
Investors and their incentives - taylorwc
http://www.aaronkharris.com/investors-and-their-incentives
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tptacek
I don't have a whole lot to say about investor incentives because I've been a
bootstrapper for ~13 years now, but this (useful!) piece is missing one bit of
incentive that my experience suggests is pretty important.

For corporate investment, either direct or through investor arms, an important
incentive some companies might have is to constrain your M&A options down the
road. Between information rights, potential board control, investment terms
themselves, or simple signaling, taking investment dollars from a giant
company might make it difficult to do deals with that company's competitors. I
feel like that's something that happened to a pretty big startup I worked for
before.

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shostack
I understand the concept you're presenting, but are there any well-documented
cases of this happening that people might be familiar with?

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loceng
I doubt it would become or be able to become public information.

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kapilkale
(disclosure: I work for AngelList)

Much-needed article. Worth adding some color on AngelList syndicate
incentives:

Syndicate leads are compensated by earning carried interest on the additional
capital that follows them. [1] [2] [3]

Carry creates leverage for syndicate leads. Which is cool because syndicate
leads have a bigger stake in a company's success, and often want to help the
company more.

This also means a lead may want to invite as many investors as possible in
order to get more $ into their syndicate and create more leverage. If left
unchecked, this would create conflicts with a founder's interest in privacy.

Part of AngelList's job is to ensure lead behavior doesn't conflict with a
founder's interests. Here's some of what we do:

* 80% of syndicate deals in the last 4 months were private (invite-only).

* AngelList has tools to block specific users / competitors from seeing information about a deal.

* Probably the most interesting tidbit: AngelList is undergoing a professionalization of capital. Most syndicate deals have fewer than 20 investors participating, and much of the capital is institutional. These investors are vetted by AngelList and act more like LPs in in a VC fund (for example, most institutional investors on AngelList have signed confidentiality agreements)

If you've got ideas or questions about syndicates, feel free to ask below or
email me at kapil@angel.co

-

[1] Some syndicates (both on and off AngelList) do charge 0% carry, but
they're uncommon.

[2] Leads earn carry deal-by-deal vs. on a portfolio basis, where gains net
out losses. This creates a different set of incentives, but IMO doesn't impact
founders much. ([http://avc.com/2016/02/fund-level-vs-deal-by-deal-
carry/](http://avc.com/2016/02/fund-level-vs-deal-by-deal-carry/))

[3] Currently no management fees on AngelList.

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projectramo
You might want to add the best kind of "investor" to the mix: a really large,
patient and interested customer. They might understand they are underwriting
1.0 with a large check and work with you closely on tailoring the system.

Their incentive is to get the service to themselves as quickly as possible
hitting all their required features.

The downside is that they may insist on over-fitting the solution to their
particular needs.

~~~
pc86
That's a pretty big downside, especially when you need to go counter to their
wishes in order to serve a broader market, or pivot to something different
entirely that won't serve them at all.

~~~
akg_67
> That's a pretty big downside

Or it might give you a huge upside.

I worked in one such situation where a small group at megacorp did pilot our
alpha product and drove a lot of feature requirements. I was main point of
contact for pilot. It was lot of work and some frustration but after a year of
this pilot work, referral from this little group resulted in over $20M in
revenue for the product from other groups within Megacorp. Over $100M of
revenue from other customers in next few years was easily attributable to
referral from this small group at megacorp.

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rbcgerard
One piece that should be be included is the time horizons of these investors -
I.e. Hedge funds with <3yr holding periods (probably less than that) at one
end of the spectrum and sovereign wealth funds and endowments at the other
with essentially 20+ year time horizons...

~~~
akharris
That's an important point. Time horizons can substantially alter how investors
view their investments. For the most part, though, early stage companies are
raising from investors who should be planning on long holding periods.

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bing_dai
Fantastic list!

I would also add "yourself / your own saving" as a source of investment.

Pros:

\- Non-dilutive

\- No loss of control

\- Quick to close the deal

\- Putting in one's own money sends a _strong_ signal to your investors and
employees that you are committed to the company

\- The investor's incentive is perfectly aligned with the entrepreneur :)

Cons:

\- Risky

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brudgers
It might be worth adding something about traditional private equity investors
given the difference in the methods that may be used to create returns and the
way this [mis]aligns with the startup model.

~~~
ryanburk
I agree this since private equity investments and buyouts seem to be
accelerating and it is important to understand their motivations.

I thought this post covered the differences versus VCs, angels, etc well:
[https://medium.com/lightspeed-venture-partners/what-
happens-...](https://medium.com/lightspeed-venture-partners/what-happens-when-
private-equity-buys-your-competitor-6095cb3c43#.qdshh68qp)

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jaxomlotus
This is an amazing list.

I get that this might fall under the crowd-funding category, but you also
might want to add debt vehicles, including crowd-based advanced ordering
platforms like kickstarter.

There's no equity exchange, but then again that's true of the government
grants as well.

~~~
akharris
Thanks.

That's an increasingly important group, but I don't think of people who pre-
order as investors. Even though those people provide the capital to build your
business, they are customers, not investors, and should be thought about
differently.

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mbesto
So which one is YC? A seed investor, an accelerator or a VC firm?

> Notably absent in this year’s list are Y Combinator and RockHealth–both
> programs now classify themselves as seed funds rather than accelerators, and
> asked us to respect their evolution into a new model.

[https://techcrunch.com/2015/03/17/these-are-the-top-20-us-
ac...](https://techcrunch.com/2015/03/17/these-are-the-top-20-us-
accelerators/)

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toufka
Government grants usually have pretty direct and explicit incentives that
really have no connection with 'helping the government'. With many of the SBIR
grants (NSF, NIH, etc.) the incentive is to either 'create jobs' or 'spur
innovation' (read: produce patents).

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reasonattlm
This seems to miss a very important incentive, which is to change the world in
a specific way.

For example there is a growing informal network of angels and VCs associated
with the SENS Research Foundation / Methuselah Foundation community and the
so-far handful of companies that are emerging from the past years of research
funding into treating aging by repairing its root causes. The goal here is as
much to produce specific new capabilities in medical science and get them to
the clinic as it is to make money. In many cases these investors have the view
that the only use for making money is to funnel it back into growing this
research and development community.

There are analogous groups in other spaces.

This is an important motivation because it lets you look further than just
for-profit funding. If I were launching a fund today, I'd try to set it up as
90% for-profit, 10% non-profit investment, with the latter going to nudge
promising research across the line into startup viability. With the right
connections in the research community, a group that is split between
scientists, advocates, and funding sources can be meaningful minority owners
in the creation of an entire new field by shepherding the research and seed
funding the startups. Modern day early stage life science research, and
proving mouse studies, are so cheap in comparison to later development for the
clinic that this is a great investment model.

One reason most people don't do this is that they don't understand how to
understand the spaces they invest in at the level of research and seeding new
companies, and finding things that are a year or two away from viability, and
could be pushed across the line with a little money and coordination, and the
people who do understand that typically have little interest in investment. It
is very hard to gather the necessary knowledge and will in one room.

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joshu
People investing other people's money aren't angels. They are VCs.

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lowglow
I'd like to get people's opinions on how Baqqer can integrate some traditional
funding / sponsorship / support on the resources we're getting to makers,
inventors, and developers.

We already have crowdfunding options for both individuals and projects, pre-
orders for products, but are now considering how to offer even more through
larger funding options for people and startups -- specifically thinking about
how we can merge these two models that makes sense for the community.

