

The New Funding Landscape - anateus
http://paulgraham.com/superangels.html

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mrshoe
Angel investing is kind of a fad right now. Everyone's doing it. My gut
instinct is that it's at least a mini bubble. In 3-5 years a lot of angels are
going to be unhappy about negative returns, the stock market is going to be
looking stronger, and they'll shift their money back to stocks and bonds.

Surely this huge influx of angel investors has contributed to the much higher
valuations early stage startups have been exacting in recent months. When many
of these new angel investors wind up losing money and angel investing is no
longer the cool thing to do, those sky high valuations will probably return to
normalcy.

These are just my personal predictions, and I could be completely wrong.
During his talk, pg said he'd wondered if we might be seeing a bubble and
decided that we're not. Who knows? Either way, I think that we, as
entrepreneurs, should take advantage of the current situation.

~~~
bkudria
I asked PG to clarify his thoughts on why this isn't a bubble - he was
referring to the SV landscape in general. His definition of a bubble, IIRC:
when people overpay with the expectation that others will overpay _even more_.
He doesn't think that's happening here.

(PG, feel free to correct me if I misinterpreted your answer)

~~~
rms
Yeah... in my opinion there is clearly more money floating around startup
investment than is strictly rational but it's a long way from a systemic
bubble.

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chris123
To Paul G: What's the ETA on the model convertible note you said
<http://news.ycombinator.com/item?id=1655585> you guys were releasing soon?

~~~
pg
Oops, yes, I should talk to someone about that.

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csallen
> _So if some of the super-angels were looking for companies that could get
> acquired quickly, that would explain why they'd care about valuations. But
> why would they be looking for those? Because depending on the meaning of
> "quickly," it could actually be very profitable. A company that gets
> acquired for 30 million is a failure to a VC, but it could be a 10x return
> for an angel, and moreover, a quick 10x return. Rate of return is what
> matters in investing—not the multiple you get, but the multiple per year. If
> a super-angel gets 10x in one year, that's a higher rate of return than a VC
> could ever hope to get from a company that took 6 years to go public._

Very true, but this model doesn't seem sustainable to me, unless I greatly
underestimate the number of companies that could provide that "quick 10x
return" (or unless the amount of money invested remains small and constant
year-to-year).

Imagine you start with $10M in investments this year and make 10x. To make the
same return next year, you've gotta find enough companies capable of a 10x
return to invest all $100M you now have. Should you succeed, the following
year you'd have $1B to invest. In a very short amount of time, your limiting
factor switches from the amount of money you have to invest to the number of
quality companies you can find to invest in.

It seems their rate of return is going to significantly decrease, year after
year, until they're forced to change their strategy to one more in line with
what the VCs are doing.

~~~
pg
You wouldn't reinvest all your returns. You'd distribute most of them to your
limited partners (the people who supplied the money).

~~~
csallen
Right. I guess what I wanted to point out is that you may be overestimating
the super angels' strategy and the returns VCs would have to get to compete
("10^6—one million x"). If the super angels can't reinvest all their returns,
they won't actually make anywhere near that much. Even if they could reinvest
it all, their returns would diminish each year.

So the question is, how much _will_ they make with their current strategy? I
don't know enough about the relevant numbers to do anything more than
speculate. But if I had to, I'd bet the super angels are better off focusing
on finding big winners than they are worrying about valuations and quick
returns.

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jcroberts
Paul, I noticed some of the people posting edits/fixes (spelling, line break)
got down-voted, and others wanted to argue/disagree about it. Silly.
Personally, I like having others point out my mistakes; it's the best way for
me to know about and fix them. With this in mind...

s/accomodating/accommodating/

I hope no offense is taken. ;)

And now, the more important stuff...

As you know, the terms often control the discussion, so kudos for your notes
listing the various terms, i.e. "Super Angels" "Mini-VCs" and "Micro-VCs."
Some have balked at the use of the adjective/term "super" as misleading, but
the terms typically used, and their corresponding definitions don't have
distinct lines. A potential resolution might be using the term "archangel" for
the investments/investors beyond the typical "angel" round? Anyone fluent
enough in English to know the term "archangel" will understand the implication
of it being greater than "angel." --It's just a thought.

Another thought would be to break down the classifications by their most
defining aspect, namely amount of capital. The lines will still be imperfect,
and you have a better grasp of the numbers than I do, but the language would
be generally more clear. I was thinking something like this:

seed: < 30,000

angel: 30,000 - 150,000

archangel: 150,000 - 1,000,000

vc: > 1,000,000

That would classify YC pretty much as you describe it, namely, as a "seed
fund," or better said, specializing in "seed round funding." At present, I
still not convinced my little idea above is any better than the currently
confusing status quo, but at least it's an attempt.

EDIT: Uggh! Fix line breaks ;)

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gfodor
There's a startup idea in here. It sounds like super angels can be given a
pitch and make a decision quickly. So, why not provide a website that can
coordinate these pitches. Hell, maybe some angels would be willing to invest
some small amount of money by just doing a live pitch over the web. Whatever
the minimal barrier to closing a deal is, a startup should come along and
automate to make it as fast and painless as possible. One could imagine a
Groupon like model being applied here as well, with one super angel really
going all out and meeting with the founders multiple times, and the others
hopping on board with a click of their mouse after watching a less impactful
pitch like a pre-recorded one or just reading the feedback from the "head"
super angel.

~~~
huangm
AngelList (<http://angel.co/>) is innovating a lot in this arena.

~~~
gfodor
Welp, there ya go. Wish this was around about 18 months ago :)

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chrisaycock
This recent discussion of angels vs. VCs is just like the debate of hedge
funds vs. proprietary trading firms. What's happened in New York (and Chicago)
is that they've gone after after completely different strategies.

Hedge funds have a lot of investor capital and must hold positions overnight,
so they concentrate on portfolio construction. Prop shops don't have a lot of
capital, so they can dabble in high-frequency trading where the concern is
taking single positions as fast as possible, and often earning rebates from
the exchange to provide liquidity.

Having worked for both types of firms, I can say that "quant trading" is a
pretty broad term. I suspect "investing in start-ups" will come to mean
different things. (PG hints at acquisitions vs. IPOs as a differentiating
investing goal.)

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projectileboy
What occurs to me reading this is that there's a big untapped market for
super-angels in areas _outside_ of Silicon Valley. Sure, there's fewer
investment opportunities (to put it mildly), but the super-angels in these
areas simply don't exist, and the VCs in these areas are often buffoons.

Is this a legitimate opportunity, or would it simply not be worth the effort
to find the few needles in all those haystacks?

~~~
c3o
Dave's 500Startups seems to invest pretty much everywhere, including Asia and
Europe.

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ecuzzillo
s/hoplessly/hopelessly/

Edit: If someone who downmodded feels like explaining, please do, because I
thought it was a nice thing to do to correct typos in someone's essay.

~~~
jpwagner
correcting typos should be reserved for when it causes confusion. in this
case, no one thought he was describing a rabbit with no legs.

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lukis100
BTW, a lot of what he writes is covered in a recent presentation he did:
<http://www.justin.tv/c3oorg/b/272030715>

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davidw
I think some discussion of the changing economics of web startups would have
been in order. The reason why smaller investments are becoming more common is
because people can do more with less. So perhaps VC's will simply focus on
other industries like biotech, which don't seem to have that "problem" just
yet.

Also:

s/risk depends/Risk depends/

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notahacker
> _Since angels generally don't take board seats, they don't have this
> constraint. They're happy to buy only a few percent of you. And although the
> super-angels are in most respects mini VC funds, they've retained this
> critical property of angels. They don't take board seats, so they don't need
> a big percentage of your company.

Though that means you'll get correspondingly less attention from them, it's
good news in other respects._

Do many founders consider the additional attention given and influence wielded
by VCs as an advantage of taking funding from them?

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nlavezzo
Wow, that was great. I think every entrepreneur even thinking about raising
money should read this whole article. Twice.

This distills the current situation (as I've spent months piecing together
through various means) as well as could be desired.

If you're at all concerned about raising money in the near future, get the
scoop here and then spend your time building a great company instead of trying
to figure out what the deal is with fundraising at the moment.

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bdr
\- Can the market really decide whether the VC value-add is worth it? Seems
like it would be hard to measure, and that a lot of the information would not
be public.

\- If the bottleneck for VCs is board seats, why hadn't VCs already stopped
taking board seats? Surely they thought of this. Implicit collusion?
Entrepreneur ignorance?

\- What, would the "mouse skins" analogy from the SS talk have been too
distracting? Alas.

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eande
>Who will win, the super-angels or the VCs? I see the start-up companies and
entrepreneurs the winners here for now. Question is how long this new
arrangement with with super angels is sustainable.

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danilocampos
> As of now, few of the startups that take money from super-angels are ruling
> out taking VC money. They're just postponing it. But that's still a problem
> for VCs. Some of the startups that postpone raising VC money may do so well
> on the angel money they raise that they never bother to raise more.

I'm excited that this is the case. The way I see it, a small, focused group of
people can get an extraordinary amount of good work done in a short period.
The constraints of lean funding, to the tune of the $600,000 Paul describes,
seem like the perfect way to keep focused for the first couple of years. Maybe
they're an aberration, but my hat is off to 280 North for pursuing just this
strategy. Raise a bit of cash, work hard, build cool stuff, stay focused. They
got quite an exit out of it, (from any reasonable founder's perspective) but
that's almost beside the point that they got to do their own thing without
outside meddling. But maybe there are war stories I should hear before I
commit to that position.

As soon as someone is shoving several million dollars into your pockets,
they're also commanding you to spend it, which always seems to mean hiring
people, bloating your team and throttling your momentum. (see Digg vs. Reddit)
That sounds terrible. It also lets you delay figuring out how your company is
going to actually generate some money one day, which strikes me as
counterproductive.

I'd rather retain a nimble position. Communication is easy, focus is non-
negotiable.

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dools
Whoever they are - send some to Australia!! The funding situation over here is
a travesty for anything that doesn't have a patent attached to it (in my
experience, anyway).

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rythie
He doesn't mention crowdfunding at all as model, though it's clearly
generating enough funding for several businesses.

~~~
philwelch
Really? Which businesses? And how do you avoid the obvious legal liability
issues involved in crowdfunding?

~~~
rythie
The Gilf is a good example of something that needed investment to get started:
[http://www.kickstarter.com/projects/danprovost/glif-
iphone-4...](http://www.kickstarter.com/projects/danprovost/glif-
iphone-4-tripod-mount-and-stand)

My understanding is that the people funding these sites do not own any part of
the business. Clearly for that reason it's not interesting to investors but
can be to business owners.

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notAdvertising
Ok. Negative points for my last comment justified.

Here is my dilemma:

Our company has created an online application we call "Supertrainer."

The reason we named it "Supertrainer" is because we are providing personal
trainers with tools that allow them to separate themselves from all other
personal trainers out there. There is a tangible and measurable difference
between the average personal trainer and the "Supertrainer," and as we
continue development, this concept will become even more so apparent.

My question is... what evidence actually supports the claim for "Super Angels"
to call themselves "Super". What separates these guys from all the other Angel
Investors I've met, and all the other VC's I've met?

It certainly isn't the amount of money they're investing and it certainly
isn't the number of companies they're investing in. Are they "riskier", and if
so, how on Earth could you possibly quantify such a thing?

I challenge the name. If I am provided evidence that truly separates a "Super
Angel" from the other kinds of investors out there, I may be able to accept
such a claim, but as of now, it seems more like an overly hyped PR move.

I love what groups like YC are doing, but calling them "Super Investors" loses
credibility in my mind.

~~~
lisper
I don't normally downvote or harsh on comments because there are plenty of
other people around here doing that, but in this case I'm going to apply the
golden rule and give you some brutally honest feedback that I wish someone
would give me if I were digging myself into a hole the way you are doing:

> I challenge the name.

If, as you say, you are trying to start a company then you should have twenty
thousand more important things to do than to hang out here quibbling over some
terminology that doesn't matter anyway. The "super angels" are what they are.
What difference does it make if they aren't "super"? Or even "angels"? How is
resolving this going to help you make your customers happier?

Those are rhetorical questions by the way.

~~~
nlavezzo
>> Or even "angels"?

...Wait a minute, they're NOT supernatural beings?

That awesome observation made me laugh out loud :)

