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.
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... :-)
What's the effect you're talking about? I assume they favor diversification and therefore cause lower overall variation in the performance of companies invested in?
I believe vasilipupkin is referring to the financial phenomenon of ETFs, robo-advisers, and the "democratization" of traditional (stocks, bonds real estate) investing. In yesteryear, middlemen (rentiers) would charge premiums for running an active portfolio (of say bonds or stocks). Nowadays, the middlemen have been cut out because the increased returns (if any) didn't cover their fees. This has yet to have happened to VC. Once you move to a invest-in-everything model, there is no need for the investment managers (only advisers which actually help the companies) a la 500S.
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.
Institutional investors are some of the most conservative investors you will ever meet. They don't have much downside from losing money in a fund that looks "normal", and they don't have much upside in outperforming in a fund that looks "weird". They'll look past personality differences for a proven winner but a track record as short as 500 startups' can easily be attributed to luck (even if it is not). It's a principal-agent issue
_Excessive_ profanity, by the nature of its excessiveness, is unnecessary. Well-placed profanity can do a lot to color a conversation by adding stress, tone, pace, repetition, etc.. The kind of things a good rhetorical performer needs on hand and in easy supply at all times.
I think profanity is essential to self-expression, even more so at work than in a social setting, where I actually do try to exercise some restraint. This idea that profanity is somehow unprofessional is a new, and frankly, bewildering idea to me
I'm originally from NYC and have a bunch of friends in the financial world. From at least anecdotal evidence, cursing is alive and well on Wall Street. If you don't want to take my word for it, read any Michael Lewis book on Wall Street.
I've worked as a trader and I agree. But there's a world of difference between swearing at your Bloomberg screens when the market goes against you (or at the guy who just snuck up behind you and farted in your ear), and explaining to a conservative, 55-year old family lawyer or a buttoned-down pension fund trustee why they should invest in 500 Startups instead of that nice, reassuring, corporate venture capital firm.
In my experience, trading desks are less overtly sexist than in the old days (that I've only read about) but there is still lots of profanity and other highly offensive "colorful" language.
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?
> 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.
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...
Ideally, all investors want to invest into a top fund. But that is hard to do because of capacity constraints and because you don't know ex ante which fund will be in the top 5% in the future - so this sort of performance close to the mean seems pretty good.
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.
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 - "Avoid investors who don't lead" - obviously 500 Startups is an exception thanks to their brand and network).
From the LP pov, it boils down to capital concentration. Most LPs I've spoken with are not that different from Michael Kim (LP from the article) in that they are for capital concentration. It is the most controversial part of the offering.
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.
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.
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.
I don't think averages are a very good benchmark in venture because the top performes are so easy to identify (a16z, benchmark, founders, sequoia, etc).
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
