
Y Combinator Founder Paul Graham Issues New Warning to Start-ups - azazo
http://www.inc.com/kathleen-kim/y-combinator-advisor-sends-seed-funding-warning.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+inc%2Fheadlines+%28Inc.com+Headlines%29&utm_content=Google+Feedfetcher
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pg
Just so everyone understands, I was not saying that Google Ventures is a bad
investor and should be avoided. If we thought that, the email would have been
a lot shorter. I was just talking about a structural problem that happens when
you've already raised some money on a convertible note with a valuation cap,
and an investor offers to invest at a lower cap.

That sort of offer puts founders in a bind, because if you take it (a) it can
anger the earlier investors, and (b) perhaps worse, it can, like a "down
round" give investors the impression that your prospects are getting worse.

My overall advice about fundraising is to do breadth-first search weighted by
expected value. I.e. talk to every investor who's interested but focus on the
most promising ones. This is one of many situations whose solution follows
from that rule. An investor offering you money on worse terms is at least
offering you money, which is better than nothing. But all other things being
equal, the expected value of such an investor is lower than that of one
willing to invest on the same terms as your existing investors, so you have
any of the latter you should focus on them.

~~~
loceng
Perhaps Google is leveraging their name and their value as a resource? Google
Ventures investing in you could also be seen as a strong positive signal too.
And not that I know what those resources offered might be, and not saying it
is fair to earlier investors, though I would give someone with say media reach
more value than say a local silent investor who has nothing other than money
to offer.

~~~
arkonaut
Google Ventures is not the "Google" of venture funding. And there are about
5-7 firms that would have this type of brand-value that don't even _consider_
these kind of tactics.

~~~
loceng
It's still called Google Ventures to leverage Google's name. Regarding
tactics, I guess it's a matter of knowing your poker hand and trying to put
your best foot forward. I can see a point to perhaps doing such a lessened
risk with incubator-founded startups, in that the model isn't yet proven of
how the average incubator startup can compare to an external team that would
have very different dynamics of being processed. It's in an incubator's best
interest to make things look good - so the startup gets funding and the
incubator's equity becomes more available - though it doesn't mean it was
people on the team itself that could have achieved the same, nor that those
same resources would continue to be available to the team (or at the same
amount) once away from the incubator.

------
vnorby
I don't know if this is true or isn't true, but Google Ventures' counter
arguments are red herrings:

    
    
      "I don't know what Paul's thinking," Maris said.
      "It's just not true. Our portfolio speaks for itself."
    

and

    
    
      "We've already closed investments on companies from this class,
      so they don't seem to feel that way," Maris said.
    

Neither of those things mean that what PG is saying is false. Google Ventures
is a desirable investor and entrepreneurs would be willing to trade lower caps
for a Google stamp of approval on their round. The question is whether it's a
matter of their policy to quote a cap at half of a company's existing one, and
whether that is an ethical policy. Because they are skirting the question, it
certainly makes them look guilty to me.

~~~
qq66
How could it be unethical? I could offer Ferrari $500 for their latest model
-- they would would tell me to stick it where the sun don't shine, but it
hardly makes the offer unethical. If I was Jay-Z, they'd probably accept my
offer for the publicity value, which is what Google is hoping happens to them.

~~~
blahedo
It'd be unethical if you knew $500 was undervalued _and you thought Ferrari
didn't_ , i.e. if they were inexperienced and possibly accidentally
undervaluing their own car. Then you would be taking advantage of them.

~~~
wtvanhest
I disagree. The CEO of a startup is an adult, maybe a young one, but an adult
no less. They need to know what is over and undervalued for their company. On
the other hand, the investor has a fiduciary responsibility to get the best
round possible for their fund. In Google's case it is for their shareholders.

In other words it would be unethical for the VC to not work to get the best
valuation.

~~~
blahedo
Interesting code of ethics you're proposing there: that it's actually
unethical _not_ to take advantage of people, and your only ethical
responsibility is to the people who pay you. Convenient, I'm sure.

~~~
wtvanhest
If you invested what you consider to be a large amount of money with a VC to
produce a return for you over a 10 year period would your rather they:

A) Care deeply about producing the highest return for you and in doing so use
their expertise as negotiators including their competative advantage as a well
branded firm (google). And in doing so dilute founders and less experienced
investors in the process...

B) Ask them to negotiate in a way which maximizes other investors' returns and
founder returns at the expense of your own returns.

Both cases you are paying them a fee to do this.

If you answer B, I encourage you to leave a response explaining your position.

Then consider you are a pension advisor who needs high returns to make sure
that you will be able to pay the pensions of fire fighters. Would you make the
same decision?

~~~
akkartik
Your argument applies as well to Google Ventures as to Enron. I'm sure there's
a line in your head that companies are not meant to cross in serving their
investors, but it didn't make it into the argument.

Fiduciary responsibility is independent of ethics. You can't use ends to
justify means.

~~~
wtvanhest
_Your argument applies as well to Google Ventures as to Enron._

Exactly! Enron would be the equivalent if Google Ventures decided to falsify
their valuation documents they were sending to investors saying they were
getting much better valuations than they actually were. Then one day in 6
years they said all of those financial reports they submitted to the SEC were
falsified so there is a total loss in the Google Venture line. In doing so
they violated their fiduciary responsibility.

 _I'm sure there's a line in your head that companies are not meant to cross
in serving their investors, but it didn't make it into the argument._

Of course there is, but an arm's length negotiation with CEOs of angel
invested startups seeking to be the CEOs of the worlds largest, most
innovative companies is well within that line.

 _Fiduciary responsibility is independent of ethics._

Fiduciary responsibility is the core of business ethics that should never be
violated. Within fiduciary responsibility you still can't do anything illegal.
Of course ethics are always a grey area which is why there is a discussion
about this topic here, but I disagree where the line is clearly with you.

 _You can't use ends to justify means._

That is not what I am doing.

Seriously, ask yourself what you would want the VC you entrust with your money
to do.

~~~
akkartik
_"Seriously, ask yourself what you would want the VC you entrust with your
money to do."_

Is that _all_ you need to ask in considering how ethical an action is?

The whole point of ethics is to reason in the context of tensions. Tensions
between what you want and what others want. Companies have responsibilities to
more than their investors. Their employees, their communities, their
customers, their environment. Focusing exclusively on one side of the tension
has nothing to do with ethics.

Focusing disproportionately on investors is also ethically convenient, because
their interests are often aligned with yours.

 _"an arm's length negotiation with CEOs of angel invested startups seeking to
be the CEOs of the worlds largest, most innovative companies is well within
that line."_

It may seem obvious to you, but it's clearly not obvious to grandparent since
_that is what the argument is about_.

 _"Fiduciary responsibility is the core of business ethics that should never
be violated. Within fiduciary responsibility you still can't do anything
illegal."_

I think this position doesn't require the word 'ethics'. You can get by with
just 'laws'.

This isn't a rhetorical device. I think lots of people think this, and
honestly am ok with it. At the least it's internally consistent. It just fails
for me because it doesn't permit asking, "what should the laws be?"

~~~
wtvanhest
We are discussing CEOs of startups and their negotiation with professional
investors. In that scenerio, I cannot imagine a reason why a VC should give up
something in the negotiation because he feels like the startup doesn't know
what they are worth. Both sides have lawyers and advisors and the CEO is an
adult who can analyze his future as well as anyone else.

If the CEO is unable to negotiate what they are worth, they should hire a
dreaded MBA to help them.

------
pkaler
I don't think the problem here is with Google Ventures. The problem is that
founders don't understand convertible notes with caps. More by Mark Suster
here: [http://www.bothsidesofthetable.com/2012/09/05/the-truth-
abou...](http://www.bothsidesofthetable.com/2012/09/05/the-truth-about-
convertible-debt-at-startups-and-the-hidden-terms-you-didnt-understand/)

~~~
jbigelow76
Maybe it's not that the founders don't understand convertible notes. Maybe
they are taking the funding at a lower valuation because they're willing to
gamble on the likelihood of a (big money, not acqui-hire) acquisition by
Google later down the road is more likely.

~~~
earbitscom
Google Ventures, in my experience, tells entrepreneurs that they have little
to do with Google. They do not invest in things because they are synergistic
with Google, and they may even invest in things that compete _with_ Google.
They make it very clear up front that Google Ventures is a separate
organization. At most, they may tap into their network within Google to assist
you if it makes sense, but any investor worth their weight in Silicon Valley
can connect you with Googlers and other important companies.

------
rdl
The phrase I've heard is "Google Ventures is not the Google of venture
capital."

~~~
Vaismania
It is in Google's nature to try and dip their feet everywhere

------
wamatt
Coincidentally, I was just reading this rather insightful essay on press
releases <http://paulgraham.com/submarine.html> yesterday, and remember a line
that stood out:

 _> 'why he's writing about this subject at all.'_

Makes one wonder what PG today, would say in response to PG (2005) :p

~~~
timpeterson
@wamatt, agree regardless of the "why" PG's email feels petty, YCombinator and
its way too many startups are jumping the shark

~~~
SkyMarshal
With their business model, the more startups the more likely they are to get a
homeruns and base hits, as long as they can maintain a minimum standard that's
strongly correlated to outcome (which PG seems to have figured out). It's an
odds and numbers game.

~~~
timpeterson
YC is billed like the yankees, but singles more likely, how did the Seattle
Mariners do with Ichiro all these years?

------
dchest
Source link [http://www.businessinsider.com/paul-graham-y-combinator-
goog...](http://www.businessinsider.com/paul-graham-y-combinator-google-
ventures-lowball-offers-2012-9)

------
crisnoble
The warning:

"According to the website, the incubator's prominent founder said: "If you're
talking to Google Ventures you may be part of a pattern. The pattern is:
you've already raised some money at a cap of $x. Then GV says they're
interested and wants to invest at a cap of $x/2.""

------
dclusin
I'm a bit confused. Is the Google Ventures dig referring to companies that
have already raised seed money from GV, and then try to get series A from
them? Or is GV just doing this across the board for all startups that have
raised seed rounds using convertible notes?

------
TinyBig
Why are startups often disasters internally, as PG says in one of the linked
articles?

~~~
rsbrown
This was my favorite line from the article, actually.

The quote in question: "Practically all start-ups internally are disasters"

Not just "often", but "practically all" start-ups. It's true in my experience,
and not necessarily a bad thing. Of course, it would be great if everyone
acted thoughtfully, didn't let ego get in the way, planned things just enough
(but not too much), etc., but that's not just not the way it happens.

Acknowledging this fact, getting okay with it and still forging a highly
functional team in the midst of such chaos and tragedy is the key. That's a
tall order.

------
calpaterson
One of the worst mobile website I've ever seen. I can scroll down on the
article, so I click "go to full site". That takes me back to the main page,
which is annoying, but I manage to click back to the article, at which point I
am put through to the article on the mobile site again. And that's on top of
the fact that I have to view a loading throbbler for a text article. Chrome
for Android and the Android Browser

------
duncan_bayne
Meta: the Inc.com mobile website offers an horrible experience on my Desire w/
ICS + Chrome. Slow, cluttered and buggy (wouldn't let me scroll to the bottom,
kept bouncing back).

It's text content. Why not just a nice simple HTML page: instead of all the
'HTML app' cruft on top?

------
mathewgj
I'm sure this is both true and reasonable for some companies that did notes
with absurdly high caps earlier (which many have) and are now raising more
money. Nothing to see here.

------
trips2
So is GV consistently approaching startups that are already being funded,
i.e., making offers after the project has had a little time to mature?

------
markmm
If Google are willing to invest in your startup then why the hell would you
turn that down?, it's like turning down a BJ from a supermodel, because she
demands you do it at her house.

~~~
Evbn
That's not what an investment is.

------
markmm
Did Apple,Google, Facebook, Twitter or Microsoft use an incubator company? Why
do people think they are required to be successful?

------
papsosouid
It seems pretty hypocritical to be warning people "don't let google rip you
off with lowball offers" when you run a company whose business model is "rip
off college kids by taking a huge stake in their company in exchange for
nothing". Wouldn't "dear google, please don't out-compete us in the ripping
off college kids game" have been more honest?

