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> Except that once you implement it, investors start anchoring to how small your numbers are. Catch 22. Are investors really that irrational?

by api 11y ago

jonnathanson 11y ago
Some are. The rest aren't irrational so much as impatient. They tend to believe -- correctly or not -- that the winners and losers among their portfolio can be identified quickly, and prioritized accordingly. They are not just thinking about your company in isolation. They are thinking about it in terms of stack-ranked IRR on a spreadsheet with other investments.
DiabloD3 11y ago
Yes. I may not be apart of that highly rigged game personally, but holy goddamned yes a thousand times. The front page of HN almost always has at least one story during the day about how irrational they are.
bsder 11y ago
Now that I stopped laughing, I can give you a reasonable answer. Yes, they are. But, then, handing someone a couple million dollars in the hope that it will turn into 50 or 100 million is an irrational act, too. So, it's hard to get too upset over them being purely irrational. There are two problems: 1) VCs/Investors are sheep. This is the infuriating one as it makes most of the VCs/investors you deal with effectively useless. To the point that when pitching to them the goal is to trigger that behavior (the term is FOMO-"Fear of Missing Out" aka: acting like sheep). So, if everybody is investing in something, everybody will invest in something. Until it blows apart. If you just want funding, try to pitch something which runs downwind of this tendency. 2) It's really all after the fact rationalization of "I don't like/trust you." This doesn't make me mad--I just would rather a VC/investor just say this. But they won't turn you down definitively for lots of social reasons (mostly hoping they don't turn down the next AirBnB/Uber/etc. and get laughed at at the country club). I would actually respect someone more who simply said "My astrologer says the signs aren't right. KTHXBYE." Or, even, flat out "I don't like you." I'm cool with that--my personality is straightforward--most people like it, a few call it tactless and arrogant. If you're one of those I rub the wrong way, fine, we need to find different dance partners. The problem is that too many investors want you to jump through hoops when they're looking for reasons to turn you down. Generally, you should simply read this as "No" and move on. It's like trying to date a pretty girl--when she gives you some excuse multiple times, she's probably telling you "No" but trying to keep you in her list of options just in case. Upshot: raising money is hard work. If you want to sit in the big chair, you had better be prepared for the slog.
jacquesm 11y ago
At the risk of upsetting those that pay my bread & butter, yes, for the most part. And then there are tons of buts. The first one: but they're usually good at judging people. The second: some of them do hire tech people to help improve the odds (because that's all this is, playing the odds, improve them enough and you can do very well at this). The third: they're past masters at the other end of it, protecting the exit. This is important because without an exit there is no return worth measuring (dividends don't really count as a rule, but an IPO would be nice if the company survives the lock-up period or if the VCs get to float their shares or a large chunk of them). Obligatory lame VC joke: Q: Why does a venture capitalist walk into the negotiation room backwards? A: So they keep sight of the exit. The fourth: there are at least as many irrational founders as there are irrational VCs, if not many many more. Finally: Trust is everything. Break the trust at any point and you can kiss any investment goodbye. Have broken tech, a broken business model, a good attitude and team willing to put in the time and the effort to fix the tech and the model (or even an outright pivot) and I wouldn't rule out that you get funded. Fun fact: the one thing that keeps on being repeated back to me whenever we (one of my clients and me) go to do tech dd on any one of the companies they've signed a terms sheet with is that no matter how many other investors have already been in that position and no matter how many times that company has already seen due diligence teams it will be the very first time that they actually get to really show their tech, both the good and the bad. This never ceases to amaze me, the amount of sloppy homework on the part of VCs and the usual suspects of companies that do dd (usually the big legal and accounting firms get hired and they then farm out the bits to various parties) is scary and this costs quite a few of them many millions of dollars annually. Even so, it's good advertising for me so I really shouldn't complain.

> Except that once you implement it, investors start anchoring to how small your numbers are. Catch 22. Are investors really that irrational?

by api 11y ago

> Except that once you implement it, investors start anchoring to how small your numbers are. Catch 22. Are investors really that irrational?

jonnathanson 11y ago

Some are. The rest aren't irrational so much as impatient. They tend to believe -- correctly or not -- that the winners and losers among their portfolio can be identified quickly, and prioritized accordingly. They are not just thinking about your company in isolation. They are thinking about it in terms of stack-ranked IRR on a spreadsheet with other investments.

DiabloD3 11y ago

Yes. I may not be apart of that highly rigged game personally, but holy goddamned yes a thousand times. The front page of HN almost always has at least one story during the day about how irrational they are.

bsder 11y ago

Now that I stopped laughing, I can give you a reasonable answer. Yes, they are. But, then, handing someone a couple million dollars in the hope that it will turn into 50 or 100 million is an irrational act, too. So, it's hard to get too upset over them being purely irrational. There are two problems: 1) VCs/Investors are sheep. This is the infuriating one as it makes most of the VCs/investors you deal with effectively useless. To the point that when pitching to them the goal is to trigger that behavior (the term is FOMO-"Fear of Missing Out" aka: acting like sheep). So, if everybody is investing in something, everybody will invest in something. Until it blows apart. If you just want funding, try to pitch something which runs downwind of this tendency. 2) It's really all after the fact rationalization of "I don't like/trust you." This doesn't make me mad--I just would rather a VC/investor just say this. But they won't turn you down definitively for lots of social reasons (mostly hoping they don't turn down the next AirBnB/Uber/etc. and get laughed at at the country club). I would actually respect someone more who simply said "My astrologer says the signs aren't right. KTHXBYE." Or, even, flat out "I don't like you." I'm cool with that--my personality is straightforward--most people like it, a few call it tactless and arrogant. If you're one of those I rub the wrong way, fine, we need to find different dance partners. The problem is that too many investors want you to jump through hoops when they're looking for reasons to turn you down. Generally, you should simply read this as "No" and move on. It's like trying to date a pretty girl--when she gives you some excuse multiple times, she's probably telling you "No" but trying to keep you in her list of options just in case. Upshot: raising money is hard work. If you want to sit in the big chair, you had better be prepared for the slog.

jacquesm 11y ago

At the risk of upsetting those that pay my bread & butter, yes, for the most part. And then there are tons of buts. The first one: but they're usually good at judging people. The second: some of them do hire tech people to help improve the odds (because that's all this is, playing the odds, improve them enough and you can do very well at this). The third: they're past masters at the other end of it, protecting the exit. This is important because without an exit there is no return worth measuring (dividends don't really count as a rule, but an IPO would be nice if the company survives the lock-up period or if the VCs get to float their shares or a large chunk of them). Obligatory lame VC joke: Q: Why does a venture capitalist walk into the negotiation room backwards? A: So they keep sight of the exit. The fourth: there are at least as many irrational founders as there are irrational VCs, if not many many more. Finally: Trust is everything. Break the trust at any point and you can kiss any investment goodbye. Have broken tech, a broken business model, a good attitude and team willing to put in the time and the effort to fix the tech and the model (or even an outright pivot) and I wouldn't rule out that you get funded. Fun fact: the one thing that keeps on being repeated back to me whenever we (one of my clients and me) go to do tech dd on any one of the companies they've signed a terms sheet with is that no matter how many other investors have already been in that position and no matter how many times that company has already seen due diligence teams it will be the very first time that they actually get to really show their tech, both the good and the bad. This never ceases to amaze me, the amount of sloppy homework on the part of VCs and the usual suspects of companies that do dd (usually the big legal and accounting firms get hired and they then farm out the bits to various parties) is scary and this costs quite a few of them many millions of dollars annually. Even so, it's good advertising for me so I really shouldn't complain.