
Paul Graham’s Prescription For VCs: Move Fast, Take Less Equity - llambda
http://techcrunch.com/2013/06/30/paul-grahams-prescription-for-vcs-move-fast-take-less-equity/
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iandanforth
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?

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buro9
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/](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.

~~~
iandanforth
Fantastic, detailed, interesting answer. My thanks.

For those missing the numbers, they sold 10% of the company for ~80K (US).
[https://www.seedrs.com/startups/microcosm](https://www.seedrs.com/startups/microcosm)

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Cherian
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.

Pros I can think of:

I can set an independent board

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marvin
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.

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pmtarantino
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.

~~~
michaelochurch
VCs want the high burn rate because it means that the company moves to
finality (liquidity or failure) quickly and gets off the books in time.

They're not in the business of building long-lived healthy companies, even
though that's something the world sorely needs.

~~~
lsc
>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.

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peloton
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.

~~~
tmandarano
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.

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waster
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.

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michaelochurch
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.

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patio11
_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?

~~~
verbin217
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.

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robsim0
Amen Paul!

