10 ms·

“Angels” that aren’t actually angels, and the problems that poses

96 points by akharris 7y ago

throwmeplz700 7y ago
Throwaway account for obvious reasons: While the words of warning in this article may be true, they (sadly) sound like a thinly veiled complaint about competition increasing pressure on YC's investment turf. Founders should be grateful for, not skeptical of, increased funding and competition in early rounds as it should help them raise on better terms!
- clhodapp 7y ago
  The complaint seems to be about the duplicity, not the raw interest in investing.
- tlb 7y ago
  There is, of course, a potential conflict of interest anytime an investor gives advice about other investors. But not as much as you'd think, when the investors specialize in different stages. The rounds typically go: seed - angel - series A - series B - series C ... YC only does seed and series B onwards, so it can give unbiased advice about angel and series A. By the time a startup is doing series B, they should have in-house experts.
  - Tomte 7y ago
    I've never understood these terms. Is there a clear definition for those? Seed is very little money, angel is more money, but still small enough that a wealthy individual can provide it? Series A, B and C are pretty much the same, it just so happens that companies usually re-capitalize three times before going bust or IPO? (The whole space is very perplexing, the idea of diluting earlier investors sounds outright fraud-like to me, but obviously it's well-accepted and probably priced in.)
    - icedchai 7y ago
      Angels are often part of seed rounds. Differentiating between the two seems pointless. Also dilution is part of equity. There is nothing fraudulent about it.
      - soup10 7y ago
        unwanted dilutions, share issuance dilution scams, controlling share dilution schemes, clawbacks... there's a lot of unpleasant things that can happen to minority stakeholders
  - deleted 7y ago
    [deleted]
  - nabnob 7y ago
    Not sure I follow your reasoning. Even if YC only does seed and series B, investments in other stages have an impact their investment. YC has incentive to give advice that aligns with their interests.
- pge 7y ago
  I read the article differently. At the end, the warning seems to be less about lack of disclosure (i.e. funds masquerading as angels) and more about the consequences of taking large amounts of capital under a safe or convertible structure. That is very much a legitimate concern, and a mistake I have seen a number of startups make.
- akharris 7y ago
  To me, more capital is a good thing. If that creates competition which forces us to improve, that's even better. My point is that investors who hide their incentives by obfuscating that they have outside sources of funding are exhibiting bad behavior. Founders should know about this pattern so that they can make decisions with as much information as possible.
  - deleted 7y ago
    [deleted]
tlb 7y ago
Don't underestimate the value of the angel investor being a person you can talk to. I've made several angel investments, and sometimes the company needed to restructure in a way that a strictly profit-focused institutional investor would not have allowed. Since I invest mainly because it's interesting and it helps people, I've never said no to what the founders wanted to do. Of course, individual angels can be hard-asses. But an institutional fund is legally required to be a hard-ass. So I agree with Aaron's advice: you should know exactly whose money you're taking, and go for as long as possible only taking money from people you can reason with. If you don't have a good sense of the investor, ask a founder they invested in where the company ran into trouble.
- lann 7y ago
  > institutional fund is legally required to be a hard-ass What do you mean by this?
  - sansnomme 7y ago
    There are laws/expectations that state a company must optimize for profits (Dodge v Ford). Perhaps this what is meant.
    - wtetzner 7y ago
      Is that for all companies, or just publicly traded companies?
    - elcritch 7y ago
      It's a common myth, and may be for certain states, but in general it doesn't appear to true in the US [1, 2]. 1: https://www.nytimes.com/roomfordebate/2015/04/16/what-are-corporations-obligations-to-shareholders/corporations-dont-have-to-maximize-profits https://www.nytimes.com/roomfordebate/2015/04/16/what-are-co... 2: https://www.nakedcapitalism.com/2014/05/guess-who-is-responsible-for-the-corporations-exist-to-maximize-shareholder-value-myth.html https://www.nakedcapitalism.com/2014/05/guess-who-is-respons...
    - mattkrause 7y ago
timruffles 7y ago
"LP dollars", LPs = Limited Partners = https://www.quora.com/What-is-the-difference-between-limited-partners-LPs-and-general-partners-GPs-in-the-venture-capital-business https://www.quora.com/What-is-the-difference-between-limited...
chews 7y ago
This is a bullshit article... ycominator is an “angel” who invests in “startups” like alpaca markets, a “free” trading platform. This “free” trading platform, isn’t a startup, it’s a front for the front running side of the business alpaca.ai, yes the users in this YC backed front, are just the inputs to a more elaborate Japanese trading firm that front runs US markets. You guys are Hippocrates.
- tlb 7y ago
  Y Combinator is a seed accelerator, not an angel investor. They're quite distinct types of investors. Your point about Alpaca is unclear to me. If you want to convince anyone, perhaps you should write a blog post, with sources and evidence, to explain why you think it's not a startup?
  - chews 7y ago
    Open tab to alpaca.markets Then Open tab to alpaca.ai Look around on both that they share founders, and that one startup is used to power the other. It’s like Robin Hood but sneakier. P.s. I work in the regulated finance space, finra compliance is my life now. Edit: “PFOF” as it’s called :-( https://files.alpaca.markets/disclosures/library/Alpaca+PFOF+Disclosure.pdf https://files.alpaca.markets/disclosures/library/Alpaca+PFOF...
RocketSyntax 7y ago
Boston is guilty. New englanders are too practical to be angels.
- icedchai 7y ago
  Do you have any more details? There's dozens of angel groups in the Boston area.
motohagiography 7y ago
Is it accurate to interpret from the article that if an angel investor is in fact backed by money from LPs, her fiduciary responsibility to her own investors is greater than the flexibility she might have toward the company if she were just running her own money, and therefore these incentives can put her interests at odds with founders? Further, is there an implication that it's the SAFE itself that sets this up in the first place? The example I'm thinking of is an institutional LP who can't do risky deals like startup SAFEs, but they can buy into "established," funds where the risk is distributed over other partners who can, and this angel front gets them the startup portfolio exposure they need. The downside is the SAFE explodes into giving up more equity than founders anticipated to their proxied angel, whose partners' risk appetite causes complexity and conflicts with potential A-round participants. I've only read about this stuff, but what would you correct about these interpretations?
tuberelay 7y ago
Does anyone else think that angel investing seems like an odd concept in that it implies a single person investing a large amount in a very early stage business. Most people with sub 9 figure net worth should probably steer towards investing in larger derisked businesses as they are unlikely to back the 100+ startups required to get the 1 really big winner. In contrast, large VCs who have the capacity to invest in several hundred startups are much better suited to this form of investing as they can derisk by having a large portfolio size?
RhysU 7y ago
Based on the title, I wanted Evangelion.
simonebrunozzi 7y ago
> Founders have a right to know where the money they are taking comes from, and they need to know how that source might influence the advice given them by their investors. That's correct. However, a provocative question: does every YC company know where YC's funds come from? My purely anecdotal evidence is that at least half, possibly 2/3rds of them, don't. If that's the case, it might be useful for YC to disclose that to everybody.
vikramkr 7y ago
One thing I don't understand - why would exceptionally high or uncapped safes be a bad deal for founders? The post mentions that this leads to dilution and other issues in the eventual series A, but doesn't an uncapped safe lead to less dilution in the series A than a safe with a lower cap? Why is it a bad thing that there are more "to good to be true" offers being made now?

96 points by akharris 7y ago

Throwaway account for obvious reasons: While the words of warning in this article may be true, they (sadly) sound like a thinly veiled complaint about competition increasing pressure on YC's investment turf. Founders should be grateful for, not skeptical of, increased funding and competition in early rounds as it should help them raise on better terms!

clhodapp 7y ago
The complaint seems to be about the duplicity, not the raw interest in investing.
tlb 7y ago
There is, of course, a potential conflict of interest anytime an investor gives advice about other investors. But not as much as you'd think, when the investors specialize in different stages. The rounds typically go: seed - angel - series A - series B - series C ... YC only does seed and series B onwards, so it can give unbiased advice about angel and series A. By the time a startup is doing series B, they should have in-house experts.
- Tomte 7y ago
  I've never understood these terms. Is there a clear definition for those? Seed is very little money, angel is more money, but still small enough that a wealthy individual can provide it? Series A, B and C are pretty much the same, it just so happens that companies usually re-capitalize three times before going bust or IPO? (The whole space is very perplexing, the idea of diluting earlier investors sounds outright fraud-like to me, but obviously it's well-accepted and probably priced in.)
  - icedchai 7y ago
    Angels are often part of seed rounds. Differentiating between the two seems pointless. Also dilution is part of equity. There is nothing fraudulent about it.
    - soup10 7y ago
      unwanted dilutions, share issuance dilution scams, controlling share dilution schemes, clawbacks... there's a lot of unpleasant things that can happen to minority stakeholders
- deleted 7y ago
  [deleted]
- nabnob 7y ago
  Not sure I follow your reasoning. Even if YC only does seed and series B, investments in other stages have an impact their investment. YC has incentive to give advice that aligns with their interests.
pge 7y ago
I read the article differently. At the end, the warning seems to be less about lack of disclosure (i.e. funds masquerading as angels) and more about the consequences of taking large amounts of capital under a safe or convertible structure. That is very much a legitimate concern, and a mistake I have seen a number of startups make.
akharris 7y ago
To me, more capital is a good thing. If that creates competition which forces us to improve, that's even better. My point is that investors who hide their incentives by obfuscating that they have outside sources of funding are exhibiting bad behavior. Founders should know about this pattern so that they can make decisions with as much information as possible.
- deleted 7y ago
  [deleted]

tlb 7y ago

Don't underestimate the value of the angel investor being a person you can talk to. I've made several angel investments, and sometimes the company needed to restructure in a way that a strictly profit-focused institutional investor would not have allowed. Since I invest mainly because it's interesting and it helps people, I've never said no to what the founders wanted to do. Of course, individual angels can be hard-asses. But an institutional fund is legally required to be a hard-ass. So I agree with Aaron's advice: you should know exactly whose money you're taking, and go for as long as possible only taking money from people you can reason with. If you don't have a good sense of the investor, ask a founder they invested in where the company ran into trouble.

lann 7y ago
> institutional fund is legally required to be a hard-ass What do you mean by this?
- sansnomme 7y ago
  There are laws/expectations that state a company must optimize for profits (Dodge v Ford). Perhaps this what is meant.
  - wtetzner 7y ago
    Is that for all companies, or just publicly traded companies?
  - elcritch 7y ago
    It's a common myth, and may be for certain states, but in general it doesn't appear to true in the US [1, 2]. 1: https://www.nytimes.com/roomfordebate/2015/04/16/what-are-corporations-obligations-to-shareholders/corporations-dont-have-to-maximize-profits https://www.nytimes.com/roomfordebate/2015/04/16/what-are-co... 2: https://www.nakedcapitalism.com/2014/05/guess-who-is-responsible-for-the-corporations-exist-to-maximize-shareholder-value-myth.html https://www.nakedcapitalism.com/2014/05/guess-who-is-respons...
  - mattkrause 7y ago

timruffles 7y ago

"LP dollars", LPs = Limited Partners = https://www.quora.com/What-is-the-difference-between-limited-partners-LPs-and-general-partners-GPs-in-the-venture-capital-business https://www.quora.com/What-is-the-difference-between-limited...

chews 7y ago

This is a bullshit article... ycominator is an “angel” who invests in “startups” like alpaca markets, a “free” trading platform. This “free” trading platform, isn’t a startup, it’s a front for the front running side of the business alpaca.ai, yes the users in this YC backed front, are just the inputs to a more elaborate Japanese trading firm that front runs US markets. You guys are Hippocrates.

tlb 7y ago
Y Combinator is a seed accelerator, not an angel investor. They're quite distinct types of investors. Your point about Alpaca is unclear to me. If you want to convince anyone, perhaps you should write a blog post, with sources and evidence, to explain why you think it's not a startup?
- chews 7y ago
  Open tab to alpaca.markets Then Open tab to alpaca.ai Look around on both that they share founders, and that one startup is used to power the other. It’s like Robin Hood but sneakier. P.s. I work in the regulated finance space, finra compliance is my life now. Edit: “PFOF” as it’s called :-( https://files.alpaca.markets/disclosures/library/Alpaca+PFOF+Disclosure.pdf https://files.alpaca.markets/disclosures/library/Alpaca+PFOF...

RocketSyntax 7y ago

Boston is guilty. New englanders are too practical to be angels.

icedchai 7y ago
Do you have any more details? There's dozens of angel groups in the Boston area.

motohagiography 7y ago

Is it accurate to interpret from the article that if an angel investor is in fact backed by money from LPs, her fiduciary responsibility to her own investors is greater than the flexibility she might have toward the company if she were just running her own money, and therefore these incentives can put her interests at odds with founders? Further, is there an implication that it's the SAFE itself that sets this up in the first place? The example I'm thinking of is an institutional LP who can't do risky deals like startup SAFEs, but they can buy into "established," funds where the risk is distributed over other partners who can, and this angel front gets them the startup portfolio exposure they need. The downside is the SAFE explodes into giving up more equity than founders anticipated to their proxied angel, whose partners' risk appetite causes complexity and conflicts with potential A-round participants. I've only read about this stuff, but what would you correct about these interpretations?

tuberelay 7y ago

Does anyone else think that angel investing seems like an odd concept in that it implies a single person investing a large amount in a very early stage business. Most people with sub 9 figure net worth should probably steer towards investing in larger derisked businesses as they are unlikely to back the 100+ startups required to get the 1 really big winner. In contrast, large VCs who have the capacity to invest in several hundred startups are much better suited to this form of investing as they can derisk by having a large portfolio size?

RhysU 7y ago

Based on the title, I wanted Evangelion.

simonebrunozzi 7y ago

> Founders have a right to know where the money they are taking comes from, and they need to know how that source might influence the advice given them by their investors. That's correct. However, a provocative question: does every YC company know where YC's funds come from? My purely anecdotal evidence is that at least half, possibly 2/3rds of them, don't. If that's the case, it might be useful for YC to disclose that to everybody.

vikramkr 7y ago

One thing I don't understand - why would exceptionally high or uncapped safes be a bad deal for founders? The post mentions that this leads to dilution and other issues in the eventual series A, but doesn't an uncapped safe lead to less dilution in the series A than a safe with a lower cap? Why is it a bad thing that there are more "to good to be true" offers being made now?