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Is this a common policy in the VC world in general (prohibiting personal investments by general partners in the firm's companies)?

pg 13y ago
It is in VC funds in the narrower sense, because their LP agreements often forbid any individual investments in startups. VCs' LPs don't want the VC partners siphoning off the best of the firm's deal flow for themselves.
- larrys 13y ago
  Long long time ago when I was a kid and my dad was buying real estate I asked him why the realtor didn't buy the property if it was so good. He answered by saying that if he did that you might then infer that the properties that he didn't buy were not good. I also point this out because what I've found in business is that so many basic principles end up repeating themselves in different situations. Things that you don't learn in school or in books but by listening to others and real life experiences. One reason that certain people who have grown up in business families have a nice advantage over those that don't. [1] You have a seat of the pants feel for things because everything is just a variation of something that has already happened. [1] But it's not just growing up in the family but also interacting and listening and thinking. My siblings grew up with the same parents but are vastly different than I am in their thinking and understanding even given the same trough of water.
  - gertef 13y ago
    Any realtor who knows a good investment becomes an investor, not a realtor.
    - lawnchair_larry 13y ago
      This sounds nice rolling off the tongue, but there is clearly no truth to it. Did you just make it up?
  - ghshephard 13y ago
    I understand your meta point, but a better answer would have been, "The realtor doesn't have enough money to buy the property, even if it was the greatest deal ever."
  - 001sky 13y ago
    I asked him why the realtor didn't buy the property if it was so good Hmm. The way to effect this as a broker is to take comission, with 3rd part capital backing the acquisition. The broker "pump and dumps" the property and takes a comission. The structure is opaque to the purchaser, and avoids the signalling 'tell' alluded to in the narrative above. This isn n% as profitable as a outright "front-run" or "flip", but can be executed at greater leverage/scale, since it is easily repeatable and the conflict of interest is far less obvious.
- sriramk 13y ago
  Why not prohibit this outright for the YC partners ( instead of the 3 week/500k numbers).
  - argumentum 13y ago
    Umm because the YC partners are smart, helpful and therefore awesome to have as investors in your startup. Why would you want to prevent some of the best angel investors in the business from investing in the best startups? Since YC itself doesn't do follow-on investments it doesn't have to worry about competing with its own partners (unlike the VC LPs). This new policy seems to be addressing a specific problem: demo day is meant to be an opportunity for all the presenting startups, not a competition for attention between them. I.e. for YC's sake, it should never hurt a startup to present at demo day, so its a problem if not having a yc partner invest looks like a signal of relative weakness.
crapshoot101 13y ago
diff funds have very different policies - most top tier funds (from my experience) have a hard rule against it, given the potential signalling issues. That being said, I know at least one Tier-1 fund that lets partners invest in an existing portfolio company if and only if the firm chooses to pass on the investment in a round - take the pro-rata as it were.
lpolovets 13y ago
As the other replies mentioned, this is pretty standard. I think there's sometimes an exception for companies that a fund passes on, or for very small investments (e.g. if you personally invest $10k into a $5m company, then your fund's LPs probably won't care). The main concern is this: let's say your fund passes on Twitter during its seed round, but you put $25k into it personally. 8 years later, the company has an IPO and you get a 100x or 1000x return. LPs are going to be frustrated that they let you invest on their behalf, but you took such a great investment for yourself. Even if the fund passed, there will always be the perception of "maybe they just passed so that Partner X could invest individually because the company looked very promising."

pg 13y ago

It is in VC funds in the narrower sense, because their LP agreements often forbid any individual investments in startups. VCs' LPs don't want the VC partners siphoning off the best of the firm's deal flow for themselves.

larrys 13y ago
Long long time ago when I was a kid and my dad was buying real estate I asked him why the realtor didn't buy the property if it was so good. He answered by saying that if he did that you might then infer that the properties that he didn't buy were not good. I also point this out because what I've found in business is that so many basic principles end up repeating themselves in different situations. Things that you don't learn in school or in books but by listening to others and real life experiences. One reason that certain people who have grown up in business families have a nice advantage over those that don't. [1] You have a seat of the pants feel for things because everything is just a variation of something that has already happened. [1] But it's not just growing up in the family but also interacting and listening and thinking. My siblings grew up with the same parents but are vastly different than I am in their thinking and understanding even given the same trough of water.
- gertef 13y ago
  Any realtor who knows a good investment becomes an investor, not a realtor.
  - lawnchair_larry 13y ago
    This sounds nice rolling off the tongue, but there is clearly no truth to it. Did you just make it up?
- ghshephard 13y ago
  I understand your meta point, but a better answer would have been, "The realtor doesn't have enough money to buy the property, even if it was the greatest deal ever."
- 001sky 13y ago
  I asked him why the realtor didn't buy the property if it was so good Hmm. The way to effect this as a broker is to take comission, with 3rd part capital backing the acquisition. The broker "pump and dumps" the property and takes a comission. The structure is opaque to the purchaser, and avoids the signalling 'tell' alluded to in the narrative above. This isn n% as profitable as a outright "front-run" or "flip", but can be executed at greater leverage/scale, since it is easily repeatable and the conflict of interest is far less obvious.
sriramk 13y ago
Why not prohibit this outright for the YC partners ( instead of the 3 week/500k numbers).
- argumentum 13y ago
  Umm because the YC partners are smart, helpful and therefore awesome to have as investors in your startup. Why would you want to prevent some of the best angel investors in the business from investing in the best startups? Since YC itself doesn't do follow-on investments it doesn't have to worry about competing with its own partners (unlike the VC LPs). This new policy seems to be addressing a specific problem: demo day is meant to be an opportunity for all the presenting startups, not a competition for attention between them. I.e. for YC's sake, it should never hurt a startup to present at demo day, so its a problem if not having a yc partner invest looks like a signal of relative weakness.

crapshoot101 13y ago

diff funds have very different policies - most top tier funds (from my experience) have a hard rule against it, given the potential signalling issues. That being said, I know at least one Tier-1 fund that lets partners invest in an existing portfolio company if and only if the firm chooses to pass on the investment in a round - take the pro-rata as it were.

lpolovets 13y ago

As the other replies mentioned, this is pretty standard. I think there's sometimes an exception for companies that a fund passes on, or for very small investments (e.g. if you personally invest $10k into a $5m company, then your fund's LPs probably won't care). The main concern is this: let's say your fund passes on Twitter during its seed round, but you put $25k into it personally. 8 years later, the company has an IPO and you get a 100x or 1000x return. LPs are going to be frustrated that they let you invest on their behalf, but you took such a great investment for yourself. Even if the fund passed, there will always be the perception of "maybe they just passed so that Partner X could invest individually because the company looked very promising."