
Paul Buchheit: Angel investing, my first three years - paul
http://paulbuchheit.blogspot.com/2011/01/angel-investing-my-first-three-years.html
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ctl
It's ironic that YC membership might become exactly the kind of credential to
investors that a college degree is to employers, given PG's distaste for such
things. Makes me a little sad, actually.

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Eliezer
Only if PG becomes as perfunctory as colleges.

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pg
Fortunately we have powerful forces keeping us in line. If we make a bad
decision, we tend to have that fact thrust in our faces within a year, if not
sooner. Whereas college admissions officers do not, as far as I know, look at
applicants' later careers to determine whether they chose well. Even if they
did, they'd have to wait 5-10 years.

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robg
Say a company is rejected by YC. Do you want to hear about their future
success, like fundraising right afterwards? Being a fan of YC and hoping YC
learns from its "mistakes" seem synchronous from where I sit.

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pg
Yes, definitely. We say so explicitly in the email we send to the groups we
don't invite to interviews.

When a startup we rejected does well, we usually know about it without them
telling us though. And when one does we go back and try to figure out how we
missed them. We've already made several changes in the application process
because of good startups we missed.

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robg
Can you say which changes?

What about something that seems too radical for the model, like energy sources
or medical devices? Those lessons could take 3-5 years to become obvious.

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pg
1\. The video.

2\. We now have YC alumni read the applications too.

We'd be happy to try funding energy sources or medical devices, but we just
don't get many applications for that sort of thing.

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seehafer
Speaking as a guy in medical devices, I would love for a YC-like organization
to exist for my industry, though I think the structure of any such
organization would be quite different than what PG & Co. do now.

Just three examples: First, the capital requirements of a med dev company are
much higher than a software company. 11K + 3K*n wouldn't even cover the early
biocompatibility and animal trials needed to demonstrate proof of concept.

Second, there is less measurable progress in 10 weeks relative to a software
company, due in part to the length of the aforementioned trials.

Third, there's no ability to release a minimum viable product to customers and
quickly pivot based on their feedback. That's partly because in medical
technology 'customer' is an unclear concept and partly because your product
won't get used in a meaningful way until feasibility human trials, which are
at minimum several months after prototypes are created.

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nod
I'm surprised that the average investment is actually that small. (Yes, we've
been hearing of this trend overall, but still, ~30 companies per million?) Is
an average of < $38K all that companies want/need, or all that they will take?

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paul
Since my goal was to learn without losing too much money, I generally made
smaller investments. (and of course there are other people investing, so the
total round could be $1M or more)

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tstegart
How low do you think its possible to go in terms of investing? As an
experiment, lets say I decided to save up $1000 and try my hand as a venture
capitalist. Do you think it could work out, or its pointless to even try
because other costs, like administration time etc. would get in the way?

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jackowayed
Well, you'd have to be an accredited investor:
<http://en.wikipedia.org/wiki/Accredited_investor>

(Though I assume that friends and family rounds have some way around that, so
maybe if you know someone that's looking for super-early investment, you could
invest.)

But even so, from my limited knowledge (mostly drawn from reading stuff posted
here) I think $25k is pretty much the least that people tend to invest.

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sahillavingia
joshu said he invested usually $10-25k per investment. I think $10k would be a
better lower bound approximation.

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joshu
10k is too small, really. It is mostly a way for me stay in the game. On one
hand, startups have rejected that as an amount, wanting 25-50k. On the other
hand, I have wanted to do my usual 25k and only bee able to get a 10k
allocation.

The better the deal, the less I invest, paradoxically.

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lachyg
Why's that?

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joshu
Better deals are harder to get more dollars into. It's not a choice, just a
consequence.

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lachyg
That makes sense, thanks a lot.

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elvirs
Would be nice to hear what you have learned from those six companies two of
which are dead and four are zombies.

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CytokineStorm
"A few companies (such as ScanScout) were acquired by other private companies,
so I include those in the "still alive and doing well" category, since it was
not an exit from the investor perspective (no liquidity)"

How common is it for investors not to get liquidity in this situation?

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drusenko
Acquisitions made primarily with private stock really fall into two buckets:

\- Those where the private stock is worth more than cash. It would have been a
good bet to get pre-IPO Google stock instead of the same amount in cash.

\- Those where the acquiring company stock is equally risky and the
acquisition is made as a last-ditch effort (fire sale, consolidate investor
portfolio, etc)

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zacharycohn
Looking back, what are some warning signs that you can identify from some of
your failed investments that you'll look for in the future?

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paul
Identifying the winners is more important than identifying the losers. It's
the investments you don't make that kill you.

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joshu
Yeah, but not making the bad bets is a good idea.

Big mistakes, so far:

    
    
        - startup has no lead investor
        - startup is raising too little
        - generally, not having an investment thesis
    

Curiously, I've been working on taking stock of my angel portfolio as well
lately, though it seems gauche to talk dollar numbers.

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kenjackson
Talk dollar numbers... I think I'd be safe in saying, we're all ears. :-)

The problem with bad bets is that they take money from your good bets. If
Paul's only bets were Heroku and Mint, he would probably have a much larger
return.

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joshu
Ok.

I tend to invest $10-$25k. There was one for $50k (which is a loser) and one
for $40k (which returned a bit.)

The better investments tended to have smaller allocations for me. Hotter deals
tended to go on to Series B.

I've spent maybe $800k on investments. The unrealized value of the portfolio
is approximately $1.6m, most of which is in one company. Since the original
investment was only $25k and my first actual investment, if I had just stopped
there I would be doing way better.

I cannot conclude that I am actually any good at this.

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kenjackson
That's actually quite good. You and Paul are both ahead of the game, and it
seems to be the case that there are quite a few exits. It _seems_ like if
you're in there long enough you eventually hit a Groupon, Facebook, Google, or
happen to be in during a big boom. At worst you're out $1M.

Not bad odds, although I think you and Paul have opportunities that most of us
would never see (and rightfully so).

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joshu
You have to compare the numbers annualized (which is hard to do, since the
data isn't in) and then compare that to contemporaneous treasury returns (and
maybe the stock market i guess) to get a real sense if it's good or not.

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johnrob
_I find myself asking non-YC companies why they aren't yet in YC_

Are there any legitimate excuses for a startup not to be in YC, other than
rejection? I can't think of any (especially when you read
<http://paulgraham.com/equity.html>).

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paul
Not in my opinion :)

If an established entrepreneur like Joshua Schachter starts a company, then
I'm going to invest no matter what, but for everyone else...

Watch the Facebook movie and imagine what would have happened without Sean
Parker. (I think Zuck would have lost control of the company) YC provides that
same kind of value (minus the drugs and women, unfortunately).

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joshu
wait, you don't provide drugs and women? i was misinformed.

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Alex3917
All the drugs are down the street at the institute of transpersonal
psychology. I think Myron and Jean Stolaroff live within biking distance as
well.

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joshu
what is this i don't even

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Alex3917
You ever read What The Doormouse Said? It's all about how LSD influenced the
birth of the Internet. Basically the Stolaroffs introduced all the most
important technologists in silicon valley (e.g. Doug Engelbart) to LSD. These
folks picked up on the mystical ideas that 'everything is one' and 'we're all
connected', and set out to recreate this metaphysical vision using computer
hardware. And now YC is building software that runs on this platform. Just
goes to show that reality is not only stranger than we suppose, it's stranger
than we can suppose.

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joshu
what's the unicode emoticon for bonghit noises?

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mahmud
LSD, you're doing it wrong.

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joshfraser
This reminded me of the Ignite talk David Cohen (TechStars) gave on the math
behind angel investing: <http://www.youtube.com/watch?v=54vmDhBImkw>

These are GREAT returns when you remember that most angel investors lose
money. But I'm not surprised Paul is doing well. It's obvious that his motives
are in the right place and he's been hands-on with enough technology that he
understands this stuff better than most. Paul is a huge asset to YC. This just
goes to show (again) how lucky YC are to have him on their team.

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pvg
That's usually not how the quality of returns is measured.

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ivankirigin
Have you tried to estimate the value of the still active but illiquid
startups?

Heroku was winter 08 not summer, btw

