

Paul Graham: Some VCs Push For Large Rounds, Even When Startups Don't Need Them - tomio
http://www.forbes.com/sites/tomiogeron/2013/06/27/paul-graham-some-vcs-push-for-large-rounds-even-when-startups-dont-need-them/

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malandrew

        "Graham suggests that if one reputable venture firm were 
        to break this non-spoken 20% Series A agreement, the best 
        startups would instantly flock to that firm. “It’s going 
        to happen,” Graham says. “You might as well anticipate it 
        and look bold.”"
    

pg,

Any plans on using the collective attractiveness of YC to help push that 20%
stake down? e.g. would you talk to a lot of the startups in the current batch
about collectively sticking to a lower percentage like 15% to get the ball
rolling in the direction of the new funding landscape?

It seems like YC companies keep raising larger and larger rounds, oftentimes
more money than they really need for 18 months of runway. With that in mind,
the logical thing to do is to collectively help them give up less equity to
get back to 18 months of runway.

~~~
benjamincburns
> would you talk to a lot of the startups in the current batch about
> collectively sticking to a lower percentage like 15%

I'm not a lawyer or even a particularly skilled investor, but that smells like
an SEC violation. Even if it wasn't, I think it'd be something akin to price
fixing.

Would someone who knows more care to chime in? Am I wrong?

~~~
malandrew
Isn't the current situation of 20% as a bottom limit the same?

The US has a history of cartel like behavior in finance. Just look at the
percentage charged for IPOs [0]. I'm sure if you created a similar graph for
venture capital financing that you'd see a black line on the graph just like
the one created by Mark Abrahamson, Tim Jenkinson, and Howard Jones.

Trying to break that 20% barrier would seem acceptable. After all, the goal
here isn't to get the VCs to take less equity for the same amount of money,
but to provide more flexibility in the tradeoff between cash and equity.

[0]
[http://www.sbs.ox.ac.uk/research/people/Documents/Tim%20Jenk...](http://www.sbs.ox.ac.uk/research/people/Documents/Tim%20Jenkinson/AJJexecsum.pdf)

~~~
benjamincburns
Some questions:

Do you believe that the 20% as a bottom limit is the result of a group
colluding with intent, or is it just the result of a type of evolutionary
convergence?

By chain rule, as long as the market has some modicum of elasticity, isn't
fixing supply analogous to price fixing? Maybe I'm assuming that the supply of
appealing early stage equity is much lower than it is? Or is something flying
over my head and this has nothing to do with supply of said equity?

I definitely agree on the bigger point. The whole early stage equity market is
weird as hell, and it seems like there are plenty of opportunities to
manipulate/exploit it.

~~~
malandrew
I would say culture and sometimes intentional and sometimes unintentional
collusion.

Investments are made in other industries all the time and the percentage owned
after an investment can vary dramatically, from fractions of a percent to
majority ownership. What makes VC investments so special that its own nature
would result in settling upon a nice conveniently round number like 20%?

Plus, the 20% isn't fixed in stone. It's an asymptote. It's not unusual for it
to range as high as 30 to 35%. I'd love to see a graph like the one in the IPO
study. I'm sure it would be very illustrative of collusion.

------
mashmac2
Fred Wilson (Union Square Ventures) just wrote about something similar in his
blog post today.

[http://www.avc.com/a_vc/2013/06/valuation-vs-
ownership.html](http://www.avc.com/a_vc/2013/06/valuation-vs-ownership.html)

Edit: mentioned in the article - I should read more carefully!

~~~
natejenkins
'We are also very much focused on what is in the best interest of the
entrepreneur. You might ask "how can taking $2mm for 20% be better than taking
$5mm for 20%?" and you'd be right asking that question. The answer is you can
get the other $3mm later at an even higher price. That has been the history of
many of our investments.'

Can someone explain to me how this makes sense. I'm still going to have to
give away x percent of the company to raise another $3mm. What am I missing
here?

~~~
ScottBurson
"... at an even higher price" is perhaps unclear; I presume he meant "... at
an even higher valuation". That is, the total percentage of the stock you have
to sell to the investor to raise the money is less if you raise in two stages
than if you get it all up front.

There's an assumption here: that you actually manage to make demonstrable
progress in the business between the first and second round. If you think it's
going to take longer to show progress than the amount of time $2M will give
you, then you should raise more to start with.

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jseliger
This is essentially a shallower version of "The New Funding Landscape"
([http://www.paulgraham.com/superangels.html](http://www.paulgraham.com/superangels.html)),
which was published in 2010.

~~~
beat
Yeah. It read like our beloved pg dumbed down to a Forbes puff piece level.
Which kind of puts it at the business nerd equivalent of celebrity gossip for
those not seriously interested in VC and startups. Such things can be a little
painful to read if you're a startup nerd rather than a mainstream business
nerd - not because it's wrong, but because it's shallow to us.

I wonder what impact it'll really have, though? Most people aren't in any
position to ever deal with VC from either end, except at a far distance. And
the VCs and startups are plenty aware of the situation already.

------
e3pi
"Graham also released some metrics on Y Combinator: it has 564 startups total.
Of the 285 that have valuations, the total valuation of the companies is $11.6
billion."

!

~~~
adventured
I wonder which companies are skewing that the most, anybody have a list of the
top Y Combinator companies?

Obviously the average of $46 million doesn't provide a clear picture at all.

~~~
jwoah12
Just taking out Dropbox and Airbnb, the average for the rest already drops
quite a bit. With Dropbox at more than $4bil [1] and Airbnb at $2.5bil [2],
that leaves the remaining 283 at about $5bil total, or $17.6mil each. Taking
out others like Weebly would drop it further.

[1] - [http://www.forbes.com/sites/quora/2013/02/07/why-is-
dropbox-...](http://www.forbes.com/sites/quora/2013/02/07/why-is-dropbox-
worth-more-than-4-billion/)

[2] - [http://www.bloomberg.com/news/2012-10-19/airbnb-said-to-
be-r...](http://www.bloomberg.com/news/2012-10-19/airbnb-said-to-be-raising-
money-from-peter-thiel.html)

~~~
il
So what you're saying is that if you take all of the successful companies out
of an investor's portfolio, that portfolio will have a lower value.

~~~
waterside81
Well I think more precisely, he's implying if you take out the few heavy
hitters, then the value drops precipitously.

~~~
ibdknox
Or stated even more precisely, the mean and median are very different :)

