
Is Angel Investing Out of Hand? Joshua Schachter Thinks So - yarapavan
http://blogs.wsj.com/venturecapital/2010/12/07/is-angel-investing-out-of-hand-joshua-schachter-thinks-so/
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frederickcook
Regarding convertible notes: "“You’re putting in money now and getting a
valuation later, whether the company is a failure or a success. If it’s a
success, you get the valuation after it’s a success, but you really want the
valuation of the company to be lower,” he says. “As an investor, that’s the
wrong alignment with a start-up.”"

I didn't think sophisticated investors were doing convertible notes without
valuation caps - something this article makes no mention of.

cdixon: "I believe that pretty much every other seed investor who advocates
converts also assumes they have a cap. So any discussion of convertibles
without caps seems to me a red herring." [1]

Clarification please? (Josh?)

[1] <http://cdixon.org/2010/08/31/converts-versus-equity-deals/>

EDIT: Congrats on the recent funding and founding!

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joshu
Some strong deals have no cap.

More importantly, angels behind a note want your valuation to be as low as
possible (so they get the most value) - it's the misalignment that's most
toxic.

Also, I'm seeing lots of sky-high caps, too.

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frederickcook
I don't understand. My company recently raised using convertible notes with a
cap right around where an appropriate valuation might have been. Now my
investors are all interested in seeing the company valuation at the next
funding round be a multiple on the cap. Where are the misaligned interests?

Additionally, it seems as though high caps are a separate argument from the
"conv. with cap vs. priced round" argument. With either, the market decides
what an appropriate valuation, cap, or terms (no cap) a company is able to
raise at. Therefore, it is simply the mechanics of the market that lead to no
cap notes and sky-high caps, not the fact that the deals are done with
convertible notes.

Not trying to be argumentative; I'm really interested in learning why you've
taken a strong stance on this.

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joshu
Caps keep the situation from getting totally out of hand. Not everyone is able
to get a capped deal done.

It's not a stance, it's just an opinion. I was doing converts when I was
forced to, or if the caps were reasonable. I just didn't love them.

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gyardley
Nothing in this article is wrong -- but raising that healthy Series A at the
prototype stage requires a track record most of us don't have.

Any first-time entrepreneur who reads this and decides to forego today's very-
entrepreneur-friendly angel environment to try and raise a Series A instead is
doing themselves a disservice.

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joshu
You can raise a priced seed round with a lead investor without going to an A.

You can raise a convertible note with a lead investor as well.

The article is a BIT confusing.

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gyardley
Yes, I think the "it's important to have a lead that'll help get the Series A
done" advice got overshadowed by the "angel-backed companies don't raise
enough cash" comment.

Having a strong lead in my own (priced) seed round proved very, very, very
helpful later on - but I still wasn't able to raise much more than $500K on
the first go-round.

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joshu
I really think 500k is the bare minimum, and 750k is better. But it's very
short with no runway...

I see way too many startups raise 100-300k or whatever and simply die.

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joshu
btw note that this article came out of a conversation about my motives from
switching from angel back to entrepreneur.

a better title would have been "it's a tough time to be an angel" or even "now
is an awesome time to be a founder"

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zaidf
Just shows the importance of context. Knowing this, it makes you sound like a
smart guy picking founding over angel investing for now.

The title makes you sound like some sour angel investor.

Of course both things could be equally true in real-life. But not equally
communicated by a title or an article.

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joshu
Huh -- they changed the title!

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zaidf
The writer must be a grade A lurker :) Props to them.

Alas, they can't "fool" the URL:

 _/is-angel-investing-out-of-hand-joshua-schachter-thinks-so/_

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chrisaycock
He brings-up a good point that most start-ups don't raise enough capital:

“If you raise [$500,000 to $700,000], you can pay the two founders decent
salaries, you’re able to hire one or two other people, and that gets you maybe
eight months, almost a year, except you have to start fundraising again three
or four months beforehand."

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Andrewski
I think a smart "founder" saves his Porsche buying until after the company is
actually profitable.

A $50k salary for a founder is about the limit until the company is actually
raking in some dough, unless the goal is to feel important and drive that
sucker into the ground.

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ojbyrne
Or you live in the Bay Area or NYC and hope to avoid poverty.

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yummyfajitas
If your _startup_ lives in NYC, you can avoid poverty quite easily on
$50k/year. NJ is about 20-30 min away. Rent is lower, food is cheaper, and you
don't need to pay 2-3% of your income to MTA ticket booth agents taking home
more money than you do [1].

Where you live is a choice, and living in Manhattan is choosing luxury.

[1] Or assorted other overpaid NYC workers.

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erik_landerholm
Glad we got to him before he decided this...

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joshu
Yeah, well, you also were in my sweet spot for investing.

There's a huge class of startups that are just so... played out that I can't
even bear to hear the pitches anymore.

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erik_landerholm
Yeah, I hear that. It was/is awesome for us to have you as an investor. Good
luck with your new venture. It sounds interesting. You should stop by the
office some time. Get a hold of Tommy or me and swing by.

~~~
joshu
I am still here for you!

