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Abundant Capital

362 points by tomhoward 6y ago

cvaidya1986 6y ago
Agreed on most points. I’d add that some investors such as a16z or YC add way more value by acting as partners so there is such a thing as more ‘valuable’ capital.
- playeren 6y ago
  Isn't that the case for most reputable VCs? Marketing your product, identifying synergies in portfolio companies, recruiting opportunities and so forth? Or are a16z & YC in a class of their own in that regard?
  - borski 6y ago
    It's true for any of the tier 1 VCs. YC and a16z (and others, like SV Angel) have some of the highest reputations in this regard, though.
- nikanj 6y ago
  Prominent VCs like to spread this message. I'd take it with a healthy pinch of "remember who's bringing the news". Obviously the people offering less money are trying to sell the idea that less money is somehow more valuable.
  - borski 6y ago
    Honestly, as a founder...it is. Dumb money is, in effect, pretty useless, whereas 'smart money' comes with additional benefits (provided you and the partner get along, etc.). It isn't guaranteed, but we leaned heavily on our investors for advice and help, especially in those times when we were either at a crossroads or dealing with a situation we had never seen before (b2b enterprise contracts when all our customers were SMB, etc.). Some of them were also helpful just as the equivalent of 'executive coaches.' Being in the weeds constantly means it's hard to be objective sometimes. Good VCs and good angels are usually experienced and helpful, even if the incentives aren't perfectly aligned. They mostly are though; growth helps both the VC and the founder, so in that sense they're aligned. But when deciding how big your option pool should be, your incentives are no longer directly aligned. :)
    - nikanj 6y ago
      Nobody cares if payroll came out of dumb money or smart money. Same for AWS bills, office rent, etc. Having started a few companies, I'd much rather take a long runway than more coaches.
      - borski 6y ago
        You seem to be equating "smart money" with "less money" which isn't true. It may be equivalent, or even more money, possibly with less favorable terms, due to the outsized advantage they provide in other ways. It's nice that you'd prefer a longer runway to more coaches. I prefer a longer runway and more coaches I trust to help me execute; they are not mutually exclusive and you've presented a false choice, particularly in this market which is so founder-driven.
rmonroe 6y ago
This article raises some awesome points. As a founder who is going through a seed round right now, I'm working hard to optimize our own fundraising process. Aaron refers to a plethora of resources for effective fundraising, but it's often hard to identify experts from rabble. Has anyone already curated a list of quality resources? I would be greatly appreciative!
- akharris 6y ago
  There's good stuff on YC's Startup School Library: https://www.ycombinator.com/library?categories=Fundraising%20%2B%20Investors https://www.ycombinator.com/library?categories=Fundraising%2...
  - rmonroe 6y ago
    Cool, thanks Aaron. I feel like we've been carried on the backs of YC SUS videos for some time, but this startup library is far more organized than what I've seen before. I echo your sentiment, by the way: thus far, fundraising on good terms is turning out to be far easier than we expected - is it possible that low interest rates from the fed are making it easier for investors to get money? If so, we may expect this trend to continue for a few years, as the fed has committed to keeping rates low for some time.
- borski 6y ago
  read all of Venture Hacks, seriously. Trust me, you won't be disappointed: https://venturehacks.com/archives https://venturehacks.com/archives [edit] It's a bit dated, but the points and lessons are timeless. The 'norm' has changed (SAFEs are more common over convertible notes now, for example), but the rest is still accurate.
  - rmonroe 6y ago
    Awesome, going through it right now and learning a ton. Dated? Sure, but How To Win Friends And Influence People is still bang-on, and it was written almost a century ago. I really appreciate the recommendation!
pge 6y ago
To add another nuance here - the other issue to consider is the power-law nature of VC returns (meaning a small number of investments disproportionately contribute to returns). Given that dynamic, funds are eager not to miss out on those big winners. The supply of companies that look like they have that potential is less than the available capital can fund, so to those companies, capital looks very abundant. Companies that do not appear to have that potential may not experience the same abundance of capital. The challenge for funds is identifying the signifiers of potential outperformance, and it seems to me that a lot of funds are looking at the same indicators (whether or not they are the right ones) which makes for a feeding frenzy on those companies.
- lumost 6y ago
  From a fund perspective doesn't this eventually lead to the softbank model? where winners are made through overwhelming capital.
  - borski 6y ago
    It can, but that implies capital is the only thing required for good execution, and we know that's not true (as we saw with some of the Softbank failures). However, if you need to make a bet, you make a bet, because for a VC fund, the small chance of an outsized return (that can return your fund) is better than a more likely chance of a 'decent' return, so you often make a bet and double down while it still seems viable. There's a reason Lyft kept getting funded even when Uber raised significantly more.
  - kkotak 6y ago
    Completely agree. Capital is used to make Kings. Companies like Uber, Lyft, WeWork - won't exist without this. As for quality of the founders, I think, with enough money (and loss appetite), a mediocre team can execute well on an decent opportunity.
    - borski 6y ago
      It is hard for an incredible team to execute well on a decent opportunity, even with ample capital; the 'it is trivial once you have money' trope is just that, a trope. Money does not make a company successful; financing helps along the route, and helps allow the founders to take bigger risks (with hopefully similarly outsized rewards), but it does not execute for the founders. That part is still on the founders, and is still the most important part of any startup bet; 'can they raise future capital' is certainly a factor in the decision, too.
Liron 6y ago
> Founders should approach every fundraising as an auction. I agree. So what's the auction marketplace of startup fundraising - a place where every deal can be posted publicly, or as close to that as possible?
- akharris 6y ago
  Demo Day does this for YC companies. Angel List does it, to some extent. Other than that, it doesn't exist. Got some thoughts on this part of the dynamic in the works.
- borski 6y ago
  This, while seemingly a natural extension, is a bad idea, imho. Investing in startups is inherently one of the riskiest investments you can make, and having deals be public is a problem, as 'normal' investors will be swayed by charismatic founders into losing their homes. That said, 'auctions' for accredited investors already exist, if the company choose to take advantage of it. There are seed funding sites as well as AngelList, etc., to publicize deals. Some founders also choose not to publicize a raise (except among the VC/angel networks) so as to remain under the radar until they are ready to launch.
  - guntars 6y ago
    > 'normal' investors will be swayed by charismatic founders into losing their homes. You mean their second or third homes, right? There's a minimum net-worth requirement before you're able to invest in a startup so a failed investment is not going to bankrupt any investors. The founders are much more likely to end up in the poorhouse if things don't work out than investors are.
    - borski 6y ago
      You missed my point; I specifically mentioned accredited investors vs 'normal' investors. I agree with you; it is a good thing that there are accreditation requirements to invest in as risky an investment as a startup. Getting rid of that would be an awful idea. That was the point of my comment.
cs702 6y ago
I agree, at present, capital is abundant. That is, at the moment: Σ(capital available) > Σ(investment opportunities) And this imbalance of demand for and supply of investment opportunities is showing up everywhere as... asset price inflation. You can see it in rising angel valuations, rising early-stage VC valuations, rising later-stage VC valuations, rising growth-equity valuations, rising leveraged buyout valuations, rising stock market valuations, rising cryptocurrency prices, rising home prices, etc. Feeding frenzies and bidding wars for high quality assets have become more and more common. Asset prices keep going up and up and up... The multi-trillion-dollar question: Is this sustainable?
- A12-B 6y ago
  Ironically, whoever answers the question probably wont be paid trillions of dollars. That is because the most likely answer to the question is that it is not sustainable, meaning there's two options: we switch to a non-capital system, and they don't get paid, or everyone chooses to ignore them and they still don't get paid.
- akharris 6y ago
  I'm not sure that any founder should make a decision based on a future prediction of sustainability. Each founder should make decisions based on the environment he encounters when making a decision. In this case, the imbalance has existed for years and is getting more pronounced. My thoughts here are based on that dynamic. If this changes, then I'd likely change the advice.
  - borski 6y ago
    Importantly, the imbalance has changed, and the valley has not seemed to hold a grudge. There have been shifts during the recessions, and certainly after the 2000 bust, but it's a fact of life: the power dynamic sometimes changes, and the best deal you're able to get at the time is the deal you are going to get. It's not entirely unlike mortgage rates, tbh; when you refi matters, due to the rates being variable. When you raise also matters, but sometimes raising is the important part, and the terms are the terms.
  - 6y ago
josephjacks 6y ago
This is horrifically BAD advice. Shopping a TS to a few folks is not an unwise thing to do, but running a full-blown auction absolutely is! Founders: If you want to ONLY optimize for max price + max check size, the “partners” you bring into your business are bankers.
- borski 6y ago
  You missed the point; Aaron wasn't saying to always optimize for price and take "dumb money." His point was that founders today have a choice, and that choice is important, and worth recognizing. Because of the (present) imbalance of power, founders can be more aggressive with their fundraising. That isn't always true, though.
  - josephjacks 6y ago
    I hear you... but this "run an auction" narrative he's proposing is very dangerous if implemented in any way close to actual auctions.
    - borski 6y ago
      Sure, I agree; I do not think it was intended as a pure price auction. That would be ridiculous, imho.
seibelj 6y ago
Another thing is it seems people want to move into VC rather than keep building products. Investing is inherently lazy, it requires decision making but not much work if you are the person who has the connections to raise the fund. You can hire other people to do the effort of managing investments because you can’t be dethroned from having the money connections. So people who actually make successful products get valued more and more. The unfortunate part is you actually have to work for a living, but luckily you keep getting more of the lazy people’s money.
corry 6y ago
With interest rates so low (and lots of headwinds for them to increase in the short-term), one has to think that this will be the new normal for a few years at least. The rise of SPACs is another sign - they are disrupting both later-stage VC funds as well as obviously vanilla IPOs. I wonder if the abundance of capital is not evenly distributed through the startup lifecycle, but more heavily-weighted towards later stages. Anecdotally, I've heard from founders that SEED rounds are getting harder despite all the frothiness. Even back when we did our seed rounds ~2015, we already heard "today's seed round is yesterday's Series A" in terms of $ size but also minimum bar of progress. And these days it seems that is EVEN MORE true. It's also true it's easier to start a SaaS company than ever before. But it's ALSO ALSO true that there is less and less SaaS greenspace. Hmmmm.
- seibelj 6y ago
  Salaries for good engineers have simply gone up. Competing with FAANG for good engineers is expensive. Need $5mil to get a small team for a couple years runway. That used to be an A. Having one or more cofounders as capable engineers to get MVP out is also beneficial.
  - flyinglizard 6y ago
    None of the early stage startups I know even tries to compete with FAANGs on compensation. I don’t know if it’s because of disparity of information on the side of the employees, or simply people joining for a wild ride (I suspect it’s both). Not to say salaries have not gone up, but not to those levels. That said, it is also uncommon for me to see startup employees which previously worked for FAANGs (you do see founders).
    - seibelj 6y ago
      No one is trying to pay 500k total comp but higher salaries have become the norm. Getting someone sub-100k with experience and knows what they are doing is impossible unless you are exploiting them.
      - 6y ago
ihm 6y ago
It's tautological but worth noting: capital is abundant for projects which VCs as a class are already eager to fund. If you have an idea which does not appeal to VCs, capital is not abundant for you.
corry 6y ago
Perhaps I'm a minority, but I got A LOT of value from my investors (both pre-seed, seed, and series A). To the point where I'd consider them core partners in my journey of building the business. I know Aaron isn't saying that the investors don't matter. But when I think about why VCs hate going through an auction-like process, at least part of it is human nature. Like, we're about to work together for a long time. Let's not start off by commoditizing what we each bring to the table. I understand the POV that 99.999% of what VCs bring to the table is the literal commodity of cash... but if you have good ones, they really can help. In our case, we had multiple term sheets for our Series A so I was able to optimize terms and get the partner/fund who I thought would add the most value but at "market" on the other terms. "Market" being what was on the other term sheets. That seemed to work OK as a softer way of actually doing the auction. The real point in all of this is that if the VC's value-add is true, then you shouldn't NEED to discount things because of that. If it's real, then they should be happy to pay 'market rate' to invest in you, and the impact of their other value will be that together you build a better business, which is more valuable to them too.
- borski 6y ago
  Sure, but that's not how negotiation works; both parties are trying to get as much out of the deal as they can, assuming it beats both parties' BATNA. Also, that you had multiple term sheets means you... ran an auction. It's wonderful that most of the terms were similar, but getting multiple term sheets is effectively generating a bidding war. You don't have to pick the one that is monetarily best (we didn't, because we preferred the partners), but that's why you're doing. :)
  - corry 6y ago
    Well, if we're defining "auction" to mean anything with competing options -- rather than its typical usage, which is price-only competition of something rather commodity-ish -- then sure. My process had elements of an auction - using competing options to determine "a market price" for various terms. BTW - the VCs also had that, in that they could have put that same capital to work in other companies vs mine. But that's not a pure auction. i.e. there's still room for qualitative choice and optimization on both sides. This should be most obvious to you in the non-monetary terms and how difficult it would be to translate into $ terms (for instance - how many seats on the board? How much lower/higher of price makes sense for more/fewer board seats? Well, for starters, it would depend on which VC is asking and what stage the biz is in). Clearly these aren't pure auctions. Because (back to my original point) this is possibly a 10+ year partnership you're getting into (longer than many marriages). A good process is more equivalent to (1) speed dating, which leads to (2) a handful of non-exclusive longer dates, (3) a period of exclusivity (no-shop) and 'meeting the family' (diligence), and then possibly, finally, (4) marriage.
nitsky 6y ago
When I saw the headline of this article on HN, I assumed Aaron Harris was starting a new venture capital fund called "Abundant Capital" after leaving YC. How ironic that the article is about how "new funds... seem to launch on a daily basis"!
hamhamed 6y ago
I don't know about abundance. Maybe Aaron has confirmation bias being around the industry so closely. Or maybe other founders here can tell me otherwise. From my side, I can't vouch for an over abundance of capital. It's been a year we're trying to close our round, missing 350k from the $1M round and yet still growing 30% MoM. Yes covid fucked our business in a sense, and we got hit since March - but we remain ever so bullish esp given our sustaining growth.
- di4na 6y ago
  That is the access problem he talks about in the notes. He is right. All the number that we see from the industry shows that there is a fuckton of capital. But it is really badly distributed. That is probably a far bigger problem right now and one that need to be solved if this industry want to maximise impact. There are interesting things happening in that space, but they are still at the fringe.
- corry 6y ago
  I made a comment further down that your comment jives with. It’s the idea that abundant capital doesn’t necessarily mean it’s evenly distributed through the various stages. In particular, seed stage seems not to have seen the effect yet. Hard data on aggregate seed funding through the years would be interesting. Also - hang in there! 30% MoM is no joke, sounds like you’ve done one the hardest things (made something people want).
- dgudkov 6y ago
  Why do you need VC having such growth rate? Get a loan. If you're at least 95% sure that your business will work out (and the growth rate strongly indicates that) why would you want to pay with equity?
  - imtringued 6y ago
    I honestly don't know why debt for growing companies is vilified. People will literally give you their money. From the perspective of the borrower the lender is absolutely insane because he could have spent that money in a way that would yield superior returns compared to giving you a loan. Instead you get to extract that value yourself.
technotony 6y ago
> [3] When a company IPOs, it opens ownership up to anyone who can afford a share. Imagine, for a second, an investor arguing that this is a sign of low quality. I thought this note was important, this is precisely what investors signalled when startups started being able to crowdfund equity under Regulation CF.
enahs-sf 6y ago
my question after reading this essay is, 1. why are there no startups building VC investing as a platform akin to what carta has done for equity. 2. are there any ways to shore up the cost of the transaction such that they benefit both parties as a service (eg. shore up lawyer fees which are currently passed onto the fundraiser)
- molsongolden 6y ago
  Do the equity crowdfunding platforms fit here? Wefunder, Republic, Startengine, etc...? They'll be able to run non-accredited investor crowdfunding rounds up to $5MM per year soon.
poochinienini 6y ago
This conversation is a bit misguided in its premises. There is not that much excess capital compared to yesteryears when one considers the real value vs the nominal amount. If anything, sure capital will flow more freely and be doled out more freely in ever increasing nominal amounts. However, let's stop and ponder, how much more will this capital buy? Will it buy more actual assets? Will salaries go up? Then you will get the same amount of engineers for the capital. This is quite a decaying state, not that different to how despite, more food being produced, and salaries "going upz and increasing" the average person in the US can afford, worse quality food and housing despite having "muh iphones". Long term this trend will further bitcoin's position as a more useful nominal quantity. When will the salaries in fixed BTC begin? Right now it is a bit unstable, sure "muh transaction costs". But imagine schemes where pay is paid out yearly, reducing the number of transactions, or where it is held in escrow.
siruva07 6y ago
From the title of the post, I thought he launched his own VC firm. FWIW It's a good name.
idlewords 6y ago
If you're new enough to computerworld that you've never been through a downturn (and it's been a long time!), then take note: this is what a crazy asset bubble looks like. This is what 1998 felt like.
- ant6n 6y ago
  So we’ve got years of bubble left
  - idlewords 6y ago
    Yeah. If only we knew which years, though!
f430 6y ago
> As a thought experiment, assume that the abundance model is here to stay this is a dangerous assumption. The feds are poised to raise interest rates this year and it will have ripple effects, in particular the abundance period of capital is slowly being reigned in to avoid a loss of faith in the dollar and slow down inflation.
- mdorazio 6y ago
  > and slow down inflation What inflation? CPI has been absurdly flat for years, despite all the QE and pandemic relief funds. Inflation is only showing up in property and securities.
  - f430 6y ago
    I can't believe you actually think CPI is flat when the cost of goods are rising across the board. I guess this is why its so easy to control the markets. People don't even practice critical thinking and check for real world data. Whatever we are told is what we hold!
    - colinmhayes 6y ago
      CPI is objectively flat, you can look it up on the bls site. You might think CPI isn't well correlated to price inflation, but you'd be wrong there too.
      - AngrySkillzz 6y ago
        Yeah, people on HN are kind of cranks about this sort of thing
        imtringued 6y ago
        It's not HN, it's everywhere. The housing as an investment mantra doesn't help. Yes, house prices are going up but for all we know it's a bubble right now. If CPI inflation does pick up in the future it may turn out to be correct. It would be helpful if people actually did the right thing and built more housing, though.
mbesto 6y ago
For the people in this thread who are unfamiliar with the current capital markets: There is roughly 2.5T dollars in dry powder (uncalled capital). In laymen's terms this means there is currently 2.5T dollars sitting there not being deployed and $830B of this for PE Buyouts alone. It looks like VC is ~$300B. In other words, investors can't spend allocated money (from LPs) fast enough. https://www.bain.com/globalassets/noindex/2020/bain_report_private_equity_report_2020.pdf https://www.bain.com/globalassets/noindex/2020/bain_report_p... -> Figure 1.12
- codeisawesome 6y ago
  IMO (please prove me wrong! There will be info in your proof I'd like to know...) - founder immigration is the greatest bottleneck for this capital to be invested. A startup founder visa will more than take care of this 'dry powder' and get it working to increase the US GDP. Said visa needs to have a realistic "minimum savings requirement" to come live in the US & start a company (not the $1MM or even $500k required by EB-5 that put it out of reach for most founders especially on the younger side). Said visa is a necessity because of the way human society works & the way the global order has formed. All this Capital is in the US (reserve currency). People who control it and decide how to allocate it are in the US (history). People do not like to give capital to other people who will live and use it thousands of kilometres away (oversight becomes hard). Wishing for more tech startup founders to spring from the general US population alone is not going to solve it, and pumping all the available money into the same companies may be quite risky from a diversification perspective for the US economy.
  - umeshunni 6y ago
    To add to what you said, US population growth from 2010-20 was the slowest it has been since the 1930s. Without some seriously increased immigration over the next 10-20 years, the US demographics will go the direction of Europe and Japan soon.
zuhayeer 6y ago
With all the noise around NFTs right now, my immediate thought was "Hmm so treat companies like NFTs, where investors bid on price"
fallingfrog 6y ago
What goes up,
staunch 6y ago
> ...whenever a company has a signifier of quality - a YC demo day slot, a high quality angel, pedigreed founders, or, even better, strong growth. In these cases, there are investor feeding frenzies... And therein lies the fundamental problem of Silicon Valley today. Most of what matters in early stage startups is not anything remotely objective about the startup's prospects. What matters most at this stage is connections and perceived pedigree. All that should matter, in an efficient market, is the real potential of the startup itself. "YC demo day slot" = someone spent 10 minutes interviewing some people and decided they were a good culture fit. "High quality angel" = Someone's friend knows a well known rich person and hooked them up. "Pedigreed founders" = Someone's rich parents bought them credentials by gaming the system. It's not reasonable to expect every early stage startup to have "strong growth" because big successes most did not have this attribute. But what could be improved is the process of finding startups with high potential. YC was, when it launched, an innovative attempt at solving this. But it hasn't evolved or scaled enough to address the market. Some kind of early stage crowdfunding solution seems the most likely answer, but no one has managed to crack this nut yet. And so the Silicon Valley investors continue to feed in the same small pond. The most likely outcome is that a new system will develop that totally bypasses traditional Silicon Valley investors. They may have an abundance of capital compared to the small number of startups they care to look at, but they have nowhere near the money (or intelligence) that the public at large has.
- Jommi 6y ago
  This is what people call "luck" when talking about successful startups. Unfortunately some people are just more "lucky" than others :)
prankash 6y ago
If you listen to Alfred Lin on Acquired he actually says that abundant capital has always been a problem, so it definitely feels like this isn't a new problem necessarily
rexreed 6y ago
Is it really that much easier for a "typical" startup to raise money now than before? And by typical, I mean a non-Silicon Valley based startup with founders that no one has heard of before and that do not have good connections with VCs operating in a mediocre market with a decent, but not ground-breaking offering. Not a hype-driven, silicon-valley based startup in a "hot" market led by superstar founders or founders with deep networks? It would seem that all this "easy money" is simply flowing to the places where it has always flowed before, but in larger quantities. The same big money chasing a small number of deals, just with deeper pockets and more gusto to participate in an auction if need be. Honestly, has it really gotten any easier for the typical startup?
- mandelbrotwurst 6y ago
  There have been some rule changes in recent years allowing non-accredited investors to invest in startups more easily, and platforms such as SeedInvest have sprung up which facilitate this, so this is at least one new pathway, although I don’t know how much easier it is necessarily, if at all.
- aerosmile 6y ago
  If you reach the threshold required to get into YC, then your location and experience won't matter (and with the size of the batches getting larger and larger, you could argue that it is in fact getting easier to raise money now than before). If something about your seed-stage startup is stopping you from getting into YC, then I would ask myself if I might be doing something wrong. This is coming from someone who went through YC with one startup and also got rejected in another instance. While YC does make mistakes, in my case they were spot on. Please know that I am not discouraging you from pursuing whatever it is that you're working on - every early-stage founder has a special place in my heart. Just realize that your time on this planet is limited, and there truly is so much opportunity out there. Spend your time wisely.
  - Aeolun 6y ago
    Just because someone could get into YC doesn’t mean they want to. That means the signal isn’t there, even though the company is just as good as one that did enter YC.
guidoism 6y ago
Somewhat related to the discussion: Why do start-up's need so much money? We live in a world where a software start-up needs basically $0 in cap ex. If the founders don't have existing financial obligations and can live in a place that isn't the BA or NYC or Seattle then they can make a lot of progress for peanuts. Venture Capital is essentially paying for 1. The founders existing financial obligations, and 2. The ability for them to live in an extremely expensive part of the world. The only other thing that a VC provides is a financial reason not to work for a large tech company that's going to pay the founder hundreds of thousands of dollars a year.
- refenestrator 6y ago
  To compete with rival overfunded startups.
  - guidoism 6y ago
    I mean, yeah, sure. But if solving a problem is your goal, not "being number 1" or whatever then who cares about your competition. You are (hopefully) in competition against problems and reality, not other companies.
    - kapp_in_life 6y ago
      Sure, but if you're solving the same(or at least somewhat similar) problem to another company, the one with more resources absolute has an advantage and will probably in the long term edge you out by having more features or sniping your prospects with better marketing or any of the other things you can do when you have a large war chest.
      - imtringued 6y ago
        A well funded competitor could simply acquire your company if it truly has a superior product.
eucryphia 6y ago
The US is $26.7 trillion in the hole, and you're about to add another three trillion to that. An not one VC is going to pay off any of it. I don't think capital is your problem.
JohnJamesRambo 6y ago
Another signal we are in a bubble top. He is screaming there is too much money. If there is that much excess money everywhere, this paper isn’t worth what we think it is. The rich are running out of places to jam it in.
- peteretep 6y ago
  For every dollar there's a new cryptocurrency!!
pabs3 6y ago
Would be nice to see some of this excess money thrown at open source projects.

362 points by tomhoward 6y ago

cvaidya1986 6y ago

Agreed on most points. I’d add that some investors such as a16z or YC add way more value by acting as partners so there is such a thing as more ‘valuable’ capital.

playeren 6y ago
Isn't that the case for most reputable VCs? Marketing your product, identifying synergies in portfolio companies, recruiting opportunities and so forth? Or are a16z & YC in a class of their own in that regard?
- borski 6y ago
  It's true for any of the tier 1 VCs. YC and a16z (and others, like SV Angel) have some of the highest reputations in this regard, though.
nikanj 6y ago
Prominent VCs like to spread this message. I'd take it with a healthy pinch of "remember who's bringing the news". Obviously the people offering less money are trying to sell the idea that less money is somehow more valuable.
- borski 6y ago
  Honestly, as a founder...it is. Dumb money is, in effect, pretty useless, whereas 'smart money' comes with additional benefits (provided you and the partner get along, etc.). It isn't guaranteed, but we leaned heavily on our investors for advice and help, especially in those times when we were either at a crossroads or dealing with a situation we had never seen before (b2b enterprise contracts when all our customers were SMB, etc.). Some of them were also helpful just as the equivalent of 'executive coaches.' Being in the weeds constantly means it's hard to be objective sometimes. Good VCs and good angels are usually experienced and helpful, even if the incentives aren't perfectly aligned. They mostly are though; growth helps both the VC and the founder, so in that sense they're aligned. But when deciding how big your option pool should be, your incentives are no longer directly aligned. :)
  - nikanj 6y ago
    Nobody cares if payroll came out of dumb money or smart money. Same for AWS bills, office rent, etc. Having started a few companies, I'd much rather take a long runway than more coaches.
    - borski 6y ago
      You seem to be equating "smart money" with "less money" which isn't true. It may be equivalent, or even more money, possibly with less favorable terms, due to the outsized advantage they provide in other ways. It's nice that you'd prefer a longer runway to more coaches. I prefer a longer runway and more coaches I trust to help me execute; they are not mutually exclusive and you've presented a false choice, particularly in this market which is so founder-driven.

rmonroe 6y ago

This article raises some awesome points. As a founder who is going through a seed round right now, I'm working hard to optimize our own fundraising process. Aaron refers to a plethora of resources for effective fundraising, but it's often hard to identify experts from rabble. Has anyone already curated a list of quality resources? I would be greatly appreciative!

akharris 6y ago
There's good stuff on YC's Startup School Library: https://www.ycombinator.com/library?categories=Fundraising%20%2B%20Investors https://www.ycombinator.com/library?categories=Fundraising%2...
- rmonroe 6y ago
  Cool, thanks Aaron. I feel like we've been carried on the backs of YC SUS videos for some time, but this startup library is far more organized than what I've seen before. I echo your sentiment, by the way: thus far, fundraising on good terms is turning out to be far easier than we expected - is it possible that low interest rates from the fed are making it easier for investors to get money? If so, we may expect this trend to continue for a few years, as the fed has committed to keeping rates low for some time.
borski 6y ago
read all of Venture Hacks, seriously. Trust me, you won't be disappointed: https://venturehacks.com/archives https://venturehacks.com/archives [edit] It's a bit dated, but the points and lessons are timeless. The 'norm' has changed (SAFEs are more common over convertible notes now, for example), but the rest is still accurate.
- rmonroe 6y ago
  Awesome, going through it right now and learning a ton. Dated? Sure, but How To Win Friends And Influence People is still bang-on, and it was written almost a century ago. I really appreciate the recommendation!

pge 6y ago

To add another nuance here - the other issue to consider is the power-law nature of VC returns (meaning a small number of investments disproportionately contribute to returns). Given that dynamic, funds are eager not to miss out on those big winners. The supply of companies that look like they have that potential is less than the available capital can fund, so to those companies, capital looks very abundant. Companies that do not appear to have that potential may not experience the same abundance of capital. The challenge for funds is identifying the signifiers of potential outperformance, and it seems to me that a lot of funds are looking at the same indicators (whether or not they are the right ones) which makes for a feeding frenzy on those companies.

lumost 6y ago
From a fund perspective doesn't this eventually lead to the softbank model? where winners are made through overwhelming capital.
- borski 6y ago
  It can, but that implies capital is the only thing required for good execution, and we know that's not true (as we saw with some of the Softbank failures). However, if you need to make a bet, you make a bet, because for a VC fund, the small chance of an outsized return (that can return your fund) is better than a more likely chance of a 'decent' return, so you often make a bet and double down while it still seems viable. There's a reason Lyft kept getting funded even when Uber raised significantly more.
- kkotak 6y ago
  Completely agree. Capital is used to make Kings. Companies like Uber, Lyft, WeWork - won't exist without this. As for quality of the founders, I think, with enough money (and loss appetite), a mediocre team can execute well on an decent opportunity.
  - borski 6y ago
    It is hard for an incredible team to execute well on a decent opportunity, even with ample capital; the 'it is trivial once you have money' trope is just that, a trope. Money does not make a company successful; financing helps along the route, and helps allow the founders to take bigger risks (with hopefully similarly outsized rewards), but it does not execute for the founders. That part is still on the founders, and is still the most important part of any startup bet; 'can they raise future capital' is certainly a factor in the decision, too.

Liron 6y ago

> Founders should approach every fundraising as an auction. I agree. So what's the auction marketplace of startup fundraising - a place where every deal can be posted publicly, or as close to that as possible?

akharris 6y ago
Demo Day does this for YC companies. Angel List does it, to some extent. Other than that, it doesn't exist. Got some thoughts on this part of the dynamic in the works.
borski 6y ago
This, while seemingly a natural extension, is a bad idea, imho. Investing in startups is inherently one of the riskiest investments you can make, and having deals be public is a problem, as 'normal' investors will be swayed by charismatic founders into losing their homes. That said, 'auctions' for accredited investors already exist, if the company choose to take advantage of it. There are seed funding sites as well as AngelList, etc., to publicize deals. Some founders also choose not to publicize a raise (except among the VC/angel networks) so as to remain under the radar until they are ready to launch.
- guntars 6y ago
  > 'normal' investors will be swayed by charismatic founders into losing their homes. You mean their second or third homes, right? There's a minimum net-worth requirement before you're able to invest in a startup so a failed investment is not going to bankrupt any investors. The founders are much more likely to end up in the poorhouse if things don't work out than investors are.
  - borski 6y ago
    You missed my point; I specifically mentioned accredited investors vs 'normal' investors. I agree with you; it is a good thing that there are accreditation requirements to invest in as risky an investment as a startup. Getting rid of that would be an awful idea. That was the point of my comment.

cs702 6y ago

I agree, at present, capital is abundant. That is, at the moment: Σ(capital available) > Σ(investment opportunities) And this imbalance of demand for and supply of investment opportunities is showing up everywhere as... asset price inflation. You can see it in rising angel valuations, rising early-stage VC valuations, rising later-stage VC valuations, rising growth-equity valuations, rising leveraged buyout valuations, rising stock market valuations, rising cryptocurrency prices, rising home prices, etc. Feeding frenzies and bidding wars for high quality assets have become more and more common. Asset prices keep going up and up and up... The multi-trillion-dollar question: Is this sustainable?

A12-B 6y ago
Ironically, whoever answers the question probably wont be paid trillions of dollars. That is because the most likely answer to the question is that it is not sustainable, meaning there's two options: we switch to a non-capital system, and they don't get paid, or everyone chooses to ignore them and they still don't get paid.
akharris 6y ago
I'm not sure that any founder should make a decision based on a future prediction of sustainability. Each founder should make decisions based on the environment he encounters when making a decision. In this case, the imbalance has existed for years and is getting more pronounced. My thoughts here are based on that dynamic. If this changes, then I'd likely change the advice.
- borski 6y ago
  Importantly, the imbalance has changed, and the valley has not seemed to hold a grudge. There have been shifts during the recessions, and certainly after the 2000 bust, but it's a fact of life: the power dynamic sometimes changes, and the best deal you're able to get at the time is the deal you are going to get. It's not entirely unlike mortgage rates, tbh; when you refi matters, due to the rates being variable. When you raise also matters, but sometimes raising is the important part, and the terms are the terms.
- 6y ago

josephjacks 6y ago

This is horrifically BAD advice. Shopping a TS to a few folks is not an unwise thing to do, but running a full-blown auction absolutely is! Founders: If you want to ONLY optimize for max price + max check size, the “partners” you bring into your business are bankers.

borski 6y ago
You missed the point; Aaron wasn't saying to always optimize for price and take "dumb money." His point was that founders today have a choice, and that choice is important, and worth recognizing. Because of the (present) imbalance of power, founders can be more aggressive with their fundraising. That isn't always true, though.
- josephjacks 6y ago
  I hear you... but this "run an auction" narrative he's proposing is very dangerous if implemented in any way close to actual auctions.
  - borski 6y ago
    Sure, I agree; I do not think it was intended as a pure price auction. That would be ridiculous, imho.

seibelj 6y ago

Another thing is it seems people want to move into VC rather than keep building products. Investing is inherently lazy, it requires decision making but not much work if you are the person who has the connections to raise the fund. You can hire other people to do the effort of managing investments because you can’t be dethroned from having the money connections. So people who actually make successful products get valued more and more. The unfortunate part is you actually have to work for a living, but luckily you keep getting more of the lazy people’s money.

corry 6y ago

With interest rates so low (and lots of headwinds for them to increase in the short-term), one has to think that this will be the new normal for a few years at least. The rise of SPACs is another sign - they are disrupting both later-stage VC funds as well as obviously vanilla IPOs. I wonder if the abundance of capital is not evenly distributed through the startup lifecycle, but more heavily-weighted towards later stages. Anecdotally, I've heard from founders that SEED rounds are getting harder despite all the frothiness. Even back when we did our seed rounds ~2015, we already heard "today's seed round is yesterday's Series A" in terms of $ size but also minimum bar of progress. And these days it seems that is EVEN MORE true. It's also true it's easier to start a SaaS company than ever before. But it's ALSO ALSO true that there is less and less SaaS greenspace. Hmmmm.

seibelj 6y ago
Salaries for good engineers have simply gone up. Competing with FAANG for good engineers is expensive. Need $5mil to get a small team for a couple years runway. That used to be an A. Having one or more cofounders as capable engineers to get MVP out is also beneficial.
- flyinglizard 6y ago
  None of the early stage startups I know even tries to compete with FAANGs on compensation. I don’t know if it’s because of disparity of information on the side of the employees, or simply people joining for a wild ride (I suspect it’s both). Not to say salaries have not gone up, but not to those levels. That said, it is also uncommon for me to see startup employees which previously worked for FAANGs (you do see founders).
  - seibelj 6y ago
    No one is trying to pay 500k total comp but higher salaries have become the norm. Getting someone sub-100k with experience and knows what they are doing is impossible unless you are exploiting them.
    - 6y ago

ihm 6y ago

It's tautological but worth noting: capital is abundant for projects which VCs as a class are already eager to fund. If you have an idea which does not appeal to VCs, capital is not abundant for you.

corry 6y ago

Perhaps I'm a minority, but I got A LOT of value from my investors (both pre-seed, seed, and series A). To the point where I'd consider them core partners in my journey of building the business. I know Aaron isn't saying that the investors don't matter. But when I think about why VCs hate going through an auction-like process, at least part of it is human nature. Like, we're about to work together for a long time. Let's not start off by commoditizing what we each bring to the table. I understand the POV that 99.999% of what VCs bring to the table is the literal commodity of cash... but if you have good ones, they really can help. In our case, we had multiple term sheets for our Series A so I was able to optimize terms and get the partner/fund who I thought would add the most value but at "market" on the other terms. "Market" being what was on the other term sheets. That seemed to work OK as a softer way of actually doing the auction. The real point in all of this is that if the VC's value-add is true, then you shouldn't NEED to discount things because of that. If it's real, then they should be happy to pay 'market rate' to invest in you, and the impact of their other value will be that together you build a better business, which is more valuable to them too.

borski 6y ago
Sure, but that's not how negotiation works; both parties are trying to get as much out of the deal as they can, assuming it beats both parties' BATNA. Also, that you had multiple term sheets means you... ran an auction. It's wonderful that most of the terms were similar, but getting multiple term sheets is effectively generating a bidding war. You don't have to pick the one that is monetarily best (we didn't, because we preferred the partners), but that's why you're doing. :)
- corry 6y ago
  Well, if we're defining "auction" to mean anything with competing options -- rather than its typical usage, which is price-only competition of something rather commodity-ish -- then sure. My process had elements of an auction - using competing options to determine "a market price" for various terms. BTW - the VCs also had that, in that they could have put that same capital to work in other companies vs mine. But that's not a pure auction. i.e. there's still room for qualitative choice and optimization on both sides. This should be most obvious to you in the non-monetary terms and how difficult it would be to translate into $ terms (for instance - how many seats on the board? How much lower/higher of price makes sense for more/fewer board seats? Well, for starters, it would depend on which VC is asking and what stage the biz is in). Clearly these aren't pure auctions. Because (back to my original point) this is possibly a 10+ year partnership you're getting into (longer than many marriages). A good process is more equivalent to (1) speed dating, which leads to (2) a handful of non-exclusive longer dates, (3) a period of exclusivity (no-shop) and 'meeting the family' (diligence), and then possibly, finally, (4) marriage.

nitsky 6y ago

When I saw the headline of this article on HN, I assumed Aaron Harris was starting a new venture capital fund called "Abundant Capital" after leaving YC. How ironic that the article is about how "new funds... seem to launch on a daily basis"!

hamhamed 6y ago

I don't know about abundance. Maybe Aaron has confirmation bias being around the industry so closely. Or maybe other founders here can tell me otherwise. From my side, I can't vouch for an over abundance of capital. It's been a year we're trying to close our round, missing 350k from the $1M round and yet still growing 30% MoM. Yes covid fucked our business in a sense, and we got hit since March - but we remain ever so bullish esp given our sustaining growth.

di4na 6y ago
That is the access problem he talks about in the notes. He is right. All the number that we see from the industry shows that there is a fuckton of capital. But it is really badly distributed. That is probably a far bigger problem right now and one that need to be solved if this industry want to maximise impact. There are interesting things happening in that space, but they are still at the fringe.
corry 6y ago
I made a comment further down that your comment jives with. It’s the idea that abundant capital doesn’t necessarily mean it’s evenly distributed through the various stages. In particular, seed stage seems not to have seen the effect yet. Hard data on aggregate seed funding through the years would be interesting. Also - hang in there! 30% MoM is no joke, sounds like you’ve done one the hardest things (made something people want).
dgudkov 6y ago
Why do you need VC having such growth rate? Get a loan. If you're at least 95% sure that your business will work out (and the growth rate strongly indicates that) why would you want to pay with equity?
- imtringued 6y ago
  I honestly don't know why debt for growing companies is vilified. People will literally give you their money. From the perspective of the borrower the lender is absolutely insane because he could have spent that money in a way that would yield superior returns compared to giving you a loan. Instead you get to extract that value yourself.

technotony 6y ago

> [3] When a company IPOs, it opens ownership up to anyone who can afford a share. Imagine, for a second, an investor arguing that this is a sign of low quality. I thought this note was important, this is precisely what investors signalled when startups started being able to crowdfund equity under Regulation CF.

enahs-sf 6y ago

my question after reading this essay is, 1. why are there no startups building VC investing as a platform akin to what carta has done for equity. 2. are there any ways to shore up the cost of the transaction such that they benefit both parties as a service (eg. shore up lawyer fees which are currently passed onto the fundraiser)

molsongolden 6y ago
Do the equity crowdfunding platforms fit here? Wefunder, Republic, Startengine, etc...? They'll be able to run non-accredited investor crowdfunding rounds up to $5MM per year soon.

poochinienini 6y ago

This conversation is a bit misguided in its premises. There is not that much excess capital compared to yesteryears when one considers the real value vs the nominal amount. If anything, sure capital will flow more freely and be doled out more freely in ever increasing nominal amounts. However, let's stop and ponder, how much more will this capital buy? Will it buy more actual assets? Will salaries go up? Then you will get the same amount of engineers for the capital. This is quite a decaying state, not that different to how despite, more food being produced, and salaries "going upz and increasing" the average person in the US can afford, worse quality food and housing despite having "muh iphones". Long term this trend will further bitcoin's position as a more useful nominal quantity. When will the salaries in fixed BTC begin? Right now it is a bit unstable, sure "muh transaction costs". But imagine schemes where pay is paid out yearly, reducing the number of transactions, or where it is held in escrow.

siruva07 6y ago

From the title of the post, I thought he launched his own VC firm. FWIW It's a good name.

idlewords 6y ago

If you're new enough to computerworld that you've never been through a downturn (and it's been a long time!), then take note: this is what a crazy asset bubble looks like. This is what 1998 felt like.

ant6n 6y ago
So we’ve got years of bubble left
- idlewords 6y ago
  Yeah. If only we knew which years, though!

f430 6y ago

> As a thought experiment, assume that the abundance model is here to stay this is a dangerous assumption. The feds are poised to raise interest rates this year and it will have ripple effects, in particular the abundance period of capital is slowly being reigned in to avoid a loss of faith in the dollar and slow down inflation.

mdorazio 6y ago
> and slow down inflation What inflation? CPI has been absurdly flat for years, despite all the QE and pandemic relief funds. Inflation is only showing up in property and securities.
- f430 6y ago
  I can't believe you actually think CPI is flat when the cost of goods are rising across the board. I guess this is why its so easy to control the markets. People don't even practice critical thinking and check for real world data. Whatever we are told is what we hold!
  - colinmhayes 6y ago
    CPI is objectively flat, you can look it up on the bls site. You might think CPI isn't well correlated to price inflation, but you'd be wrong there too.
    - AngrySkillzz 6y ago
      Yeah, people on HN are kind of cranks about this sort of thing
      - imtringued 6y ago
        It's not HN, it's everywhere. The housing as an investment mantra doesn't help. Yes, house prices are going up but for all we know it's a bubble right now. If CPI inflation does pick up in the future it may turn out to be correct. It would be helpful if people actually did the right thing and built more housing, though.

mbesto 6y ago

For the people in this thread who are unfamiliar with the current capital markets: There is roughly 2.5T dollars in dry powder (uncalled capital). In laymen's terms this means there is currently 2.5T dollars sitting there not being deployed and $830B of this for PE Buyouts alone. It looks like VC is ~$300B. In other words, investors can't spend allocated money (from LPs) fast enough. https://www.bain.com/globalassets/noindex/2020/bain_report_private_equity_report_2020.pdf https://www.bain.com/globalassets/noindex/2020/bain_report_p... -> Figure 1.12

codeisawesome 6y ago
IMO (please prove me wrong! There will be info in your proof I'd like to know...) - founder immigration is the greatest bottleneck for this capital to be invested. A startup founder visa will more than take care of this 'dry powder' and get it working to increase the US GDP. Said visa needs to have a realistic "minimum savings requirement" to come live in the US & start a company (not the $1MM or even $500k required by EB-5 that put it out of reach for most founders especially on the younger side). Said visa is a necessity because of the way human society works & the way the global order has formed. All this Capital is in the US (reserve currency). People who control it and decide how to allocate it are in the US (history). People do not like to give capital to other people who will live and use it thousands of kilometres away (oversight becomes hard). Wishing for more tech startup founders to spring from the general US population alone is not going to solve it, and pumping all the available money into the same companies may be quite risky from a diversification perspective for the US economy.
- umeshunni 6y ago
  To add to what you said, US population growth from 2010-20 was the slowest it has been since the 1930s. Without some seriously increased immigration over the next 10-20 years, the US demographics will go the direction of Europe and Japan soon.

zuhayeer 6y ago

With all the noise around NFTs right now, my immediate thought was "Hmm so treat companies like NFTs, where investors bid on price"

fallingfrog 6y ago

What goes up,

staunch 6y ago

> ...whenever a company has a signifier of quality - a YC demo day slot, a high quality angel, pedigreed founders, or, even better, strong growth. In these cases, there are investor feeding frenzies... And therein lies the fundamental problem of Silicon Valley today. Most of what matters in early stage startups is not anything remotely objective about the startup's prospects. What matters most at this stage is connections and perceived pedigree. All that should matter, in an efficient market, is the real potential of the startup itself. "YC demo day slot" = someone spent 10 minutes interviewing some people and decided they were a good culture fit. "High quality angel" = Someone's friend knows a well known rich person and hooked them up. "Pedigreed founders" = Someone's rich parents bought them credentials by gaming the system. It's not reasonable to expect every early stage startup to have "strong growth" because big successes most did not have this attribute. But what could be improved is the process of finding startups with high potential. YC was, when it launched, an innovative attempt at solving this. But it hasn't evolved or scaled enough to address the market. Some kind of early stage crowdfunding solution seems the most likely answer, but no one has managed to crack this nut yet. And so the Silicon Valley investors continue to feed in the same small pond. The most likely outcome is that a new system will develop that totally bypasses traditional Silicon Valley investors. They may have an abundance of capital compared to the small number of startups they care to look at, but they have nowhere near the money (or intelligence) that the public at large has.

Jommi 6y ago
This is what people call "luck" when talking about successful startups. Unfortunately some people are just more "lucky" than others :)

prankash 6y ago

If you listen to Alfred Lin on Acquired he actually says that abundant capital has always been a problem, so it definitely feels like this isn't a new problem necessarily

rexreed 6y ago

Is it really that much easier for a "typical" startup to raise money now than before? And by typical, I mean a non-Silicon Valley based startup with founders that no one has heard of before and that do not have good connections with VCs operating in a mediocre market with a decent, but not ground-breaking offering. Not a hype-driven, silicon-valley based startup in a "hot" market led by superstar founders or founders with deep networks? It would seem that all this "easy money" is simply flowing to the places where it has always flowed before, but in larger quantities. The same big money chasing a small number of deals, just with deeper pockets and more gusto to participate in an auction if need be. Honestly, has it really gotten any easier for the typical startup?

mandelbrotwurst 6y ago
There have been some rule changes in recent years allowing non-accredited investors to invest in startups more easily, and platforms such as SeedInvest have sprung up which facilitate this, so this is at least one new pathway, although I don’t know how much easier it is necessarily, if at all.
aerosmile 6y ago
If you reach the threshold required to get into YC, then your location and experience won't matter (and with the size of the batches getting larger and larger, you could argue that it is in fact getting easier to raise money now than before). If something about your seed-stage startup is stopping you from getting into YC, then I would ask myself if I might be doing something wrong. This is coming from someone who went through YC with one startup and also got rejected in another instance. While YC does make mistakes, in my case they were spot on. Please know that I am not discouraging you from pursuing whatever it is that you're working on - every early-stage founder has a special place in my heart. Just realize that your time on this planet is limited, and there truly is so much opportunity out there. Spend your time wisely.
- Aeolun 6y ago
  Just because someone could get into YC doesn’t mean they want to. That means the signal isn’t there, even though the company is just as good as one that did enter YC.

guidoism 6y ago

Somewhat related to the discussion: Why do start-up's need so much money? We live in a world where a software start-up needs basically $0 in cap ex. If the founders don't have existing financial obligations and can live in a place that isn't the BA or NYC or Seattle then they can make a lot of progress for peanuts. Venture Capital is essentially paying for 1. The founders existing financial obligations, and 2. The ability for them to live in an extremely expensive part of the world. The only other thing that a VC provides is a financial reason not to work for a large tech company that's going to pay the founder hundreds of thousands of dollars a year.

refenestrator 6y ago
To compete with rival overfunded startups.
- guidoism 6y ago
  I mean, yeah, sure. But if solving a problem is your goal, not "being number 1" or whatever then who cares about your competition. You are (hopefully) in competition against problems and reality, not other companies.
  - kapp_in_life 6y ago
    Sure, but if you're solving the same(or at least somewhat similar) problem to another company, the one with more resources absolute has an advantage and will probably in the long term edge you out by having more features or sniping your prospects with better marketing or any of the other things you can do when you have a large war chest.
    - imtringued 6y ago
      A well funded competitor could simply acquire your company if it truly has a superior product.

eucryphia 6y ago

The US is $26.7 trillion in the hole, and you're about to add another three trillion to that. An not one VC is going to pay off any of it. I don't think capital is your problem.

JohnJamesRambo 6y ago

Another signal we are in a bubble top. He is screaming there is too much money. If there is that much excess money everywhere, this paper isn’t worth what we think it is. The rich are running out of places to jam it in.

peteretep 6y ago
For every dollar there's a new cryptocurrency!!

pabs3 6y ago

Would be nice to see some of this excess money thrown at open source projects.