500 Startups still owes money to its latest group of startups | Hacker News Reader

500 Startups still owes money to its latest group of startups

axios.com

203 pointsmoritzplassnig73 comments

"While we were completing legal documentation related to Dave McClure's resignation from 500, funding for certain companies was delayed. Since then, we have resumed fundraising, as well as funding our investment commitments. We have been regularly communicating with our companies regarding the status of their investment and expect to complete all outstanding investments in December."

Here's my outsider's guess: Dave was almost certainly a Key Person in 500's Limited Partnership Agreement. When a Key Person leaves, for whatever reason, that triggers a Suspension Event and the start of the Suspension Period. During the suspension period, the LPs are not required to contribute capital except for certain things (e.g. management fees, follow-ons). The LP's (some threshold or some combination of them like the LP advisory committee) then have 60-90 days to vote whether or not to continue with the fund.

500 would already have called down some capital so that meant they could make a few investments but otherwise, during the suspension period they likely couldn't make any new ones. Since then they got their LPs on board with the idea of continuing without Dave and now can fulfill all their obligations. That would make sense to me because 500 as an institution is much more than just one man.

The LPs would likely be on the hook for capital calls related to a binding committed investment under the docs.

Except the implication is they “invested” in companies they didn’t have the cash for. It’s not acceptable to say you’ll invest in a company and then go fundraise to fulfill that commitment. Those things need to happen in reverse order.

Although I would love to agree with you in theory, in practice in Silicon Valley everyone is selling first and building second (or not at all). It's not unlikely that 500 was fundraising with one hand and investing with the other, and when their master sales person left, the process got a little tangled.

If I remember correctly, Microsoft famously sold Windows like this...

Not Windows, DOS.

For the record, this happens all the time in the private equity world (they're called fundless sponsors).

> It’s not acceptable to say you’ll invest in a company and then go fundraise to fulfill that commitment

When a VC “raises” capital, they don’t get a box of cash. Instead, their LPs sign commitments. When the VC signs a subscription agreement with a company, they “call” that capital from their LPs. LPs are then obligated to supply it promptly so the VC can meet its obligation to the company.

This is done to separate cash management and investment. (While the cash sits waiting, one investor may want it in CDs; another in Treasuries. Mingling that risk with the core activity of VCs, picking great ventures, isn’t worth it.)

OP is saying the LPs, as part of their commitment, may have had an out in their paperwork. VC signed subscription agreement. VC called money. LPs said “no, we’re exercising this clause to delay or not give you that money.”

TL; DR a round isn’t raised until it’s closed.

Disclaimer: I am not a lawyer. This is not legal advice. It outlines a hypothetical and does not necessarily represent the facts and circumstances of 500 Startups.

Yes, but you don’t invest money that isn’t closed.

> don’t invest money that isn’t closed

Are you talking to the VC or the company?

When a VC says they have “closed” a fund, it means they have collected commitments. (I have found no consistency in what companies mean by having “closed” a round.)

My company just finished this batch. 500 was upfront that funding would not happen until at least 2 months after the batch starts. My impression is that communication has been weak after Dave leaving and that has allowed room for speculation. Personally, 500 has been good to us.

I participated in an accelerator run by a large corporate VC. They were supposed to give part of the cash up front (for common stock) and part after (in exchange for a note). During the initial negotiation, they offered to let me take it all up front for common stock. Because we had plenty of cash on hand, and because I wanted to use the post-program note to kick start a funding round, I said I'd just do the regular deal.

When I asked them about the note after the program ended, they said they thought I didn't want all the cash and so they wouldn't give it to me. Years later, and I've only just now gotten them to give the promised funding. I was shocked that they would behave this way considering the damage it can do to their reputation if word got out.

And yet...word doesn't get out.

I decided not to publicize it without giving them several chances to fix things. They did eventually fix it, and for reasons I won't disclose (because disclosing would make identification much easier), publicizing what happened to me would no longer be terribly helpful.

>publicizing what happened to me would no longer be terribly helpful.

To you maybe; what about everyone else?

The unhelpfulness isn't related to my getting the funding. It's about changes at the VC

Why not write an anonymous post, better for others to know.

Definitely thought about it at several points. We aren't technically covered by a nondisclosure agreement, but at this time I'm not writing it up. Many people (from my cohort and beyond) are aware of what happened, so if people reach out to them when they are doing diligence on the VC, they may find out that way.

Everyone in your cohort may also assume that you will be the one to tell those doing due diligence because you aren't covered by an NDA and it happened to you?

As I mentioned in a sister thread, the issue is largely moot because of changes at the VC.

I've had a bad feeling about Dave McClure and 500 Startups since their Geeks on a Plane trip to India.

I was living in India at the time with a few other American open-source engineers. I reached out to 500 Startups and GOAP several times about the trip and couldn't even get a response.

The whole premise of GOAP felt like a way for Dave McClure to travel to remote places with attractive women. I'll probably get heavily down-voted for this comment, but I think it's not very far away from the truth.

I always felt that something's amiss when you name your Korea fund "500 Kimchi" and let that hit media headlines.

I mean wouldn't people in South Korea find this to be derogatory?

Good question: would they?

If you named your Canadian fund “500 Maples”, nobody would have a problem.

“500 Poutines” just wouldn’t get taken seriously.

I think when you swap south korea for canada, which is pretty culturally identical to america, you lose all the history of racism against eastern people and countries. So I wouldn't blame them if they did, and I would kind of expect them to actually, and would consider alternate views exceptions or even misguided. Its not necessarilly bad but it looks pretty bad.

It works both ways though - there is plenty racism from many in the east against western people both black and white. As a (very!) white person I've experienced this first hand in several places in Asia.

Can’t seem to find a translation: what does kimchi mean in Korean?

Edit: never mind. Found it. Haha.

I thought it mean "love" for some reason... maybe I'm thinking of a different Korean word.

It’s a local dish/recipe...not very startup-py I’d say...

I believe it is fermented cabbage.

So more startuppy than it might first appear then

For anybody else curious, it's a fermented cabbage side dish, really delicious in my opinion :)

Hmm...either I haven't found it or...it means "Kimchi" but you didn't originally know what Kimchi was (seems unlikely..)

I'm in Thailand and there's a fund here called 500 tuktuks. The local startup people I talked to didn't find it offensive.

>The whole premise of GOAP felt like a way for Dave McClure to travel to remote places with attractive women.

why would he need an excuse? or did he want to travel on investor's dime?

You don't get rich by writing a lot of checks.

Yeah lots of folks I've worked with, C*-level on down, plan vacations such that work pays for it (around conf travel dates, for example).

Ain't gonna lie, I've done it; got to spend two days sightseeing Munich by straight up lying about how long it would take to fix the customers problem.

I don't regret it. The extent of graft and grift on display by society as a whole... I don't feel like a villain for costing the customer a couple thousand dollars extra.

I don't understand why puhnbbuy777's comment has been killed. It looks like they created a throwaway account so they could admit to unethical behavior. Their comment seems like a useful perspective for us to keep in mind.

I feel like we've had this conversation before? HN has software that kills some comments based on patterns of past abuses by trolls. Sometimes there are false positives. That unfortunately was the case here.

Instead of posting an off-topic comment about it, why not just solve the problem by vouching for the original comment? That's why we added that feature: to rescue good comments that happen to be [dead].

All: to vouch for a dead comment, click on its timestamp to go it its link, then click 'vouch' at the top. There's a small karma threshold (currently 30) before such links appear.

This is a general comment not specific to the topic at hand. If you have facts to share then do so. But if you 'feel' that someone has an ulterior motive and you share it in a public forum then many people might take it as fact or an anecdote. Some people might even repeat it to their own friends. By doing so you risk harming the reputation of someone who may be innocent of that accusation.

Let me demonstrate with an example: I 'feel' that you wanted to join GOAP because you wanted to hang out with attractive women. And I 'feel' that 500 Startups didn't respond to you because they recognized your sleazy intentions. And I feel that you got upset and this is your way of getting revenge. Now, obviously, I don't really feel that way. But I just wanted to show how easy it is to throw dirt at someone.

Let's stick to the facts, please.

disclaimer: I was in 500 Startups first batch.

I would recommend adding a disclaimer to your comment, that 500Startups is one of the two principal investors in the startup you own and manage.

Otherwise, some may be inclined to question your motives.

Edit: The requested disclaimer has been added.

Thanks! Done. Although I hope I was clear that my comment is general and not specific to the topic at hand. I just think people should share the facts but be careful about making assumptions.

Sure.

The facts are that David Mcclure is stepping down due to his long-term sexual harassement of women:

https://techcrunch.com/2017/07/01/500-startups-dave-mcclure-...

And is shutting down investment funds associated with him: https://betakit.com/500-canada-to-shut-down-fund-investments...

Considering the article above says 500 startups is refusing to pay its bills, one person sharing an anecdote of 500Startups being flakey and perhaps being oriented towards David's libido, doesn't seem alarmist or unreasonable at all.

I feel that the fact that the parent had a feeling specific to the topic at hand is completely relevant, and your comment warning against the "risk of harming the reputation" of this person, who already has a bad reputation, is not relevant to the discussion.

Not so much irrelevant as it is distracting; a tactic to defend the (increasingly-seeming) indefensible.

The parent has nothing to do with this topic. This is about whether 500S can pay the money it owes to the startups they fund. The parent is purely insinuation and is not based in fact, nor is it relevant to the fund; rather, it is simply trying to throw shade at Dave McClure, who is no longer with the fund, regardless.

This is shown to be especially true by the fact that parent never even had a conversation with anyone at GOAP, as they didn't respond (by parent's admission).

I wasn’t in 500 startups or associated with them in any way but I wanted throw out there that I agree with waleedka. There’s absolutely no value in GP’s post and potentially does harm to the truth.

All things equal I would argue with your argument. The fact that David Mcclure had to step down due to long-term sexual harassment of women makes the parent statement little bit less crazy. But still I would argue statements like that should not be made without direct evidence.

I wonder if the paperwork (eg. term sheet or whole contract) got signed before Dave McClure left and (some) LPs are holding back their money now. Is that a realistic scenario?

Happens for companies in StartupChile frequently

StartupChile is significantly different. With SUP you have to prove the funds were used appropriately as part of the fund. It is an equity free government program. The terms of the agreement are that you are reimbursed for approved expenses.

This is much different and worse. This is a traditional investor / incubator that took equity in these companies and promised them the money and isn't paying them.

Sort of but not quite. The guy you're responding to has been through Sup Chile, and so I have I.

They're nice people but there have been many unexplained delays of money across the generations that have nothing to do with anything you've mentioned.

Also, only some generations follow or have followed a reimbursement model. Mine didn't.

How active is StartupChile now? Their website says it is down, and is full of dead links: http://www.startupchile.org/programs/

I also went through SUP, which is why I responded. I can only speak for while I was there. Delays were minimal and usually caused by documentation and not them withholding secretly. That may have changed in later rounds.

If they're out of money, they're out of money. Was it all just coming out of McClure's pocket? IANAL, but presumably a substantial failure to adhere to contract terms on 500's part will release the startups from their contract requirements?

Recently 500 Startups started offering coworking space at their Mountain View location:

http://go.500.co/coworking

Seems to me to suggest they're looking for alternative ways to raise money.

Or they are planning to downsize the accelerator program and are looking to start making the workspaces self sustaining so they don’t have to close them down.

This has always been the case. They're just publicizing it now.

How has Dave McClure’s departure affected fundraising for 500 Startups?

I'd imagine the whole scandal has negatively effected the firm and its future.

I wonder how this fits in with the decline in accelerator and seed funding activity?

Did they get the stock?

I doubt because 500s didn't fulfill their part of the contract.

IANAL, but I assume a competently-written contract would have explicitly listed the cash 500 Startups was supposed to invest as consideration for its equity share, so if the money never shows up the contract is void.

Incidentally, this is one of the advantages of a human-run judicial system over the wild west of "code is law"-style equity on a public blockchain. If it comes down to it and there's a fight over how much equity is owed to 500 by one of the startups in this group, it can be resolved by a judge with access to all the context after hearing the best arguments available to both sides.

EDIT: The reason why this is a good example is that 500 Startups provides more than a straight cash-for-equity trade. They also provide mentoring through their accelerator program, introductions to later-stage investors, etc. Those considerations (as well as HOW late the payment is eventually made, whether that can reasonably be considered hardship for the company, etc.) can all be weighed by an impartial judge in resolving a disagreement.

I'm not defending "code-is-law" as a valid solution to this, but wouldn't a smart contract require the cash (crypto) to be sent in before allocating equity? The issue in this situation is that no money was ever wired. In a smart contract, that means the "invest" function would not be executed and the "equity tokens" not assigned.

Yes, it would.

In the real world requiring "payment up front" for all contracts isn't really feasible. A lot of low-margin businesses live or die on the cash flow terms of their contracts.

This isn't a particularly good example, because on a blockchain, both the currency received and the equity percentage of ownership of the company are numbers that go onto the blockchain and can be cryptographically enforced. A blockchain simply wouldn't let you write a contract that says "I give $X in exchange for Y% equity in this entity" unless it could prove that you have ownership of $X.

The real advantages of a human judicial system come when there's a judgment call involved in the contract. For example, "I own X% of 500 startups and have control over future investment decisions, unless it can be shown that I have violated the laws of the United States, some of which happen to be about sexual harassment." What constitutes sexual harassment? Damned if a blockchain knows. It's hard enough for humans to come to agreement on that, let alone computers.

But what if the contract is "I will give you $X in three months time in exchange for Y% equity in this entity"? It's not unusual to enter a contract that obliges you to pay money you do not yet have at some future date when you do expect to have it.

If your contract system doesn't allow that then it isn't a very useful contract system.

> A blockchain simply wouldn't let you write a contract that says "I give $X in exchange for Y% equity in this entity" unless it could prove that you have ownership of $X.

A blockchain absolutely would let you write a contract that does that, and it could be on purpose or by accident. If you want to be sure your contract doesn't accidentally or maliciously do that, you have to audit it ahead of time because once it's executed, you're screwed. There's no judge who can come in after the fact and nullify some of your contract provisions based on fraud or mistakes or conflict with existing laws or other totally reasonable considerations that aren't explicitly coded into the contract ahead of time.

I suspect that the real ownership of the stock doesn't need to be really solved until a stock operation that need signature happens.

Once they hit 500 startups, did you _actually_ expect them to continue to pay?

I was actually in a 500 Startups batch over 2 years ago, and they did pay.

I think it was just a tongue-in-cheek joke about the name.

1) Huge screw up by Techcrunch for not catching this. Do they even produce quality journalism anymore?

2) Why is 500 Startups interviewing for the next accelerator period when they can't fund the previous one?

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