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.
A big part of the index advantage is that fees are so much lower than an actively managed fund. Does 500 Startups have a similar fee advantage?
How does what 500 do resemble index investing? High quantity? Limited evaluation?