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"Why doesn't Paul Graham start this mythical founders first VC firm?" Partly because it would conflict with YC, partly because I wouldn't be good at it, but mo

by pg 13y ago

"Why doesn't Paul Graham start this mythical founders first VC firm?" Partly because it would conflict with YC, partly because I wouldn't be good at it, but most of all because I don't want to. I like dealing with early stage startups, because at that stage the big problem is what to build. I wouldn't be any good at advising founders how to organize an executive team, or how to prepare the company's finances for an IPO. Incidentally, VCs are not nearly as bad as this comment suggests. The best ones are nice people and genuinely helpful. When they take a long time to make up their minds, it's because they're afraid—not just of the risk of investing in a particular startup, but because that startup has to be the only one of its type they invest in.

sillysaurus 13y ago
because that startup has to be the only one of its type they invest in. That's surprising. Would anyone mind explaining why that's the case? YC has no such restriction, and it seems to work out ok. Why wouldn't later stage investors do deals with multiple startups in the same space?
- ibdknox 13y ago
  VC's won't invest in competitors - how would you give advice/counsel? It would cause all sorts of weird dynamics in the firm (e.g. partners competing) that are likely to be pretty detrimental. In terms of why YC can get away with this, companies are so early that it's not clear what they will ultimately be doing in the end. Many of the internal competitors ended up that way by accident. Moreover, YC doesn't make singular large bets, while later stage investors do. As a result, they aren't nearly as diversified as YC is and so a duplicate represents a much greater overall risk (essentially guaranteeing a loss before you even start).
  - sillysaurus 13y ago
    VC's won't invest in competitors - how would you give advice/counsel? Hmm. YC does, and it seems to work ok. Why wouldn't it work for later stage VCs? Or rather, why does it work for YC?
    - fragsworth 13y ago
      I'm going to take a guess here. YC doesn't have to give up the best of its limited resources to competing startups. They just help get you to a Series A round. They can do this for competing companies without any issues. VC's help assemble an executive team, provide critical business relationships, etc., and it's not in anyone's interests if they have to divide their best contacts and resources between two competing companies. They should want to go all-out in providing one company all their best resources.
    - mattzito 13y ago
      YC deals with people at such an earlier stage that a lot of their advice and hand-holding is more generic - how to get a product out the door, how to improve user conversions, how to attract quality talent - these are examples of isuses that are universal, so having (some) competitors isn't too much of a conflict. A later-stage VC, though, you might be having conversations with portfolio company A about how to entice sales people from portfolio company B, or portfolio company B might be getting ready to expand internationally and you're advising them on the best way to capture market share in Asia, where company A is stronger. It's much more specific, targeted advice and consultation vs. "here's how we're going to help you get off the ground"
    - loumf 13y ago
      I think there might be a disclosure requirement or perhaps it only matters if they take board seats or what kind of access they have to internal matters. At latter stages it might arise if a company pivots into another space. See this on how Andreessen-Horowitz dealt with a conflict (Instagram v. PicPlz): http://bhorowitz.com/2012/04/22/instagram/ http://bhorowitz.com/2012/04/22/instagram/
- Scorponok 13y ago
  Conflict of interest. If you're advising startup X in the "deliver food to people at lunchtime" space, it could very well be a conflict to do the same to startup Y in the same space, as they'd be competitors.
apsec112 13y ago
Unfortunately, someone being a "nice person" doesn't mean they're immune to being corrupted by power. If I had known Obama before he was elected, I'm sure I'd have thought of him as a nice guy. As this last month shows, that's no protection against abuses. Given that the corruption is minor - petty abuses like not returning emails or stealing a few percent equity or inserting terms at the last minute - and the amount of power so large (giving tens of millions to people who are often broke, with zero appeal or oversight), I'd be surprised if it didn't happen.
- pg 13y ago
  The best ones are actually very careful not to do anything fishy. They don't need to, and in any case it would not be worth the risk to their brand.
  - read 13y ago
    (A side note irrelevant to this comment thread. One has to applaud this essay for one of the most strategic uses of "Hell if I know". I learned a lot about writing by reading what you write. Thank you.)
dataisfun 13y ago
Thanks PG for this essay. Some of the issue with the various mythologies (and more often than not, bromides) around seed/angel/VC is that they're based on historical conclusions (that seem to have been arrived at in the late 90s early 00s), rather than a more forward-looking approach to what's changing (infrastructure costs, tech eating the world, etc.). As an angel, it seems pretty obvious to me the shape of the investing world is shifting, so it's nice to see it put so well.
nwenzel 13y ago
"but most of all because I don't want to." Like a boss. pg - I know you mentioned increading idea conflicts in the essay, but in your comment you touched on it again in a slightly different way. VCs can only invest in one of a given type of company. The increasing ease of starting a company should result in more startups in more obscure markets where previously would-be founders only saw employment and academia as their two paths. These new investable markets should present VCs with new and less saturated opportunities. Are VCs and other investors going to be ready to jump into previously uninvestable markets? Feels like they weren't with hardware. Do you expect it to be different this time?
- pg 13y ago
  New markets shouldn't be a problem for VCs. They're used to the idea of startups moving into markets that didn't have startups before. They have a bit of inertia, like anyone does, but on the whole they're probably more open to having their minds changed than most people, if only because any experienced VC has seen a bunch of apparently crazy ideas turn out to be good.

by pg 13y ago

sillysaurus 13y ago

because that startup has to be the only one of its type they invest in. That's surprising. Would anyone mind explaining why that's the case? YC has no such restriction, and it seems to work out ok. Why wouldn't later stage investors do deals with multiple startups in the same space?

ibdknox 13y ago
VC's won't invest in competitors - how would you give advice/counsel? It would cause all sorts of weird dynamics in the firm (e.g. partners competing) that are likely to be pretty detrimental. In terms of why YC can get away with this, companies are so early that it's not clear what they will ultimately be doing in the end. Many of the internal competitors ended up that way by accident. Moreover, YC doesn't make singular large bets, while later stage investors do. As a result, they aren't nearly as diversified as YC is and so a duplicate represents a much greater overall risk (essentially guaranteeing a loss before you even start).
- sillysaurus 13y ago
  VC's won't invest in competitors - how would you give advice/counsel? Hmm. YC does, and it seems to work ok. Why wouldn't it work for later stage VCs? Or rather, why does it work for YC?
  - fragsworth 13y ago
    I'm going to take a guess here. YC doesn't have to give up the best of its limited resources to competing startups. They just help get you to a Series A round. They can do this for competing companies without any issues. VC's help assemble an executive team, provide critical business relationships, etc., and it's not in anyone's interests if they have to divide their best contacts and resources between two competing companies. They should want to go all-out in providing one company all their best resources.
  - mattzito 13y ago
    YC deals with people at such an earlier stage that a lot of their advice and hand-holding is more generic - how to get a product out the door, how to improve user conversions, how to attract quality talent - these are examples of isuses that are universal, so having (some) competitors isn't too much of a conflict. A later-stage VC, though, you might be having conversations with portfolio company A about how to entice sales people from portfolio company B, or portfolio company B might be getting ready to expand internationally and you're advising them on the best way to capture market share in Asia, where company A is stronger. It's much more specific, targeted advice and consultation vs. "here's how we're going to help you get off the ground"
  - loumf 13y ago
    I think there might be a disclosure requirement or perhaps it only matters if they take board seats or what kind of access they have to internal matters. At latter stages it might arise if a company pivots into another space. See this on how Andreessen-Horowitz dealt with a conflict (Instagram v. PicPlz): http://bhorowitz.com/2012/04/22/instagram/ http://bhorowitz.com/2012/04/22/instagram/
Scorponok 13y ago
Conflict of interest. If you're advising startup X in the "deliver food to people at lunchtime" space, it could very well be a conflict to do the same to startup Y in the same space, as they'd be competitors.

apsec112 13y ago

Unfortunately, someone being a "nice person" doesn't mean they're immune to being corrupted by power. If I had known Obama before he was elected, I'm sure I'd have thought of him as a nice guy. As this last month shows, that's no protection against abuses. Given that the corruption is minor - petty abuses like not returning emails or stealing a few percent equity or inserting terms at the last minute - and the amount of power so large (giving tens of millions to people who are often broke, with zero appeal or oversight), I'd be surprised if it didn't happen.

pg 13y ago
The best ones are actually very careful not to do anything fishy. They don't need to, and in any case it would not be worth the risk to their brand.
- read 13y ago
  (A side note irrelevant to this comment thread. One has to applaud this essay for one of the most strategic uses of "Hell if I know". I learned a lot about writing by reading what you write. Thank you.)

dataisfun 13y ago

Thanks PG for this essay. Some of the issue with the various mythologies (and more often than not, bromides) around seed/angel/VC is that they're based on historical conclusions (that seem to have been arrived at in the late 90s early 00s), rather than a more forward-looking approach to what's changing (infrastructure costs, tech eating the world, etc.). As an angel, it seems pretty obvious to me the shape of the investing world is shifting, so it's nice to see it put so well.

nwenzel 13y ago

"but most of all because I don't want to." Like a boss. pg - I know you mentioned increading idea conflicts in the essay, but in your comment you touched on it again in a slightly different way. VCs can only invest in one of a given type of company. The increasing ease of starting a company should result in more startups in more obscure markets where previously would-be founders only saw employment and academia as their two paths. These new investable markets should present VCs with new and less saturated opportunities. Are VCs and other investors going to be ready to jump into previously uninvestable markets? Feels like they weren't with hardware. Do you expect it to be different this time?

pg 13y ago
New markets shouldn't be a problem for VCs. They're used to the idea of startups moving into markets that didn't have startups before. They have a bit of inertia, like anyone does, but on the whole they're probably more open to having their minds changed than most people, if only because any experienced VC has seen a bunch of apparently crazy ideas turn out to be good.