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Network of ‘Scouts’ Spreads Money Through Silicon Valley

76 points by ganeumann 11y ago

deleted 11y ago
[deleted]
- olalonde 11y ago
  Or click the "web" link.
AndrewKemendo 11y ago
As a founder, the whole world of startup finance is incredibly depressing and very easy to become cynical about.
vadym909 11y ago
I'm not sure if or why this is news? Everywhere you read, VCs say- don't cold call- come through a warm introduction which makes it clear that there are insider groups and people that carry weight. Not necessary that their scout circle has insight into every great idea/company.
- thinkcomp 11y ago
  There's a pretty significant difference between a warm referral and a kickback, and especially a kickback that makes use of a shell company that disguises from entrepreneurs and other investors the kickback's existence and the origin of the funds used. If it's not illegal, it should be. Investments typically involve disclosure for good reason.
  - deleted 11y ago
    [deleted]
  - snarf 11y ago
    The lack of disclosure that the scouts are agents acting on behalf of Sequoia is definitely wrong, though it is unclear if it's the norm or the exception. However, the shell company that disguises the source of the investment from other investors does serve a useful purpose to the entrepreneur in minimizing signaling risk in the follow on round. If Sequoia invests in your seed round but passes on the subsequent series A, every other investor you're talking to is going to wonder why one of the top VC firms is passing on the investment.
deleted 11y ago
[deleted]
- thinkcomp 11y ago
  ...says one of them. You use shell companies to obfuscate investments.
  - deleted 11y ago
    [deleted]
    - thinkcomp 11y ago
      No, you're seriously misguided, and I'm seriously going to talk to Congress and the SEC about this. You posted A) without disclosing that you are one of the "scouts" mentioned in the article; B) with the misleading assertion that everything in the article was disclosed in 2013 already by Pando Daily, which is not true; and now C) with this new assertion that the never-before-disclosed shell companies aren't obfuscatory. Wow.
      - numair 11y ago
        Dude, can you calm down? David is a nice person who is doing work that grows the economy. He isn't polluting rivers or clear-cutting forests. Stop treating these people like scam artists, they're just trying to help capital move around more efficiently; maybe you don't like the circles in which that capital is moving, but at least it's moving. And for the record, David and I do not have any sort of financial/business relationship and I haven't seen or talked to the guy in like 10 years.
        icpmacdo 11y ago
        >they're just trying to help capital move around more efficiently One of the companies was not told for 3 years were the investment money was really coming from. Growing the economy is not a valid excuse for being deliberately misleading.
      - 11y ago
thinkcomp 11y ago
As a former CS50 student and Mark's classmate, I personally find it depressing that Harvard's current CS50 professor, who is widely praised, is secretly on Sequoia's payroll via a shell company so that they can have the inside track on the "next Zuckerberg." If professors want to teach, they should teach. If they want to invest, they should invest. But they shouldn't be doing both without making it clear to students what they've actually signed up for. Actually, all of it is deceptive (to entrepreneurs, to students, to the public, to other investors) and depressing. But that part is particularly disturbing.
- rajacombinator 11y ago
  What makes you think there's a conflict of interest here?
  - angelbob 11y ago
    The fact that entrepreneurs are regularly encouraged to drop out, so the investor and professor roles are potentially in conflict?
rajacombinator 11y ago
Not sure why WSJ thinks this is exposé-worthy. Just a clever tactic on Sequoia's behalf, probably a good example of why they've been considered top dog in VC for so long.
cperciva 11y ago
I wonder if it would make sense at some point for VCs to make seed investments at infinite valuations -- that is, taking no equity at all -- in order to obtain information rights. Even if there are no follow-on investment rights attached, having insider information on how well a startup is doing must be worth something... (For legal and tax reasons I'm guessing the "infinite" valuation would instead need to merely be astronomically high; the point remains however that in an economic sense they would be buying information rights rather than shares.)
- pen2l 11y ago
  > I wonder if it would make sense at some point for VCs to make seed investments at infinite valuations -- that is, taking no equity at all -- in order to obtain information rights. Even if there are no follow-on investment rights attached, having insider information on how well a startup is doing must be worth something... Somewhat incidentally, I think this is one of the reasons why YC is such a powerful force. YC recently invested in their 1000th startup -- couple that with the many other thousands of applications they've gotten (when you submit an application to YC, you're spilling a lot of beans already about yourself / your startup to YC), all of that put together is quite the house of knowledge. And on top of it all, it owns HN and thus to some extent has the power to frame the prevailing narrative of tech, I think there is no other entity in the world more in tune with the spirit and direction of startups than YC.
  - cperciva 11y ago
    I'm sure YC benefits tremendously from the information they've gathered about all the companies they've funded. Probably less so for the applications... I suspect those are incredibly noisy signals and the effort required to extract meaning from them would be prohibitive. On the other hand, YC Fellowships might be pretty much the "infinite valuation investment" idea I mentioned -- while there's no formal information rights attached, I'm sure they're getting a strong signal for which companies they'll want to fund.
lmroz 11y ago
When a startup receives investment from a VC firm, are all the limited partners in the fund disclosed? If so, how do you know those aren't also shell corporations, etc?
deleted 11y ago
[deleted]

76 points by ganeumann 11y ago

deleted 11y ago

[deleted]

olalonde 11y ago
Or click the "web" link.

AndrewKemendo 11y ago

As a founder, the whole world of startup finance is incredibly depressing and very easy to become cynical about.

vadym909 11y ago

I'm not sure if or why this is news? Everywhere you read, VCs say- don't cold call- come through a warm introduction which makes it clear that there are insider groups and people that carry weight. Not necessary that their scout circle has insight into every great idea/company.

thinkcomp 11y ago
There's a pretty significant difference between a warm referral and a kickback, and especially a kickback that makes use of a shell company that disguises from entrepreneurs and other investors the kickback's existence and the origin of the funds used. If it's not illegal, it should be. Investments typically involve disclosure for good reason.
- deleted 11y ago
  [deleted]
- snarf 11y ago
  The lack of disclosure that the scouts are agents acting on behalf of Sequoia is definitely wrong, though it is unclear if it's the norm or the exception. However, the shell company that disguises the source of the investment from other investors does serve a useful purpose to the entrepreneur in minimizing signaling risk in the follow on round. If Sequoia invests in your seed round but passes on the subsequent series A, every other investor you're talking to is going to wonder why one of the top VC firms is passing on the investment.

deleted 11y ago

[deleted]

thinkcomp 11y ago
...says one of them. You use shell companies to obfuscate investments.
- deleted 11y ago
  [deleted]
  - thinkcomp 11y ago
    No, you're seriously misguided, and I'm seriously going to talk to Congress and the SEC about this. You posted A) without disclosing that you are one of the "scouts" mentioned in the article; B) with the misleading assertion that everything in the article was disclosed in 2013 already by Pando Daily, which is not true; and now C) with this new assertion that the never-before-disclosed shell companies aren't obfuscatory. Wow.
    - numair 11y ago
      Dude, can you calm down? David is a nice person who is doing work that grows the economy. He isn't polluting rivers or clear-cutting forests. Stop treating these people like scam artists, they're just trying to help capital move around more efficiently; maybe you don't like the circles in which that capital is moving, but at least it's moving. And for the record, David and I do not have any sort of financial/business relationship and I haven't seen or talked to the guy in like 10 years.
      - icpmacdo 11y ago
        >they're just trying to help capital move around more efficiently One of the companies was not told for 3 years were the investment money was really coming from. Growing the economy is not a valid excuse for being deliberately misleading.
    - 11y ago

thinkcomp 11y ago

As a former CS50 student and Mark's classmate, I personally find it depressing that Harvard's current CS50 professor, who is widely praised, is secretly on Sequoia's payroll via a shell company so that they can have the inside track on the "next Zuckerberg." If professors want to teach, they should teach. If they want to invest, they should invest. But they shouldn't be doing both without making it clear to students what they've actually signed up for. Actually, all of it is deceptive (to entrepreneurs, to students, to the public, to other investors) and depressing. But that part is particularly disturbing.

rajacombinator 11y ago
What makes you think there's a conflict of interest here?
- angelbob 11y ago
  The fact that entrepreneurs are regularly encouraged to drop out, so the investor and professor roles are potentially in conflict?

rajacombinator 11y ago

Not sure why WSJ thinks this is exposé-worthy. Just a clever tactic on Sequoia's behalf, probably a good example of why they've been considered top dog in VC for so long.

cperciva 11y ago

I wonder if it would make sense at some point for VCs to make seed investments at infinite valuations -- that is, taking no equity at all -- in order to obtain information rights. Even if there are no follow-on investment rights attached, having insider information on how well a startup is doing must be worth something... (For legal and tax reasons I'm guessing the "infinite" valuation would instead need to merely be astronomically high; the point remains however that in an economic sense they would be buying information rights rather than shares.)

pen2l 11y ago
> I wonder if it would make sense at some point for VCs to make seed investments at infinite valuations -- that is, taking no equity at all -- in order to obtain information rights. Even if there are no follow-on investment rights attached, having insider information on how well a startup is doing must be worth something... Somewhat incidentally, I think this is one of the reasons why YC is such a powerful force. YC recently invested in their 1000th startup -- couple that with the many other thousands of applications they've gotten (when you submit an application to YC, you're spilling a lot of beans already about yourself / your startup to YC), all of that put together is quite the house of knowledge. And on top of it all, it owns HN and thus to some extent has the power to frame the prevailing narrative of tech, I think there is no other entity in the world more in tune with the spirit and direction of startups than YC.
- cperciva 11y ago
  I'm sure YC benefits tremendously from the information they've gathered about all the companies they've funded. Probably less so for the applications... I suspect those are incredibly noisy signals and the effort required to extract meaning from them would be prohibitive. On the other hand, YC Fellowships might be pretty much the "infinite valuation investment" idea I mentioned -- while there's no formal information rights attached, I'm sure they're getting a strong signal for which companies they'll want to fund.

lmroz 11y ago

When a startup receives investment from a VC firm, are all the limited partners in the fund disclosed? If so, how do you know those aren't also shell corporations, etc?

deleted 11y ago

[deleted]