One Investor's Global Hunt For Worthy Startups

David McClure's venture capital strategy: place small bets on lots of companies.

Just listening to David McClure recap his recent travel schedule is exhausting. From the start of October through mid-November the 44-year-old venture capitalist addressed entrepreneurs at 14 conferences from Toronto to Nanjing, China. During one stretch he flew from New York to Dublin, where he landed at 6 a.m., gave a speech at 8 a.m. and talked startups with Twitter founder Jack Dorsey at a club until 3:30 a.m.; 36 hours later he was trick-or-treating with his two kids in Palo Alto, Calif.
Many investors scour specific arenas looking for big winners. That model hasn't worked so well for many VCs, thanks to a dearth of acquisitions and initial public offerings in recent years. As of June 30 the VC industry had posted a -4.2% annualized return over the previous decade, versus a -1.6% for the S&P 500, according to the National Venture Capital Association.

McClure's strategy: Place small bets on a lot of companies--wherever they are--and flip enough of them quickly to larger acquirers or other investors. Hence the ambitious name of his fund, 500 Startups, launched in March and now with some $15 million under management and 60 tech-flavored outfits in its portfolio. Rather than try to find one Google ( GOOG - news - people ) in 100 tries, McClure is aiming for at least 10 good "exits"--in the $50 million to $150 million range--for every 200 companies he bets on. "I want to be Ichiro Suzuki, not Barry Bonds," says McClure, who favors T-shirts, sneakers and spicy expletives.
McClure says he has flown roughly 100,000 miles this year--including three trips to Asia, three to Europe and one to South America--looking for targets. In some cases his picks are as much about doing research as about placing considered bets. In September McClure bet on China Net Cloud, a cloud-computing-services company in Shanghai. "It's an opportunity to put a toe in the water and see what could be interesting in China," he says. McClure took a similar approach in Austin, Tex., where he plunked down $250,000 for 2.6% of OtherInbox, an e-mail management company. The founder, Joshua Baer, also runs Capital Factory, a nearby business incubator. "It's basically a twofer," says McClure. "It helps me understand the Austin startup scene."

McClure was a Web developer and consultant before heading PayPal's marketing division from 2001 to 2004--long enough to meet a rash of Silicon Valley players and snare enough stock options to buy his mom a house and write checks to 13 startups. One of them, Mint.com, a personal-finance website, got picked up by Intuit ( INTU - news - people ) for $170 million in 2009.
Jody Sherman, founder of Ecomom, an online retailer of green baby gear, doesn't mind his backer's itinerant approach. One meeting took place walking between conferences in San Francisco; during those 20 minutes McClure fired off six e-mails and introduced Sherman to a potential investor and a Web designer who could smooth Ecomom's interface. Says Sherman: "People take the time to talk to you when Dave makes the introduction."

Business VIDEO part 4

Business VIDEO part 1

Business VIDEO part 3

International Sales Key For Consumer Staples To Keep Pace

The sector has been outperforming, but slow growth at home means even more needs to come from emerging markets.

In Pictures: Ten Consumer Staples Stocks Set Up For Success

In the hunt for elusive profits in a sector that relies on consumer demand, the companies poised to outperform are those that are less dependent on slow-growing developed markets and more exposed to faster-growing emerging markets.
Despite the challenges facing the U.S. and Europe, consumer staples companies have outperformed the broader market this year. Accounting for 11.3% of the S&P 500, the sector has risen at a 5.7% clip in 2010, better than the 3% advance for the index as a whole. Looking ahead, analysts think the biggest winners are going to be the companies that have moved aggressively into Asian and Latin American that are poised to lead the way in consumption growth for the next several years.

"Most emerging markets are healthier now than they were 10 months ago," says Citi analyst Wendy Nicholson. For companies like Avon Products ( AVP - news - people ), which has invested more than 90% of its business in emerging markets and 50% in Latin America alone, the potential to offset weaker profits in developed economies with strength from newer markets is good.
One of the biggest benefits to U.S. companies with strong operations abroad has been the decline of the dollar, and the correlation between rising consumer staples stocks and the sliding greenback is readily apparent. As just one example, Avon shares are up 32% since June 1, while the dollar is down 12% against the euro. "That the dollar has fallen over the last 6 months is a huge positive for these companies. Now they owe us an update in the way this has affected their top and bottom lines," Nicholson says.
In Pictures: 10 Consumer Staples Stocks Set Up For Success

BATS Real-Time Market Data by Xignite

Morningstar analyst Philip Gorham recommends looking at companies with "broad geographic footprints" for the best performers this earnings season. The largest consumer staples companies, like Coca-Cola ( KO - news - people ) and PepsiCo ( PEP - news - people ), have focused in markets like Latin America and Asia for 30-40% of their top lines. Emerging markets generate higher operating margins than the U.S., thanks to stronger currencies and lower production costs

Business VIDEO part 2

Emerging Market Bonds Still A Buy

Should you invest in emerging market bonds?

Kristin Ceva says emerging markets are likely to keep creditors happy.

Americans have poured billions of dollars into emerging market bond funds this year in their global search for high yields. Are they setting themselves up for disaster as developing countries revert to their bad old habit of stiffing foreign creditors?
Not likely, says Kristin Ceva, comanager of the $635 million (assets) Payden Emerging Markets Bond Fund. Ceva, who holds a Stanford Ph.D. in international politics and studied Mexico's financial system as a Fulbright scholar, undoubtedly has an interest in talking up emerging markets. But she also makes an impressive case that they offer attractive fixed-income deals relative to the U.S.

The balance sheets of many developing countries' governments, she notes, are far healthier than Uncle Sam's. Total emerging market government debt averages less than 50% of gross domestic product, compared to more than 100% for the G3 (the U.S., Europe and Japan). Meanwhile sovereign emerging market bonds (about half of which are investment grade) are paying around three percentage points more than the 2.5% investors can earn from the comparable ten-year U.S. Treasurys.
"On any measure of debt sustainability, whether it's GDP, overall debt levels or GDP growth, the emerging countries are about twice as good as what you're seeing in developed markets," says Ceva.
There are risks, of course. Many of the countries Ceva is investing in have defaulted or restructured debt in recent years. The Asian financial crisis sent the value of emerging debt into a tailspin in 1997. A year later Russia defaulted on its domestic debt and halted bank payments to foreign creditors. The Dominican Republic restructured its foreign debt a mere five years ago.
Another reason for caution is that the popularity of emerging market bonds itself increases the risks. Americans have hiked their holdings of emerging market debt nearly sevenfold over the past decade to $34 billion, including a $5 billion inflow this year alone, according to Lipper Analytics. It's probably no coincidence that during that time emerging market bond funds have returned an annual average of 11.5%, or more than twice the 5.2% bond fund average.

Investing

As prices have risen yield spreads over Treasurys have narrowed for sovereign emerging market bonds. Their three percentage point yield premium means the emerging bonds are hovering close to their long-term average but double where they were during the frothy precrash days of 2007.
Pricing may not yet be flashing red, but there are other concerns. Foreign investors have gotten fleeced in the past as inflation in places like Brazil and Turkey has undermined the value of local currencies relative to the dollar. Investors can limit such risk by buying greenback-denominated "dollar pay" bonds. Owners still get burned, of course, if the issuer fails to come up with the dollars to honor its debts. That helps explain why spendthrift Venezuela was forced to offer a whopping 15.25% coupon in August to unload $3 billion worth of dollar-pay bonds.
So far, the dollar-pay pool is shallow, with only about $500 billion worth outstanding. That compares to $2.5 trillion worth of local denomination emerging market bonds, Ceva says.