If I got it correctly, I wondered the same. Why not an investor would pay me to me and the other co-founder our salary for X months (12 months?) for the Y% of the company? I think it would be good and non-risky for both parts.
>They're not in the business of building long-lived healthy companies, even though that's something the world sorely needs.
That's the thing, though; being a long-lived, healthy company is much easier if you have one person who unambiguously owns it (and that person is also the top operational manager.)
That's the thing, what kills a web startup? the owner deciding to get a real job.
If you have two owners? now rather than having one person who will kill the company if they get a real job, you have two.
I'm not saying absolutely that it's an unsolvable problem; if the person who loses interest early gives most of the ownership to the remaining partner, I suppose it could work out? but I'm not sure how that would or even should work.
VCs raise funds from LPs that typically range from the hundreds of millions to single digit billions. They need to return money on those huge funds, which means they care more about absolute returns than a large percentage return. In other words, given the choice to invest $10M and get back $50M or invest $100M and get back $200M, they'd definitely prefer the second deal (assuming equal risk).
As this was a forward looking piece I was surprised to see no mention of crowd-investing. Are YC companies looking forward to it? Are they indifferent?
As one VC said to me on Friday: "The best way to take money from your users is revenue".
We've crowd-funded our seed in the UK, using an equity based crowd-funding site called Seedrs. We're currently the fastest equity crowd-funded company in the world, we got our seed in 15 hours thanks to the belief and need that the users have.
Our impression was that this was massive social proof, but what we're hearing from angels and VCs is that there is a great amount of uncertainty about crowd-funding.
Questions like:
* What happens with drag-along?
* Did you crowd-fund because no-one else would invest?
* Are we now dealing with 100 naive investors?
So much FUD.
We did it in place of the friends and family round, and chose Seedrs for their nominee structure that gives us a single shareholder with terms that are not a disincentive to any future investor. We had a third party (Orrick) check the papers to make sure nothing was in there that would cause complications, that things like drag-along and preemption rights were all standard, that the seed investors couldn't complicate things later.
We also had numerous options on money and went with the one that helped mitigate a risk we had. By securing a financial as well as emotional investment, our biggest risk of substantially changing the product and losing a core of our key early users as we imported sites with UIs that they knew intimately, is mitigated somewhat as their investment helps to overcome some of that.
Our experience has been positive, but the amount of inexperience within angel circles and VCs of crowd-funded companies that have later raised and exited is so great that there is a great deal of uncertainty, and from that the fear and doubts emerge.
We http://microco.sm/ have only good things to say about the process and engagement of users, and some of our "user as investors" have contributed phenomenal feedback and helped win us key customers at an early stage.
What happens next, for us, and for other companies in our position in the next few years, will help influence how crowd-funding is perceived by angels and VCs.
We are at an interesting stage now where we need to raise a further round as demand for the product is out-shipping our revenue and we need to go faster. Users still want to invest, but users can't always be the source of investment and we now need to start transitioning towards angels and VCs.
An issue for us is that the crowd-funding allowed us to get the MVP done and gain initial traction, and it has raised our valuation such that small angels may now be deterred as they won't receive as much ownership for their investment. And VCs like to have social proof of key angels to help filter and vet companies. So we find ourselves considering down-valuing to get the angels to help us go beyond this round, or tightening belts further and shooting for more traction and growth so that we can jump to Series A and skip the follow-on seed rounds.
If any angels are interested in hearing more, get in touch, contact details on my profile.
Ultimately what you learn is that more important than the money, is who backs you. We'd love to have one or two key angels who can be mentors and guides, whose experience we can learn from, and crowd-funding did not give us that.
I've never raised money-- I wasn't born into the connections, and that's what being "fundable" is actually about-- but I've worked in VC-funded companies and I hate what they have done to this industry.
The slow decision-making is about three things:
(1) It reaffirms the rank of the VCs. (Status waiting.)
(2) It's a test of the petitioner's social status. (If desperate or low-status, the petitioner will continually seek feedback.) The whole point of the time-wasting deliberation is to weed out the desperate, and more importantly to see if you come from the right social class (and can therefore summon enough resources to make their slow response tolerable) to be funded.
(3) It gives risk-averse VCs, who are driven more by their individual career goals (of being "in on" career-making deals that occur once every few years and require social access) than portfolio optimization, plenty of time to collude, trade favors, and peddle influence.
It will never change or go away. Nor do I think we will see an end to this insane bipolarism in which a company is either overfunded or forced to operate on a shoestring.
VC is just unhealthy for software; it works (because it's the only option) for biotechnology startups that require $50m+ just to get started, but for software it's just kingmaking (work with us, or we fund your competition) that doesn't really add anything.
I wasn't born into the connections, and that's what being "fundable" is actually about
Are you amenable to being convinced that this belief is false if I can point to people who had no connections at birth but are funded or clearly fundable?
Not really. Most of them teamed up with well-connected co-founders. The problem is that 95+% of those well-connected people take an insufferably superior stance toward anyone who's not in their set. If you can find one in that other <5% of that already small set, good for you, but it's not common.
If you're from a rich and well-connected background, VCs who turn you down mentor you until you're fundable, and set you up with EIR sinecures so money's not an issue. If not, you're trying to hit the head of a pin from a mile.
The game is clearly rigged, but very few people have the courage to talk about it.
I don't think anecdotes can support or contradict the type of assertion he's making. People frequently point to that rare individual who overcame adversity. It doesn't really prove anything. The system is big enough that there will be instances to support nearly any belief. I think the opposite of what he's saying might be something like: "It's not who you know, it's what you know." I can only speak for myself but that seems much less true.
I meet people every other week that were not born into connections, in fact they may not have any connections today. And yet, they're fundable: they have a product, they have some level of validation, they may not even be looking for money outright (the money finds them as often as not).
Some of these teams blow me away with their technical expertise, plenty of these guys & girls have had a life full of headwind and yet they push on. The one common factor: they don't complain about their misfortunes (perceived or real) they just keep pushing forward. I'm seriously impressed with that, being born into anything has nothing to do with it whatsoever.
Finally, yes, being born into connections can help. But I've seen lots of people that were born into connections/wealth end up losing it all in a very short time.
VCs for software make good sense in many situations, companies that are still on the losing side of the equation that want to sew up the market before a competitor comes along (not all software is throwaway apps), international expansion, horizontal expansion across several niches. All of these cost money, and sometimes bootstrapping just isn't enough (especially with older founders).
My opinion is that we need more big seed funds (lets say ~$50M fund size). We can't rely on Series A funds to do smaller deals. Revolution comes from below. Besides, those Series A funds have probably sold an investment strategy to their LP investors and they can't change (or don't want to look silly changing) strategies in the middle of their fund.
Agreed. More smaller cap funds and accelerate deal closing. Shouldn't take three months to raise. Right team, right product/pitch and they should be on their way iterating as fast as possible.
This could also potentially shorten length of runway needed. If you knew you could raise in 30 days... you wouldn't need 12 months of runway. Much more efficient for the entire ecosystem.
Yes. Yes, yes, yes. If you're an investor, and you want a given company to be healthy (and thus produce the best return over time for your investment), provide prompt support and let them do their jobs. If you think they can't, don't invest. If you think they can, but with help, help them... but promptly. Go, PG.
I’ve always wondered if I can do the mini version of an IPO instead of a Series A right after seed.
With some caveats:
I cannot make my business decisions public. You have to trust me as a founder. This is a company is still at a stage of going under water and moving fast with competitive technology/business tactics etc.
I should be able to choose the reserve investment amount at 1000$ or 2000. Maybe that’s personal call
I am not clear about this one but I’ll set the valuation for my company. If there is a mechanic for feedback I’ll be able to move the scale based on tempo of the current market. This I believe will help set the right valuation for the convertible round I raised earlier.
In an ideal world, this would be perfect. IPOs used to work more or less like this (albeit at a later stage). Unfortunately, it has been decided that amateur investors will do stupid things when they have the option of buying stock in companies that could tank at the drop of a hat. Sarbanes-Oxley has completely killed off this possibility.
22 comments
[ 3.0 ms ] story [ 74.3 ms ] threadWe need something like YC-to-launch.
Open source has greatly reduced the cost of starting a business.
I think if you can't get to profitability on $150k, you're building an aquihire rather than a business.
But then, that's just my opinion, man.
They're not in the business of building long-lived healthy companies, even though that's something the world sorely needs.
That's the thing, though; being a long-lived, healthy company is much easier if you have one person who unambiguously owns it (and that person is also the top operational manager.)
That's the thing, what kills a web startup? the owner deciding to get a real job.
If you have two owners? now rather than having one person who will kill the company if they get a real job, you have two.
I'm not saying absolutely that it's an unsolvable problem; if the person who loses interest early gives most of the ownership to the remaining partner, I suppose it could work out? but I'm not sure how that would or even should work.
We've crowd-funded our seed in the UK, using an equity based crowd-funding site called Seedrs. We're currently the fastest equity crowd-funded company in the world, we got our seed in 15 hours thanks to the belief and need that the users have.
Our impression was that this was massive social proof, but what we're hearing from angels and VCs is that there is a great amount of uncertainty about crowd-funding.
Questions like:
* What happens with drag-along?
* Did you crowd-fund because no-one else would invest?
* Are we now dealing with 100 naive investors?
So much FUD.
We did it in place of the friends and family round, and chose Seedrs for their nominee structure that gives us a single shareholder with terms that are not a disincentive to any future investor. We had a third party (Orrick) check the papers to make sure nothing was in there that would cause complications, that things like drag-along and preemption rights were all standard, that the seed investors couldn't complicate things later.
We also had numerous options on money and went with the one that helped mitigate a risk we had. By securing a financial as well as emotional investment, our biggest risk of substantially changing the product and losing a core of our key early users as we imported sites with UIs that they knew intimately, is mitigated somewhat as their investment helps to overcome some of that.
Our experience has been positive, but the amount of inexperience within angel circles and VCs of crowd-funded companies that have later raised and exited is so great that there is a great deal of uncertainty, and from that the fear and doubts emerge.
We http://microco.sm/ have only good things to say about the process and engagement of users, and some of our "user as investors" have contributed phenomenal feedback and helped win us key customers at an early stage.
What happens next, for us, and for other companies in our position in the next few years, will help influence how crowd-funding is perceived by angels and VCs.
We are at an interesting stage now where we need to raise a further round as demand for the product is out-shipping our revenue and we need to go faster. Users still want to invest, but users can't always be the source of investment and we now need to start transitioning towards angels and VCs.
An issue for us is that the crowd-funding allowed us to get the MVP done and gain initial traction, and it has raised our valuation such that small angels may now be deterred as they won't receive as much ownership for their investment. And VCs like to have social proof of key angels to help filter and vet companies. So we find ourselves considering down-valuing to get the angels to help us go beyond this round, or tightening belts further and shooting for more traction and growth so that we can jump to Series A and skip the follow-on seed rounds.
If any angels are interested in hearing more, get in touch, contact details on my profile.
Ultimately what you learn is that more important than the money, is who backs you. We'd love to have one or two key angels who can be mentors and guides, whose experience we can learn from, and crowd-funding did not give us that.
For those missing the numbers, they sold 10% of the company for ~80K (US). https://www.seedrs.com/startups/microcosm
The slow decision-making is about three things:
(1) It reaffirms the rank of the VCs. (Status waiting.)
(2) It's a test of the petitioner's social status. (If desperate or low-status, the petitioner will continually seek feedback.) The whole point of the time-wasting deliberation is to weed out the desperate, and more importantly to see if you come from the right social class (and can therefore summon enough resources to make their slow response tolerable) to be funded.
(3) It gives risk-averse VCs, who are driven more by their individual career goals (of being "in on" career-making deals that occur once every few years and require social access) than portfolio optimization, plenty of time to collude, trade favors, and peddle influence.
It will never change or go away. Nor do I think we will see an end to this insane bipolarism in which a company is either overfunded or forced to operate on a shoestring.
VC is just unhealthy for software; it works (because it's the only option) for biotechnology startups that require $50m+ just to get started, but for software it's just kingmaking (work with us, or we fund your competition) that doesn't really add anything.
VCs are not out to "stick-it" to anyone. They want to be a part of a great deal just as much as the next person.
Key bottleneck is that the process is too slow. Not designed for today's 15-minute world.
Are you amenable to being convinced that this belief is false if I can point to people who had no connections at birth but are funded or clearly fundable?
If you're from a rich and well-connected background, VCs who turn you down mentor you until you're fundable, and set you up with EIR sinecures so money's not an issue. If not, you're trying to hit the head of a pin from a mile.
The game is clearly rigged, but very few people have the courage to talk about it.
Some of these teams blow me away with their technical expertise, plenty of these guys & girls have had a life full of headwind and yet they push on. The one common factor: they don't complain about their misfortunes (perceived or real) they just keep pushing forward. I'm seriously impressed with that, being born into anything has nothing to do with it whatsoever.
Finally, yes, being born into connections can help. But I've seen lots of people that were born into connections/wealth end up losing it all in a very short time.
VCs for software make good sense in many situations, companies that are still on the losing side of the equation that want to sew up the market before a competitor comes along (not all software is throwaway apps), international expansion, horizontal expansion across several niches. All of these cost money, and sometimes bootstrapping just isn't enough (especially with older founders).
This could also potentially shorten length of runway needed. If you knew you could raise in 30 days... you wouldn't need 12 months of runway. Much more efficient for the entire ecosystem.
With some caveats:
I cannot make my business decisions public. You have to trust me as a founder. This is a company is still at a stage of going under water and moving fast with competitive technology/business tactics etc.
I should be able to choose the reserve investment amount at 1000$ or 2000. Maybe that’s personal call
I am not clear about this one but I’ll set the valuation for my company. If there is a mechanic for feedback I’ll be able to move the scale based on tempo of the current market. This I believe will help set the right valuation for the convertible round I raised earlier.
Pros I can think of:
I can set an independent board