8 ms·

Paul Buchheit: Angel investing, my first three years

227 points by paul 16y ago

zacharycohn 16y ago
Looking back, what are some warning signs that you can identify from some of your failed investments that you'll look for in the future?
- paul 16y ago
  Identifying the winners is more important than identifying the losers. It's the investments you don't make that kill you.
  - joshu 16y ago
    Yeah, but not making the bad bets is a good idea. Big mistakes, so far: - startup has no lead investor - startup is raising too little - generally, not having an investment thesis Curiously, I've been working on taking stock of my angel portfolio as well lately, though it seems gauche to talk dollar numbers.
    - kenjackson 16y ago
      Talk dollar numbers... I think I'd be safe in saying, we're all ears. :-) The problem with bad bets is that they take money from your good bets. If Paul's only bets were Heroku and Mint, he would probably have a much larger return.
      - joshu 16y ago
        Ok. I tend to invest $10-$25k. There was one for $50k (which is a loser) and one for $40k (which returned a bit.) The better investments tended to have smaller allocations for me. Hotter deals tended to go on to Series B. I've spent maybe $800k on investments. The unrealized value of the portfolio is approximately $1.6m, most of which is in one company. Since the original investment was only $25k and my first actual investment, if I had just stopped there I would be doing way better. I cannot conclude that I am actually any good at this.
        wslh 16y ago
        What % of stocks do you take aprox?
        joshu 16y ago
        The better opportunities tend to have higher valuations. Most things are at $3-4mm pre at the very least (and I tend to pass on lower-end stuff than that.) Divide it out :)
        kenjackson 16y ago
        That's actually quite good. You and Paul are both ahead of the game, and it seems to be the case that there are quite a few exits. It _seems_ like if you're in there long enough you eventually hit a Groupon, Facebook, Google, or happen to be in during a big boom. At worst you're out $1M. Not bad odds, although I think you and Paul have opportunities that most of us would never see (and rightfully so).
        joshu 16y ago
        You have to compare the numbers annualized (which is hard to do, since the data isn't in) and then compare that to contemporaneous treasury returns (and maybe the stock market i guess) to get a real sense if it's good or not.
    - paul 16y ago
      Yes, avoiding bad investments is definitely good. However, I think people have a natural cognitive bias towards loss-aversion, which means that we need to be careful that we aren't focusing too much on that side of things (e.g., we should focus 20% on avoiding bad deals, and 80% on not missing good ones).
  - Eliezer 16y ago
    I think this maxim should be qualified as applying only to startup investing, and YCombinator investing in particular. If you're otherwise getting 20% returns, investing 20% more money annually in losing investments will trash those returns. And 20% would be pretty good for the VC industry nowadays, or a hedge fund, or even Berkshire Hathaway. With investments like Heroku, YC is probably doing better than 20% and can afford a winner-based strategy - but this will rarely be a viable mode of thinking in finance generally.
    - vessenes 16y ago
      Interesting. One way you just made me think of this is considering what a 'great' investment return is. Let's say it's 20%. If you're getting 20% already, you might as well expand your base looking for more 1000x returns, and not cry too much about bad placements; this investing business has a significant opportunity cost risk which means you probably want to err on the side of putting some money in. If you're over 'great' returns, you can afford to do that, and should. On the flip side, if you're under 'great' you probably want to figure out how to prune your choices away a bit first.
johnrob 16y ago
I find myself asking non-YC companies why they aren't yet in YC Are there any legitimate excuses for a startup not to be in YC, other than rejection? I can't think of any (especially when you read http://paulgraham.com/equity.html http://paulgraham.com/equity.html).
- staunch 16y ago
  If you've already taken money and your investors wouldn't be cool with it.
  - paul 16y ago
    Then you have bad investors.
    - evgen 16y ago
      No matter how much YC kool-aid you may be quaffing, there are probably legitimate reasons for existing investors in an angel round to think twice about giving up some percentage of the company (e.g. 6%) for chump change and access to a "network" that they probably think they can provide just as well.
- paul 16y ago
  Not in my opinion :) If an established entrepreneur like Joshua Schachter starts a company, then I'm going to invest no matter what, but for everyone else... Watch the Facebook movie and imagine what would have happened without Sean Parker. (I think Zuck would have lost control of the company) YC provides that same kind of value (minus the drugs and women, unfortunately).
  - ryanwaggoner 16y ago
    This comment is interesting to me. Does this mean you wouldn't invest in a company that YC rejected? Does it mean you wouldn't invest in a company that didn't even apply to YC? Are you going to be angel investing at all now that you've joined YC?
nod 16y ago
I'm surprised that the average investment is actually that small. (Yes, we've been hearing of this trend overall, but still, ~30 companies per million?) Is an average of < $38K all that companies want/need, or all that they will take?
- paul 16y ago
  Since my goal was to learn without losing too much money, I generally made smaller investments. (and of course there are other people investing, so the total round could be $1M or more)
  - kmfrk 16y ago
    What kind of share did those investments generally get you? On another note regarding the low amount of money, having someone like paul around is worth considering as extra value with the investment similar to when 37Signals took money from Jeff Bezos.
  - tstegart 16y ago
    How low do you think its possible to go in terms of investing? As an experiment, lets say I decided to save up $1000 and try my hand as a venture capitalist. Do you think it could work out, or its pointless to even try because other costs, like administration time etc. would get in the way?
    - jackowayed 16y ago
      Well, you'd have to be an accredited investor: http://en.wikipedia.org/wiki/Accredited_investor http://en.wikipedia.org/wiki/Accredited_investor (Though I assume that friends and family rounds have some way around that, so maybe if you know someone that's looking for super-early investment, you could invest.) But even so, from my limited knowledge (mostly drawn from reading stuff posted here) I think $25k is pretty much the least that people tend to invest.
      - sahillavingia 16y ago
joshfraser 16y ago
This reminded me of the Ignite talk David Cohen (TechStars) gave on the math behind angel investing: http://www.youtube.com/watch?v=54vmDhBImkw http://www.youtube.com/watch?v=54vmDhBImkw These are GREAT returns when you remember that most angel investors lose money. But I'm not surprised Paul is doing well. It's obvious that his motives are in the right place and he's been hands-on with enough technology that he understands this stuff better than most. Paul is a huge asset to YC. This just goes to show (again) how lucky YC are to have him on their team.
- pvg 16y ago
  That's usually not how the quality of returns is measured.
elvirs 16y ago
Would be nice to hear what you have learned from those six companies two of which are dead and four are zombies.
ctl 16y ago
It's ironic that YC membership might become exactly the kind of credential to investors that a college degree is to employers, given PG's distaste for such things. Makes me a little sad, actually.
- Eliezer 16y ago
  Only if PG becomes as perfunctory as colleges.
  - pg 16y ago
    Fortunately we have powerful forces keeping us in line. If we make a bad decision, we tend to have that fact thrust in our faces within a year, if not sooner. Whereas college admissions officers do not, as far as I know, look at applicants' later careers to determine whether they chose well. Even if they did, they'd have to wait 5-10 years.
    - robg 16y ago
      Say a company is rejected by YC. Do you want to hear about their future success, like fundraising right afterwards? Being a fan of YC and hoping YC learns from its "mistakes" seem synchronous from where I sit.
      - pg 16y ago
        Yes, definitely. We say so explicitly in the email we send to the groups we don't invite to interviews. When a startup we rejected does well, we usually know about it without them telling us though. And when one does we go back and try to figure out how we missed them. We've already made several changes in the application process because of good startups we missed.
        robg 16y ago
        Can you say which changes? What about something that seems too radical for the model, like energy sources or medical devices? Those lessons could take 3-5 years to become obvious.
CytokineStorm 16y ago
"A few companies (such as ScanScout) were acquired by other private companies, so I include those in the "still alive and doing well" category, since it was not an exit from the investor perspective (no liquidity)" How common is it for investors not to get liquidity in this situation?
- drusenko 16y ago
  Acquisitions made primarily with private stock really fall into two buckets: - Those where the private stock is worth more than cash. It would have been a good bet to get pre-IPO Google stock instead of the same amount in cash. - Those where the acquiring company stock is equally risky and the acquisition is made as a last-ditch effort (fire sale, consolidate investor portfolio, etc)
- vessenes 16y ago
  To elucidate drusenko's point: As to commonality, who knows? As to preferability: it is very, very rarely preferable for an investor to be in this situation.
ivankirigin 16y ago
Have you tried to estimate the value of the still active but illiquid startups? Heroku was winter 08 not summer, btw
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227 points by paul 16y ago

Looking back, what are some warning signs that you can identify from some of your failed investments that you'll look for in the future?

paul 16y ago
Identifying the winners is more important than identifying the losers. It's the investments you don't make that kill you.
- joshu 16y ago
  Yeah, but not making the bad bets is a good idea. Big mistakes, so far: - startup has no lead investor - startup is raising too little - generally, not having an investment thesis Curiously, I've been working on taking stock of my angel portfolio as well lately, though it seems gauche to talk dollar numbers.
  - kenjackson 16y ago
    Talk dollar numbers... I think I'd be safe in saying, we're all ears. :-) The problem with bad bets is that they take money from your good bets. If Paul's only bets were Heroku and Mint, he would probably have a much larger return.
    - joshu 16y ago
      Ok. I tend to invest $10-$25k. There was one for $50k (which is a loser) and one for $40k (which returned a bit.) The better investments tended to have smaller allocations for me. Hotter deals tended to go on to Series B. I've spent maybe $800k on investments. The unrealized value of the portfolio is approximately $1.6m, most of which is in one company. Since the original investment was only $25k and my first actual investment, if I had just stopped there I would be doing way better. I cannot conclude that I am actually any good at this.
      - wslh 16y ago
        What % of stocks do you take aprox?
        joshu 16y ago
        The better opportunities tend to have higher valuations. Most things are at $3-4mm pre at the very least (and I tend to pass on lower-end stuff than that.) Divide it out :)
      - kenjackson 16y ago
        That's actually quite good. You and Paul are both ahead of the game, and it seems to be the case that there are quite a few exits. It _seems_ like if you're in there long enough you eventually hit a Groupon, Facebook, Google, or happen to be in during a big boom. At worst you're out $1M. Not bad odds, although I think you and Paul have opportunities that most of us would never see (and rightfully so).
        joshu 16y ago
        You have to compare the numbers annualized (which is hard to do, since the data isn't in) and then compare that to contemporaneous treasury returns (and maybe the stock market i guess) to get a real sense if it's good or not.
  - paul 16y ago
    Yes, avoiding bad investments is definitely good. However, I think people have a natural cognitive bias towards loss-aversion, which means that we need to be careful that we aren't focusing too much on that side of things (e.g., we should focus 20% on avoiding bad deals, and 80% on not missing good ones).
- Eliezer 16y ago
  I think this maxim should be qualified as applying only to startup investing, and YCombinator investing in particular. If you're otherwise getting 20% returns, investing 20% more money annually in losing investments will trash those returns. And 20% would be pretty good for the VC industry nowadays, or a hedge fund, or even Berkshire Hathaway. With investments like Heroku, YC is probably doing better than 20% and can afford a winner-based strategy - but this will rarely be a viable mode of thinking in finance generally.
  - vessenes 16y ago
    Interesting. One way you just made me think of this is considering what a 'great' investment return is. Let's say it's 20%. If you're getting 20% already, you might as well expand your base looking for more 1000x returns, and not cry too much about bad placements; this investing business has a significant opportunity cost risk which means you probably want to err on the side of putting some money in. If you're over 'great' returns, you can afford to do that, and should. On the flip side, if you're under 'great' you probably want to figure out how to prune your choices away a bit first.

johnrob 16y ago

I find myself asking non-YC companies why they aren't yet in YC Are there any legitimate excuses for a startup not to be in YC, other than rejection? I can't think of any (especially when you read http://paulgraham.com/equity.html http://paulgraham.com/equity.html).

staunch 16y ago
If you've already taken money and your investors wouldn't be cool with it.
- paul 16y ago
  Then you have bad investors.
  - evgen 16y ago
    No matter how much YC kool-aid you may be quaffing, there are probably legitimate reasons for existing investors in an angel round to think twice about giving up some percentage of the company (e.g. 6%) for chump change and access to a "network" that they probably think they can provide just as well.
paul 16y ago
Not in my opinion :) If an established entrepreneur like Joshua Schachter starts a company, then I'm going to invest no matter what, but for everyone else... Watch the Facebook movie and imagine what would have happened without Sean Parker. (I think Zuck would have lost control of the company) YC provides that same kind of value (minus the drugs and women, unfortunately).
- ryanwaggoner 16y ago
  This comment is interesting to me. Does this mean you wouldn't invest in a company that YC rejected? Does it mean you wouldn't invest in a company that didn't even apply to YC? Are you going to be angel investing at all now that you've joined YC?

nod 16y ago

I'm surprised that the average investment is actually that small. (Yes, we've been hearing of this trend overall, but still, ~30 companies per million?) Is an average of < $38K all that companies want/need, or all that they will take?

paul 16y ago
Since my goal was to learn without losing too much money, I generally made smaller investments. (and of course there are other people investing, so the total round could be $1M or more)
- kmfrk 16y ago
  What kind of share did those investments generally get you? On another note regarding the low amount of money, having someone like paul around is worth considering as extra value with the investment similar to when 37Signals took money from Jeff Bezos.
- tstegart 16y ago
  How low do you think its possible to go in terms of investing? As an experiment, lets say I decided to save up $1000 and try my hand as a venture capitalist. Do you think it could work out, or its pointless to even try because other costs, like administration time etc. would get in the way?
  - jackowayed 16y ago
    Well, you'd have to be an accredited investor: http://en.wikipedia.org/wiki/Accredited_investor http://en.wikipedia.org/wiki/Accredited_investor (Though I assume that friends and family rounds have some way around that, so maybe if you know someone that's looking for super-early investment, you could invest.) But even so, from my limited knowledge (mostly drawn from reading stuff posted here) I think $25k is pretty much the least that people tend to invest.
    - sahillavingia 16y ago

joshfraser 16y ago

This reminded me of the Ignite talk David Cohen (TechStars) gave on the math behind angel investing: http://www.youtube.com/watch?v=54vmDhBImkw http://www.youtube.com/watch?v=54vmDhBImkw These are GREAT returns when you remember that most angel investors lose money. But I'm not surprised Paul is doing well. It's obvious that his motives are in the right place and he's been hands-on with enough technology that he understands this stuff better than most. Paul is a huge asset to YC. This just goes to show (again) how lucky YC are to have him on their team.

pvg 16y ago
That's usually not how the quality of returns is measured.

elvirs 16y ago

Would be nice to hear what you have learned from those six companies two of which are dead and four are zombies.

ctl 16y ago

It's ironic that YC membership might become exactly the kind of credential to investors that a college degree is to employers, given PG's distaste for such things. Makes me a little sad, actually.

Eliezer 16y ago
Only if PG becomes as perfunctory as colleges.
- pg 16y ago
  Fortunately we have powerful forces keeping us in line. If we make a bad decision, we tend to have that fact thrust in our faces within a year, if not sooner. Whereas college admissions officers do not, as far as I know, look at applicants' later careers to determine whether they chose well. Even if they did, they'd have to wait 5-10 years.
  - robg 16y ago
    Say a company is rejected by YC. Do you want to hear about their future success, like fundraising right afterwards? Being a fan of YC and hoping YC learns from its "mistakes" seem synchronous from where I sit.
    - pg 16y ago
      Yes, definitely. We say so explicitly in the email we send to the groups we don't invite to interviews. When a startup we rejected does well, we usually know about it without them telling us though. And when one does we go back and try to figure out how we missed them. We've already made several changes in the application process because of good startups we missed.
      - robg 16y ago
        Can you say which changes? What about something that seems too radical for the model, like energy sources or medical devices? Those lessons could take 3-5 years to become obvious.

CytokineStorm 16y ago

"A few companies (such as ScanScout) were acquired by other private companies, so I include those in the "still alive and doing well" category, since it was not an exit from the investor perspective (no liquidity)" How common is it for investors not to get liquidity in this situation?

drusenko 16y ago
Acquisitions made primarily with private stock really fall into two buckets: - Those where the private stock is worth more than cash. It would have been a good bet to get pre-IPO Google stock instead of the same amount in cash. - Those where the acquiring company stock is equally risky and the acquisition is made as a last-ditch effort (fire sale, consolidate investor portfolio, etc)
vessenes 16y ago
To elucidate drusenko's point: As to commonality, who knows? As to preferability: it is very, very rarely preferable for an investor to be in this situation.

ivankirigin 16y ago

Have you tried to estimate the value of the still active but illiquid startups? Heroku was winter 08 not summer, btw

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