4 ms·

Shoehorning startups into the VC model

82 points by darrelsumi 14y ago

mvzink 14y ago
If there is one thing I wish I saw more of on HN, it's posts about funding and business outside of the VC model. I feel the thoughts expressed in this post are on the rise.
- acgourley 14y ago
  I'd like to see analysis that suggested if traditional VCs have it right or not. Yes, yes, startup returns follow a power law distribution, I agree. That doesn't necessarily mean that it's optimal to chase the potential top companies!
  - aaronblohowiak 14y ago
    "Shotgun" angels take a different strategy.. Edit: also, if you think about the YC acceptance rate vs the VC acceptance rate in terms of attempts to money, then it is interesting that VCs consider YC a filter. IIRC, YC has a higher acceptance rate than most top-tier VCs. Note that i probably don't remember correctly ;)
- jjacobson 14y ago
  Agreed. It's fascinating and confusing to learn about the difference between VC's and Angels, especially when you have VC's acting like Angels and making smaller, seed round investments these days.
  - aaronblohowiak 14y ago
    VCs make more money because they have more money under management, but angel investments are so much cheaper because of lower due diligence... VCs may also be making angel investments not so much for the equity but in order to have a shoe in the door in order to have a "right of first refusal" (implied/socially) in later financing rounds. Unfortunately (as some are learning) this can also mean you make some less-desirable angel investments that would create a portfolio conflict with a desire to do a later round with a competitor in the space... this is why some VCs might have an "angel arm" or similar "separate" structure so they get the best of both worlds...
adventureful 14y ago
His billion dollar marker is drastically high. He has been living in dotcom fantasy land for far too long. There's no reason you can't raise $250k for 25% from an angel investor, to build a $10 or $20 million business. That's a helluva result to put it mildly. You know, building an actual business that produces actual profits, not vaporware built-to-flip companies that produce nothing and only exist in a tiny corner of the economy. The stock market hasn't moved in real terms in 13 years or so. Interest rates are on the floor. Any investor outside the big VC game would kill for a 10 or 20 fold return over 10 or 20 years. There's a beautiful thing called dividends, which a successful business can pay to its owners. Dixon doesn't seem to know anything about that however, as his assumed scenarios require the big exit and ignore any other possibilities. If you take $250k, and you build a $10 or $20 million valuation business, it's not difficult to kick off a very nice dividend to the investor that provides a stellar return on their capital. AND if you ever choose to sell, said investor also gets their big exit as well. You can also buy their stock back at the higher valuation and they get their exit that way. These types of results are common in the real economy, but not so common in the fantasy dotcom economy.
- il 14y ago
  I doubt a business going from 0 to $20M in <5 years while paying out millions in dividends along the way is common anywhere. You have to remember that for investors it's all about IRR. That kind of IRR on the 1 out of 10 investments that gets to that level isn't interesting to any real investor. Your focus on profit and dividends is misguided. Taking money out of a company in its early stages is a suboptimal strategy for value creation. I rewrote my comment several times to make it less rude, but your advice is completely wrong and I hope nobody seeking investment follows it.
  - rdl 14y ago
    Is IRR really the thing VCs are trying to optimize? Since they're once and done with the money, and have limited bandwidth (board seat capacity), I think total returns are their goal -- they'd rather have their $500mm fund make $2b investing 100% vs. have their $500mm fund invest only $250mm total in its lifetime and make $1.5b.
brudgers 14y ago
"There are lots of tech companies that are very successful but don’t fit the VC model. If they don’t raise VC, the founders can make money, create jobs, and work on something they love." e.g. Microsoft
jg2009 14y ago
Thank you !!!!!!!! Love you all. Jg

82 points by darrelsumi 14y ago

If there is one thing I wish I saw more of on HN, it's posts about funding and business outside of the VC model. I feel the thoughts expressed in this post are on the rise.

acgourley 14y ago
I'd like to see analysis that suggested if traditional VCs have it right or not. Yes, yes, startup returns follow a power law distribution, I agree. That doesn't necessarily mean that it's optimal to chase the potential top companies!
- aaronblohowiak 14y ago
  "Shotgun" angels take a different strategy.. Edit: also, if you think about the YC acceptance rate vs the VC acceptance rate in terms of attempts to money, then it is interesting that VCs consider YC a filter. IIRC, YC has a higher acceptance rate than most top-tier VCs. Note that i probably don't remember correctly ;)
jjacobson 14y ago
Agreed. It's fascinating and confusing to learn about the difference between VC's and Angels, especially when you have VC's acting like Angels and making smaller, seed round investments these days.
- aaronblohowiak 14y ago
  VCs make more money because they have more money under management, but angel investments are so much cheaper because of lower due diligence... VCs may also be making angel investments not so much for the equity but in order to have a shoe in the door in order to have a "right of first refusal" (implied/socially) in later financing rounds. Unfortunately (as some are learning) this can also mean you make some less-desirable angel investments that would create a portfolio conflict with a desire to do a later round with a competitor in the space... this is why some VCs might have an "angel arm" or similar "separate" structure so they get the best of both worlds...

adventureful 14y ago

His billion dollar marker is drastically high. He has been living in dotcom fantasy land for far too long. There's no reason you can't raise $250k for 25% from an angel investor, to build a $10 or $20 million business. That's a helluva result to put it mildly. You know, building an actual business that produces actual profits, not vaporware built-to-flip companies that produce nothing and only exist in a tiny corner of the economy. The stock market hasn't moved in real terms in 13 years or so. Interest rates are on the floor. Any investor outside the big VC game would kill for a 10 or 20 fold return over 10 or 20 years. There's a beautiful thing called dividends, which a successful business can pay to its owners. Dixon doesn't seem to know anything about that however, as his assumed scenarios require the big exit and ignore any other possibilities. If you take $250k, and you build a $10 or $20 million valuation business, it's not difficult to kick off a very nice dividend to the investor that provides a stellar return on their capital. AND if you ever choose to sell, said investor also gets their big exit as well. You can also buy their stock back at the higher valuation and they get their exit that way. These types of results are common in the real economy, but not so common in the fantasy dotcom economy.

il 14y ago
I doubt a business going from 0 to $20M in <5 years while paying out millions in dividends along the way is common anywhere. You have to remember that for investors it's all about IRR. That kind of IRR on the 1 out of 10 investments that gets to that level isn't interesting to any real investor. Your focus on profit and dividends is misguided. Taking money out of a company in its early stages is a suboptimal strategy for value creation. I rewrote my comment several times to make it less rude, but your advice is completely wrong and I hope nobody seeking investment follows it.
- rdl 14y ago
  Is IRR really the thing VCs are trying to optimize? Since they're once and done with the money, and have limited bandwidth (board seat capacity), I think total returns are their goal -- they'd rather have their $500mm fund make $2b investing 100% vs. have their $500mm fund invest only $250mm total in its lifetime and make $1.5b.

brudgers 14y ago

"There are lots of tech companies that are very successful but don’t fit the VC model. If they don’t raise VC, the founders can make money, create jobs, and work on something they love." e.g. Microsoft

jg2009 14y ago

Thank you !!!!!!!! Love you all. Jg