
For Dave McClure’s New 500 Startups Fund, U.S. Institutions Shy Away - kposehn
http://www.wsj.com/articles/BL-DGB-39825
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dharma1
I think they will do well if these companies are still around in 5-10 years
time, there will be success stories. The bets are longer term, since the exit
opportunities outside the US are still not comparable to the US. But a lot of
these regions are high growth so the landscape should evolve over time.

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jackgavigan
I suspect there's a bit of a culture clash thing going on too. Dave's F-bombs
and piratical demeanor may not sit well with institutional investors, who
_probably_ lie at the more strait-laced end of the spectrum... :-)

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k-mcgrady
Are there really still adults who care about cursing? I know there are people
who don't like it but I don't think it would result in them not doing business
with someone. Likewise I swear like a sailor but try not to in a business
setting as I find it unprofessional - but I wouldn't hold it against anyone
who thinks differently.

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maccard
Me, for one. I'm 23 and would prefer it if people didn't swear. It doesn't add
anything to the conversation and is completely unnecessary.

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EC1
It's completely necessary. Otherwise the words wouldn't exist and we wouldn't
be talking about it.

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bdcs
The article mentions rates of return of ca. 20%. Are these realized IRR
numbers? I would imagine the unrealized IRR (including only priced rounds, not
convertible notes [or SAFEs] with a higher cap) are higher than this. Am I
mistaken? What is convention here?

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antr
_> 500 Startups’ first fund, a $29 million pool from 2010, had an 18% net
investment rate of return as of the third quarter of 2014, according to Mr.
McClure. The mean return for all venture funds raised in that year stood at
20.5%_

This, to me, is the real reason. I know it doesn't paint the entire picture,
but if I were a portfolio manager at an endowment or pension fund I wouldn't
invest in 500 Startups:

1\. The fund is performing below the industry average (caveat, I'd like to see
what makes up that "venture funds" average), and

2\. even if we ignore the venture funds average return, 18% net IRR seems
extremely low for an investment vehicle that has above average risk. From a
portfolio management perspective I'd rather investment in mezzanine funds,
where the return is higher than 18% and a risk lower than equity/VC financing.

My feeling is that 500 Startups returns are decoupled from the inherent
risk... all I'm saying is that 500S is not picking the right (home run)
investments/companies.

Let's remember that these LPs/institutional investors have a fiduciary duty to
make sound investments, and 500 Startups doesn't meet the "right" criteria.
However, I were fund raising for 500 Startups, I would target wealthy
individuals, family offices, et al. who investment on their own behalf[1], and
haven't got that third party responsibility.

[1] I'm not saying these investors are not disciplined, but are able to take
on unconventional risks.

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davemc500hats
we believe we are performing far above average, actually... both in IRR,
exits, black swans, and other areas. that said, we are less than 5 years old
and most VC funds don't have much measurable results until 4-8 years in.

our first fund is performing at 18% _Net_ IRR (which includes fees; I think
the WSJ #s were actually _Gross_ IRR, which would be higher for our fund as
well, and likely considerably above mean).

regardless, our second fund is performing at 27% Net IRR, which is performing
considerably higher than median 6% IRR as reported by WSJ / Cambridge.

our third fund is still very early (just over 1 year old), however it seems we
are performing over 30-40% IRR (44% currently).

so overall: \- our funds are performing substantially above median \- our
performance appears to be increasing over the past 3 funds \- I doubt that
most LPs have turned us down because occasionally I use some 4-letter words...

thanks,

DMC

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antr
Dave, thanks for the clarification and insights. Your comment provides a much
better insight into the fund. Thanks

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zkhalique
Sorry but how does 500Startups really differ from all the other VC funds out
there? Real question.

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austenallred
They do a ton of small investments (hence the name) all over the world, via
both an accelerator and a seed fund.

Differences:

* Their site says they've funded over 800 companies, which is absolutely absurd in the few short years they've been around. A lot of venture funds won't do that many deals in their entire lifetime, let alone in a few years.

* They do a _lot_ of International deals (in 40+ countries). Most other VC funds are skeptical of (and often avoid) investments outside of Silicon Valley, let alone outside the United States.

* My own interpretation is that 500 Startups also focuses on things that generate revenue quickly, and not so much trying to find the next Facebook.

* And then there's Dave McClure. If you know who he is, this bullet point needs no explanation.

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crdb
Don't forget: they're "almost always" not the lead investor. They specifically
will only look at companies with an existing investor.

When I asked, Khailee Ng told me they used that as a filter (presumably
instead of "only warm intros" and/or associates binning thousands of cold
pitches). I thought it was a neat idea, especially since the industry does
this unofficially anyway
([http://paulgraham.com/fr.html](http://paulgraham.com/fr.html) \- "Avoid
investors who don't lead" \- obviously 500 Startups is an exception thanks to
their brand and network).

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mikeleeorg
I don't find any of this surprising. From the point of view of an
institutional investor, the arguments they've made in the article totally make
sense.

One definition of a startup is that it's a high-growth, high-risk enterprise.
While endowments and pension funds sometimes do carry some high-growth, high-
risk capital, it's generally not the bulk of it. And I think that's perfectly
sensible.

On a side note, the idea of a "index fund of startups" is interesting. I'm not
sure I'd consider 500S, or even YC, quite like that, but it's a great line to
use.

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jshore
Assuming he can uniformly invest across startups (i.e. invest in quality in
addition to lower quality), and adds to winners, such an approach is akin to
"ensemble-learning" approach. Works well for portfolios if the measure of
prior performance & risks used to determine reweighting is proper and there is
a high positive auto-correlation between the performance measure and future
performance.

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vasilipupkin
My guess is, 500 startups will beat the median VC fund over a long period of
time. Perhaps the very best VCs are able to identify winners through their
stock picking skills, or through better access. But I doubt this is true for
the median VC.

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jmsdnns
The median VC fund doesn't even beat the S&P. It operates under power laws, so
the top 5% get basically the money and everyone else goes broke.

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vasilipupkin
they don't go broke - they still generate positive returns. I am not sure why
they actually need to beat S&P 500. I think this is misunderstanding portfolio
theory. As long as they are not perfectly correlated with investors overall
portfolios and they have positive returns, it's ok for them not to beat S&P

