[tjpd]

"While we were completing legal documentation related to Dave McClure's resignation from 500, funding for certain companies was delayed. Since then, we have resumed fundraising, as well as funding our investment commitments. We have been regularly communicating with our companies regarding the status of their investment and expect to complete all outstanding investments in December."

Here's my outsider's guess: Dave was almost certainly a Key Person in 500's Limited Partnership Agreement. When a Key Person leaves, for whatever reason, that triggers a Suspension Event and the start of the Suspension Period. During the suspension period, the LPs are not required to contribute capital except for certain things (e.g. management fees, follow-ons). The LP's (some threshold or some combination of them like the LP advisory committee) then have 60-90 days to vote whether or not to continue with the fund.

500 would already have called down some capital so that meant they could make a few investments but otherwise, during the suspension period they likely couldn't make any new ones. Since then they got their LPs on board with the idea of continuing without Dave and now can fulfill all their obligations. That would make sense to me because 500 as an institution is much more than just one man.

[austenallred]

Except the implication is they “invested” in companies they didn’t have the cash for. It’s not acceptable to say you’ll invest in a company and then go fundraise to fulfill that commitment. Those things need to happen in reverse order.

[JumpCrisscross]

> It’s not acceptable to say you’ll invest in a company and then go fundraise to fulfill that commitment

When a VC “raises” capital, they don’t get a box of cash. Instead, their LPs sign commitments. When the VC signs a subscription agreement with a company, they “call” that capital from their LPs. LPs are then obligated to supply it promptly so the VC can meet its obligation to the company.

This is done to separate cash management and investment. (While the cash sits waiting, one investor may want it in CDs; another in Treasuries. Mingling that risk with the core activity of VCs, picking great ventures, isn’t worth it.)

OP is saying the LPs, as part of their commitment, may have had an out in their paperwork. VC signed subscription agreement. VC called money. LPs said “no, we’re exercising this clause to delay or not give you that money.”

TL; DR a round isn’t raised until it’s closed.

Disclaimer: I am not a lawyer. This is not legal advice. It outlines a hypothetical and does not necessarily represent the facts and circumstances of 500 Startups.

[austenallred]

Yes, but you don’t invest money that isn’t closed.

[JumpCrisscross]

> don’t invest money that isn’t closed

Are you talking to the VC or the company?

When a VC says they have “closed” a fund, it means they have collected commitments. (I have found no consistency in what companies mean by having “closed” a round.)

[kirillzubovsky]

Although I would love to agree with you in theory, in practice in Silicon Valley everyone is selling first and building second (or not at all). It's not unlikely that 500 was fundraising with one hand and investing with the other, and when their master sales person left, the process got a little tangled.

[thanksgiving]

If I remember correctly, Microsoft famously sold Windows like this...

[asadlionpk]

Not Windows, DOS.

[lhh]

For the record, this happens all the time in the private equity world (they're called fundless sponsors).

[piker]

The LPs would likely be on the hook for capital calls related to a binding committed investment under the docs.