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I was a VC. I think it is mainly that it is a very weak signal. A good VC or a select group of high quality angels does help a company get itself in order, so r

I was a VC. I think it is mainly that it is a very weak signal. A good VC or a select group of high quality angels does help a company get itself in order, so raising money from a large collection of distant angels tends to be a signal that the quality of the company must be low - as they should have tried to raise from high quality individuals first. A company with crowdfunding will have to display stronger metrics than a company with strong angels / VCs. Imagine two companies come to pitch, both are identical in every way. One has crowdfunded a $1M seed, the other got a check from Andreessen Horowitz and the CTO of LinkedIn. Which one do you put your money in? Even the potential deal flow from those individuals helps hedge your bet. As a side note I think that this relationship of quality and crowdfunding is true (though not always by any means). I have seen fraudulent behaviour by companies misrepresenting their data to a group who are, by a VC's standard, very unsavvy investors. This company was certainly not able to raise money from a VC, but raised two $M+ rounds on a crowd funding site. However, I have also seen good companies who don't have an 'in' to the VC world raise money in this way.

zebrafish 9y ago
as they should have tried to raise from high quality individuals first.....got a check from Andreessen Horowitz and the CTO of LinkedIn Exactly the point the parent was making. Those are big time contacts. Somebody outside of the valley now has a chance to get $1MM(!!!!) of seed money for their idea without having to relocate and schmooze and network. I'm as big a proponent of real world social skills as anyone, but this removes a significant barrier to entry for a lot of would be entrepreneurs. Also, wouldn't a large number of crowdfunders indicate a better product-market fit?
- lettergram 9y ago
  I actually am torn on the subject. I'm not a VC, but I do invest heavily and regularly track various companies. That being said, I recognize my opinion might mean little, but... Product-market fit is definitely a good sign a company is on the right track in terms of product. However, 99% of what makes a company successful is execution. A crowd funded campaign on Kickstarter doesn't need to even be possible[1] or it can be completely silly [2]. It doesn't need to show a 100x growth, nor does it need to exist. On the other hand a VC will do vetting, to make sure the team is right to execute to solve a problem. Let's put it this way: * A VC invests in a team to solve a problem * Crowdfunding invests in a product/idea A VC is a much stronger signal. [1] https://www.kickstarter.com/projects/gnut/kickstarter-open-source-death-star?ref=discovery https://www.kickstarter.com/projects/gnut/kickstarter-open-s... [2] https://www.kickstarter.com/projects/elanlee/exploding-kittens https://www.kickstarter.com/projects/elanlee/exploding-kitte...
  - angersock 9y ago
    > A VC is a much stronger signal. Sure, like all the folks that were in on Color and Clinkle, right?
  - mindcrime 9y ago
    A VC is a much stronger signal. Well, VC's think so anyway. Given the success rate of VC funds, I'm not sure that's actually true at all.
  - hkmurakami 9y ago
    > * Crowdfunding invests in a product/idea I would expand this to state that crowdfunding would fund product/idea but not product/idea fit with market.
  - watwut 9y ago
    I dunno, the vetting of SV teams leads to pretty strange signaling behaviour of wannabe startups.
ericb 9y ago
I think this bias is mistaken--because VC's use their network as a filter, it falsely equivocates strong business/strong founder with individuals who landed on a social graph that happened to have VC connections. Biases like this are market inefficiencies that can provide outsize returns for those who learn to look past it.
- prostoalex 9y ago
  In order to fight that bias, a startup would need to turn down a check from a big VC name (Sequoia, a16z, KPCB, Benchmark) and choose crowdfunding. Until that happens, the implicit assumptions is that the startup tried shopping itself around to first-tier VCs and angels, failed, tried to go to second-tier VCs and angels, failed, so crowdfunding is their last resort. Alternatively, a crowdfunded startup scorned by VCs needs to make a really nice exit or achieve a very impressive unicorn valuation.
- hkmurakami 9y ago
  It's basically a filter that tolerates false negatives. Figuring out a way to create that VC/Angel connection implies abilities and characteristics that they pattern match to past success. There may be high potential teams that cannot pass this filter but will still succeed, but the industry's deal flow is large enough that they are fine with a small number of false negatives since false positives in their portfolio hurt more, especially when you consider VC math needing 100x-1000x return potential from each of their companies. It's just like the FaceGooAmaSoft hiring filter we're familiar with that is designed to prioritize low false positives at the cost of having a higher false negative. (skilled programmers who aren't interested in the contrived coding quizzes or can't do them well will be a false negative in the hiring process)
  - xiaoma 9y ago
    >"the industry's deal flow is large enough that they are fine with a small number of false negatives since false positives in their portfolio hurt more" This is backwards. Funding a company that goes nowhere is far smaller an error than turning down the next SpaceX.
hkmurakami 9y ago
What happens when the crowd funded company tells you that the cap on their note was 2x that of the A16Z backed one and they chose the route of less dilution at a stage where they were searching for product market fit?
- notahacker 9y ago
  The follow on investors probably want to know why A16Z and other VCs competing with them for deal flow thought they were less valuable than people who hadn't met the founders... (I mean, "frankly, we wanted the most money for the least equity and if that was dependent on the public having more inflated expectations than VCs so be it" is a perfectly valid answer from the point of view of running a startup, but it's still an adverse signal if the investors most informed about your company at the last investment round were those willing to offer the lowest price for your shares)
Taek 9y ago
I can talk as a startup who took institutional capital. Our investors have been super hands on, board meetings every month, and if I need to talk to them about something or get help with a company problem they are never more than a day or two from being able to give me a few hours. It's helped a lot. In my mind we are much, much better off for having their guidance and assistance. If you crowdfund, you aren't getting that. You are weaker relative to the companies that did. Doesn't matter if you were stronger initially, the company that got institutional capital (especially first time founders) is going to have training that gives them a huge edge. Having been on both sides of the fence, there is no question to me that good institutional capital will make a better team. Smart money goes a long way.
api 9y ago
> One has crowdfunded a $1M seed, the other got a check from Andreessen Horowitz and the CTO of LinkedIn. Which one do you put your money in? If it's a consumer product, probably the former. It means they can market and hustle. If it's an enterprise or B2B product, probably the latter. Edit: with the caveat that I would only put my money in the former if they have shipped. There's a lot of vaporware in places like Kickstarter and crowdfunding markets. VCs and knowledgeable angels are more likely to be able to see through that (but as we've seen, they're not perfect either).
hassiktir 9y ago
I don't really understand this logic. If you are trying to determine which company (all else being equal) is more likely to be successful, would you not take the company that has validation already from a population that is more likely going to be using whatever it is that you are pitching? Essentially you are saying that getting funded by a big name is more indicative of success than consumers who will be using the service/product/etc.
luckydata 9y ago
The VC crowd in Silicon Valley prizes themselves as great out of the box thinkers while, in reality, they are intellectually lazy and quite conventional.

zebrafish 9y ago

as they should have tried to raise from high quality individuals first.....got a check from Andreessen Horowitz and the CTO of LinkedIn Exactly the point the parent was making. Those are big time contacts. Somebody outside of the valley now has a chance to get $1MM(!!!!) of seed money for their idea without having to relocate and schmooze and network. I'm as big a proponent of real world social skills as anyone, but this removes a significant barrier to entry for a lot of would be entrepreneurs. Also, wouldn't a large number of crowdfunders indicate a better product-market fit?

lettergram 9y ago
I actually am torn on the subject. I'm not a VC, but I do invest heavily and regularly track various companies. That being said, I recognize my opinion might mean little, but... Product-market fit is definitely a good sign a company is on the right track in terms of product. However, 99% of what makes a company successful is execution. A crowd funded campaign on Kickstarter doesn't need to even be possible[1] or it can be completely silly [2]. It doesn't need to show a 100x growth, nor does it need to exist. On the other hand a VC will do vetting, to make sure the team is right to execute to solve a problem. Let's put it this way: * A VC invests in a team to solve a problem * Crowdfunding invests in a product/idea A VC is a much stronger signal. [1] https://www.kickstarter.com/projects/gnut/kickstarter-open-source-death-star?ref=discovery https://www.kickstarter.com/projects/gnut/kickstarter-open-s... [2] https://www.kickstarter.com/projects/elanlee/exploding-kittens https://www.kickstarter.com/projects/elanlee/exploding-kitte...
- angersock 9y ago
  > A VC is a much stronger signal. Sure, like all the folks that were in on Color and Clinkle, right?
- mindcrime 9y ago
  A VC is a much stronger signal. Well, VC's think so anyway. Given the success rate of VC funds, I'm not sure that's actually true at all.
- hkmurakami 9y ago
  > * Crowdfunding invests in a product/idea I would expand this to state that crowdfunding would fund product/idea but not product/idea fit with market.
- watwut 9y ago
  I dunno, the vetting of SV teams leads to pretty strange signaling behaviour of wannabe startups.

ericb 9y ago

I think this bias is mistaken--because VC's use their network as a filter, it falsely equivocates strong business/strong founder with individuals who landed on a social graph that happened to have VC connections. Biases like this are market inefficiencies that can provide outsize returns for those who learn to look past it.

prostoalex 9y ago
In order to fight that bias, a startup would need to turn down a check from a big VC name (Sequoia, a16z, KPCB, Benchmark) and choose crowdfunding. Until that happens, the implicit assumptions is that the startup tried shopping itself around to first-tier VCs and angels, failed, tried to go to second-tier VCs and angels, failed, so crowdfunding is their last resort. Alternatively, a crowdfunded startup scorned by VCs needs to make a really nice exit or achieve a very impressive unicorn valuation.
hkmurakami 9y ago
It's basically a filter that tolerates false negatives. Figuring out a way to create that VC/Angel connection implies abilities and characteristics that they pattern match to past success. There may be high potential teams that cannot pass this filter but will still succeed, but the industry's deal flow is large enough that they are fine with a small number of false negatives since false positives in their portfolio hurt more, especially when you consider VC math needing 100x-1000x return potential from each of their companies. It's just like the FaceGooAmaSoft hiring filter we're familiar with that is designed to prioritize low false positives at the cost of having a higher false negative. (skilled programmers who aren't interested in the contrived coding quizzes or can't do them well will be a false negative in the hiring process)
- xiaoma 9y ago
  >"the industry's deal flow is large enough that they are fine with a small number of false negatives since false positives in their portfolio hurt more" This is backwards. Funding a company that goes nowhere is far smaller an error than turning down the next SpaceX.

hkmurakami 9y ago

What happens when the crowd funded company tells you that the cap on their note was 2x that of the A16Z backed one and they chose the route of less dilution at a stage where they were searching for product market fit?

notahacker 9y ago
The follow on investors probably want to know why A16Z and other VCs competing with them for deal flow thought they were less valuable than people who hadn't met the founders... (I mean, "frankly, we wanted the most money for the least equity and if that was dependent on the public having more inflated expectations than VCs so be it" is a perfectly valid answer from the point of view of running a startup, but it's still an adverse signal if the investors most informed about your company at the last investment round were those willing to offer the lowest price for your shares)

Taek 9y ago

I can talk as a startup who took institutional capital. Our investors have been super hands on, board meetings every month, and if I need to talk to them about something or get help with a company problem they are never more than a day or two from being able to give me a few hours. It's helped a lot. In my mind we are much, much better off for having their guidance and assistance. If you crowdfund, you aren't getting that. You are weaker relative to the companies that did. Doesn't matter if you were stronger initially, the company that got institutional capital (especially first time founders) is going to have training that gives them a huge edge. Having been on both sides of the fence, there is no question to me that good institutional capital will make a better team. Smart money goes a long way.

api 9y ago

> One has crowdfunded a $1M seed, the other got a check from Andreessen Horowitz and the CTO of LinkedIn. Which one do you put your money in? If it's a consumer product, probably the former. It means they can market and hustle. If it's an enterprise or B2B product, probably the latter. Edit: with the caveat that I would only put my money in the former if they have shipped. There's a lot of vaporware in places like Kickstarter and crowdfunding markets. VCs and knowledgeable angels are more likely to be able to see through that (but as we've seen, they're not perfect either).

hassiktir 9y ago

I don't really understand this logic. If you are trying to determine which company (all else being equal) is more likely to be successful, would you not take the company that has validation already from a population that is more likely going to be using whatever it is that you are pitching? Essentially you are saying that getting funded by a big name is more indicative of success than consumers who will be using the service/product/etc.

luckydata 9y ago

The VC crowd in Silicon Valley prizes themselves as great out of the box thinkers while, in reality, they are intellectually lazy and quite conventional.