500 Canada to shut down fund investments following Dave McClure scandal

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Betakit |

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).

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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.

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.

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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.

“It’s sad it’s come to this,” said one 500 Canada member, who stated that the relationship with 500 Startups remained tense but cordial. “I’m pretty pissed at Dave, but there’s no animosity [with 500 Startups].” The person indicated that the organization believed internally that McClure’s actions and subsequent extrication would slow the fund, not torpedo it.

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The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with both social and investment crowdfunding stakeholders across the country. NCFA Canada provides education, research, leadership, support, and networking opportunities to over 1600+ members and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding industry in Canada. Learn more at www.ncfacanada.org.

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