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500 Startups Looking to Latin America and India for Second Fund

8 August 2012

(Forbes) August 8, 2012 – Seed fund and incubator 500 Startups is bullish on international investing – especially Latin America and India, the overseas markets it will concentrate on in its second fund, said Paul Singh, an investing partner who manages the accelerator and focuses on investments in Asia.

The firm, founded in 2010 by angel investor and former PayPal executive Dave McClure, announced in June that it is raising a $50M second fund, a much larger slice of which will be set aside for overseas investments (around 25%) than in their first, said Singh. In addition to partnering with Mexican startup accelerator Mexican.VC, they’ve expanded the investing team with their first overseas hires. Venture partners in Japan and Brazil were added earlier this year, and Singh says they’re currently interviewing candidates for a similar post in India.

Why India? “My answer would be, why not?” said Singh, citing deep entrepreneurial talent and the huge market, particularly with internet penetration still on the rise and the anticipated explosion in mobile internet use.

Founder Dave McClure and 500 Startups have already done a handful of deals in India, including Slideshare, one of McClure’s personal investments and among his biggest successes. The company, which lets users upload and share presentations, was acquired by LinkedIn in May for $119M. 500 Startups has also invested in Mygola, a Bangalore-based travel planning service, and is finalizing term sheets on a third.

500 Startups’ investing strategy is sometimes described as the “Moneyball approach,” which is one reason they’re so keen on looking overseas – there’s a much greater chance of finding an undiscovered or undervalued winner than in the venture capital-saturated Valley. Others look at the pace (500 Startups has invested in over 250 companies) and call it “spray and pray.”

Companies typically get a $50,000-$250,000 initial investment, with follow-up rounds available for those that show promise. Conservatively, Singh said to expect five investments in India by the end of the year, with an additional 10-15 in 2013.

There’s no lack of promising ventures, despite relatively tight markets for angel funding, he said. Instead, the problem is discoverability: sifting through hundreds of pitches to find the winners.
“In the US, you know where to look. Here, if you ask 20 people you’ll get 20 different answers for where to look, and which are the most exciting teams,” Singh said.

India is hardly an untapped market when it comes to venture capital, but Singh said 500 Startups can bring some of the “functional expertise” built up from years of experience in Silicon Valley, where startups have a longer history.

That experience would be a major asset above and beyond the liquidity they can provide founders, Singh said, if they can figure out how “import” the mentorship component. In addition to advising at a distance, they plan to work with Indian angel investors who can serve as local mentors, Singh said, but they’ll still face the challenge of adapting Silicon Valley lessons to local markets.

E-commerce companies, for example, face a range of challenges using credit cards for online transactions since regulations are stricter. Some have sidestepped the issue by incorporating outside India,Singh said, but that does little to solve the other online payment issue: credit cards are rare enough that most companies make cash on delivery an option.

But they’ll also need to adjust the way they advise companies, Singh said. “If a founder asks me, ‘What do you think of my business?’ and I say there are certain things they need to think about or change, a founder in the US would go out to a bunch of VCs, get other suggestions, and take it as one person’s thought. A founder here would be more likely to say, ‘Well, I respect him and that’s what he thinks, so I have to change it.’ We need to find a way to mentor founders so we’re giving advice and it doesn’t come across as instructions.”

Challenges aside, Singh says we can expect to see a lot more from 500 Startups in India in the next few months. They’re planning to “build the scene” with startup events, demo days and “angel education,” and Singh’s “aggressive goal” is to bring a handful of Indian startups to 500 Startups’ October accelerator in the US.