stages, where small bets are possible
– Watch and learn over the next few years, doubling down on the top 20-30% startups
– Wait 5-10 years for returns and expect that 10-20% of investment returns will come from small exits

Dave’s perspective on when you’re ready, how to find better deals, or attract venture capital to your city, etc – “Just write fucking checks.”
-Abrupt and harsh, we know. But it’s a key tenet of his philosophy, and it mirrors what works in many of the world’s most successful startup communities.
-If you wait to invest, you’ll never do it. If you wait for VCs to show up, they never will.

McClure also broke investing into three stages:

Stage one is product validation and customer usage. Investments at this stage tend to go to startups with 1-3 founders who are working in an incubator environment. Investments are smaller, typically up to $100K. Founders at this stage are seeking their “Minimum Viable Product” and finding ways to reduce product risk.

Stage two is market validation and revenue testing. Teams at this stage are between 2-10 people generally and investments tend to range from $100K to $1M. Startups in this stage are looking for ways to expand their customer base and test revenue and assess market size as they go from alpha to beta in their product lifecycle. During this stage, startups are likely making key hires and developing their organizational structure as well.

Stage three is revenue validation and growth. Investments made at this stage typically range from $1M to $10M and go to teams that are generally 5-25 people in size. Startups at this phase are looking to “make money or go big;” they aspire to go into production, invest in scalability and infrastructure, and expand growth.

By the way: let’s quickly talk tickets versus rounds for those who are new to startup investing. Keep in mind that Dave’s talking about entire fundraising rounds — but as an individual investor, you need to think about your check sizes, and they need to accommodate the size of the round. You don’t need to “take” the whole round with one big check, but you can’t be a tiny fraction of the round, either. Early on, anywhere from $5K to $50K can make sense — depending on your conviction and risk tolerance. Around stage two (the ‘seed stage’), $25K to $50K is reasonable for an individual investor. In later stages, bigger checks are expected: $100K, $250K, up to a few million.

Final words Throughout his talk, Dave also reminded the audience at AngelSummit that angel investors shouldn’t expect big wins from investments – let alone ‘Unicorn’ level wins. Instead, angel investors should broaden their reach, investing in numerous companies, and anticipate small returns that pay out over time. No one ever said lean investing was sexy, but there are plenty of other reasons that people choose to invest in startups — more on that later.

To read more of Dave’s advice for startups and investors, check out his slideshare presentations here.