Why is it so hard for Dave McClure to raise money for 500 Startups?

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JASON LEMKIN

Dave has an epic brand and has backed multiple unicorns and “hard” is a relative term — raising any fund at all is really hard no matter how it looks on the outside.

[ While Storm V was raised in just a few months during The Best of Times — Storm IV took over 2 years to raise. ]

Venture Capital is a very small asset class and almost all the money is soaked up by the Big Guys.

In any event … since the press said he raised a smidge less than target … here’s my guess.

LPs (the folks that invest in VCs) want three things:

  • High IRR (or returns):  500 is at 20%+ IRR across all its funds apparently.  That is better than almost all VC funds.  Check.
  • 1x / Significant Cash-on-Cash Returns.  This is the tough one.  They also want you to have returned an entire fund’s investment back out in cash at least once.  The earlier you invest, the longer this takes.  I’m assuming this will take the longest for 500 since it invests earlier than almost anyone.  It’s also almost a paradox … if it takes 10 years to get here, you really want to wait 10 years to invest as an LP?
  • Same as Everyone Else.  It’s a conservative industry.  500 start-ups historical strategy has been the most ‘diversified’ of anyone, ever.  This was a new model.  Basically, LPs only want to invest in 2 things — Sequoia/Benchmark or The Next Sequoia/Benchmark.  To be the latter, you have to generate some FOMO & a unique proposition & the potential of large returns.  It seems like 500 has everything except it looks different.

Understand that most VC funds don’t even return 1x the money they are given and you’ll see the asset class, it’s a very odd beast.  If you don’t, as an LP, invest in the outliers — you lose.  By definition.

With so many unicorns and pre-nicorns in the 500 portfolio, watch the 500 fundraising here accelerate over the years to come.  I expect we’ll see Dave raise hundreds of millions across multiple funds in the coming years.

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Published on September 14, 2015
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