7 ms·

As an angel investor, I can anecdotally confirm that I've become more cautious recently (in the last year, really). However, I'm not at all concerned about the

by dsacco 11y ago

As an angel investor, I can anecdotally confirm that I've become more cautious recently (in the last year, really). However, I'm not at all concerned about the stock market. That has never influenced my decision to fund a company. My belief is that a strong company can weather a bear market. I'm concerned with the current state of valuations - I enjoy giving investments to companies on the order of five figures or so each with the hope that they make something meaningfully impactful. I don't necessarily look for them to become moonshot successful; a win can be much smaller than that. Developing incrementally impressive technology that effects change is also a win. But valuations are so frothy right now that it's difficult to tell the strong companies from the ones that won't survive "when the tide goes out." It all seems very clear in hindsight, but it's hard to know right now, even moreso than usual. This is always very difficult, but the market for ideas has become somewhat "congested." There has been a flood of folks entering the "startup game" who seem to be planning for their IPO before they've even gotten a product off the ground. Again, anecdotally, I'm observing a noticeable increase in fraud among founders who are trying to raise money unscrupulously, especially with novice investors. I don't like to use the word bubble because I think it's lazy analysis, but I do strongly believe valuations are in the beginning of a market correction. At the very least, I think there will be a higher bar for invested money to indicate a legitimate valuation instead of a loan. I do think that there will still be plenty of capital ready to be given to companies, investors are just going to be more selective (read: cautious) about it, which may very well change the growth and success potential of certain more dubious business models in the valley.

paulpauper 11y ago
It's easy to separate the potential winners from the losers though. Start-ups that deal with hardware and other physical stuff tend to fare much worse than apps and software.
- dsacco 11y ago
  I think that analysis is too one-dimensional - it's not meaningful enough for me to simply say "hardware startups are probably bad and software startups are probably good." That's not a complete picture, even if it's true that successful startups are not evenly distributed between hardware and software, because all the other factors of startup success are not evenly co-distributed between hardware and software. It is merely one dimension of risk analysis. In the United States, ~32,000 people die annually in car accidents. In New York, ~1200 people die annually in car accidents. I live in New York. Which statistic do I pay attention to? Does it influence my analysis of total vehicular accidents that New York has a much higher population density than most of the country? Am I more likely to die in New York or somewhere else? What is the startup building? What is the existing market the product? What experience and domain knowledge do the founders have? How far along are they? Who are their actual and potential customers? That's the first five minutes of a due diligence conversation. If it were so easy to divide potential winners from virtually certain losers, people would hedge so well they would lose almost nothing and most angel investors would become rich. The reality is very different.
- bsder 11y ago
  > Start-ups that deal with hardware and other physical stuff tend to fare much worse than apps and software. I'm not sure I buy this. Maybe on Kickstarter, et al. I do, because most of the people trying to do hardware there are hobbyists who have never actually shipped a product and so have highly unrealistic expectations. My baseline for a hardware Kickstarter is "Take the Bill of Materials and Multiply by 3--if that isn't retail price they're in big trouble." Hardware startups take quite a bit more money to get running. However, once they do, you tend to have a very strong customer base and a less assailable position. They have hardware after all--3 guys and a dog can't just clone them.
roymurdock 11y ago
> However, I'm not at all concerned about the stock market. That has never influenced my decision to fund a company. It probably will as things start to slow down. During the growth phase of the business cycle, many companies do well. Even some with poor fundamentals that shouldn't. This is the danger of stimulus - it promotes an inefficient and wasteful allocation of resources. But it makes investing easier as a larger pool of companies are succeeding and finding exits for their founders and investors through IPOs and acquisitions, which are both very closely correlated with the health of the stock market. During the contraction phase, the companies with poor fundamentals are exposed. Ok, no loss there, they were struggling and nobody really believed in their potential anyways. But contractions can also bring down good, solid companies who were just caught unaware and were not holding enough liquid assets to pay their employees and the interest on their debts. Some non-negligible percentage will not make it through a rocky period while liquidity dries up and relatively cheap funding/investing slows down. I think it's smart to not read too much into the stock market as it can be distracting and noisy, but I think its trajectory and what it indicates about the phase and timing of the next business peak/trough cycle is extremely important and should not be discounted.
- dsacco 11y ago
  You have a very good point, in that the stock market's current phase ultimately affects the health of all its constituent companies (in both a symbiotic and parasitic relationship). But like you said, I don't consider it helpful to pay attention on a day to day basis, and I find it to be a more useful indicator for macrotrends than microtrends. In other words, my understanding of the stock market will influence my opinions about the angel investing and startup market en masse, but it would not be anything more than one factor in my opinion about a single company I could invest in. While it's true that companies with strong fundamentals do fail in a downturn, companies with strong fundamentals can fail for any number of reasons. Just as I'm not all that concerned with my Vanguard funds going down for a while because they'll be back up in 10 years, I'm not too worried about a single company with strong fundamentals getting caught with its shorts down when the tide goes out. If it happens, it happens; in the absence of other poignant data, however, I find it much more important to focus on the company itself and pay attention to macrotrends more infrequently. Besides, a market downturn is an excellent time to hedge long bets with shorts :)
CPLX 11y ago
> However, I'm not at all concerned about the stock market. That has never influenced my decision to fund a company. You may be the exceptional person who has no assets whatsoever tied up in the stock market, but nearly every investor who has the resources to be an angel will have money in the market. When the market falls they have less money. They use money to invest in things. The correlation between the market and seed stage investing should be fairly direct and clear.
- criddell 11y ago
  > The correlation between the market and seed stage investing should be fairly direct and clear. The money can only be in one place at a time though. If you pull money out of publicly traded stocks, wouldn't that mean you have more money for angel activities? Although, when the market is way down, that's a great buying opportunity, so is that when angel investors stop putting money into startups and instead go on a stock buying spree?
  - CPLX 11y ago
    You're arguing that they are substitute assets for each other that might move reciprocally, like stocks and bonds are. But equity at seed stage and public stage are the same asset class at different levels and move more in tandem. My argument was more about the wealth effect though, which is that a crash in stocks makes Angels poorer and thus less likely to invest in risky startups.
- frandroid 11y ago
  It depends if the investor pulls their money out of the market when things start to shake down, or if they have some insights that would push them to do so ahead of a downturn. If they do, they might have _more_ money than usual to invest during a market downturn. Also, as a VC, your money is in a variety of startups that can crest even when the rest of the market goes sideways. Shopify had its IPO this year, others have been bought by the big guys, so their investors are now flush with new money. I mean if we have another big recession, there's going to be an investment chill so even an investor with cash to spare will have trouble finding partners to invest with. But we're not there yet.
DenisM 11y ago
An unrelated question, if I may... When evaluating a startup in a given area, how do you bridge the gap between your expertise in that area, and that which is required to assess the opportunity? Obviously the startup founders will always project the fields of gold ripe for the taking, so you can't blindly trust that. Do you only invest in the field you know well? Do you look for behavioral clues? Do you look for your or their peers' decision? Do you look for what's in trend, or counter trend? It seems like a super tough problem, yet it hardly ever gets discussed...
- jacquesm 11y ago
  Hire an expert. This is routinely done during any kind of due-diligence, if you don't know the field find someone who does, get them to sign an NDA and start picking the proposition apart. Make sure there is absolutely no conflict of interest, make sure the expert will be told up front they will not be able to participate in any kind of deal and will only be paid an agreed-up-front hourly rate for their participation in the due-diligence process.
  - mbesto 11y ago
    Unfortunately angels rarely do due-diligence. The fees to do this for a portfolio approach (which VC's model is) are much too high.
    - jacquesm 11y ago
      The amount of money you spend on a due diligence should be related to the size of the investment. Under 100K investment 5 to 10% should be enough to keep you out of trouble. A couple of hours (or a full day) of an expert in the field that you're going for would amount to maybe $1K to $3K depending on the field. Easy money for the expert and a very cheap insurance for someone putting down 20 to 100K of their hard earned money. The funny thing is they don't bat an eye at spending that kind of money on a lawyer but to actually get a good look at the material it is suddenly 'a lot of money'.
      - 11y ago
forgetsusername 11y ago
>But valuations are so frothy right now that it's difficult to tell the strong companies from the ones that won't survive "when the tide goes out." There seems to be some contradiction here: you seem to say valuations don't matter, but also that you're worried about them. How do valuations prevent you from spotting a good company?
cookiecaper 11y ago
>I do think that there will still be plenty of capital ready to be given to companies, investors are just going to be more selective (read: cautious) about it, which may very well change the growth and success potential of certain more dubious business models in the valley. With so many SV companies that have hit it big without any real idea on how they're going to make money some day, it'd be interesting to hear what passes for a "dubious business model" out there.
jacquesm 11y ago
> There has been a flood of folks entering the "startup game" who seem to be planning for their IPO before they've even gotten a product off the ground. Again, anecdotally, I'm observing a noticeable increase in fraud among founders who are trying to raise money unscrupulously, especially with novice investors. FWIW I'll back you up on this, definitely a complicating factor for novice investors. Free tip to novice investors: If someone approaches you with a request for funding, if it is still 'just an idea' and if the idea will surely deliver billions and if the funding required is < $50K then you're being fed a line of bull-shit. Anything that will grow to turnovers that high will surely require a little bit of traction after implementation before any figures can be projected at all and anything that hasn't been implemented yet doesn't even qualify to be discussed in other terms than hypotheticals. Another free tip for novice investors: pair up with a more experienced investor to vastly reduce your chances of being ripped off on your first investment(s). This is also not a guarantee but it will increase your odds considerably, it also requires you to convince another, hopefully more skeptical party that what you've found is really worth an investment.
- bsder 11y ago
  > anything that hasn't been implemented yet doesn't even qualify to be discussed in other terms than hypotheticals. Except that once you implement it, investors start anchoring to how small your numbers are. Catch 22. I work with an actual IoT startup. Hardware--implemented. Backend and frontend--up and running on Azure migration to AWS ongoing. Customers who pay? Yep--and they love it. So, investors? "Ick, haaaardwaaaaare? But ... but ... but ... that's going to take actual moooooney." (yeah--well, so did Nest, thanks) "Your numbers are too small to be meaningful" (no duh--does the word "startup" actually mean anything to you) "This isn't going to scale." (translation--it takes money and marketing to acquire customers--welcome to a business with actual value and customer lockin). "Big data is uninteresting to us now." (translation--"actuarials" and "business process" are only profitable--not wildly profitable and flippable) To a certain extent, I'm looking forward to these unicorns winding up on the butcher block and being discovered to have no meat. The lead VC's of these unicorns are going to give a bunch of the initial investors a huge haircut via preferences (don't get me started ranting on the stupidity of that). Suddenly, initial investors are going to have to start looking at "sustainable" rather than "flippable". Those of us with actual profit will be waiting.
rdlecler1 11y ago
The more money that flows to the sector the more of a magnet it is for sociopaths and I don't think many of us are very good at dealing with sociopaths. You mentioned fraud, care to give some examples (no need to name names of course).
- api 11y ago
  I've seen some things I'd have to tone down to sell as believable fiction, and this was several years ago doing consulting for startups. Standard issue asshattery include things like: - Paper-thin mock up demos of a product being misrepresented as actual finished sale-able product. Sorry but the V in MVP stands for viable. - Impressive people are touted as employees, even co-founders, and when you go talk to them it's news to them. Maybe they had a conversation with said founder once and expressed some interest and suddenly to investors and others they are the CTO. Sometimes this arises from the founder(s) being so narcissistic that they simply assume that anyone would of course feel privileged to join them. Why wouldn't they? - Company/founder has sales/vendor relationship with other companies and misrepresents those products as "theirs," implying that they actually own them. In one case I saw rebranding without permission, which is flat out fraud. - Signups/trials/downloads misrepresented as active continuous users or free users counted together with paid users. - Lying about educational or work background. A skilled blowhard will do so in an ambiguous way, e.g. "went to MIT" means "attended one workshop there and read a lot of open courseware." - Products that would violate known laws of physics or proven mathematical theorems. (Or sometimes even grade school math...)
  - anon8418 11y ago
    > - Products that would violate known laws of physics or proven mathematical theorems. (Or sometimes even grade school math...) Drop-Kicker just covered one such startup: http://drop-kicker.com/2016/01/ampy-move-teardown-and-review/ http://drop-kicker.com/2016/01/ampy-move-teardown-and-review... This is from three PHD engineering students from Northwestern.... over $1.5MM raised via Kickstarter and investors. Hard to believe the founders (remember PHDs) are so naive to actually believe in their own advertising claims.

by dsacco 11y ago

paulpauper 11y ago

It's easy to separate the potential winners from the losers though. Start-ups that deal with hardware and other physical stuff tend to fare much worse than apps and software.

dsacco 11y ago
I think that analysis is too one-dimensional - it's not meaningful enough for me to simply say "hardware startups are probably bad and software startups are probably good." That's not a complete picture, even if it's true that successful startups are not evenly distributed between hardware and software, because all the other factors of startup success are not evenly co-distributed between hardware and software. It is merely one dimension of risk analysis. In the United States, ~32,000 people die annually in car accidents. In New York, ~1200 people die annually in car accidents. I live in New York. Which statistic do I pay attention to? Does it influence my analysis of total vehicular accidents that New York has a much higher population density than most of the country? Am I more likely to die in New York or somewhere else? What is the startup building? What is the existing market the product? What experience and domain knowledge do the founders have? How far along are they? Who are their actual and potential customers? That's the first five minutes of a due diligence conversation. If it were so easy to divide potential winners from virtually certain losers, people would hedge so well they would lose almost nothing and most angel investors would become rich. The reality is very different.
bsder 11y ago
> Start-ups that deal with hardware and other physical stuff tend to fare much worse than apps and software. I'm not sure I buy this. Maybe on Kickstarter, et al. I do, because most of the people trying to do hardware there are hobbyists who have never actually shipped a product and so have highly unrealistic expectations. My baseline for a hardware Kickstarter is "Take the Bill of Materials and Multiply by 3--if that isn't retail price they're in big trouble." Hardware startups take quite a bit more money to get running. However, once they do, you tend to have a very strong customer base and a less assailable position. They have hardware after all--3 guys and a dog can't just clone them.

roymurdock 11y ago

> However, I'm not at all concerned about the stock market. That has never influenced my decision to fund a company. It probably will as things start to slow down. During the growth phase of the business cycle, many companies do well. Even some with poor fundamentals that shouldn't. This is the danger of stimulus - it promotes an inefficient and wasteful allocation of resources. But it makes investing easier as a larger pool of companies are succeeding and finding exits for their founders and investors through IPOs and acquisitions, which are both very closely correlated with the health of the stock market. During the contraction phase, the companies with poor fundamentals are exposed. Ok, no loss there, they were struggling and nobody really believed in their potential anyways. But contractions can also bring down good, solid companies who were just caught unaware and were not holding enough liquid assets to pay their employees and the interest on their debts. Some non-negligible percentage will not make it through a rocky period while liquidity dries up and relatively cheap funding/investing slows down. I think it's smart to not read too much into the stock market as it can be distracting and noisy, but I think its trajectory and what it indicates about the phase and timing of the next business peak/trough cycle is extremely important and should not be discounted.

dsacco 11y ago
You have a very good point, in that the stock market's current phase ultimately affects the health of all its constituent companies (in both a symbiotic and parasitic relationship). But like you said, I don't consider it helpful to pay attention on a day to day basis, and I find it to be a more useful indicator for macrotrends than microtrends. In other words, my understanding of the stock market will influence my opinions about the angel investing and startup market en masse, but it would not be anything more than one factor in my opinion about a single company I could invest in. While it's true that companies with strong fundamentals do fail in a downturn, companies with strong fundamentals can fail for any number of reasons. Just as I'm not all that concerned with my Vanguard funds going down for a while because they'll be back up in 10 years, I'm not too worried about a single company with strong fundamentals getting caught with its shorts down when the tide goes out. If it happens, it happens; in the absence of other poignant data, however, I find it much more important to focus on the company itself and pay attention to macrotrends more infrequently. Besides, a market downturn is an excellent time to hedge long bets with shorts :)

CPLX 11y ago

> However, I'm not at all concerned about the stock market. That has never influenced my decision to fund a company. You may be the exceptional person who has no assets whatsoever tied up in the stock market, but nearly every investor who has the resources to be an angel will have money in the market. When the market falls they have less money. They use money to invest in things. The correlation between the market and seed stage investing should be fairly direct and clear.

criddell 11y ago
> The correlation between the market and seed stage investing should be fairly direct and clear. The money can only be in one place at a time though. If you pull money out of publicly traded stocks, wouldn't that mean you have more money for angel activities? Although, when the market is way down, that's a great buying opportunity, so is that when angel investors stop putting money into startups and instead go on a stock buying spree?
- CPLX 11y ago
  You're arguing that they are substitute assets for each other that might move reciprocally, like stocks and bonds are. But equity at seed stage and public stage are the same asset class at different levels and move more in tandem. My argument was more about the wealth effect though, which is that a crash in stocks makes Angels poorer and thus less likely to invest in risky startups.
frandroid 11y ago
It depends if the investor pulls their money out of the market when things start to shake down, or if they have some insights that would push them to do so ahead of a downturn. If they do, they might have _more_ money than usual to invest during a market downturn. Also, as a VC, your money is in a variety of startups that can crest even when the rest of the market goes sideways. Shopify had its IPO this year, others have been bought by the big guys, so their investors are now flush with new money. I mean if we have another big recession, there's going to be an investment chill so even an investor with cash to spare will have trouble finding partners to invest with. But we're not there yet.

DenisM 11y ago

An unrelated question, if I may... When evaluating a startup in a given area, how do you bridge the gap between your expertise in that area, and that which is required to assess the opportunity? Obviously the startup founders will always project the fields of gold ripe for the taking, so you can't blindly trust that. Do you only invest in the field you know well? Do you look for behavioral clues? Do you look for your or their peers' decision? Do you look for what's in trend, or counter trend? It seems like a super tough problem, yet it hardly ever gets discussed...

jacquesm 11y ago
Hire an expert. This is routinely done during any kind of due-diligence, if you don't know the field find someone who does, get them to sign an NDA and start picking the proposition apart. Make sure there is absolutely no conflict of interest, make sure the expert will be told up front they will not be able to participate in any kind of deal and will only be paid an agreed-up-front hourly rate for their participation in the due-diligence process.
- mbesto 11y ago
  Unfortunately angels rarely do due-diligence. The fees to do this for a portfolio approach (which VC's model is) are much too high.
  - jacquesm 11y ago
    The amount of money you spend on a due diligence should be related to the size of the investment. Under 100K investment 5 to 10% should be enough to keep you out of trouble. A couple of hours (or a full day) of an expert in the field that you're going for would amount to maybe $1K to $3K depending on the field. Easy money for the expert and a very cheap insurance for someone putting down 20 to 100K of their hard earned money. The funny thing is they don't bat an eye at spending that kind of money on a lawyer but to actually get a good look at the material it is suddenly 'a lot of money'.
    - 11y ago

forgetsusername 11y ago

>But valuations are so frothy right now that it's difficult to tell the strong companies from the ones that won't survive "when the tide goes out." There seems to be some contradiction here: you seem to say valuations don't matter, but also that you're worried about them. How do valuations prevent you from spotting a good company?

cookiecaper 11y ago

>I do think that there will still be plenty of capital ready to be given to companies, investors are just going to be more selective (read: cautious) about it, which may very well change the growth and success potential of certain more dubious business models in the valley. With so many SV companies that have hit it big without any real idea on how they're going to make money some day, it'd be interesting to hear what passes for a "dubious business model" out there.

jacquesm 11y ago

> There has been a flood of folks entering the "startup game" who seem to be planning for their IPO before they've even gotten a product off the ground. Again, anecdotally, I'm observing a noticeable increase in fraud among founders who are trying to raise money unscrupulously, especially with novice investors. FWIW I'll back you up on this, definitely a complicating factor for novice investors. Free tip to novice investors: If someone approaches you with a request for funding, if it is still 'just an idea' and if the idea will surely deliver billions and if the funding required is < $50K then you're being fed a line of bull-shit. Anything that will grow to turnovers that high will surely require a little bit of traction after implementation before any figures can be projected at all and anything that hasn't been implemented yet doesn't even qualify to be discussed in other terms than hypotheticals. Another free tip for novice investors: pair up with a more experienced investor to vastly reduce your chances of being ripped off on your first investment(s). This is also not a guarantee but it will increase your odds considerably, it also requires you to convince another, hopefully more skeptical party that what you've found is really worth an investment.

bsder 11y ago
> anything that hasn't been implemented yet doesn't even qualify to be discussed in other terms than hypotheticals. Except that once you implement it, investors start anchoring to how small your numbers are. Catch 22. I work with an actual IoT startup. Hardware--implemented. Backend and frontend--up and running on Azure migration to AWS ongoing. Customers who pay? Yep--and they love it. So, investors? "Ick, haaaardwaaaaare? But ... but ... but ... that's going to take actual moooooney." (yeah--well, so did Nest, thanks) "Your numbers are too small to be meaningful" (no duh--does the word "startup" actually mean anything to you) "This isn't going to scale." (translation--it takes money and marketing to acquire customers--welcome to a business with actual value and customer lockin). "Big data is uninteresting to us now." (translation--"actuarials" and "business process" are only profitable--not wildly profitable and flippable) To a certain extent, I'm looking forward to these unicorns winding up on the butcher block and being discovered to have no meat. The lead VC's of these unicorns are going to give a bunch of the initial investors a huge haircut via preferences (don't get me started ranting on the stupidity of that). Suddenly, initial investors are going to have to start looking at "sustainable" rather than "flippable". Those of us with actual profit will be waiting.

rdlecler1 11y ago

The more money that flows to the sector the more of a magnet it is for sociopaths and I don't think many of us are very good at dealing with sociopaths. You mentioned fraud, care to give some examples (no need to name names of course).

api 11y ago
I've seen some things I'd have to tone down to sell as believable fiction, and this was several years ago doing consulting for startups. Standard issue asshattery include things like: - Paper-thin mock up demos of a product being misrepresented as actual finished sale-able product. Sorry but the V in MVP stands for viable. - Impressive people are touted as employees, even co-founders, and when you go talk to them it's news to them. Maybe they had a conversation with said founder once and expressed some interest and suddenly to investors and others they are the CTO. Sometimes this arises from the founder(s) being so narcissistic that they simply assume that anyone would of course feel privileged to join them. Why wouldn't they? - Company/founder has sales/vendor relationship with other companies and misrepresents those products as "theirs," implying that they actually own them. In one case I saw rebranding without permission, which is flat out fraud. - Signups/trials/downloads misrepresented as active continuous users or free users counted together with paid users. - Lying about educational or work background. A skilled blowhard will do so in an ambiguous way, e.g. "went to MIT" means "attended one workshop there and read a lot of open courseware." - Products that would violate known laws of physics or proven mathematical theorems. (Or sometimes even grade school math...)
- anon8418 11y ago
  > - Products that would violate known laws of physics or proven mathematical theorems. (Or sometimes even grade school math...) Drop-Kicker just covered one such startup: http://drop-kicker.com/2016/01/ampy-move-teardown-and-review/ http://drop-kicker.com/2016/01/ampy-move-teardown-and-review... This is from three PHD engineering students from Northwestern.... over $1.5MM raised via Kickstarter and investors. Hard to believe the founders (remember PHDs) are so naive to actually believe in their own advertising claims.