
Ask YC: Can I become a VC? - tricky
I'm a hacker who'd love to invest in other people's startups.  I, of course, don't have enough savings on hand to do any significant damage.<p>Is there anything out there like a micro-VC or investors club for tech startups?  Say n people put up $x each to fund a project. What are the implications? Would it work? If so, who's in?
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sgoraya
Thats a pretty interesting idea - I have participated in a real estate
investment syndicate which was basically 4 guys I knew and trusted, plus
myself - We pooled our money together and purchased 2 four-plexes - Its a
great experience and has netted us a nice, although not huge, return - We sold
one of the units and re-invested in raw land in the path of development. We're
all under 30, so we figured we would invest in more speculative properties
(raw land) and wait for the higher return.

Anyhow, that was slightly off topic, but an investment syndicate with say
$500k-$1 million would be interesting as a seed stage 'micro'fund - As
mentioned in a previous comment, the cost of legally setting up this type of
fund might be expensive with other legal implications as well.

I would definitely be interested in something like this though! Everyone has
got to start somewhere right? Just like my buddies in the RE investment, we
started out small, but we are certainly making progress, have made a return
and have property in our name.

~~~
kmt
That's very similar to what I did with some friends. We are a group of 4, one
of us is the active project manager. We are in our 4th project already and the
current one is even more exciting and profitable than the others. 3rd and 4th
projects were in Bulgaria though, we recognized the US bubble pretty early.

I'd be really interested to participate in small scale tech investments as
well. In a year or two I'd like to start something like that if it's not yet
available. Again, it is my feeling that there are interesting opportunities in
the countries with rapidly growing economies.

~~~
ntoshev
The real estate here in Bulgaria may be a bubble too, although it hasn't
bursted yet. Vacation properties' prices are already falling. Few people can
afford to buy a place to live in Sofia. For those who can, quality is another
problem. There are a lot of expectations connected with future better standard
of living (result of entering EU) factored into the prices.

~~~
kmt
I completely agree with you, which is not surprising since I am Bulgarian
myself as well and I follow the news on a daily basis. In our case we were
lucky because we acquired properties early enough, so we have substantial
equity already without even risking to develop anything.

Anyway, I think we are deviating from the topic and from the geek world in
general. But it was nice of you to comment so I couldn't resist!

Feel free to contact me personally, BTW, it'd be a pleasure to get in touch
with you and share experience.

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hugh
As far as I know there's no reason why it wouldn't work, as long as you can
find a bunch of rich people and/or pension funds willing to give you lots of
money. There are presumably legal issues involved with setting it up as a
proper venture fund, but it should be fairly straightforward once you hire the
right lawyer.

But of course, finding a bunch of rich people and/or pension funds willing to
give you a lot of money is the hard part, and by "hard" I mean "almost
certainly impossible". But hey, good luck!

~~~
tonystubblebine
"as long as you can find a bunch of rich people and/or pension funds willing
to give you lots of money"

I had a VC explain to me that the primary skill needed to be successful was
the ability to raise money from the limited partners, not to be a great picker
of companies.

~~~
tptacek
Isn't this like saying "the primary skill needed to be a software entrepreneur
is the ability to get purchasing managers to write checks, not the ability to
write good code"?

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auston
I think I get what you're saying: I wish there was something established that
I knew about, but for now I've seen this: <http://couchtycoon.net/>

~~~
ssharp
I had this idea earlier this year. However, after talking with a couple of
lawyers, non of them felt comfortable with any sort of structure for doing
this. The way they are setting this up makes me pretty uneasy (not to mention
that it isn't even U.S. based). If you're going to be dealing with U.S.
securities, it should be within the laws of the U.S . I think if anyone can
get around the SEC laws and structure something that IS legal, P2P investments
could be a really great thing. I'm not sure if that's happening EVER though.

~~~
teamonkey
There's Zopa, which probably inspired Couchtycoon. Zopa does P2P loans rather
than investments (like Prosper, I guess). I don't know what the state is in
the US, but it's all above board in the EU. There have been a few companies
looking for funding - I noticed one from www.billster.net - but the problem is
that given the size of the loan and the rates you're likely to get, a tech
startup is far better off looking for VC or a government grant.

I'm interested in CouchTycoon (EU-based is fine for me), but it seems like
it's more of a trading platform than an investment platform. Share trading for
non-listed companies. The site looks a bit dodgy too. I'll wait and see what
happens when it comes out of Beta.

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lisper
> Is there anything out there like a micro-VC or investors club for tech
> startups?

Yes, there are many of these.

> Say n people put up $x each to fund a project. What are the implications?

You would have $nx. :-)

> Would it work?

That depends on what you mean by "work". People do it. Some of the people who
do it even make money doing it.

> If so, who's in?

Ah, there's the rub. The trick is:

> I'm a hacker who'd love to invest in other people's startups. I, of course,
> don't have enough savings on hand to do any significant damage.

If you don't have your own money to invest then you need to convince other
people to let you play with their money. That is not such an easy thing to do.
Starting an investment fund is not fundamentally different from starting any
other kind of business. But you can't just join the VC club and start raking
in the cash any more than you can just join the entrepreneur's club and start
raking in the cash. At root they're the same club.

------
alaskamiller
If you're really smart or if you're really good at sales you can apply for
entrepreneur-in-residence positions at venture capital companies.

It also works out very well if you move to where the startups are. Silicon
Valley. Washington. New York City. London. Tel Aviv.

~~~
prakash
_if you're really good at sales_

any particular reason you need to be good at sales to be an entrepreneur-in-
residence?

~~~
alaskamiller
You either bring to the table the tech aspect of entrepreneurship or the
business/sales side.

~~~
maxniederhofer
To become an EIR you have to have relevant experience and a successful prior
career / first venture

~~~
alaskamiller
I guess I wasn't verbose enough in introducing that into my point. Yes, you do
need to be successful and really smart with technology or sales in order work
as an EIR.

~~~
tptacek
I think he means, specifically, "have sold or IPO'd a company you founded".

~~~
alaskamiller
We're now just going around in circles.

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mtw
it's <http://www.founderscoop.com/> that you want to lookup

a community of founders with equity interest in companies working with the
coop

------
maxniederhofer
i'd suggest getting some experience working for a VC or a seed fund before
setting up your own shop.

~~~
eugenejen
Working for a VC or a seed fund probably only gives him technical part of the
VC operation, such as how to read/interpret term sheets. The real
talent/insight of picking bets, probably can not be learned. I think even YC
has to revisit its portfolio from time to time to find clues. And in the case
like black swan, the experiences based on unexamined faith may be a big
problem.

Maybe he can work in YC as intern....

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ph0rque
If you do start your own VC firm, take these considerations into account:

_____________________________

So far, the "design spec" for the next-generation vc seems to be:

1\. Invests $250-500k

2\. Gets back to the applicants with a yes/no decision in 24 hours (can't find
the pg essay).

_____________________________

Taken from here: <http://news.ycombinator.com/item?id=163717>

~~~
tptacek
Virtually no modern VC gets back $250k-500k decisions to applicants in 24
hours.

~~~
ph0rque
That's the point (see the referring link for pg's discussion on why this would
be a lot closer to ideal.)

~~~
tptacek
There is a world of difference between cutting 8 $20k checks from 100+
applicants and cutting 1 $160k check on the fly. Yes, it would be awesome if
we could just pull $200k out of the sky on a day's notice. But unless the
dollar goes somewhere very unpleasant, that isn't going to happen.

~~~
ph0rque
I assume the world of difference you're mentioning is the due diligence
process that an angel investor or a VC takes the startup through, correct?

~~~
tptacek
I generally rebel at the idea of describing what VCs do as a "process" ---
it's mostly a system combining the most salient attributes of a good-'ol-boys
club and the recording industry. But yeah, at a certain point, probably around
$100k, you're in that system. Not the YC system.

------
run4yourlives
If you can make your small dollars large, you can do whatever you want with
them, and that includes investing in businesses.

Of course, this is high risk stuff. You'd probably have an easier time talking
ten of your friends into pooling savings and finding a decent index fund.

------
flipbrad
you're going to need a lot of contacts - as a VC, you're a matchmaker between
investors and capital-needy high potential businesses. Have you got enough
contacts that you can access the best prospects, and turn away asshole
investors and only work with the ones that trust you and won't be breathing
down your neck for returns? If not, do something to get all those contacts,
and a reputation. Work for a VC, go do an MBA, go to ever goddamn OpenCoffee
that's out there (and ideally infiltrate the comp sci campus at your local
universities).

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tptacek
Don't you have to be a "qualified investor" to invest, for equity, in a
private company? I think you want to talk to a lawyer before you try this.

~~~
nostrademons
I think the "qualified investor" rule is for investing in certain types of
(venture/hedge) funds, i.e. handing your cash over to someone else to invest.
So your investors would need to be qualified investors, but not yourself.
Otherwise, there're an awful lot of friends & family investors who are
breaking the law...

I'll second the "talk to a lawyer before you try this" advice.

~~~
ssharp
You can take on unqualified investors. This happens all the time with family,
friends, etc. The problem is when you're publicly seeking investors. If you're
doing that, they must be high-net worth investors.

~~~
tptacek
Talk to a lawyer; don't act on YC comments. For instance, Google for Brad Feld
explaining that nonaccredited investors (including friends and family) can
rescind their investments at any time.

Brad also comments on large companies having issues with holdings by
nonaccredited investors. I have direct experience with this: I executed
options in a startup in the mid-90s and was able to negotiate a significant
premium on my stock holding when the startup's acquirer refused to allow
nonaccredited stockholders.

This just seems like something not to fuck around with.

------
bokonist
I'd love to do this too. It would be great to have a stock market for very
early stage startups. SEC regulations make it tough though.

~~~
ssharp
I doubt you will ever be able to have a stock market for private companies.
There are reasons why they make companies be public in order to have their
securities on the open market. Doing this would undue all of that, would be
rampant with fraud, and would implode quickly.

A one-on-one buying/selling system could work but you could never emulate the
way the stock market works, it would be far to easy to manipulate stocks and
the company has way too many incentives to fool investors with no regulating
body. If a regulating body was created, it would cost the startups too much to
comply.

~~~
bokonist
The stock market would have to be privately run, and the company running it
would set rules for all listed companies ( such as stock purchased by
investors is preferred, employee shares cannot be sold until certain
milestones are hit, etc). There would be a cost of compliance with these
rules, but I bet it would be more efficient for the startups than raising
money through the existing Angel/VC route. Some of the compliance could be
automatic, such as reporting software that integrated with Salesforce or
Google Analytics.

~~~
tptacek
You cannot simply set up a "private stock market" to bypass SEC rules. To
purchase non-registered securities, you need to make more than $200k/year or
have more than $1MM in assets, and attest to "accredited investor" status.

~~~
bokonist
Maybe the market could be run out of a foreign country? Or perhaps the
investments would be funneled through a holding company that was SEC
registered? In other words, the holding company would own the stock in the
startup, and the small time investor would purchase contracts from the holding
company that would pay back cash in the event of a liquidity event for the
desired startup.

------
utnick
i think alot of VCs invest other peoples money

so yes you can!.. now go convince a bunch of wealthy people to give you money

~~~
tricky
Well.. not exactly. I'm thinking more along the lines of investing "our"
money. The P2P comment hit it on the head.

Say 100 people think project x is viable. Each person throws down $1k and gets
a small piece. You have 100 people interested in seeing the company to
fruition who may or may not be able to lend a hand using their own
expertise... managing the noise may be tough.

~~~
hugh
Ahh, well in that case you've got all sorts of new problems.

If it's structured so that the fund owns the share and the 100 people own the
fund then you have the problem that there's all sorts of regulations saying
that only "accredited investors" (ie. very rich people) can invest in venture
capital funds.

Or if it's structured so that the 100 people own small shares directly, you're
setting the company up for all sorts of troubles in the future. In particular,
a lot of later-stage VCs and/or potential acquirers won't like it if there's a
hundred tiny shareholders floating around -- too much potential trouble
involved.

That said, there might be a way to do it, and I'm not a lawyer, etc.

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ideas101
i dont know why people over here are giving an impression that its difficult
or not that possible - i think it is 100% possible - if Angels can do it and
VCs can do it and Seed funding people can do it then why not you ...

according to pg's essay <http://www.paulgraham.com/startupfunding.html> \-
there are 3 phase of funding - Seed, Angel and then VC. YC model comes under
pre-seed funding phase (am i right?), nevertheless what is interesting is that
there is a GAP between all these phases. It would be nice if someone fills one
of these gap... they might be called as micro-seed or micro-angel or micro-vc
or pre-angel or pre-vc etc... but there is definitely this gap to be taken
care of by some smart investor(s). Just recently I was talking about this to
one of my friend and he did showed little bit of interest, so i'm sure you
will also find few investors. If nothing works then just find couple of
partners and get in to pre-seed funding, though you should have some talent to
pick brilliant ideas/people/companies to invest in... sometime its like
looking for needle in a haystack (but not impossible). Good Luck.

EDIT: read pg's essay which i'm sure will motivate you :
<http://www.paulgraham.com/googles.html> : you just need to create a business
model that makes win-win game for all.

~~~
tptacek
Something that angels, VCs, and "seed funding" ventures all have in common is
accredited investor status.

~~~
ideas101
do i need to be accredited investor if i'm helping my friend and he is readily
giving me equity in his startup?? does model like YC requires such
accredition? if yes, then i think the law is not favoring startup growth, is
it? : there has to be some way out or may be rules are only for the people who
are investing over million $$.

~~~
tptacek
I am not a lawyer and am probably wrong. But, the way I understand it, if you
"buy" equity in your friends startup, you can at any time demand your money
back, or sue your friend.

There are all sorts of weird little rules about equity people ignore. For
instance, if you have an LLC, there are rules about people drawing salary and
simultaneously holding equity in the company. Most probably won't bite you in
the ass if you're just working with friends on a company, but they may take on
significance when you try to start your own private VC firm.

~~~
ideas101
thx - too tricky though - i wish there is some knowledge base available for
this kind of investments.

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sabat
Maybe work through an interest group on prosper.com?

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ideas101
i read this post again and again and realized that most of the comment is for
you becoming a VC - a VC is someone who invests other people's money, are you
sure you want to do that??? because what i understand from your question is
you just want to invest along with other like minded people, right?

couple of months a go even i didn't knew that a VC is different than an
investor...becoming a VC (or running a VC firm) and becoming an investor, both
are different and distinct. Both have pros and cons along with different sets
of roles and responsibilities.

