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500 Startups Raises New $50M Fund, Adds 4 New Partners. 250 investments to date (techcrunch.com)
68 points by dwynings 1122 days ago | 22 comments



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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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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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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n.b.:

Markets aren't efficient in any space ;)... (review the assumptions required for an efficient market, so see how reality violates all of them with consequences, or just look at the empirical, historical data; also see behavioral finance literature).

All existing investors/shareholders are diluted in new rounds, almost always. And all shareholders -- including investors -- in high-tech startups are minority shareholders (less than 50%), with the exception of single founders early on, typically. (Minority shareholders, investors especially, still have certain rights.)

I hope these notes help!

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

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LOL.

500 Bazillion Startups, yo.

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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.

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

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Based on shear numbers, "spray" is probably accurate. But I don't think "pray" is the right word. Obviously Dave cannot give every company a substantial amount of attention but he is ridiculously attentive, has partners and has mentors.

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What makes you think their approach is spray and pray?

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

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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"

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This is pretty interesting. It's kinda like high stakes online poker where you take luck out of the equation by playing thousands and thousands of hands.

Basically, you're going to have a run of bad cards (companies) and a run of good ones. But if your decisions are consistent, and adjust to migrate towards successes, you'll end up ahead no matter what... assuming you're moving in that direction.

It's really not spray and pray, just as high stakes poker doesn't really have anything to do with luck.

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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?

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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.

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They aren't investing VC level money either. The same criticism applies to YC as well doesn't it?

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I'm not criticizing, I'm wondering what their returns are. We know YC has had some huge hits... has 500?

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nothing like DropBox or AirBnB as yet, however hopefully a few Herokus on the way;)

looking good so far: Twilio, SendGrid (TechStars), Wildfire (fbFund), MakerBot, TaskRabbit (fbFund), Smule/Khush, Viki, Medialets, Zozi, ElaCarte (YC), 9Gag (500), ReadyForZero (YC), several others @ Series A/B/C doing pretty solid.

smaller but growing well: MindSnacks (DreamIt), 955 Dreams (500), PicCollage (500), Kiwi Crate, Visually (500), AppStack, MyGengo, Erply (SeedCamp), GinzaMetrics (YC), Farmeron (SeedCamp), ZenCoder (YC), Fitocracy (500), StyleSeat.

10+ modest early exits to Google, Twitter, LinkedIn (x3), Amazon, Groupon, Cisco, Facebook, ReturnPath, DemandForce, etc.

(apologies to any juggernauts or others i left out!)

DMC

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MyGengo has built a fantastically useful tool which has saved me a ton of time and money. I don't know anything about the addressable market size, but they have <i>nailed</i> the product.

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Cool - thanks.

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they've had some great exits (Backtype for one) and are in on some great companies like Twilio, Fitocracy, Sendgrid, Wildfire, and TaskRabbit.

Honestly, 10 have already exited, and they have at least half a dozen impressive companies in the pipe.

Are these companies AirBnB or Dropbox? Probably not, though Twilio is legit.

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