
Investors - niyazpk
http://blog.chriszacharias.com/investors
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pg
"They had been completely priced out!"

This is a fallacy. People use this term "priced out" as if it meant some sort
of process, but it means nothing more than that the investor thought the
startup's stock was too expensive. And it is very stupid to let valuation
decide which startups you invest in, because the variation in outcomes between
startups is orders of magnitude greater than the variation in valuations. I.e.
there is no value investing in startups.

What we have here is a case of anecdotal evidence. A founder happened to get
some investors who hadn't invested in other startups because they felt the
valuations were too high, and those investors turned out to be really helpful.
But there are other investors who are willing to invest at high valuations who
are helpful, and investors who seek out low valuations who aren't.

~~~
saosebastiao
I know this is a generalization, but I think his comments about commitment are
spot on. I would expect that high valuations decrease investor commitment and
involvement because they reduce ownership in the outcome.

~~~
rdl
That doesn't make much sense to me. I can see passing on something because it
is expensive (maybe), but if I buy something which is expensive, I don't value
it _less_.

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saosebastiao
Sure you do. You are confusing fur coats with investments. To how many
companies in your 401k portfolio have you offered free consulting? With an
investment, ownership matters. If you could spend $200k on a company for a 1%
share or $100k for a 50% share of a similar company with similar prospects for
growth, I would easily bet you would spend more time on the investment on
which you could get the cheaper deal. More ownership means a greater return on
your time investment.

~~~
rdl
It's more realistically the one where you spent $2mm for a 20% share or where
you spent $500k for a 20% share. Most investors seem to target percentage
ownership, not amount they're investing.

(I guess you could consider the case where you got one at a huge discount
through luck -- getting a $100k product for $10k. Then, I'd basically treat it
as a $100k asset for the purposes of how much to help -- the 10x gain on the
$10k already happened the moment you made the deal, even if it's unrealized.
I'd be happy to buy $100k negotiable assets for $10k, but in general, bargains
aren't -- there is a reason you're getting a discount, ranging from the
founders being noobs who will equally be likely to get taken advantage of by
others later, or the deal has more risk than you thought, etc. There may be
some cases where assets are systemically mispriced -- I think Dave McClure
thinks non-US startups are one, especially from LatAm and SEA.)

If I were making an investment into a public company (or a really late stage
private company, like investing in Facebook the year before the IPO), I
wouldn't think I'd have as much to contribute, true, but I'd assume I could
help a $2.5mm valuation startup about as much as a $10mm valuation startup.

(Actually, my #1 metric on helping would be "is it fun for me to help" -- I'd
probably end up spending all my time helping portfolio companies with security
or infrastructure issues, and would avoid helping with design, HR-fiasco, or
fundraising issues. And, if I could get Apple, Tesla, etc. to value my advice,
I'd almost work for them for free ($50k/yr?) just to make them 10x more secure
than they are now. It's just easier to get someone to value your advice when
he's paying you $300/hr.)

I don't dispute that some people would behave like you're saying, but I would
not, and most of the professional investors (super angels/VCs) probably
wouldn't. I think this might be the difference between "professional"
investors and angels.

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cududa
This is my first company, but I've found that by having a lower valuation cap
on my note two great things have happened. Some of my more powerful investors
have felt comfortable introducing me to people who don't give two shits about
the latest consumer web fad or investment trends, found my terms very easy to
buy in on, and have been enormously helpful. Second, a lot of my friends have
found they couldn't recapitalize or raise an A. Having the terms that I do, it
was pretty easy for my investors to re-up when I needed it.

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scottkduncan
I think this fits into the larger conversation around what terms to take in a
funding round. The anecdote about all the YC companies bragging about
valuation post-Demo Day rings true - but what else did they agree to in
getting that high valuation? Ensuring that those who have partial control of
your company and your future have interests aligned with yours does seem much
more valuable than wringing every dollar out of a cap rate.

~~~
pg
Actually high valuations tend to be correlated with clean terms. Which is not
surprising since both reflect founders having power relative to investors.

~~~
cududa
I think this is a fallacy. In my experience of the big firms law firms have
already developed very clean convertible notes, and there are many that are
public, leading to a larger trend in easy terms. By having an entrepreneur
friendly first investor (not necessarily lead) agreeing to "clean terms"
(independent of valuation), it seems most other investors in a round come on
with little friction, even if it might require a call from one of your
existing investors/ commitments.

~~~
garry
In practice, investors are either pretty upstanding, or kind of dirty.
Upstanding investors tend to get the pick of the best because the best
companies can choose who they want to do business with. Investors downstream
tend to try to overreach on participating preferreds, pro ratas, and lower
valuations. It's just how it seems to work.

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tomasien
My company wasn't able to raise much money, but the money we did raise was
from people who, luckily, have turned out to be amazing. We've gone through
some really terrible things (my submissions will point you to some details),
but they've stood by us 100%. Even though we had to shut down 3 months ago,
these guys are still trying to make connections for us that would allow us to
restart. You can't put a price on that, especially with the importance of not
dying.

Everything is going to go wrong: optimize for having people around you that
are going to help you out of THOSE times, because when it's going well help
will chase you down. When it's going bad, you better have backup.

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dainix
Not sure if I believe boot strapping because of my background and location
Latvia, but it seems crazy people trying to raise millions of dollars, like
their lifes would depend from it!! How could possibly you need money like that
to launch a successful project???

I understand in USA all the hires are much more expensive, but why not aim
towards bootstrapping if you have some money, hire cheaper Philippinos to help
out at starters, and then go all shiny and hustla!!

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arbuge
"Think about it. With too high of a cap or valuation, what incentive does an
investor have to go to work on your behalf in the short term when the real
return on their investment requires several orders of magnitude of growth,
which has a very low likelihood of happening ever?"

It seems to me that if the angel investors in question are really able and
willing to do productive work, you could get a similar result by simply paying
them additional equity as an incentive after allowing the market to set the
company valuation in the natural way. In other words, same as you would for
any other early stage employee. No need to artificially interfere with the
valuation and set it low to attract them.

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diziet
I like the concept of the investors having some skin in the game. One way
might be to have them invest a lot -- and have a lot to lose, in addition to
having a lot to gain from a smaller valuation. I also wonder if a smaller
valuation makes a company more hungry and more driven to innovate and work
harder than a company that knows they can throw money at a problem and 'solve
it'.

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gallerytungsten
Without ever using those terms, this article was a great commentary on the
difference between "smart money" and "dumb money." Not to say that the
investors snapping up YC companies at big valuations were necessarily dumb;
but that the author optimized his fundraising for the smartest of the smart. A
good way to position your company for long-term growth.

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infoseckid
Another post on celebrating "I got some moneys" and yay! this time without YC,
even though I was in YC.

Guys, get over it. Can some of you please post some inspirational articles on
how you created a bootstrapped company?

~~~
neltnerb
Robert Grass from Turbobeads gave a _fantastic_ talk at the MRS in Boston
about how to bootstrap a company. And his was even a very difficult field that
required actual tangible hardware instead of "just" time. The basic point was
that they had a technology, and so they didn't bother with patents, patent
searching, or anything like that. Instead they just started asking customers
what they wanted, worked to make it, and then started selling it everywhere.
Five years later, they own their entire company, and sell stuff all over the
world using ebay and similar for fulfillment initially, and google ads instead
of complicated marketing campaigns.

Unfortunately I can't find an online version of the talk. But if you get the
opportunity, consider checking out local trade conferences to see if they have
speakers talking about fields outside of CS. If it works outside if CS it will
almost definitely work even better inside of CS...

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eps
Chris, if you are reading this, how did you find your investors? Say, that
specific person you met in NY layover.

~~~
zacman85
At first, through YC, and then mainly through my existing network, word of
mouth, and some serendipity.

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CurtMonash
"No price is too high" is always an incorrect statement, at least in the
context of investing.

