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500 Startups surveys the early wreckage of a sexual harassment scandal

Tuesday was an early test of how VC firms might recover.

TechCrunch Disrupt NY 2015 - Day 2
500 Startups co-founder Dave McClure
Noam Galai/Getty Images for TechCrunch

If you squinted just hard enough, it looked like the sexual harassment scandal had battered someone else, not them.

Tuesday appeared to be another routine Demo Day for 500 Startups, where a batch of its 31 new chosen companies worked a spartan room, wooing bankers with friendly eyes and over-eagerly digging for business cards. Over cabernets and bourbon-glazed meatballs, investors gossiped about which of the accelerator program’s chosen startups was the surest winner or the most certain dud.

“There are three that I really liked,” one possible funder told another, offering a report card much like she might at any other Demo Day.

But on the other side of the room at the Computer History Museum, a unique conversation unfolded: “It’s so weird when change happens in an organization,” one 500 Startups employee was overheard saying.

It has been less than a month since Dave McClure, a well-known venture capitalist and 500 Startups co-founder, had resigned from his firm in disgrace after admitting he sexually harassed several female entrepreneurs. And so this celebration of its hand-plucked startups on Tuesday served as something of an early test in Silicon Valley for just how deep the scars run for venture capital firms rocked by the explosive allegations that are still landing weekly.

Some startups were apprehensive.

“Maybe people want to stay away from 500 because the brand is so toxic?” Nihal Advani, the CEO of one of the firm's supported startups, Georama, said about what he was thinking as Tuesday approached. “We were concerned Demo Day was going to be quite flat.”

An early verdict? Investors and founders like Advani are describing the wreckage at 500 Startups as isolated to McClure — arguing that high interest in one of their landmark events means that the tech industry isn’t going to brand a whole network of startups with a scarlet letter.

Indeed, a steady rush of investors paced from table to table on Tuesday with little concern (though few were from what would be considered top-of-the-class firms).

“What [McClure] and the rest of the people did shouldn't really have any negative consequences,” said angel investor Amos Ben-Meir as he shopped for companies on the floor. “Most investors I talk to say the same thing.”

But in a candid admission Tuesday, McClure's successor as CEO, Christine Tsai, recognized her company's reputation as damaged after his conduct became public — behavior that 500 Startups said it knew about but nevertheless did not disclose until reporters came calling.

“For many of you, this was a confusing, emotional time where you probably questioned the 500 that you knew,” Tsai told a quiet ballroom that some of the 400 in attendance later recounted as surprisingly bare. “This mission is much bigger than just one person. And it’s way too important to be taken down by one person’s mistakes.”

Those comments, delivered unprompted at the outset of Tuesday afternoon’s demos, were the sole recognition of the drama that both funders and entrepreneurs say they are trying to tune out.

“I appreciate it when people confront things and are direct about it,” said one attendee, who confided the fallout had caused her to second-guess whether she wanted to be associated with Tuesday’s event. Tsai’s remarks reassured her.

As allegations pile up across the industry, venture capital firms in the crosshairs are struggling to salvage their reputations, which almost always have historically been driven by their bottom lines, not out-of-office conduct. Already one firm, Binary Capital, has essentially imploded amid harassment allegations.

One investor noted it was hard for McClure’s negative publicity not to splatter on the companies 500 has supported. Others also warned that in-demand startups could flee from 500 Startups’ tarnished brand in the future.

“You’re going to see the real answer in the next couple of months — the next batch,” said Carlos Montenegro, a Brazilian investor at Startup Farm, who speculated the quality of those in the accelerator program could decline thanks to the scandal. “It was a big hit.”

Even though Tsai, who declined a Recode interview request, has not mounted an aggressive public defense of 500 Startups, the founders of its supported startups say that she has briefed them more thoroughly on McClure’s ouster.

One recent graduate of the accelerator program said Tsai was interviewing former graduates about their experiences and appeared receptive to new women-specific programming.

But the cascading scandal had also led frustrated 500 Startups graduates to chat about the scandal via an internal communication system, the graduate said.

In the meantime, the venture capital firm is keeping on its happy face. Founders were proud that 500 Startups had packed the Computer History Museum with attendees. And for the first time in the event’s history, none of them was Dave McClure.

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