By Min Chen and Nayantara Bhat
Inclusion and people power with 500 Startups Founder Christine Tsai
With startup fervor at an all-time high, it takes more than a winning idea and a passionate team to stand out in today’s venture landscape. For many, the only hope of getting their product to market is being accepted into an acceleration program, where access to capital, mentors, and a network of fellow entrepreneurs will often prove to be the formula for success.
If an Ivy League for accelerators existed, then 500 Startups’s Seed Program would unquestionably be part of the club, and one of the most exclusive, no less. Appropriately, the firm’s website reads much like a university’s landing page, filled with statistics about its global representation and photos of people smiling proudly for getting to where they are.
But 500 is far from a stuffy, centuries-old institution. The young, San Francisco-based accelerator is also the most active and international early-stage venture firm in the world, with a portfolio of 2,210 companies from 74 countries–a feat they achieved in under nine years. What’s more, ten of those companies are unicorns, and an additional 66 have reached a more than US$100 million valuation. 500 ended 2018 with $454 million of committed capital from 19 funds.
While such numbers are noteworthy, 500 makes it a point to highlight the fact that 26% of their investments are led by at least one female founder and just under half of their portfolio companies are based outside the United States. These statistics are not only what differentiates 500 from other venture funds, but determinants of the firm’s ability to scale at such an unprecedented pace.
Deviating from the traditional venture model, 500’s strength of identity-–notably its focus of placing diversity front and center-–has redefined startup success as going beyond Silicon Valley to reach every corner of the globe.
Just as 500 has come to represent the future of venture capital, so has its CEO and Founding Partner Christine Tsai. Jumpstart had the pleasure of speaking to her in January and, consistent with the persona she emanates in past interviews, Tsai is patient, open, and thoughtful about her leadership role in the industry and the responsibility that comes with it.
On the surface, Tsai would appear to be an insider, having grown up in and around Silicon Valley, where her mom was a software engineer at Intel. She went on to attend the University of California, Berkeley and was a Product Marketing Manager at YouTube and Google. Only when she began seeking opportunities in venture capital did she sense that she might be an outsider, due to both her professional and personal background.
“I didn’t see a lot of people like me, let alone in these types of roles,” says Tsai, who felt like “a lost cause” after being rejected from a number of firms in the beginning.
“It can be intimidating as a woman and an underrepresented minority coming into an industry where you’re one of the few. That’s hard for sure,” she adds.
However, Tsai worked to expand her network and play to her strengths in strategy, execution, and user understanding, rather than taking venture’s predominantly numbers-driven approach.
“I was much more interested in the chance to work with founders who were taking these big risks and their products, not so much of ‘how much return is this going to get,’” says Tsai.
She further deviated from the status quo when she co-founded 500 in 2010 with Dave McClure on the belief that entrepreneurship was not limited to the U.S., and that there were opportunities internationally.
“There’s no logical reason that anyone can’t be a successful entrepreneur, an angel investor, or the general partner of a fund,” says Tsai.
While such a statement may be taken for granted today, she notes that “in hindsight, [she] forgets how contrarian it was at the time”–to the extent that it led to a negative impression of the firm in its early days.
“I just remember hearing things here and there, where it was clear that there might’ve been a market sentiment, maybe just in Silicon Valley, that 500’s companies were not as good because we had a lot of international companies. We were known for international very early on, but that wasn’t a good thing,” says Tsai.
Acknowledging that the venture world has transformed over the past few years, Tsai is glad the firm had the foresight to invest outside the U.S., as there’s no question how global venture capital and entrepreneurship have become. In 2018, startups outside of the U.S. surpassed U.S.-based startups by $27 billion in terms of dollars raised (CB Insights).
“It was, of course, risky and hard being the contrarian investor when everyone else thinks you’re silly for doing that. Now we’re seeing the fruits of our labor, and I feel like we’re just getting started,” adds Tsai.
While other VCs in Silicon Valley may have overlooked or underestimated the thriving startup ecosystems that exist outside of the U.S., 500 leaned into its new role as the contrarian. Tsai believes 500’s success abroad has made venture capital more inclusive for startups in need of funding, and for women or other minority groups who want to enter the industry.
“We planned it to be inclusive in terms of investing in the founders and bringing others into the network, but also expanding beyond that,” she says. “Everyone has their own different needs, or they’re all at different stages, and we’re much more willing to partner and work with people, whereas I think VC in general […] they’re more exclusive.”
With more firms going international, more money is circulating in the startup ecosystem. The number of early-stage deals globally went from 2,091 (amounting to $18.1 billion) in Q2 2017 to 2,701 (amounting to $25.7 billion) in Q2 2018 (Crunchbase). The proliferation of entrepreneurship and incubation programs has risen in tandem, providing more opportunities and resources for early-stage startups.
While more people are pursuing entrepreneurship, companies with a solid business model are few and far between. As the ecosystem matures, venture capitalists are reminded of the investment philosophy that has served them so well: evaluating a startup based on its business fundamentals above all else.
Business fundamentals can mean slightly different things to different people, but at the core, it comes down to one simple thing: the bottom line. Activist investor and Live Ventures CEO Jon Isaac wrote in a 2017 Entrepreneur column: “I believe in the old-fashioned virtues of understandable businesses that simply turn a solid profit.”
To Tsai, customer validation, retention, and a business that relies on solving a problem are fundamentals because “if you do raise funding, then funding runs out at some point.” Although some of today’s tech giants started without a clear business model–Tsai lists Instagram, Facebook, and Google as examples–they are truly one in a million, which means startups need to consider fundraising as a means rather than an end.
Another misstep founders need to avoid is incomplete or inaccurate knowledge of their customers, as it becomes difficult for them to roll out the right solution.
“As an example, a lot of companies are trying to build a business for moms, but they are not moms themselves, they’re not even parents, they have no moms on their team,” says Tsai.
Details like this come out in interviews, she says, and a lack of empathy for the customer is one of the biggest red flags–second only to meeting founders who haven’t quit their day jobs to work on their startup.
On the flip side, venture firms have their own pitfalls to watch for. It’s easy to be swayed by tech trends, particularly given how explosive they become within the startup community. With terms like AI, blockchain, augmented reality and the like becoming synonymous with ‘investor bait,’ firms have become more cautious about what and who they invest in.
“We still invest in sectors that probably a lot of Silicon Valley VCs think are boring, or they stay away from because they’re not trendy anymore, like ecommerce and brands,” says Tsai.
The key, she believes, is again going back to how the product solves a problem for people, independent of tech trends.
“Things like education, access to education, those are probably universal challenges in every market. If you implement AI later on, how will AI help?” she says. “What are the really deep tech advancements that will hopefully improve life, and not make it worse?”
Another issue with following trends is that investors are limited in their ability to conduct due diligence if the industry in question is outside their area of expertise. This gap is an especially glaring problem for early-stage investments, as they are considered riskier bets, which is where 500’s strength in ecosystem building comes into play.
Each of their dedicated funds has a local team that identifies strongly with 500’s mission, and a community of people who have benefited from the firm’s initiatives and are eager to pay it forward. With several thriving regional funds, Tsai returns to the importance of localization. Market expertise, she says, is the first thing they look for when establishing a local team, which they value even more than previous venture experience.
500 TukTuks and 500 Durians are two regional thematic funds that invest comparatively smaller amounts–as is appropriate for funds operating in emerging markets–than their companion global flagship funds. Even so, TukTuks counts Thailand’s first co-working space HUBBA in its portfolio, and Durians has invested in ride-hailing titan Grab and online marketplace unicorn Bukalapak.
Along with Latin America’s 500 Luchadores, the regional funds are tailored to the markets where they operate. However, they are far from tied to their territory. Tsai says that some startups have received investment through participating in 500’s acceleration program, which is funded by their Flagship Fund, in addition to investment from one or more regional funds.
“I think that’s one of the special things when the companies come in, and 500 appears several times on their cap table,” she says.
The bottom line is often the topmost concern for investors, and even more so for their limited partners. An unwritten tactic for many firms is counting on one or two of their portfolio companies exiting to compensate for losses across the rest of the portfolio. While returns are essential considerations for any firm, Tsai’s interest lies on a parallel track: the founders and the risks that they took to get their startups off the ground.
She attributes this approach to her time at Google, where she was tasked with diving into the ‘nitty-gritty’ of a company–the product, the customers, and what the brand represents. Her interest in founders and the rapid changes in how tech is applied offer a constant challenge, and are what keep Tsai drawn to the industry.
One of the significant changes in the investing landscape over the past decade can be seen in the profile of an average entrepreneur. Ten years ago, a startup founder was seen as “a young guy in a hoodie who dropped out of Stanford.” While this impression has faded, there’s still progress to be made when it comes to tangible change.
The topic of diversity and the benefits of a diverse team are frequently discussed in the venture space, but the numbers tell a different story. Plenty of firms support the push for greater diversity, but few are successful. To Tsai, having a diverse network to source underrepresented founders or investors is an essential kickoff point that many firms lack.
“If you know that your network is not diverse, then I think the first step is then at least trying to increase the diversity of your network proactively,” she says, adding that seemingly insignificant things like the language or models used in marketing images could be turning off founders from underrepresented groups.
“In our imagery, our websites, our emails, our newsletters–we usually pretty intentionally try to feature women and founders of color, and even the language makes a difference. Those types of visuals are very powerful,” she says. Actively creating opportunities, or even blatantly putting out a call for female founders, is all it takes to get the necessary deal flow.
Tsai is also sharply focused on people when it comes to assessing the broader trajectory of the venture industry, believing that investors should be keenly aware of demographic considerations should they want to succeed in developed and emerging markets.
“Globally, women are increasingly becoming breadwinners, or delaying or not having kids, so that presents an opportunity […] that’s where things are changing, completely independent of what’s cool in tech,” she says. Another example, she notes, is the growing population under 30, particularly in SEA.
This people-focused investment thesis permeates throughout the firm’s seed programs and thematic funds, and remains an unchanging prerogative as 500 looks to the future.
With the firm growing at the rate it has, Tsai and her team haven’t had much time to reflect on it all and to share 500’s story, which is something she would like to do more of going into 2019.
“We’ve planted all these seeds, and it’s clear we have a strong network internationally. Now, I think it’s about flying our flag and looking at how strong our portfolio is. We have ten billion-dollar companies, and half of them are outside of the U.S.–very few VCs can say that,” she says.
In 2019, Tsai’s priority is to continue to do what they do best, which is investing in great companies and supporting entrepreneurialism. Last year, 500 worked with the Stanford Center for Professional Development and UC Berkeley School of Law to educate 350 investors from 60 countries, “all in the spirit of building ecosystems and increasing access to entrepreneurship and capital.”
On a higher level, it’s about walking the talk and inspiring other firms to adopt and stick to a values system they genuinely care for–a belief that was put to the test in 2017 when McClure resigned as a result of sexual misconduct.
“It doesn’t necessarily mean that you have to be superhuman and perfect, but at least my leadership philosophy is definitely being authentic to yourself and being a strong example of your company’s values and mission,” says Tsai.
Her outlook on the future of venture capital is positive, especially as “it’s become more accessible outside of Silicon Valley. Gender, race, pedigree–hopefully, that doesn’t matter.”
For those hoping to follow the same path as a woman or racial minority, Tsai’s advice is to be persistent, understand your skills, and forge your own path.
Min is Jumpstart’s Editor in Chief and Nayantara is Jumpstart’s Editorial Associate.