

500 Startups Raises New $50M Fund, Adds 4 New Partners. 250 investments to date - dwynings
http://techcrunch.com/2012/04/06/500-startups-new-fund-new-partners/

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choffstein
I met Dave when I was interviewed as part of his "Shadow Dave McClure" contest
last summer (<http://www.internmatch.com/dave-mcclure-job-shadow>). Getting to
sit down and talk to him for 15 minutes and see how 500Startups operates was
...enlightening.

Dave definitely sees the world a little differently. I sincerely hope this
business model works out well for him. On the one hand, it is a "diversify and
capture the broad market" approach, but he has also done well in creating a
brand for himself and 500Startups, making it an "exclusive" club to join
(remember, you can't apply!), which means he ideally only gets incredibly
qualified leads from his "mentors."

If markets are fairly efficient, in the long run he shouldn't make any extra
money over just investing in a broad market index. But if they aren't
efficient (and there is no reason to believe in the Angel space they are),
creating a huge diversified portfolio of incredibly well qualified leads that
he can incubate and nurture is a great portfolio strategy.

My worry is only the exit strategy and how he can prevent himself from getting
diluted in the Series A; being only a minority share-holder, there is nothing
that stops him from finding great companies, seeding them, and ultimately not
being able to turn as great a profit as he would like because he can't
liquidate and gets diluted.

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cloudwalking
Part of the fund is held for doubling-down in subsequent rounds of
seed/series-a companies that are doing well.

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choffstein
It's not just having the dry powder -- it's knowing which companies are worth
spending it on. You're either "defending your position" or "doubling down on a
loss." Great way to lose money fast unless you can find some real signal in
the noise of going from Seed to Series A.

And this is another brilliant part of Dave's model. He can rapidly apply
lessons from the last 50-100 startups he funded to the next 50. He can rapidly
collect metrics that will allow him to determine which companies are worth
following on with.

His "sample size" is much bigger and therefore allows him to mine out
statistically significant data about where to follow on.

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anandkulkarni
At this rate, they've got just two years left before they're forced to seek a
new name.

~~~
davemc500hats
LOL.

500 Bazillion Startups, yo.

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pitdesi
Dave is attentive and useful as an investor, even with 250 investments to
date. He's created a brand for himself and 500 that is awesome to be a part
of. It's great to be a part of the 500 family/mafia and I encourage anyone who
has the opportunity to do so to go for it.

As for 500s strategy, they have money for follow-on investments. They were in
our convertible note but then doubled-down in our seed round. They invest 50k
in each of their accelerator companies but also do follow-on in the ones that
show the most promise. The strategy makes sense to me... too early to tell
because none of the exits have been smashing home runs, but I certainly expect
some of them to have huge returns.

~~~
travisglines
One downside to their strategy is that the follow on investments can be seen
as a vote of confidence. It may be very hard for a company to raise funds if
passed over by the people who know them best.

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suking
I'd love to know how their spray and pray is working in terms of returns.

~~~
il
What makes you think their approach is spray and pray?

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suking
Because you can't do the due diligence a VC firm does when you invest in 250
companies.

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davemc500hats
due diligence is much better in the rear-view mirror, IMHO.

our 2nd check is a great confirmation of whether we were right or not...
happens ~20-30% of time after 1st check.

"500 due diligence = mentor filters + quick 1st check, followed by thoughtful
2nd check based on metrics"

~~~
staunch
So what are your thoughts on the "signaling" issue if you only follow on in
20-30%? What do you recommend the other 70-80% tell investors?

~~~
davemc500hats
1) we are quite clear with our companies that we are aligned in the goal that
they need to perform to receive future funding from 500 (as well as others)

2) 500 is usually a minority investor in following rounds, so decisions still
likely made primarily be lead investor

3) if companies and follow-on investors are more worried about our decisions &
subjective assessments rather than the company fundamental business metrics,
then there is already a problem.

we are in this business to be successful and make money. much as aim to help
all of our founders, we sincerely hope they are too.

