7 ms·

Y Combinator Founder Paul Graham Issues New Warning to Start-ups

188 points by azazo 14y ago

wamatt 14y ago
Coincidentally, I was just reading this rather insightful essay on press releases http://paulgraham.com/submarine.html http://paulgraham.com/submarine.html yesterday, and remember a line that stood out: >'why he's writing about this subject at all.' Makes one wonder what PG today, would say in response to PG (2005) :p
- timpeterson 14y ago
  @wamatt, agree regardless of the "why" PG's email feels petty, YCombinator and its way too many startups are jumping the shark
  - SkyMarshal 14y ago
    With their business model, the more startups the more likely they are to get a homeruns and base hits, as long as they can maintain a minimum standard that's strongly correlated to outcome (which PG seems to have figured out). It's an odds and numbers game.
    - timpeterson 14y ago
      YC is billed like the yankees, but singles more likely, how did the Seattle Mariners do with Ichiro all these years?
- rapind 14y ago
  You started me of on a trail that ended up here (so far): http://www.nytimes.com/2012/07/23/business/venture-capital-firms-once-discreet-learn-the-promotional-game.html?pagewanted=all&_moc.semityn.www http://www.nytimes.com/2012/07/23/business/venture-capital-f... Pretty interesting stuff, possibly even inspiring some ideas.
pg 14y ago
Just so everyone understands, I was not saying that Google Ventures is a bad investor and should be avoided. If we thought that, the email would have been a lot shorter. I was just talking about a structural problem that happens when you've already raised some money on a convertible note with a valuation cap, and an investor offers to invest at a lower cap. That sort of offer puts founders in a bind, because if you take it (a) it can anger the earlier investors, and (b) perhaps worse, it can, like a "down round" give investors the impression that your prospects are getting worse. My overall advice about fundraising is to do breadth-first search weighted by expected value. I.e. talk to every investor who's interested but focus on the most promising ones. This is one of many situations whose solution follows from that rule. An investor offering you money on worse terms is at least offering you money, which is better than nothing. But all other things being equal, the expected value of such an investor is lower than that of one willing to invest on the same terms as your existing investors, so you have any of the latter you should focus on them.
- loceng 14y ago
  Perhaps Google is leveraging their name and their value as a resource? Google Ventures investing in you could also be seen as a strong positive signal too. And not that I know what those resources offered might be, and not saying it is fair to earlier investors, though I would give someone with say media reach more value than say a local silent investor who has nothing other than money to offer.
  - deleted 14y ago
    [deleted]
  - arkonaut 14y ago
    Google Ventures is not the "Google" of venture funding. And there are about 5-7 firms that would have this type of brand-value that don't even consider these kind of tactics.
    - loceng 14y ago
      It's still called Google Ventures to leverage Google's name. Regarding tactics, I guess it's a matter of knowing your poker hand and trying to put your best foot forward. I can see a point to perhaps doing such a lessened risk with incubator-founded startups, in that the model isn't yet proven of how the average incubator startup can compare to an external team that would have very different dynamics of being processed. It's in an incubator's best interest to make things look good - so the startup gets funding and the incubator's equity becomes more available - though it doesn't mean it was people on the team itself that could have achieved the same, nor that those same resources would continue to be available to the team (or at the same amount) once away from the incubator.
dclusin 14y ago
I'm a bit confused. Is the Google Ventures dig referring to companies that have already raised seed money from GV, and then try to get series A from them? Or is GV just doing this across the board for all startups that have raised seed rounds using convertible notes?
vnorby 14y ago
I don't know if this is true or isn't true, but Google Ventures' counter arguments are red herrings: "I don't know what Paul's thinking," Maris said. "It's just not true. Our portfolio speaks for itself." and "We've already closed investments on companies from this class, so they don't seem to feel that way," Maris said. Neither of those things mean that what PG is saying is false. Google Ventures is a desirable investor and entrepreneurs would be willing to trade lower caps for a Google stamp of approval on their round. The question is whether it's a matter of their policy to quote a cap at half of a company's existing one, and whether that is an ethical policy. Because they are skirting the question, it certainly makes them look guilty to me.
- loceng 14y ago
  Guilty of leveraging their name and resources they perhaps offer?
  - slurgfest 14y ago
    I am afraid that unless Google is compelling people to accept a deal by force, that using a good bargaining position is just the free market at work.
- qq66 14y ago
  How could it be unethical? I could offer Ferrari $500 for their latest model -- they would would tell me to stick it where the sun don't shine, but it hardly makes the offer unethical. If I was Jay-Z, they'd probably accept my offer for the publicity value, which is what Google is hoping happens to them.
  - blahedo 14y ago
    It'd be unethical if you knew $500 was undervalued and you thought Ferrari didn't, i.e. if they were inexperienced and possibly accidentally undervaluing their own car. Then you would be taking advantage of them.
    - 14y ago
xxiao 14y ago
don't be evil
pkaler 14y ago
I don't think the problem here is with Google Ventures. The problem is that founders don't understand convertible notes with caps. More by Mark Suster here: http://www.bothsidesofthetable.com/2012/09/05/the-truth-about-convertible-debt-at-startups-and-the-hidden-terms-you-didnt-understand/ http://www.bothsidesofthetable.com/2012/09/05/the-truth-abou...
- rdl 14y ago
  Independent of capped convertible notes being problematic under some assumptions (essentially, when the market turns down and you raise at less than the cap -- that's 90% of the problem, and 9% of the rest is when you don't then sell for enough to blow the pref out of consideration), an investor trying to lowball you on the cap is no different from lowballing on equity valuation. If everyone is investing at $12mm, and an investor says "fine, but I'm special, give me $6mm or I won't invest", there's no difference if it's capped convertible note or equity (except that it's technically more difficult to do the investment as equity with different valuations; you can hack it by giving warrants or other benefits I think.)
- jbigelow76 14y ago
  Maybe it's not that the founders don't understand convertible notes. Maybe they are taking the funding at a lower valuation because they're willing to gamble on the likelihood of a (big money, not acqui-hire) acquisition by Google later down the road is more likely.
  - earbitscom 14y ago
    Google Ventures, in my experience, tells entrepreneurs that they have little to do with Google. They do not invest in things because they are synergistic with Google, and they may even invest in things that compete with Google. They make it very clear up front that Google Ventures is a separate organization. At most, they may tap into their network within Google to assist you if it makes sense, but any investor worth their weight in Silicon Valley can connect you with Googlers and other important companies.
rdl 14y ago
The phrase I've heard is "Google Ventures is not the Google of venture capital."
- deleted 14y ago
  [deleted]
- sjg007 14y ago
  Google Vultures?
- Vaismania 14y ago
  It is in Google's nature to try and dip their feet everywhere
crisnoble 14y ago
The warning: "According to the website, the incubator's prominent founder said: "If you're talking to Google Ventures you may be part of a pattern. The pattern is: you've already raised some money at a cap of $x. Then GV says they're interested and wants to invest at a cap of $x/2.""
dchest 14y ago
Source link http://www.businessinsider.com/paul-graham-y-combinator-google-ventures-lowball-offers-2012-9 http://www.businessinsider.com/paul-graham-y-combinator-goog...
mathewgj 14y ago
I'm sure this is both true and reasonable for some companies that did notes with absurdly high caps earlier (which many have) and are now raising more money. Nothing to see here.
trips2 14y ago
So is GV consistently approaching startups that are already being funded, i.e., making offers after the project has had a little time to mature?
TinyBig 14y ago
Why are startups often disasters internally, as PG says in one of the linked articles?
- rsbrown 14y ago
  This was my favorite line from the article, actually. The quote in question: "Practically all start-ups internally are disasters" Not just "often", but "practically all" start-ups. It's true in my experience, and not necessarily a bad thing. Of course, it would be great if everyone acted thoughtfully, didn't let ego get in the way, planned things just enough (but not too much), etc., but that's not just not the way it happens. Acknowledging this fact, getting okay with it and still forging a highly functional team in the midst of such chaos and tragedy is the key. That's a tall order.
calpaterson 14y ago
One of the worst mobile website I've ever seen. I can scroll down on the article, so I click "go to full site". That takes me back to the main page, which is annoying, but I manage to click back to the article, at which point I am put through to the article on the mobile site again. And that's on top of the fact that I have to view a loading throbbler for a text article. Chrome for Android and the Android Browser
markmm 14y ago
If Google are willing to invest in your startup then why the hell would you turn that down?, it's like turning down a BJ from a supermodel, because she demands you do it at her house.
- Evbn 14y ago
  That's not what an investment is.
markmm 14y ago
Did Apple,Google, Facebook, Twitter or Microsoft use an incubator company? Why do people think they are required to be successful?
papsosouid 14y ago
It seems pretty hypocritical to be warning people "don't let google rip you off with lowball offers" when you run a company whose business model is "rip off college kids by taking a huge stake in their company in exchange for nothing". Wouldn't "dear google, please don't out-compete us in the ripping off college kids game" have been more honest?
DeanCollinsNYC 14y ago
name brand recognition brings a truckload of value.....lol sounds like sour grapes.
duncan_bayne 14y ago
Meta: the Inc.com mobile website offers an horrible experience on my Desire w/ ICS + Chrome. Slow, cluttered and buggy (wouldn't let me scroll to the bottom, kept bouncing back). It's text content. Why not just a nice simple HTML page: instead of all the 'HTML app' cruft on top?

188 points by azazo 14y ago

Coincidentally, I was just reading this rather insightful essay on press releases http://paulgraham.com/submarine.html http://paulgraham.com/submarine.html yesterday, and remember a line that stood out: >'why he's writing about this subject at all.' Makes one wonder what PG today, would say in response to PG (2005) :p

timpeterson 14y ago
@wamatt, agree regardless of the "why" PG's email feels petty, YCombinator and its way too many startups are jumping the shark
- SkyMarshal 14y ago
  With their business model, the more startups the more likely they are to get a homeruns and base hits, as long as they can maintain a minimum standard that's strongly correlated to outcome (which PG seems to have figured out). It's an odds and numbers game.
  - timpeterson 14y ago
    YC is billed like the yankees, but singles more likely, how did the Seattle Mariners do with Ichiro all these years?
rapind 14y ago
You started me of on a trail that ended up here (so far): http://www.nytimes.com/2012/07/23/business/venture-capital-firms-once-discreet-learn-the-promotional-game.html?pagewanted=all&_moc.semityn.www http://www.nytimes.com/2012/07/23/business/venture-capital-f... Pretty interesting stuff, possibly even inspiring some ideas.

pg 14y ago

Just so everyone understands, I was not saying that Google Ventures is a bad investor and should be avoided. If we thought that, the email would have been a lot shorter. I was just talking about a structural problem that happens when you've already raised some money on a convertible note with a valuation cap, and an investor offers to invest at a lower cap. That sort of offer puts founders in a bind, because if you take it (a) it can anger the earlier investors, and (b) perhaps worse, it can, like a "down round" give investors the impression that your prospects are getting worse. My overall advice about fundraising is to do breadth-first search weighted by expected value. I.e. talk to every investor who's interested but focus on the most promising ones. This is one of many situations whose solution follows from that rule. An investor offering you money on worse terms is at least offering you money, which is better than nothing. But all other things being equal, the expected value of such an investor is lower than that of one willing to invest on the same terms as your existing investors, so you have any of the latter you should focus on them.

loceng 14y ago
Perhaps Google is leveraging their name and their value as a resource? Google Ventures investing in you could also be seen as a strong positive signal too. And not that I know what those resources offered might be, and not saying it is fair to earlier investors, though I would give someone with say media reach more value than say a local silent investor who has nothing other than money to offer.
- deleted 14y ago
  [deleted]
- arkonaut 14y ago
  Google Ventures is not the "Google" of venture funding. And there are about 5-7 firms that would have this type of brand-value that don't even consider these kind of tactics.
  - loceng 14y ago
    It's still called Google Ventures to leverage Google's name. Regarding tactics, I guess it's a matter of knowing your poker hand and trying to put your best foot forward. I can see a point to perhaps doing such a lessened risk with incubator-founded startups, in that the model isn't yet proven of how the average incubator startup can compare to an external team that would have very different dynamics of being processed. It's in an incubator's best interest to make things look good - so the startup gets funding and the incubator's equity becomes more available - though it doesn't mean it was people on the team itself that could have achieved the same, nor that those same resources would continue to be available to the team (or at the same amount) once away from the incubator.

dclusin 14y ago

I'm a bit confused. Is the Google Ventures dig referring to companies that have already raised seed money from GV, and then try to get series A from them? Or is GV just doing this across the board for all startups that have raised seed rounds using convertible notes?

vnorby 14y ago

I don't know if this is true or isn't true, but Google Ventures' counter arguments are red herrings: "I don't know what Paul's thinking," Maris said. "It's just not true. Our portfolio speaks for itself." and "We've already closed investments on companies from this class, so they don't seem to feel that way," Maris said. Neither of those things mean that what PG is saying is false. Google Ventures is a desirable investor and entrepreneurs would be willing to trade lower caps for a Google stamp of approval on their round. The question is whether it's a matter of their policy to quote a cap at half of a company's existing one, and whether that is an ethical policy. Because they are skirting the question, it certainly makes them look guilty to me.

loceng 14y ago
Guilty of leveraging their name and resources they perhaps offer?
- slurgfest 14y ago
  I am afraid that unless Google is compelling people to accept a deal by force, that using a good bargaining position is just the free market at work.
qq66 14y ago
How could it be unethical? I could offer Ferrari $500 for their latest model -- they would would tell me to stick it where the sun don't shine, but it hardly makes the offer unethical. If I was Jay-Z, they'd probably accept my offer for the publicity value, which is what Google is hoping happens to them.
- blahedo 14y ago
  It'd be unethical if you knew $500 was undervalued and you thought Ferrari didn't, i.e. if they were inexperienced and possibly accidentally undervaluing their own car. Then you would be taking advantage of them.
  - 14y ago

xxiao 14y ago

don't be evil

pkaler 14y ago

I don't think the problem here is with Google Ventures. The problem is that founders don't understand convertible notes with caps. More by Mark Suster here: http://www.bothsidesofthetable.com/2012/09/05/the-truth-about-convertible-debt-at-startups-and-the-hidden-terms-you-didnt-understand/ http://www.bothsidesofthetable.com/2012/09/05/the-truth-abou...

rdl 14y ago
Independent of capped convertible notes being problematic under some assumptions (essentially, when the market turns down and you raise at less than the cap -- that's 90% of the problem, and 9% of the rest is when you don't then sell for enough to blow the pref out of consideration), an investor trying to lowball you on the cap is no different from lowballing on equity valuation. If everyone is investing at $12mm, and an investor says "fine, but I'm special, give me $6mm or I won't invest", there's no difference if it's capped convertible note or equity (except that it's technically more difficult to do the investment as equity with different valuations; you can hack it by giving warrants or other benefits I think.)
jbigelow76 14y ago
Maybe it's not that the founders don't understand convertible notes. Maybe they are taking the funding at a lower valuation because they're willing to gamble on the likelihood of a (big money, not acqui-hire) acquisition by Google later down the road is more likely.
- earbitscom 14y ago
  Google Ventures, in my experience, tells entrepreneurs that they have little to do with Google. They do not invest in things because they are synergistic with Google, and they may even invest in things that compete with Google. They make it very clear up front that Google Ventures is a separate organization. At most, they may tap into their network within Google to assist you if it makes sense, but any investor worth their weight in Silicon Valley can connect you with Googlers and other important companies.

rdl 14y ago

The phrase I've heard is "Google Ventures is not the Google of venture capital."

deleted 14y ago
[deleted]
sjg007 14y ago
Google Vultures?
Vaismania 14y ago
It is in Google's nature to try and dip their feet everywhere

crisnoble 14y ago

The warning: "According to the website, the incubator's prominent founder said: "If you're talking to Google Ventures you may be part of a pattern. The pattern is: you've already raised some money at a cap of $x. Then GV says they're interested and wants to invest at a cap of $x/2.""

dchest 14y ago

Source link http://www.businessinsider.com/paul-graham-y-combinator-google-ventures-lowball-offers-2012-9 http://www.businessinsider.com/paul-graham-y-combinator-goog...

mathewgj 14y ago

I'm sure this is both true and reasonable for some companies that did notes with absurdly high caps earlier (which many have) and are now raising more money. Nothing to see here.

trips2 14y ago

So is GV consistently approaching startups that are already being funded, i.e., making offers after the project has had a little time to mature?

TinyBig 14y ago

Why are startups often disasters internally, as PG says in one of the linked articles?

rsbrown 14y ago
This was my favorite line from the article, actually. The quote in question: "Practically all start-ups internally are disasters" Not just "often", but "practically all" start-ups. It's true in my experience, and not necessarily a bad thing. Of course, it would be great if everyone acted thoughtfully, didn't let ego get in the way, planned things just enough (but not too much), etc., but that's not just not the way it happens. Acknowledging this fact, getting okay with it and still forging a highly functional team in the midst of such chaos and tragedy is the key. That's a tall order.

calpaterson 14y ago

One of the worst mobile website I've ever seen. I can scroll down on the article, so I click "go to full site". That takes me back to the main page, which is annoying, but I manage to click back to the article, at which point I am put through to the article on the mobile site again. And that's on top of the fact that I have to view a loading throbbler for a text article. Chrome for Android and the Android Browser

markmm 14y ago

If Google are willing to invest in your startup then why the hell would you turn that down?, it's like turning down a BJ from a supermodel, because she demands you do it at her house.

Evbn 14y ago
That's not what an investment is.

markmm 14y ago

Did Apple,Google, Facebook, Twitter or Microsoft use an incubator company? Why do people think they are required to be successful?

papsosouid 14y ago

It seems pretty hypocritical to be warning people "don't let google rip you off with lowball offers" when you run a company whose business model is "rip off college kids by taking a huge stake in their company in exchange for nothing". Wouldn't "dear google, please don't out-compete us in the ripping off college kids game" have been more honest?

DeanCollinsNYC 14y ago

name brand recognition brings a truckload of value.....lol sounds like sour grapes.

duncan_bayne 14y ago

Meta: the Inc.com mobile website offers an horrible experience on my Desire w/ ICS + Chrome. Slow, cluttered and buggy (wouldn't let me scroll to the bottom, kept bouncing back). It's text content. Why not just a nice simple HTML page: instead of all the 'HTML app' cruft on top?