Hustler's ambition: How 500 Startups built a different kind of fund with small bets, diversity, international investments

500 Startups, the startup accelerator and venture fund, has operated full throttle since starting in 2010. Here's how it's become one of the most successful and diverse programs in the market.

Image: Sumit Kohli/500 Startups

Dave McClure's dreams have bad timing.

Around 2007, McClure began trying to raise his own venture capital fund to invest in new and exciting startups. Unfortunately for him, one of the gravest financial crises in US history was looming just around the bend.

After years working in technology and startups, McClure began advising and investing in startups more formally in the late 2000s. He began working at Founders Fund with Sean Parker and Peter Thiel in the fall of 2008. Around the same time he was also working on Facebook's fbFund. While he couldn't build his own fund at the time, it was a "great plan B."

Then, in early 2010, the time was finally right and McClure, along with co-founder Christine Tsai, founded 500 Startups as an investment fund. The first closing was in July of 2010 and they got an aggressive start.

"We had about 75 investments we made through the end of the year in 2010, which, of course, people thought was kind of insane," McClure said.

The next year the accelerator program began with the first cohort of companies. That same year, 2011, they made some international investments in countries like Japan and India. The international presence of 500 Startups began to deepen as they made initial investments in companies like Mexican VC in Mexico City, which they eventually rolled into 500 Startups as the team on the ground in Mexico.

From the get-go, the founding team had an interest in investing internationally, but it wasn't until they began hiring folks from around the world that it really took off, McClure said. Early partners such as Bedy Yang and Khailee Ng would go on to manage the company's investments in Brazil and Southeast Asia, respectively. Partners Rui Ma, Cesar Salazar, and Santiago Zavala are just some of the others who lead efforts in other countries and regions.

"Gradually, one day we looked and realized almost 30% of our investments were outside the US," McClure said.

So far, 500 Startups has invested in more than 1000 companies across 50 countries. McClure said it is easier for his team to make international investments because of their strategy of making many small bets.

Traditional VC firms make rather large bets in a few companies, usually taking a board seat in the process, so it makes sense for them to invest in companies close by. 500 Startups makes smaller investments in many different companies so they can afford to travel around the world and make bets on emerging markets.

500 Startups' current main fund is $85 million. They also have some microfunds focused on geographic areas like Mexico and parts of Asia, and they have one that focuses exclusively on mobile technology.

They need a large portfolio to have good outcomes, maybe even 500 companies in a given fund, which is where the name 500 Startups comes from. Their first fund was 250 companies, their second fund was more than 300, and their third fund is more than 400, and it might get close to 500.

"A lot of people think our model is kind of crazy, but I would actually correct them and say it's really one of the most conservative strategies around," McClure said. "At least relative to size of [the] bet and percentage of capital deploy."

This allows 500 Startups to take a lot of risks, sometimes moving out of tech and placing bets on companies in unique space. Mayvenn is an e-commerce platform the helps hair salons break into retail without having to buy or hold inventory.

The company's first product within the platform was hair extensions. Initially, the company struggled to find investors.

"We had a product, we had a pretty clear plan, but we had the sort of product that a lot of investors didn't know anything about," said Mayvenn CEO Diishan Imira. "Also, I don't come from a place where I have access to a lot of investors."

Imira was recommended by someone who knew McClure and after applying he was accepted into the accelerator program. For Imira, the program opened doors for him and his company by connecting him with other investors he wanted to pitch. He believes McClure is digging into overlooked verticals and investing in places where other people aren't investing.

That strategy has led to a diverse portfolio of startups, but it has also led to a very diverse team. Roughly one third of the team members weren't born in the US. They're spread across 12 countries and collectively speak about 20 different languages, McClure said. It's not always perfect, though. For example, McClure said, they don't have anybody on the team currently who is black.

Diversity in terms of gender is also a key aspect of the team's identity. The team, which is currently about 70 people, is close to 50% female. Additionally, close to 300 of their portfolio companies have female founders and over 150 are led by women.

To Imira, the focus on diversity isn't contrived. He said it seems to be just part of a very broad and inclusive strategy for how they go about choosing companies.

"As a culture, he's looking for hustlers. He's looking for and finding entrepreneurs in different, various verticals that are hustling," Imira said.

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