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Dave McClure, founder of U.S. venture capital firm 500 Startups.Justin Chin/Bloomberg

The Canadian arm of scandal-plagued U.S. venture capital firm 500 Startups is suspending operations, the latest fallout of Silicon Valley's ongoing reckoning with its systemic sexism and sexual harassment issues.

"Although we are very proud of what we have accomplished together we regret that we will not be able to continue this exciting journey in its original form," 500 Startups Canada managing partners Sanjay Singhal, Mike Cegelski and Patrick Lor said in an e-mail sent Monday to the Canadian fund's limited partners and obtained by The Globe and Mail.

The fate of 500 Startups Canada, a year-old offshoot of the well-known Silicon Valley early-stage investment firm, was thrown into limbo a month ago when founder Dave McClure resigned over "inappropriate" interactions with women, first exposed in a New York Times story. In a subsequent blog post entitled I'm a Creep. I'm Sorry, Mr. McClure admitted to and apologized for his "clearly inappropriate" advances toward "multiple women in work-related situations … I selfishly took advantage of those situations where I should have known better."

That was followed by the resignation of 500 Startups partner Elizabeth Yin over her frustrations about the firm's "lack of transparency and several untruths" related to Mr. McClure's departure. Ms. Yin alleged the staff wasn't told his previously announced departure stemmed from his improprieties. On the same day, entrepreneur Cheryl Sew Hoy alleged in a blog that Mr. McClure sexually assaulted her in 2014 in her apartment. Mr. McClure resigned as general partner.

Before the scandal, 500 Startups had parlayed its reputation to launch 10 microfunds around the world that tapped local investors, including the one in Canada. The Canadian arm attracted a trio of veteran entrepreneurs in Mr. Singhal – the co-founder of – Mr. Cegelski and Mr. Lor as well as partner Neha Khera, former senior investment manager with the MaRS Investment Accelerator Fund. The Canadian unit was on target to hit the $30-million fundraising goal for its first fund, securing $23-million in commitments.

But in the e-mail Monday, the Canadian managing partners said five institutional investors who were expected to commit $25-million to the fund "informed us that they would not make their investments … if Mr. McClure continued to exercise any form of control" or "receive any economic benefit." Mr. McClure was a member of the Canadian unit's investment committee and was on the board of its general partnership.

The Canadian fund's managers said they tried to renegotiate their relationship with 500 Startups "to seek independent governance and adjust their economic arrangements" but "an agreement was not reached, and as a result, we believe we won't be able to achieve the Canada Fund's investment objectives." Mr. Singhal, contacted Monday, declined comment but verified the e-mail's authenticity.

500 Startups Canada will stop investing at the end of September, lay off its eight staff, slash management fees on committed funds and make no further capital calls. The fund's 38 investments to date – totalling less than $6-million, including a stake in hot Montreal artificial intelligence startup Element AI – will be overseen by one partner as a 500 Startups fund. Backers who ask for refunds will be made whole by the partners.

"It's unfortunate the way things ended up," said Karl Reckziegel, vice-president of funds and co-investments with BDC Capital, one of the institutions that had been looking to back the Canadian fund. "I respect the decision and diligence, and given everything that's transpired on that file they probably made the right decision. It may have been sending the wrong message had they proceeded."

Former Wind Mobile chief executive officer Anthony Lacavera, who had invested in the Canadian fund through his Globalive Capital, said he supported the decision by the Canadian group. "I'm impressed with how the Canadian team handled these issues and Globalive would certainly be interested in backing this group again in a new fund."

Several investors have told the 500 Startups Canada partners they would continue to back them if they went out on their own, but the partners disclosed no plans to that effect in their e-mail Monday.

The Globe chats with entrepreneurs Ben Zifkin, Sharn Kandola and Ben Zlotnick to get tips on raising venture capital. Produced by Sean Liliani.

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