7 ms·

Investors

153 points by niyazpk 14y ago

diziet 14y ago
I like the concept of the investors having some skin in the game. One way might be to have them invest a lot -- and have a lot to lose, in addition to having a lot to gain from a smaller valuation. I also wonder if a smaller valuation makes a company more hungry and more driven to innovate and work harder than a company that knows they can throw money at a problem and 'solve it'.
scottkduncan 14y ago
I think this fits into the larger conversation around what terms to take in a funding round. The anecdote about all the YC companies bragging about valuation post-Demo Day rings true - but what else did they agree to in getting that high valuation? Ensuring that those who have partial control of your company and your future have interests aligned with yours does seem much more valuable than wringing every dollar out of a cap rate.
- pg 14y ago
  Actually high valuations tend to be correlated with clean terms. Which is not surprising since both reflect founders having power relative to investors.
  - cududa 14y ago
    I think this is a fallacy. In my experience of the big firms law firms have already developed very clean convertible notes, and there are many that are public, leading to a larger trend in easy terms. By having an entrepreneur friendly first investor (not necessarily lead) agreeing to "clean terms" (independent of valuation), it seems most other investors in a round come on with little friction, even if it might require a call from one of your existing investors/ commitments.
    - garry 14y ago
      In practice, investors are either pretty upstanding, or kind of dirty. Upstanding investors tend to get the pick of the best because the best companies can choose who they want to do business with. Investors downstream tend to try to overreach on participating preferreds, pro ratas, and lower valuations. It's just how it seems to work.
- zacman85 14y ago
  Actually, to be fair, I did not mean to imply that anyone was "bragging". People may have been celebratory, and justifiably so, but I never felt anyone in particular was bragging.
infoseckid 14y ago
Another post on celebrating "I got some moneys" and yay! this time without YC, even though I was in YC. Guys, get over it. Can some of you please post some inspirational articles on how you created a bootstrapped company?
- neltnerb 14y ago
  Robert Grass from Turbobeads gave a fantastic talk at the MRS in Boston about how to bootstrap a company. And his was even a very difficult field that required actual tangible hardware instead of "just" time. The basic point was that they had a technology, and so they didn't bother with patents, patent searching, or anything like that. Instead they just started asking customers what they wanted, worked to make it, and then started selling it everywhere. Five years later, they own their entire company, and sell stuff all over the world using ebay and similar for fulfillment initially, and google ads instead of complicated marketing campaigns. Unfortunately I can't find an online version of the talk. But if you get the opportunity, consider checking out local trade conferences to see if they have speakers talking about fields outside of CS. If it works outside if CS it will almost definitely work even better inside of CS...
pg 14y ago
"They had been completely priced out!" This is a fallacy. People use this term "priced out" as if it meant some sort of process, but it means nothing more than that the investor thought the startup's stock was too expensive. And it is very stupid to let valuation decide which startups you invest in, because the variation in outcomes between startups is orders of magnitude greater than the variation in valuations. I.e. there is no value investing in startups. What we have here is a case of anecdotal evidence. A founder happened to get some investors who hadn't invested in other startups because they felt the valuations were too high, and those investors turned out to be really helpful. But there are other investors who are willing to invest at high valuations who are helpful, and investors who seek out low valuations who aren't.
- btilly 14y ago
  The phrase might be a fallacy, but the idea is not. Founders often think about getting investors to pay a premium for a great startup. However if your goal is to get helpful investors, founders should consider paying a premium to get the investors that they want on board. Of course this only works if you are capable of choosing investors well.
  - jhartmann 14y ago
    This idea is a really powerful concept in my opinion. The street goes two ways, and there are definitely awesome investors out there. Giving them a premium deal is so worth it if they will really be involved and move the needle overall. A great, well connected, involved investor can mean the difference between a 10x result and a 100x one. These sorts of people tend to have highly robust deal pipelines and can pick and choose who they want to work with. Remember, honey tends to attract more people then vinegar. Giving a few more percent when the pie grows geometrically is so worth it in my opinion.
- orangethirty 14y ago
  ...there is no value investing in startups. At all?
  - 14y ago
tomasien 14y ago
My company wasn't able to raise much money, but the money we did raise was from people who, luckily, have turned out to be amazing. We've gone through some really terrible things (my submissions will point you to some details), but they've stood by us 100%. Even though we had to shut down 3 months ago, these guys are still trying to make connections for us that would allow us to restart. You can't put a price on that, especially with the importance of not dying. Everything is going to go wrong: optimize for having people around you that are going to help you out of THOSE times, because when it's going well help will chase you down. When it's going bad, you better have backup.
eps 14y ago
Chris, if you are reading this, how did you find your investors? Say, that specific person you met in NY layover.
- zacman85 14y ago
  At first, through YC, and then mainly through my existing network, word of mouth, and some serendipity.
cududa 14y ago
This is my first company, but I've found that by having a lower valuation cap on my note two great things have happened. Some of my more powerful investors have felt comfortable introducing me to people who don't give two shits about the latest consumer web fad or investment trends, found my terms very easy to buy in on, and have been enormously helpful. Second, a lot of my friends have found they couldn't recapitalize or raise an A. Having the terms that I do, it was pretty easy for my investors to re-up when I needed it.
dainix 14y ago
Not sure if I believe boot strapping because of my background and location Latvia, but it seems crazy people trying to raise millions of dollars, like their lifes would depend from it!! How could possibly you need money like that to launch a successful project??? I understand in USA all the hires are much more expensive, but why not aim towards bootstrapping if you have some money, hire cheaper Philippinos to help out at starters, and then go all shiny and hustla!!
CurtMonash 14y ago
"No price is too high" is always an incorrect statement, at least in the context of investing.
arbuge 14y ago
"Think about it. With too high of a cap or valuation, what incentive does an investor have to go to work on your behalf in the short term when the real return on their investment requires several orders of magnitude of growth, which has a very low likelihood of happening ever?" It seems to me that if the angel investors in question are really able and willing to do productive work, you could get a similar result by simply paying them additional equity as an incentive after allowing the market to set the company valuation in the natural way. In other words, same as you would for any other early stage employee. No need to artificially interfere with the valuation and set it low to attract them.
gallerytungsten 14y ago
Without ever using those terms, this article was a great commentary on the difference between "smart money" and "dumb money." Not to say that the investors snapping up YC companies at big valuations were necessarily dumb; but that the author optimized his fundraising for the smartest of the smart. A good way to position your company for long-term growth.

153 points by niyazpk 14y ago

I like the concept of the investors having some skin in the game. One way might be to have them invest a lot -- and have a lot to lose, in addition to having a lot to gain from a smaller valuation. I also wonder if a smaller valuation makes a company more hungry and more driven to innovate and work harder than a company that knows they can throw money at a problem and 'solve it'.

scottkduncan 14y ago

I think this fits into the larger conversation around what terms to take in a funding round. The anecdote about all the YC companies bragging about valuation post-Demo Day rings true - but what else did they agree to in getting that high valuation? Ensuring that those who have partial control of your company and your future have interests aligned with yours does seem much more valuable than wringing every dollar out of a cap rate.

pg 14y ago
Actually high valuations tend to be correlated with clean terms. Which is not surprising since both reflect founders having power relative to investors.
- cududa 14y ago
  I think this is a fallacy. In my experience of the big firms law firms have already developed very clean convertible notes, and there are many that are public, leading to a larger trend in easy terms. By having an entrepreneur friendly first investor (not necessarily lead) agreeing to "clean terms" (independent of valuation), it seems most other investors in a round come on with little friction, even if it might require a call from one of your existing investors/ commitments.
  - garry 14y ago
    In practice, investors are either pretty upstanding, or kind of dirty. Upstanding investors tend to get the pick of the best because the best companies can choose who they want to do business with. Investors downstream tend to try to overreach on participating preferreds, pro ratas, and lower valuations. It's just how it seems to work.
zacman85 14y ago
Actually, to be fair, I did not mean to imply that anyone was "bragging". People may have been celebratory, and justifiably so, but I never felt anyone in particular was bragging.

infoseckid 14y ago

Another post on celebrating "I got some moneys" and yay! this time without YC, even though I was in YC. Guys, get over it. Can some of you please post some inspirational articles on how you created a bootstrapped company?

neltnerb 14y ago
Robert Grass from Turbobeads gave a fantastic talk at the MRS in Boston about how to bootstrap a company. And his was even a very difficult field that required actual tangible hardware instead of "just" time. The basic point was that they had a technology, and so they didn't bother with patents, patent searching, or anything like that. Instead they just started asking customers what they wanted, worked to make it, and then started selling it everywhere. Five years later, they own their entire company, and sell stuff all over the world using ebay and similar for fulfillment initially, and google ads instead of complicated marketing campaigns. Unfortunately I can't find an online version of the talk. But if you get the opportunity, consider checking out local trade conferences to see if they have speakers talking about fields outside of CS. If it works outside if CS it will almost definitely work even better inside of CS...

pg 14y ago

"They had been completely priced out!" This is a fallacy. People use this term "priced out" as if it meant some sort of process, but it means nothing more than that the investor thought the startup's stock was too expensive. And it is very stupid to let valuation decide which startups you invest in, because the variation in outcomes between startups is orders of magnitude greater than the variation in valuations. I.e. there is no value investing in startups. What we have here is a case of anecdotal evidence. A founder happened to get some investors who hadn't invested in other startups because they felt the valuations were too high, and those investors turned out to be really helpful. But there are other investors who are willing to invest at high valuations who are helpful, and investors who seek out low valuations who aren't.

btilly 14y ago
The phrase might be a fallacy, but the idea is not. Founders often think about getting investors to pay a premium for a great startup. However if your goal is to get helpful investors, founders should consider paying a premium to get the investors that they want on board. Of course this only works if you are capable of choosing investors well.
- jhartmann 14y ago
  This idea is a really powerful concept in my opinion. The street goes two ways, and there are definitely awesome investors out there. Giving them a premium deal is so worth it if they will really be involved and move the needle overall. A great, well connected, involved investor can mean the difference between a 10x result and a 100x one. These sorts of people tend to have highly robust deal pipelines and can pick and choose who they want to work with. Remember, honey tends to attract more people then vinegar. Giving a few more percent when the pie grows geometrically is so worth it in my opinion.
orangethirty 14y ago
...there is no value investing in startups. At all?
- 14y ago

tomasien 14y ago

My company wasn't able to raise much money, but the money we did raise was from people who, luckily, have turned out to be amazing. We've gone through some really terrible things (my submissions will point you to some details), but they've stood by us 100%. Even though we had to shut down 3 months ago, these guys are still trying to make connections for us that would allow us to restart. You can't put a price on that, especially with the importance of not dying. Everything is going to go wrong: optimize for having people around you that are going to help you out of THOSE times, because when it's going well help will chase you down. When it's going bad, you better have backup.

eps 14y ago

Chris, if you are reading this, how did you find your investors? Say, that specific person you met in NY layover.

zacman85 14y ago
At first, through YC, and then mainly through my existing network, word of mouth, and some serendipity.

cududa 14y ago

This is my first company, but I've found that by having a lower valuation cap on my note two great things have happened. Some of my more powerful investors have felt comfortable introducing me to people who don't give two shits about the latest consumer web fad or investment trends, found my terms very easy to buy in on, and have been enormously helpful. Second, a lot of my friends have found they couldn't recapitalize or raise an A. Having the terms that I do, it was pretty easy for my investors to re-up when I needed it.

dainix 14y ago

Not sure if I believe boot strapping because of my background and location Latvia, but it seems crazy people trying to raise millions of dollars, like their lifes would depend from it!! How could possibly you need money like that to launch a successful project??? I understand in USA all the hires are much more expensive, but why not aim towards bootstrapping if you have some money, hire cheaper Philippinos to help out at starters, and then go all shiny and hustla!!

CurtMonash 14y ago

"No price is too high" is always an incorrect statement, at least in the context of investing.

arbuge 14y ago

"Think about it. With too high of a cap or valuation, what incentive does an investor have to go to work on your behalf in the short term when the real return on their investment requires several orders of magnitude of growth, which has a very low likelihood of happening ever?" It seems to me that if the angel investors in question are really able and willing to do productive work, you could get a similar result by simply paying them additional equity as an incentive after allowing the market to set the company valuation in the natural way. In other words, same as you would for any other early stage employee. No need to artificially interfere with the valuation and set it low to attract them.

gallerytungsten 14y ago

Without ever using those terms, this article was a great commentary on the difference between "smart money" and "dumb money." Not to say that the investors snapping up YC companies at big valuations were necessarily dumb; but that the author optimized his fundraising for the smartest of the smart. A good way to position your company for long-term growth.