

Newsflash:  Founders Don't Really Care About AngelGate - sophmonroe
http://blog.wepay.com/2010/09/newsflash-founders-don%E2%80%99t-really-care-about-angelgate/

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1gor
Of course, founders should care about AngelGate.

The premise of the whole drama was that there may be a collusion between
individuals who are involved in early stage financing of startups.

A startup founder is by definition in a weak position commercially when facing
prospective investors. An engineer puts a significant chink on his life in his
venture, he does not have a portfolio of alternatives. This fact is very well
known to the party on the opposite side of the table, to the investor that is.

For a rational investor, a startup investment is a high financial risk. It is
not a well-researched public stock, it is an option. But it's OK, since it is
a game he is in. He knows that most of his portfolio will be worthless, but a
few (maybe one) stars in the portfolio will potentially make him wealthy(ier).

So, when two parties are facing each other at the negotiating table, the
investor looks at the founder as a sort of a 'disposable' asset. After the
deal is struck and the venture goes under, the investor is financially
damaged, but he is alive and will have another termsheet discussion sometimes
this week. The founder is left picking up the pieces of his life.

That's why the balance of power at the negotiating table is very important.
The founder has a single recourse -- there should be competition between
suppliers of money. Now, the AngelGate has shown us that such competition may
be a myth. There may appear a cartel between technically-savvy suppliers of
money. The market is small anyway, and when the bulk of the suppliers can fit
at a restaurant table...

The article is quite dangerous in its goal. So what, instead of addressing the
issue -- how to prevent collusion of early-stage investors -- the hackers can
go back to work and focus on putting more hours in their startups? Really?

Let me suggest a few points that should come out of this scandal before all is
forgotten and quiet.

\- reputation of the individuals involved in AngelGate should suffer. This
will give a chance to potential new entrants on the scene (new investors).
Game theory tells us that 'tit for tat' strategy is the most viable in the
long term. The cost of future collusion will be higher, and the founders will
benefit from that.

\- there should be a discussion about how to prevent cartels in the startup
field. Maybe a self-regulating body should appear eventually in this market.

\- any experts in the field of private equity (lawyers etc.) should seize the
opportunity to provide impartial advice to the founder community (via blogs
etc.). Angels have lost credibility, the void should be filled. We speak about
standard sample term-sheets, financing terms etc.

\- a credit should be given to Michael Arrington who has performed a function
normally done by a regulator in the marketplace. Founders should probably
supply him with more information from now on.

------
waxman
I'm not losing sleep over it (too busy hacking), but it's easy for We Pay to
say they don't care: they've already raised 3 rounds
<http://www.crunchbase.com/company/wepay> . The essay was edited by PG,
himself. Clearly the angels have treated them well.

I think the more pertinent conversation should be around what the hell do some
of these angels offer to entrepreneurs, anyways? Money is a commodity these
days. Plus, real hackers require very little, if any, to get off the ground in
the EC2-era. The very top guys (like PG, Sacca, Ron Conway, Chris Dixon, etc.)
are obviously in it for the right reasons AND offer a lot more than money. But
the majority of angels, even some of the top ones, I fear take more than they
give.

~~~
edanm
"What the hell do some of these angels offer to entrepreneurs, anyways? Money
is a commodity these days." As a founder, I'll take a stab at that. I haven't
been to YC or raised money, but from my perspective, here's why I would:

1\. They offer advice. For a first-time entrepreneur, this is probably enough
reason to work with angels right there.

2\. They offer networking. Good angels are supposed to know everybody,
including just the right people you should be talking to to take your company
to the next stage.

3\. Money is _important_. I happen to have savings, but if I were trying to
start without already having money in the bank, I'd _have_ to go get an angel
round. And people straight out of University don't have money.

~~~
waxman
Fair points. Having raised money from angels before, here are some of my
thoughts:

1\. Advice: This is clearly extremely valuable, even for experienced
entrepreneurs. That's probably why a company like Chartbeat (serious revenue,
and part of Betaworks) raised a $3 million round from strategic angels, when
they probably didn't need the money
<http://techcrunch.com/2010/08/31/chartbeat-3-million/> . That said, if you're
taking on angels for non-monetary reasons, then you still have to think about
their value-add in monetary terms (at least, generally). Is this person's
advice worth 10% of my company? Also, you could get their advice by asking
them to sit on a board of advisors (or directors) for a token sum of equity
(<1%) and still get them involved and incentivized without forking over a
large chunk of ownership.

2\. Networking: This is certainly a huge contribution of the top angels (and
frankly, it's probably, more than any other single factor, what separates the
Conways/PG's/Dixons of the world from every one else). Again, though, you can
potentially gain access to the same networks through less "expensive" means:
i.e. connecting with these people in some other way, whether as a friend, or a
mentor, or an advisor, etc., but not necessarily as a full-fledged investor.
If their network really IS that valuable, though, surrendering a large chunk
of equity might absolutely be worth it, provided that they are excited about
your start-up. (EDIT: I'm not recommending you "hack networking" in an
unethical way. If somebody is providing you value through their network you
should certainly reward them for it. At the same time, you shouldn't just
surrender a quarter of your company because some says they have a lot of
contacts).

3) Money: Agreed. Money makes the world go round. Most hacker/founders,
though, only need to cover their living expenses to get projects off the
ground. $70k/year for two boot-strapping founders is very different than a
million-dollar angel round. Also, people billed as "top-tier" angels are
obviously commanding a premium for their investment (a higher % of the company
for less money). Just make sure you're getting your money's worth.

I think in certain cases angels are definitely worth it, but I think it's
essential to weigh the costs of equity with what they're actually giving you.

------
points
At last. A post about AngelGate I can leave unflagged.

Lets draw a line under the soap opera gossip and move on.

~~~
thaumaturgy
Yeah, this is the first submission on the subject that I've voted up, although
I've read most of them with a passing interest.

It's been pretty clear to me from the beginning that there's a lot of
misunderstanding going around, so the whole flap is funny at best. Some
influential people got together for drinks and to talk about the industry they
all work in, and decided to meet again; some of their conversation, naturally,
turned to focus on some of the threats and challenges in their industry, of
which YC might be one of; some of the conversation might have made a few
attendees feel "uncomfortable"; Arrington got wind of it, showed up uninvited
(and, really, I can't blame anyone there for not inviting him in the first
place), and smelled a rat; Arrington likely also interpreted confidential
statements from anonymous sources in as sensationalistic way as possible,
because that's what happens when people talk about something without really
talking about it; words like "collusion" were probably the children of phrases
like "how can we handle these problems in our industry" and "what can we do to
better develop our business"; and in the meantime, Ron Conway overreacted (but
with his heart in the right place) and someone else wrote a long piece about
how the overreaction made their heart sad.

I hoped I wasn't the only one that thought it was all pretty ridiculous. Thank
you, Rich, for writing the first piece on it that hasn't been a waste of time
to read.

------
swombat
Woah. Sanity. Kinda shocking. You are definitely not going to be hired by
TechCrunch any time soon.

------
Zev
I like this post; it echos my own thoughts. Well, vocalizes them in a very
smart and public manner. Anyway, while making dinner last night, I realized
that I care more about why hot dog and hot dog bun packages are differently
sized than I do about most of the drama behind AngelGate.

Not to say I don't care about the core problem at hand (the possibility of
collusion). But, I don't care about the noise surrounding it. Plus, I don't
know enough about the law to say whether it was actually collusion or not
(assuming most of the pieces needed were public).

But, I do know that I bought 10 hot dogs and 8 buns at the supermarket on
Saturday. And that code I need to write won't write itself.

------
alexyim
I particularly liked the last paragraph.

"Ron’s advice to Angel investors is analogous to Paul’s advice to founders:
focus on what really matters. Focus on anything else is at best distracting
and at worst disingenuous and destructive. Entrepreneurs get distracted
sometimes, and, I guess, so do angel investors."

------
Sthorpe
So writing this and posting it means you do care.....just sayin.

~~~
mahmud
And comparing bickering "angels" to parents ..

------
edw519
Argue all you want about valuations, deal structures, terms, business plans,
power, and money, but no one earns _anything_ unless we hackers write
_something_. Thanks for the show, guys. Now back to work.

[EDIT: Changed "until" to "unless" to sidestep the silly debate over the
sequence that things happen. We hackers still have to make something. The
process of doing that can sometimes become monotonous, so we often appreciate
a good soap opera. But, sooner or later, we have to get back to work. I know I
have.]

~~~
melvinram
Actually, no one earns anything until the customer writes a check or pulls out
their credit card.

~~~
zaidf
You can always have an acquirer write the first and last check for your start-
up.

------
kno
Good points Rich; I just wonder if it is appropriate to post an opinion about
this debate from company blog.

------
Psyonic
The fact that each article makes the front page shows that someone here does
care AngelGate. Perhaps not founders, but "hackers."

------
bradgessler
This is really simple, and Sacca got at this in his email to Conway: if an
entrepreneur feels like they're being jerked around, they're not going to let
you invest in their company and your reputation will quickly go down the
toilet.

It really is that simple.

------
jpwagner
if there's something awry, it affects potential founders a great deal.

it's not analogous to politicians talking about the economy.

~~~
robryan
I think it's a sign for founders to look a bit further afield, given the
relatively small chunk of the entire angel funding scene these guys control
there is no chance a smart founder is going to get lowballed on valuation
everywhere they go.

Not saying that these investors are actually participating in this kind of
thing but even if they were I don't see how a smart founder who weighs up all
the options would get caught out.

------
stretchwithme
I think founders are too busy discussing amongst themselves how to get the
most money from investors to worry about VCs discussing amongst themselves how
to get the most equity from founders.

------
jongraehl
> Newsflash

gag

------
napierzaza
Why wouldn't they? It's something that might make startups go with YC or
someplace that is not affiliated with Angel-gate. Seems like it would indeed
affect how people behave or think.

~~~
aberman
Do you really think this drama is going to push founders into the hands of YC
RATHER than Ron Conway, Chris Sacca, SV Angel, Dave McClure, Mike Maples etc?
Especially when most YC companies end up raising from these guys after YC
anyways? Honest Question...

