
3 Things Investors Won't Pay the Founder For - transburgh
http://www.gobignetwork.com/wil/2007/5/14/3-things-investors-wont-pay-the-founder-for/10153/view.aspx
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bootload
_'... The startup community is highly disconnected. ... Startups, investors,
job seekers and service providers all need one another to survive and grow yet
at the same time they are hindered by their own lack of connectivity ...'_

 _"3 Things Investors Won't Pay the Founder For"_ and there's one thing the
startup should be wary of - the middle man.

It's in Wils companies interest, to debunk any _unnecessary_ costs for
investors. It's simply a negotiation tactic to increase profit. Wil is not a
fool and wants to makes sales on his terms or terms favourable to the highest
paying customer. It also highlights how making the business (Wils business)
attractive to investors by realising startups, developers as a whole have less
experience (and power) negotiating with potential investors.

You have to realise and act upon this weakness to improve your position.

~~~
wschroter
Just so we're on point here, I'm sure there are some instances where a founder
was well paid or debt was paid. It's just a really bad idea to go into an
investment thinking that's a typical situation. I've yet to meet an investor
that thinks either of those situations are preferable. Also, what happens in
the Valley works well in the Valley but rarely translates to the rest of the
world (for better and worse!)

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menloparkbum
totally wrong on all three counts. I've seen ideas funded with just a half-
baked demo. Any VC funded stratup with 1M+ in funding, the CEO is making
100K+, and in my current situation, the founder had his back debt paid up.

~~~
sabat
I appreciate that info, because (if you can't tell from my other comment) I
would have no freaking clue whether Wil is correct or not.

Maybe Wil just means this as a warning, as in "don't count on anything." But I
admit: his ideas were a little hard to believe.

~~~
sbraford
Yes, "investors" here is a bit broad.

Reading posts like this make it seem really pointless to spend too much time
seeking investment.

Just go out and build a solid business. Either:

A) It will work. You will have profits and/or investors will be beating down
your door.

B) It won't - you've run out of money and no one wants to invest in you. Just
give up!

Luckily there are angels and groups like YC who don't take the "don't fund
founder salaries" approach.

For a small web 2.0 startup -- server costs are around $100-500 a month for
even a modestly successful app.

What else are investors funding, if not founder salaries??

~~~
wschroter
I didn't say investors wouldn't fund your salary. I said they won't fund a
$200k salary. I said $50k is more like it. I hear guys ALL the time talking
about how they want to find investors so they can keep their massive paychecks
while letting someone else foot the bill to test their idea. It's just
unrealistic.

~~~
sabat
$200k/yr may seem massive, but here in the bay area, it's not. $150k is about
the base if you don't want to live at the very edge (so far out that it's a
1.5 hour commute to get to San Mateo, SF, San Jose, etc.).

I live in a 1800 sq ft townhouse on the peninsula worth $900,000, I'm on one
income, and my head is just above water -- I can save money every paycheck,
but not as much as you think. I make just shy of $200k.

I know you realize that the bay area is expensive -- I'm just not sure you
realize how expensive it is.

That fact doesn't change what investors do -- maybe they don't want to invest
in salaries. But forcing entrepreneurs into huge debt doesn't sound like a
smart investment plan. No one's looking for a mansion; I just don't want to
live in the ghetto because I had an idea.

~~~
wschroter
Sabat - I'm actually looking for a place myself in the bay area, so I do know
how expensive it is. If you can convince an investor to pay you $200k to vet
your idea, all the power to you my friend. But I have to advise you that it's
not something that an investor will typically do.

~~~
menloparkbum
How much do you think the founders at places like Digg and Facebook are
making? I can guarantee it is closer to $200K than it is $50K.

~~~
transburgh
I believe those would be the exception to the rules. They are already very
successful. We all know how many VC funded companies actually make it to the
Digg/Facebook level...very very few. If VC's were giving the majority of the
companies they funded $200k salaries those VC's wouldnt be in business very
long.

~~~
menloparkbum
the biggest expense is hiring. senior level people in the valley are not going
to work for less than $100K unless they are getting 20% of the company, which
they aren't. the reason why VCs invest $7M into series A rounds is BECAUSE
they need to pay everyone high salaries.

note: I'm not saying this is what SHOULD happen, nor am I saying paying six
figure salaries is a good strategy. It is just what happens. There are
thousands of ersatz executive types in Silicon Valley who have made a career
out of bouncing around between overpaid "VP" positions at startups that
eventually run out of money and fade away.

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wschroter
haha - mpb - spoken like a true valley insider. 550,000 businesses are started
every month in the U.S. alone. How many are VC-funded? I'm glad you've seen
startups get funded with a half-baked demo and get $100k salaries from well-
funded VC's. As it happens, the rest of the world doesn't work like that.

~~~
mxh
Wait .... 550K businesses a month = 6.6M businesses a year. There are 300M
_people_ in the US (including children, and others not immediately suited for
the entreprenurial life). If each business was started by only one person,
that would mean that about 1 out of every 45 people started a business in any
given year.

That seems high. May I ask the provenance of the 550K/mo number?

~~~
transburgh
"Over the period from 1996 to 2004, an average of 0.36 percent of the adult
population created a new business each month, representing approximately
550,000 new businesses per month." from a Kauffman report

<http://www.kauffman.org/pdf/kauffman_entrep_index_0905.pdf>

~~~
mxh
Interesting .... thanks for the link. Though, in the context of that report, a
'new business' need consume only 15 or more hours per week to 'count'. Such
low-intensity enterprises aren't really what the YC (or VC) crowd is
interested in (whatever their other virtues), so I think there's a bit of an
apples-and-oranges problem with the 550K/mo number, even assuming there are no
deeper statistical problems with the report.

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sabat
I have no doubt that what Wil's saying here is true. But it's a shame if it
is.

Investors would do well to 1) pay the founders good salaries so they aren't
building up debt while they work, and 2) help the founders out by paying at
least part of the debt they'd built up.

The way things are, a lot of people will not want to take VC -- or any
investment. I don't expect to get rich while actually working on my idea(s).
But unless an investor helped me out by giving me less distraction (read:
financial stress), I just can't see the point in taking his money unless it
was out of absolute desperation. I think a lot of entrepreneurs would agree:
investors are only hurting themselves -- there will simply be fewer things to
invest in because hackers will find a way to self-fund into profitability. And
you can believe that they'll pay themselves first.

