

Traditional VCs and first-time entrepreneurs are not aligned - wslh
http://diegobasch.com/traditional-vcs-and-first-time-entrepreneurs-are-not-aligned

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andrewljohnson
I agree with the generalization - the odds are higher that a first-time,
somewhat-poor founder will be tempted by a 7-figure exit that doesn't help the
VC, than someone with 5M in the bank.

On the other hand, I think start-up founders are, as a group, more risk-
tolerant than almost any white collar worker in America, and there are plenty
of us who will never give up on a good company as long as it's growing.

As for me, I've never wanted the money to play with, I just wanted into the
bigger game. Give me 5M, and I'm just going to put it back into play. I want
to make spaceships and robot cars and other wonders I can't afford to try
right now.

~~~
scottmcleod
"..I just wanted into the bigger game. Give me 5M, and I'm just going to put
it back into play."

Yes

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sriramk
Someone I know runs a startup which just got an acquisition offer which would
have given him $5-7m, a few years out of college with the acquirer was paying
1.1x their current valuation. He chose to turn it down since he thought his
investors (one of the top few firms around) would find him unfundable for
future startups. Instead he's choosing to 'swing for the fences', something
which may or may not work given their current momentum.

Several lessons in there, including not raising at too high a valuation that
limits your exit options.

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wheels
Generally a good post, though it's funny that Diego used a Fred Wilson quote
right before his point about bi-modal returns, when Fred's one of the (few)
VCs that's spoken out against such:

[http://www.avc.com/a_vc/2010/10/the-fallacy-of-bimodal-
retur...](http://www.avc.com/a_vc/2010/10/the-fallacy-of-bimodal-returns.html)

~~~
DanielRibeiro
Dan Shapiro also explained this seemly irrational behavior that VCs have:
[http://www.danshapiro.com/blog/2010/08/vc-insanity-
economics...](http://www.danshapiro.com/blog/2010/08/vc-insanity-economics/)

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josephlord
Seems there is logically a space for properly salaried startup founders with
significant bonuses for hitting the mega-heights. If there are people you have
sufficient confidence in (2% chance of getting to $100M) then give them get
rich slowly salaries with bonuses for hitting the VC friendly valuations
(bonus on valuation/investment rather than exit). Obviously in this scenario
the founders would have little equity - more first employee level.

This model could make more willing to try and bring more big payouts in (VCs
would have more equity) although it would cost them more on the ones that
don't get there.

The downsides are if the founders need to make it work is what gets startups
off the ground in the first place or if the VCs feel more need to meddle.

An alternative is to stick to the current model but for the VCs to be ready to
buy out the founder with the early exit option and then employ them from that
point with MUCH smaller equity for the founder.

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lifeisstillgood
VCs should expect and build in at least two "money problem" liquidation
events. The first, smallest is to give the founders enough to buy a house. The
second, if they really believe a billion dollar exit is on the cards is to
hand founders millionaire status, and all their early employees a house.

People aren't fools. At twenty years old anyone can live on Ramen and dreams.
At thirty ensuring your wife and baby have a roof puts stress on a founder
that will easily out weigh almost anything competitors can do.

If VCs want big returns, pony up halfway through, or lose.

Call it mid-air refuelling.

~~~
pcrh
What, in general, would prevent a VC from buying-out the founder? If the VC
aims for a bigger potential payout than the founder, wouldn't they want a
bigger portion of that payout?

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lifeisstillgood
Presumably the same thing that prevents them starting the start up in the
first place. Which is either they aren't capable (call that the nasty
hypothesis), or they know to spread their bets over many founders.

VCs commonly do oust founders, rather than buy outs (presumably it's cheaper)

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patarcher
VC's are money managers, playing the odds. VC's also want to build long term
businesses and sometimes the founders are not the right people for that: they
had the idea and the drive, but 2 years down the line, their attention is on
the next thing. So in that case its beneficial for all involved to "solve
their money problems" and get the right person for the day to day job at hand.

I've financed PE's for years (a further stage to VC's) who tend to either buy
fast growing companies direct from VC's or once listed and you rarely see the
original founder by that stage (c. 5-7 years down the line).

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jdevonport
Wow if I had 100k in the bank as that article assumes I would invest every
penny of that in to my new venture and aim for becoming profitable as soon as
possible before even considering a VC investment.

I would rather approach them in a position of being a sustainable, profitable
business than to ask them to invest in my idea before I had committed all my
own available assets.

~~~
jmathai
It's not really that simple though. $100k doesn't last as long as you'd
like...especially if you're a first time entrepreneur. You really need time to
make mistakes.

If you're able to be sustainable without funding then that's awesome but it's
less about the $100k than it is about focusing on the right things. That comes
with experience, usually.

I'm on my second startup. First one raised $500k and we blew it. Focused on
all the wrong things.

This second one I approached much differently. I did invest about $100k (not
including lost wages) into it and still wasn't successful at the end. Again,
in hindsight I focused on many of the wrong things. That's why I go back to
needing time to make mistakes.

I did wind up getting a grant from the Shuttleworth Foundation within about 8
weeks of not having a single penny (minus what was in 401k).

I'm not advocating raising funding. I would have done it since I knew I needed
the extended runway. But it was my last option. And getting a grant from the
foundation was a happy medium between the two.

Basically, starting up is not for the feint of heart and you will make
mistakes and you won't anticipate making them...which leaves you in really
tough spots.

~~~
jdevonport
I see where you're coming from, however I really do believe it is possible to
build a great business on a shoestring.

I think there is a lot of comfort to be had in having more cash in the bank
but not having much sure does focus you on making sure you are delivering a
great product that your customers are willing to pay for from day 1.

I started my current project on practically nothing, with an idea and cheap
rackspace cloud account. A year on we have 5 people, sure it would be great to
have the luxury of a large amount of funding but I think running on a budget
does have an upside in that it forces you to always focus on customer
satisfaction and profitability.

Growth is just slower on the organic route and that is the main thing that
concerns me.

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osteele
“[…] VCs have a different vision than founders. Founders are like parents,
saying "keep my baby alive!" VCs swing for the fences, and hit alot of outs
along with the homers. To the VC it's not a baby, it's just another baseball.”
— Lee Campbell, <http://waxy.org/random/arsdigita/>

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michaelochurch
Decent VCs will let entrepreneurs cash out partially in order to have their
incentives more aligned. Not all VCs are decent, though. It is pretty
ridiculous when people who make $1-million salaries working 9-to-5 object to a
founder taking out enough to buy a house.

It reflects really badly on our society how much pitching and pain an
entrepreneur has to endure just for a sliver of a chance at basic autonomy.
Four decades ago, it was slightly harder to get extremely rich and solve "the
money problem" outright (note: there is no such thing; when people get $5
million, most start wanting to compete with the $50-million crowd) but if you
were smart you could get an R&D job with complete autonomy over what you
worked on, how and when. That's gone now.

I think that if VC-istan is where you want to be, however, starting as an
entrepreneur is the wrong way to go (although it's better than being a non-
founder employee). You're better off doing everything you can to become a VC,
getting established enough that you always have a VC job as a backup, and
building enough connections that you can raise money, and _then_ starting a
business if that's your inclination.

