
The Hacker's Guide to Investors - byrneseyeview
http://paulgraham.com/guidetoinvestors.html
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usablecontent
"Since valuations are made up, founders shouldn't care too much about them.
That's not the part to focus on. In fact, a high valuation can be a bad thing.
If you take funding at a premoney valuation of $10 million, you won't be
selling the company for 20. You'll have to sell for over 50 for the VCs to get
even a 5x return, which is low to them. More likely they'll want you to hold
out for 100. But needing to get a high price decreases the chance of getting
bought at all; many companies can buy you for $10 million, but only a handful
for 100. And since a startup is like a pass/fail course for the founders, what
you want to optimize is your chance of a good outcome, not the percentage of
the company you keep." [Excerpt taken from the Essay]

This is exactly the reason Technorati is finding it hard to sell, whereas
MyBlogLog got sold within no time and Newroo even before they could launch the
product.

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johnmartin78
'Most investors are "bottoms" in the sense that the startups they like most
are those that are rough with them. When Google stuck Kleiner and Sequoia with
a $75 million premoney valuation, their reaction was probably "Ouch! That
feels so good."'

I don't think I've read a funnier paragraph about venture investing. Brilliant
observation.

~~~
owinebar
It's not just investors. This is a good practice anytime you're trying to sell
a big ticket item to a potential customer. It gives them permission to believe
the price is worth it.

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rms
It's telling that the "comment" link for this essay goes here and no longer to
Reddit.

~~~
ecuzzillo
That might be bad; it means that this community will grow in the same way as
Reddit did. Which was fine for a while, and maybe it'll be fine here because
the powers that be here are less religious about not messing with the content.

~~~
pg
We're determined to keep the site focused, however many users we get. We kill
submissions that are egregiously off-topic.

~~~
Sam_Odio
While seeing News.YC grow is fantastic, it's a little disheartening to watch
the community loose its "small town" feel. It seems that as things become
bigger, the comments become more anonymous and users loose their sense of
social restraint.

This is actually why I left reddit. As the site grew, I became increasingly
frustrated that anything I said contrary to popular opinion was mercilessly
downvoted & derided, regardless of the actual quality of the comment.

Reddit now cultivates one set of values & opinions. Anyone who disagrees is
hounded & ridiculed until they leave.

~~~
mojuba
From the web site's perspective, karma is a mechanism for internal
calculations, and is in no way a measurement of your intellect or morality (?)
or whatever else. And karma can't be turned into money for you, so why bother
at all? :)

That's why a possibility of being downvoted never stopped me from commenting,
be it reddit, slashdot, or YCnews.

One lesson that I learned from reddit in particular, is that if you are
interested in the topic, you should read all comments, all the way down the
page, because there might be something there, in the negative karma area.

~~~
pg
Karma reflects what the other users of a system think of you. So it can be
meaningful to the extent other users are good judges.

~~~
mojuba
Karma and all sorts of voting in general have a flaw: they reflect Average
Joe's opinion unless, of course, you have a narrow social/professional group
as your user base. The broader your group the lesser are standards of your
social website unfortunately. Wasn't it one of Reddit's lessons?

That's why I think there are two types of winners in this game: those with
good implicit ranking mechanisms (Google, Flickr) and those with good human
moderation (Slashdot). Those based on explicit voting are taking the risk of
being taken down by broad and unfocused masses.

~~~
harb
Well there are a couple solutions. One, you could tabulate votes based on the
karma of the users. So someone with higher Karma gets bigger weight. That will
probably focus the discussionsa and submissions a lot.

Two, you could have interesting comments, based on people voting them up or
down, and their replies.

Also you could do some kind of geomtric progression instead of linear, or
combine that with the voter's own karma.

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alex_from_ita
I would like to comment your (P.G.) other essay, about Unions (An alternative
theory of Unions): I'm sorry i'm posting here, I did'nt found the link to
comment the exact essay.

What you said (and what you usually says) is right from the point of view of a
person non really interested in the quality of other people's life.

Is quite obvious to see that the world is producing a lot more than before and
that the difference between poor and rich is becoming wider (in USA, your
country, more than in Europe, but we are copying you in this too...): the
question is not if they were paid more than they were entitled for, and now
their price is "the right one".

The question is: which kind of society are we building? Which kind of
countries are we shaping? Which world we want to live in? A world made of
people who can stand, one beside the other, without slave (official or
unofficial...).

You want a society where the stronger eats the weaker. It's not the world I
want. I don't want to earn so much, it's not there happiness. Is not buying
things that brings happiness: I'd rather prefer a society where the state take
part of the resources to take care of people that are lessa ble or lucky or
whatever...

I want a better Atene not a better Sparta. And if you have studied philosophy
(that you wrong said not teaching nothing to people...very unlucky words) you
would had known that no society can resists in such a disparity. You know
history better than me: our time, in the west, is not so full of revolutions,
but just few years ago we were killing each others...remember that if you push
someone's shoulders against a wall, you force him to fight or die.

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ncm
The essay neglects what happens to the 9 of 10 companies that don't, as far as
the VCs are concerned, pan out. Closing them down means they have to give any
remaining money back to the investors -- including their own fees they had
already pocketed. Any dollar the company doesn't spend before it dies means
money from the VC's own pocket.

The solution is to drain the company. The VCs install executives they owe
favors to, at massively inflated salaries. They make the company hand over
millions to "market research" and outsourced marketing companies. They make
the company sign big service and equipment contracts. Each of these deals
means a kickback or a favor owed. Best of all is if the money goes to one of
the properties not being drained, or somebody the VC owes, or personally owns
stock in.

It's no accident so many companies folded after buying unnecessary enterprise-
grade Oracle and Vignette licenses.

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boris
I remember a few years ago Paul was proclaiming that as the cost of starting a
company keeps going down, VCs will become extinct. It is interesting to see
how the perspective is changing. Now Paul says you need investors to gain
advantage over competition even though, oftentimes, a startup needs very
little to make a product that people want.

~~~
owinebar
I can't tell why point 22 shouldn't be titled "Sometimes you need capital
other than sweat equity". It's not clear to me why this couldn't come in the
form of debt. The only type of debt I recall Paul mentioning is the
convertible kind.

I mean, other than the fact you'd have to talk someone into giving you that
loan at a reasonable interest rate. Talking investors into giving you the
money as a bet for an astronomical interest rate would be easier for companies
with no collateral. Still, if you have a revenue stream and can show how a
capital expenditure would increase it, it would at least be worth considering.

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syncman
Great essay, Paul. There are indeed a lot similarities between Vcs and women
behaviour patterns. (angels are more like asking a good male friend for some
borrowed money...simple, direct, no hiding terms...) Take the "investors" from
the subtitles and replace it with "women" and the information is going to work
just as right.

I will think more on your points..

thanks again

MJ

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smranta
"Google came along three years later and kicked Yahoo's ass" ha ha.. its cool
to read it from Y!ou.

and a very cool article. great points.

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web_madness
VCs look for Sergey & Page? It seems to me that the hype about these two was
pure PR, but who actually brought all the business to the company (including
the AOL deal) is Omid Kordestani - who, as little as it is known, was third in
amount of stock owned, and also has half of the company report to him.

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mynameishere
_That means they're less likely to stick you with a business guy as CEO, like
VCs used to do in the 90s. If you seem smart and want to do it, they'll let
you run the company_

"Let you run the company" ? Surely a single round of funding doesn't take
majority ownership from the founders?

~~~
wmorein
There are a number of ways that a VC who owns less that 50% of the company can
still push through changes like this.

In some cases this will flat out be a condition of investment, so it is agreed
on in advance. If you are really anxious to close the deal it is easy to see
why you might agree.

In other cases the composition of the board might be such that a majority
might vote for a CEO change. This can be the case when, in addition to the
founders and the VCs on the board, there are "independent" directors who might
vote with the VCs. If the independents+VCs is greater than 50% of the board,
they can usually make a change of CEO.

If the VC does not have 50%, but no individual founder does either, it is
possible for the VCs to convince some of the non-CEO founders that it would
make sense to bring on "professional" management to increase the possibility
of success. Particularly if the founders have some disagreements, this can be
tempting.

One other thing that can happen is that as a company goes out to pursue
additional rounds of financing, the existing VCs can use that process as
leverage to force a change. For example, if they say that they won't invest
their pro-rata share in a new round, that can often be a warning sign to other
investors. So, the VC might threaten to withhold that investment to convince
the CEO to step down.

Majority ownership means a lot, but it is not everything.

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ashu
The essay says "You should not start a startup which requires a lot of money".
But some startups genuinely require much more money than webapps do. What
should a person do in that case, other than being at the mercy of the
investors?

~~~
sethjohn
I suspect there's a hidden upside to a startup that require a lot of
money...it's going to be more difficult for competitors to get off the ground
as well.

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holy007lotus
I am overwhelmed ... seriously I never had such a precise dose about
investors.

I am reading all articles one by one for last 6 hours.

And I will continue doing so. Because everything I find here so right and
complete.

thanks a lot...

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dlweinreb
Having been a co-founder of two VC-backed startups, I can say that everything
in this essay makes a lot of sense, sounds very plausible, and is entirely
consistent with my experience. Great essay!

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davemc500hats
best piece i've read about angel / venture investing in a long time. nice job
:)

note: i'm one of a small group of ex-geek angel investors out here in silicon
valley, altho admittedly i'm small fry compared to most others. i've done 5-6
deals averaging ~$25-50K, and only because i'm crazy and my wife isn't
watching too closely ;) i was fortunate to be at PayPal from 2001-2004, but
not so early that i'm rich enough to retire just yet... maybe someday.

enjoyed the article; keep up the great writing!

\- dave mcclure <http://500hats.typepad.com/>

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hparash
In your articles, the target content of an annotation hyperlink should also
have a hyperlink that takes the user back to the place in the original content
where they were at...

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aaaaaa
This story is really poor without Venture Hacks <http://www.venturehacks.com/>

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avocade
Very inspiring, Paul. I'm so sad I missed the talk. Here's hoping you have a
gig somewhere around the time of WWDC in June!

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sustento
Great article in many ways but i nearly fell off my chair when i saw the
photos of the team at Redpoint.......that was scary.

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MobileDigit
What is 'fuck-you money'?

~~~
jey
<http://www.urbandictionary.com/define.php?term=fuck+you+money>

<http://www.everything2.com/index.pl?node_id=680458>

<http://www.google.com/search?q=jfgi>

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loveit
FOUR STARS, THE FIFTH STAR RAN ACROSS THE STREET. loveit

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PhilipBaddeley
Great essay. How about turning it into a "rich illustration" so everyone can
see it and talk about it? Look at my site to see what Dill can achieve
<http://www.equityfingerprint.com/.> Anyone like the idea?

