500 Canada to shut down fund investments following Dave McClure scandal

In a letter sent to portfolio founders, 500 Canada’s managing partners have announced the decision to terminate the fund’s investment period.

The letter, obtained by BetaKit, states that 500 Canada was in the process of securing $25 million in “imminent commitments” from Canadian institutional LPs. However, the recent allegations of 500 Startups founder Dave McClure’s sexual misconduct, and subsequent resignation, essentially torpedoed the fund’s investment goals. BetaKit has received confirmation of the decision by 500 Canada but no official comment.

In late June, several women entrepreneurs in Silicon Valley came forward to the New York Times, claiming that McClure had made inappropriate advances and comments towards them. He eventually resigned as GP of the firm he founded a few days later.

According to one source with knowledge of the situation, the investments were on hold as long as “$1 of profit still went to McClure.”

According to 500 Canada’s managing partners, each of the target LPs informed the fund they would not make an investment if McClure continued to exercise any form of control or receive economic benefit from the Canada Fund (McClure is both a member of 500 Canada’s investment committee and on the board of directors for Canada Fund). According to one source with knowledge of the situation, the investments were on hold as long as “$1 of profit still went to McClure.”

While beginning the process of removing McClure from those roles, 500 Canada also entered a renegotiation of its relationship with 500 Startups. Sources indicated that the current relationship with the organization meant that 500 Startups set direction on 500 Canada’s operational budget, received a percentage of profits from Canada Fund, as well as other forms of control. 500 Canada was unable to reach an agreement with 500 Startups regarding independence and a revised monetary relationship, so the decision was made to axe the fund. Arguments between the two organizations are ongoing as decisions are made regarding spinning down the fund (e.g. if and how investors into the Canada Fund get cash back).

As part of the termination of the fund’s investment period, 500 Canada will make no follow-on investments to the 38 portfolio companies it has invested or committed to invest in, but states it will continue efforts to support their future fundraising. The fund will be making no new investments and no new calls for capital.

500 Startups first announced its intention to launch a Canada-focused venture arm in March 2016 to much fanfare, led by Simply Audiobooks founder Sanjay Singhal. The firm would later announce associates with footprints in Toronto, Waterloo, Calgary, and Montreal.

By January 2017, the fund closed $15 million towards its $30 million goal from investors including Globalive Capital, W Investments, and TWG. The 500 Canada team has made co-investments in companies like AmpMe, Avidbots, Element.AI, Mejuri, Motorleaf, and Synervoz.

500 Canada

Additional information obtained by BetaKit provides further clarity as to how 500 Canada will spin down the Canada Fund. Expecting the official termination of Canada Fund’s investment period by end of September, 500 Canada will make keep on a reduced staff to manage investments (no decisions have been made at this time on who will manage wind-down). Management fees will also be reduced.

“It sucks for 38 Canadian startups. Each of them have 500k+ cheques to worry about on their next raises.”

While interest in the fund is not redeemable, 500 Canada is willing to buy back any interested LP at cost. With no active manager for new investments, 500 Canada will not accept increased commitments or contributions from LPs to support the existing portfolio.
 

Overall performance for Canada Fund as it stands is expected to be positive per current performance reports (a new report is expected in August).

It is undetermined at this time if the 500 Canada leadership team will pursue a new fund following the termination of Canada Fund. Speaking on background to both 500 Canada employees and portfolio startups, the general consensus seems to be extreme disappointment caused by bad decisions, bad timing, and a (potentially) missed opportunity. People at the organization believed internally that McClure’s actions and subsequent extrication would slow the fund, not torpedo it.

“It sucks for 38 Canadian startups,” said one Canadian founder, who wished to remain anonymous. “Each of them have 500k+ cheques to worry about on their next raises. That being said, this is a perfect time for Canadian VCs to prop up our ecosystem. If I were them, I would have 38 more meetings to book in the next 30 days, before those opportunities get lost to the US.”

The Canadian investment community also seems concerned by the impact the loss of 500 Canada could have on the Canadian ecosystem.

“There’s very little pre-seed capital in Canada and they were one of the few committed to bridge folks trying to make something out of nothing,” said one VC on the request to remain anonymous. The VC indicated that while 500 Canada’s $25 million in ‘imminently’ committed capital is not gone from the ecosystem, institutional LPs might be spooked and exact a higher bar of diligence from US brands expanding into Canada.

Update (08/01/17): TWG, one of the January investors in the Canada Fund has responded to a request for comment. At their request, we have published the statement from Chris Eben, Managing Partner at TWG, on behalf of the company in full below:

    TWG is disappointed to hear that 500 Startups Canada is terminating operations, but is supportive of the rationale and position the managing partners took in making this decision along with the major LPs of the fund.

    Dave McClure’s actions were inexcusable and tarnished a brand and movement that otherwise stood for many of the things that TWG values around supporting entrepreneurs and the early stage startup ecosystem. It is important to take a stand against McClure and other VCs’ behaviour and it is up to the LPs who control the money to take that hard position in support of those that have been harassed and mistreated.

    Our experience with the managing partners and entire staff of 500 Startups Canada has been amazing and we are truly sorry that it has come to this so early in their journey. TWG would certainly consider investing in any future fund that they might raise outside of the 500 Startups brand. It’s also worth noting that we have met many great people at 500 Startups globally and very much hope that they can recover from the actions of one man and continue their mission to find and support early stage startups all over the world.

    Lastly, TWG stands with those who have been harassed and commend you for your courage which has opened the door for others to have courage as well. We will do all that we can to support this community in the most positive and progressive ways and ask our clients and partners to do the same.

Similar statements of support were made by Globalive Capital Chairman Anthony Lacavera in the Globe and Mail’s reporting of 500 Canada’s decision. TechCrunch also received a statement from 500 Startups, which we’ve pasted below.

    We remain bullish on Canada’s startup ecosystem and deal flow. It’s why we invested in Canada before the 500 Canada fund, and why we will continue to do so going forward. Though this partnership didn’t work out, we are thankful to the LPs who supported the fund, and we look forward to continuing to support our 60+ investments in Canada and investing in more Canadian companies.

Jessica Galang contributed to the reporting of this story.

Douglas Soltys

Douglas Soltys

Douglas Soltys is the Editor-in-Chief of BetaKit and founder of BetaKit Incorporated. He has worked for a few failed companies and written about many more. He spends too much time on the Internet.

  • Donny

    So again political correctness means dozens of startups are on hold because someone’s sensitivities at TWG were offended by a certain person at 500. Too bad about the hard working startups who have been screwed by the social warrior crowd. That’s why teh startup industry in Canada is in the gutter.