Investment funds in Nordic countries, Russia and India are shelved while China deals slow down
This article originally appeared in the Wall Street Journal on January 5, 2017.
Dave McClure of 500 Startups is ready to conquer the world. But not all of the world is prepared for his venture-investing strategy.
With some 1,600 portfolio companies, a third of which are based abroad, 500 Startups, founded by Mr. McClure and Christine Tsai, is likely the world’s most prolific seed investor. And it remains committed to its global strategy.
Recently, however, the Silicon Valley firm has run into some setbacks in its international-fund ambitions.
500 Startups has put its Nordics and India fundraising on hold, has scrapped plans for a Russia fund, has pulled back from investing in China, and has weathered a deteriorating investment environment in Turkey, where it is raising a fund. Several 500 Startups’ team members who were involved in those initiatives are no longer with the firm.
Geopolitical, economic, and strategy reasons, contributed to some of these setbacks, according to people involved in them.
“Some s— we don’t get over the finish line,” Mr. McClure said. “We know it’s complicated, but being in the right market early creates an advantage.”
Robert Siegel, a lecturer at Stanford’s Graduate School of Business who has co-invested in the U.S. with 500 Startups, said investing overseas holds great promise for ventures that can navigate risks ranging from immature startup communities, cultural differences and political unrest.
“You want to invest in something that you think is clever and everyone else thinks is foolish,” he said. “Otherwise you get commoditized returns.”
500 Startups started out by creating a main general fund, investing globally. More recently it began launching microfunds, focused on a geographic region or sector under the 500 brand. They are usually run by local general partners with Mr. McClure or Ms. Tsai serving as GPs, as well. The main fund looks to regional funds for deal flow.
So far 500 Startups has raised six foreign microfunds, in Southeast Asia, Latin America, Thailand, Japan, South Korea, and Turkey. It has several new ones planned from Canada to the Middle East and is raising second funds for Southeast Asia and Latin America.
Mr. McClure said that even when a micro fund doesn’t work out, 500 Startups will still invest in the region, as it’s doing in Scandinavia, for example.
The firm has recently shelved its plan to raise a $15 million 500 Nordics fund. Governments like Norway and Sweden were interested in investing only if the fund focused on their country, but it sought a regional mandate, Mr. McClure said. Sean Percival, who was due to manage it, left 500 Startups.
In India, the 500 Kulfi fund, which targeted $25 million when it was announced last February, is also on hold, Mr. McClure said, citing what he called regulatory complications related to foreign-owned investment firms. Pankaj Jain, who was leading the effort, has moved into an advisory position.
In China, meanwhile, 500 Startups has dialed down deal pace. “Valuations have been insane over there,” Mr. McClure said.
Rui Ma, a former partner at 500 Startups focused on China who left the firm in November, said that being a U.S.-dollar denominated fund with limits on investments in particular industries also stymied 500 Startups’ pace of deals.
In Turkey, despite political violence and instability, 500 Startups did manage to hold a first close on its 500 Istanbul LP fund in 2016, targeted at $15 million, Mr. McClure said. But it did replace general partner Erhan Erdogan with Rina Onur.
Mr. Erdogan (no relation to Turkey’s president) said he was somewhat disillusioned with early-stage fundraising in Turkey. Given the immature local startup scene, coupled with the general turmoil in the region, he said it was difficult to make promises to potential local limited partners, especially if they weren’t familiar with realities of startups. He emphasized that he was speaking about the regional venture landscape generally, and not about 500 Startups.
“The return on investment is kind of a dream,” Mr. Erdogan said. “It’s so early in such emerging markets to make such returns.”
For Mr. McClure’s part, he said that international fund performance may be higher or lower, but will likely be “more volatile” than in the main fund.
He has also explored a Russia and Eastern Europe fund. In 2015, Diana Moldavsky joined to lead the strategy, but she has since left. Sanctions imposed on Russia and related political events put a damper on the 500 Russia plan, Mr. McClure said, adding, “You can’t control for global politics all the time.”