After spending many years on the corporate side of Silicon Valley at Yahoo!, Marvin Liao now runs the San Francisco accelerator program of 500 Startups. He’s selected hundreds of startups from around the world to join the accelerator, many of which are from outside California—a key tenet of the 500 Startups investment thesis.
Elliott Adams: It seem like the 500 Startups thesis has a big international focus, is that correct?
Marvin Liao: I would say for 500 in general, Dave (McClure) and Christine (Tsai) had the insight that the whole world's changing, right? Nobody's going to argue that fact twenty years from now. When you look at population growth, middle class growth, urban growth, and technology and mobile, you see all these things coming together. The US is not the center of the world. You're going to see huge opportunities, and the reality is that VCs in Silicon Valley have widely ignored, with a small exception, all of these trends that are happening everywhere else. So, I think Dave was always very interested in this area, but the fact that probably 30-plus percent of our portfolio is actually outside the US means that we're putting money where our mouth is. Having said that, it's still really early, and we do think that it’s going to happen. And so, we are making very, very long-term bets here.
EA: What are you looking for when you're taking applications and looking at teams?
ML: We're an early stage VC, right? The only difference is we're doing the investment through a mechanism of an accelerator. The reality is that we look at companies the exact same way traditional VCs do—the only difference is, we're just doing it very, very early. We're doing it as a sort of larger portfolio, so the reality is that, numbers-wise, we're probably getting 2,500 applications and companies that we've looked at. We end up interviewing and talking to about 250 of them, and we end up taking forty-three companies. So, it's a very large funnel, so to speak, but we're looking for all the same things. Are these awesome founders? Is this a balanced team? Is this an interesting problem and a big market? Is this fundable? Are they at the right stage where we can be helpful when the forté of our program is really more on the customer acquisition side? It's like all these things that a VC would be looking at, just a little bit early, along with more of a hands-on process when we invest in them afterwards.
EA: They need to have, I assume, at least an early product and some sort of traction. What's your preference there?
ML: I think a lot of it depends on space. For example, if you're a FinTech or digital health company, where there are a lot more regulatory things to deal with, then your stage is probably okay. But say you’re a SaaS business. I want to see some level of MRR (monthly recurring revenue) growth, right? Or if you're enterprise software, I want to see a couple of very good customers, right? So, it just depends, but generally speaking, we’re looking for some initial proof that something's working.
EA: Is there a single thing that definitely takes someone out of the funnel or something that keeps them in? The quality of the founders, for example?
ML: For sure. I think the key things are these founders, and is this a really interesting market, right? Is this a fundable market?
EA: What do you guys do differently that you think is the secret sauce?
ML: I think it's a couple of things. Number one, it's the fact that almost everybody on our team has done twenty batches just in the Bay Area alone. Most accelerator programs do not even get past number two or number three. So, the knowledge and the large sample sets that we have of companies is very, very helpful.
I think the other part is our customer acquisition. We have about fifteen full-time and part-time online-marketing b2b sales experts that help our companies figure out how to get customers in a scalable way. The fact that we have so many ex-entrepreneurs, all founders, working for us is critical. Except for my project manager and one of my venture partners who just handles the community, everybody on my team has founded companies. They've all done this before. I think half of them have been successful, half of them haven’t, but the fact that they've all done this is actually helpful. I think the fact that we recruit everywhere, across the US and internationally, is a plus as well. My batches probably always turn out to be about one-third Silicon Valley, one-third from the rest of the US, and one-third international. It's just a very unique group of highly qualified founders in general. But also, the fact that this is personally my seventh batch—you just learn. I know so much more now than I did when I first started. I've had 271 companies go through my program. You're an idiot if you don't learn anything after all that.
EA: What have you learned in the last few years?
ML: Basic things are what I look for in companies. Who on my team is really good at picking companies? But also, who on my team is not so good at picking companies but is much better at helping the companies and coaching, for example? I look at all the different skill sets: how to run the program itself and also the programming of the types of things we're focusing on that will help the companies. I look at how much bigger our network is now or how much bigger my network personally is right now compared to when I first started, the types of speakers that we bring—all these kinds of things are very helpful.
EA: You sound pretty bullish on software as an opportunity right now. Like, you still feel there's plenty to go around.
ML: Yeah. There’s this idea that there's no more innovation happening out of the Valley, which I think is just ridiculous. The stuff that I see—there are just so many new things, and it's not even just the companies I invest in, but in biotech and in voice. And mobile, we're not even close to where mobile needs to be, like with messenger products. There's just so much in the payment space, and if you think about it, software really is eating the world. It's true.
Let's just look at SaaS. SaaS is a fraction of total enterprise software out there or even software in general. There are so many opportunities, and I'm just not concerned with this idea that there's no more innovation happening. Like I said, as you see companies getting bigger and bigger, they get slow and they get dumber.
EA: The larger ones can't get in early and do what has to be done to make something proven or prove the concept, if I'm understanding you.
ML: Yeah, but the nature of big scale and processes works against fast innovation like early-stage growth. So, the idea of [Clay Christensen’s] the innovator's dilemma is still from the late '90s. It's still very relevant.
EA: So, you bring in companies from all over the world. What are your thoughts on companies staying in Silicon Valley? Once they come and participate in a program like 500 Startups, do they need to stay?
ML: To be honest, it depends. If your core market is, say, the developer market, you should probably stay. But if your core market is Fortune 500, a lot of them are on the East Coast, you should probably go back home. Let's say you are a company where your customers are in Germany or the UK. You should go back home.
EA: Be close to the customer. Okay.
ML: Yeah. And go where your customers are. That's what I think makes the most sense.