
How angel investors are destroying young gullible programming talent - maxklein
http://maxkle.in/how-angel-investors-destroy-talent/
======
grellas
I think this piece takes an unbalanced view of angel investors by treating
them as some sort of enemy.

Successful startups can come in many shapes and sizes, though some highly
respected people like Steve Blank take the view that what you are building
cannot legitimately be called a startup unless it shoots for the moon and
seeks to massively scale. I think that Mr. Blank's view reflects VC thinking,
and it is a legitimate point of view from that perspective. All small-scale
businesses, in that view, are and will always remain "small businesses" unless
they aim for massive growth and for a transformative commercial outcome, in
which case they are true startups. High risk. High reward. High failure rate.
But, in this view, you are not doing a true startup unless that is the view in
mind. Of course, any such startup will necessarily require large infusions of
capital in order to aim that high, and this assumes it will be VC-funded.

I strongly disagree with this VC-only view of startups (that is, with its
being the only legitimate form of startup), and the founders I have worked
with for years have tended to reject it as a working approach to their
startups. These sorts of founders have always valued the independence of
keeping control of their ventures and of seeking to build it to the optimum
level for their needs and then either selling it or keeping it as a longer-
term business that is solidly profitable. Even in the days when it took far
more capital than it does today to launch the prototypical Silicon Valley
startup, it is _amazing_ how many such independent startups managed to thrive
and flourish in the nooks and crannies of the startup world. The founders
behind such companies had all the exceptional qualities that solid
entrepreneurs need in order to conceive winning ideas and to execute them
well.

In today's environment, such independent startups are thriving and flourishing
all the more as the capital needs for launching a startup have sharply
declined. The independence of the entrepreneur, and the corresponding power of
control over one's own company, is stronger than ever. This is solidly
confirmed today in Silicon Valley and elsewhere as early-stage startups are
proliferating while VC-backed ventures have been comparatively stagnant. In
this sense, it is perhaps a new era for startups. Those that want to build
their company independently, or even those who ultimately plan to seek
significant outside funding but wish to defer such funding until they can
build solid value and minimize dilution, are in the ascendancy and this trend
is possibly a permanent one.

All that said, the founders who fit in this "independent" category have
_never_ , in my experience, seen investors as the enemy. There is an antipathy
to VCs who propose shark-like terms but never to quality VCs who can
legitimately take the company to the next level. Maybe they don't want to take
the risks associated with such a course, but the founders see it as one
legitimate option to consider - to consider and reject for many of them,
perhaps, but to consider nonetheless. They are not harmed by the presence of
such VCs but rather helped in that their choices are broadened for situations
where such a path might become attractive to them.

Whatever may be said of VCs, though, there has never been any general
antipathy to angels as a potential investment source. Angel investors have
always come in all varieties. Many are successful entrepreneurs in their own
right and they not only can invest money into a promising venture but also
other talent and expertise that can help guide the venture. I have seen such
situations firsthand, over and over again, where such contributions have
proven invaluable to the startups involved and much appreciated by the
founders. It is precisely by this means that founders often can raise the
comparatively modest amounts of capital that would be too much for the
founders themselves to risk but that are essential to building the venture to
the point where it can become commercially feasible. Such companies have
nowhere to go without such capital, and the angels are there to supply it on
terms that are often reasonable and very much in the interests of not only the
angels but of the founders also. To categorically write off this sort of
investment as coming from some congenitally hostile source that must be
resisted at all costs by founders is a mistake. Some ventures, of course, will
want strictly to self-fund. But not all do. Indeed, from my experience with
having worked with countless founders, I would say that _most_ do not want to
limit themselves strictly to self-funding because they themselves see that
pure self-funding will not enable them to realize their goals for their
venture.

I am not saying that all angel investments are good or that all angel
investors are benign. It is a shark's world out there and, whenever
entrepreneurs are taking investment money, they need to watch their backs. But
to dismiss angels as a category is to dismiss the idea that founders should
have a broad range of choices before them in seeking to build their companies,
and such a categorical dismissal is a serious mistake for most ventures. It is
like saying that, because there are risks in a certain direction, I as an
entrepreneur will never walk that path even while my competitors keep that
option open for themselves and perhaps use it to outrun my venture through
needed capital infusions that can often take a company to a better level.

My advice to founders: don't be gullible in allowing yourselves to be cowed
into taking in investment money for no good purpose other than to brag about
being a legitimate startup (this is good advice from this piece); but don't
become so narrow-minded about investment options that you box yourselves into
a strictly self-funded venture in cases where that may not be in your
startup's best interests.

In other words, forget categorical rules in this area. Consider angels and
their investments in light of the bona fide needs of your venture and, if they
can meet those needs, then by all means avail yourselves of the value they
offer (and, yes, do it on the best terms you can and watch out for the
vultures). If they don't meet your needs, and you see more value in building a
long-term profitable company without looking to be acquired, then by all means
avoid investments that will only complicate your company and your life.

But by all means keep a balanced view of this or you will only arbitrarily
limit your own legitimate options for building a successful venture.

~~~
terra_t
I think he sees angels as more of a blogospheric enemy than a financial or
business enemy.

For everybody who's seriously involved in business around Hacker News, there
are quite a few dabblers and posers, and a lot of people who get their rocks
off by writing about business rather than doing it. There's also a lot of
people who are immature and naive, haven't seen much, and get a 1-dimensional
view of things... who ought to have some different perspectives on business
than you usually see around HN.

But then again, you could also be hanging around people like Eli Aliosi and
Nicky Cakes...

~~~
il
It's funny to see those names here, they are both industry friends of mine.
There are thousands of affiliates quietly making six and seven figure incomes
without any angel funding or hope for an exit. I know, I was one of them.
terra, are you an affiliate marketer too? How do you know those guys? It seems
like HN is dominated by startup guys rather than people building successful
smaller scale businesses.

------
garply
My partner left a comfy management consulting job to co-found our business and
we constantly argued about taking external investment at the beginning. She
felt compelled to seek it, even though we didn't need it. I'm convinced it was
due to the prestige of receiving investment - instead of telling her old
coworkers "I've started a little company," she could say "I've raised half a
million dollars for my startup." Thankfully, I talked her out of it.

Now people come knocking on our door looking to invest. When you're solidly
profitable and growing, suddenly these people looking to buy a chunk of your
business don't seem like such a sweet deal - unless they really have enough
capital and connections to safely push you into a much larger market.

~~~
vegashacker
What's your company?

~~~
garply
Sorry, I don't care to reveal that information. I work in an offline sector
that is not as carefree with information as Silicon Valley software firms tend
to be.

My company is actually far more capital intensive (think plumbing or
dentistry) than a software firm would be. We had non-trivial fixed startup
costs and our costs tend to scale up (slightly sublinearly) alongside our
growth, but we still managed to bootstrap via consulting, one-off jobs,
favors, and creativity. I often puzzle at why a software startup which has far
lower costs than our firm would want to take outside capital.

From an entrepreneur's perspective, capital is much more suited to a firm like
ours than a software company - when I look at the margins in the software
industry and the small amounts of money angels invest in exchange for the
equity, I think they must be laughing all the way to the bank.

~~~
ojbyrne
You're only seeing the winners. An ill-defined software product (which almost
all software startups are), is similar to scientific exploration - you start
with an idea, but you have no idea going in how much effort (months, years,
decades) it will take to realize that idea, or even if its possible at all.
After all that, what you end up producing may be not what customers want at
all. In the time you took producing your new innovative software product, the
market could have moved on.

The immediate example that comes to mind is "Cuil," - a search engine (large
market) started by ex-googlers (great team), with $5 million investment (well-
funded). It took them forever to launch (because its a hard problem), and
partly because of that, they got poor PR and little traction. They've got
another $25 million investment since then, and almost nothing to show for it.

~~~
robk
Only one founder was ex-Google, Anna.

~~~
ojbyrne
Crunchbase says: "Husband and wife team Tom Costello and Anna Patterson were
joined by Russell Power. Patterson and Power are ex-Google search experts"

Anyway I don't want to cast aspersions too much on Cuil, because they may turn
out to be successful eventually. My point was that software is a hugely risky
business, with massive upfront costs.

You can build stuff cheaply of course, but when you do that, you have the
problem of dealing with competition - namely if you can build it cheaply,
others can too.

------
joshu
I hope I'm not lumped in this group. I angel invest because there are some
amazing people and I want to be involved and help the best I can. But I don't
ever go looking for businesses and try to "convert" them to venture-backed
firms.

There's a whole LOT of businesses that outside investors make zero sense for.
Generally the kind that can reinvest their revenue for growth should avoid it.
I almost always ask folks who have early revenue why they think they need to
raise and suggest that they figure out a way to grow without an investor. If
there was a way to reliably invest in a startup that was going to produce a
revenue stream rather than exit someday then I think that would be awesome in
general.

Also, I only update my blog like twice a year.

(And, finally, I am trying to build revenue-producing projects on my own. I
don't talk about them because I am mostly just embarrassed.)

~~~
joshu
And, to be clear: I agree with Max. There is unnecessary seductiveness of the
lifestyle. And a lot of distortions in behavior due to chasing far too few
opportunities.

~~~
pvg
I think 'lifestyle' is the critical bit, rather than the hand-rubbing
evilishness of angel or other investors - it's hard to imagine this has
changed much, to the extent that it exists. The popular glamorization of
'startup as lifestyle' and, worse, 'startup as self-help/self-actualization'
seems like a newer and sillier thing. You can open HN on some days and it
reads like some sort of Cosmo for nerds.

------
dasil003
This is a paranoid worldview. Of course angels operate in self-interest, just
as you should. It's unfortunate if you get taken advantage of by an
unscrupulous investor, but it doesn't make angels evil in general.

At the end of the day angels (and VCs) are handing you wads of cash to build
your company. This might save you years of scrimping and saving just to have
enough savings to bootstrap for a year or two (and forget about it if you have
any serious capital expenditures). Should they just be cutting 5, 6, 7 figure
checks out of the goodness of their heart? No, it's your responsibility as an
entrepreneur to know what you are getting into. And I should add that that is
much easier today with the wealth of good solid information about term sheets,
etc, that is available today on the web for free compared to as recently as 10
years ago where you basically had to learn things the old-fashioned way (ie.
personal connections, apprenticeships).

That said, yeah, bootstrapping is better if you can possibly do it, because
you take all the risk and you reap all the rewards. But to say that the very
idea of aspiring to build a large company is koolaid sold by angels is
ridiculous. It's the fundamental silicon valley dream; painted by history, not
some snake oil pitch.

------
ojbyrne
A talented young programmer from a good university can easily be making $100k
within 5 years after graduation. So building small profitable companies that
pay your bills have a fairly large opportunity cost. You need somewhat of a
blowout to overcome that opportunity cost.

~~~
madair
\- most likely in a cubicle \- reporting to middle managers \- on a hardware
and software stack selected for them \- frequently in the kinds of
unsustainable scorched earth industries and overly large multinationals \-
frequently in industries which centralize wealth and destroy small and local
enterprises

All that and I'm not even a liberal saying it ;)

~~~
ojbyrne
Still an opportunity cost. And facebook, google and twitter are among the
biggest hirers of the kind of people I'm talking about. 3 or 4 years at
facebook or google makes for an even bigger opportunity cost.

~~~
jpeterson
_3 or 4 years at facebook or google makes for an even bigger opportunity
cost._

Can you elaborate on that?

~~~
deltapoint
Working at a company at facebook or google increases your human capital,
increasing one's opportunity cost.

This can make it harder to leave the stable and growing pay check and try to
create your own thing. This is not to even mention the growing amount of
responsibilities that come with age (mortgage, family, etc.).

------
jacquesm
'Max' extrapolates a lot from relatively little anecdotal data and does that
quite frequently.

For instance:

> Angel investors are not interested in companies that create value and that
> can hire one or two people, while making a steady profit.

That goes for some angel investors but definitely not for all of them, in fact
the majority of the angel investors that I know of are doing exactly that.

> The investors are interested in blow-out companies – companies that either
> grow huge, or that will be bought by other companies. Those are the only
> types of companies interesting for the angels.

No, those are the only types of companies interesting for the VCs whose only
way to recover their massive investments is a sizeable exit, not a lot of
piddly little dividends over the years.

I think it's wrong to lump 'angels' and 'vcs' on the same heap like this, and
even between VCs (and individual deals done by the same VC) there is a lot of
difference.

Partnering with an angel or a VC that has a similar risk profile to your own
is a good way to avoid such issues, and that starts by defining what your risk
profile really is.

~~~
maxklein
You can drop the quotes around my name, just like you don't put quotes around
Andrew Warner's name. It's now my real name and has been for several years.

What I am focusing on is not the actual people who successfully attach
themselves to angels, but the people who fail by aiming for that mode.

If you build for acquisition but it does not take off, there is no place to
fall back to.

~~~
jacquesm
Ah, sorry I thought it was an alias for "Mark Essien", a 'nom de plume'.

If you build for acquisition I think you're doing it wrong anyway, you really
should be building a business that stands on its own strength. Of course there
are plenty of people that do this but they are hopefully aware that their
prospective buyer is under no obligation to actually consummate a deal at any
price.

They also break their own negotiation position because there usually are not
that many possible parties that would acquire such a company, so it's a buyers
market by definition.

So, why did you change your name?

~~~
joshu
His name isn't relevant to the point.

Likewise, his methodology for getting to the point is not really relevant,
either.

There is an angel bubble. Max is discussing one aspect of it. I disagree that
many people are intentionally going out there and seducing people into the
mindset, but that is a very minor point as the outcome in aggregate is the
same.

More importantly, there needs to be a better way to finance the kind of
companies that Max is talking about. While I get the impression that Max gets
the impression that these are better, that is also not relevant to the
validity of the point.

------
coffeemug
A couple of counterpoints:

\- The angels that invested in our company have jobs/companies, families, and
dozens of other small investments. They don't have time to ensure we build any
particular type of company, even if they wanted to.

\- Every time we ask them for advice, they put exactly zero pressure on us to
take the company in any given direction.

\- The article assumes angel investors cunningly collaborate to craft their
blogs to raise a generation of an entrepreneurs that behaves in a certain way.
With all due respect, that's nonsensical. There is a similar argument that
could be made about survivor bias, but the article implies conscious intent
which simply isn't there.

\- Most angel investors make investments because they love technology and the
startup world and want to use their money to affect positive change in the
world. Often times they invest in people for no reason other than that they
like them.

\- And finally, running a small company is almost as time consuming and
stressful as running a large one, except you get no pay off. You also learn
far, far less. I'd much rather get a rewarding job (of which there are plenty)
- the stress is lower, the pay's much better, and there's opportunity to learn
from other people.

~~~
eru
I agree in general. About the last point: When you are running a (small)
company for yourself, you are much closer to the market than when just having
a job. There are lots of things to learn either way, I guess.

------
jakevoytko
_And one of their main bait methods is in their writing. Angel investors and
others in their eco-system are writing on the internet about how to make money
on the internet. These articles are what young programmers read, and the
methods that these people write about is what the programmers end up using._

Salesmanship is a fact of life. Even great products need effective marketing.
People only use products they've seen. A company must find an audience and
prove to them that the company is worthy of their money. Blogging and hanging
around social sites accomplishes this faster than anything else. It means
immediate feedback from tens - if not hundreds - of people, and a company can
rapidly change its plans accordingly. Maybe I'm not reading the right angel
investing blogs, but what I've seen is very up-front about the risks (although
they _obviously_ are outweighed by the rewards :D).

Caveat emptor!

------
alttab
This post seems rather disconnected from the angel investing process. And this
is coming from a guy whose first start up was literally stolen from him.

Try not to lump it all into programmers vs investor, because no matter what
happens afterthat distinction is made someone will lose.

------
avk
How many generalizations can this blog post get away with? How about an
example or two?

Some things I wish were touched upon:

\- How do angels"investing money because they want even more money back"
differ from VCs?

\- What are some examples of these malicious angel blog posts? What bait is in
them exactly?

\- "Those are the only types of companies interesting for the angels." Why?

\- Why is "a simple product company that has a large market and that will pay
your bills quickly" right for the young programmer? Why is it better than what
angels supposedly advocate?

\- How do you distinguish between "ambitiously dumb" and disruptive
innovations?

I agree with some of the bigger ideas here, especially: "Don’t see venture
capital as your aim. Don’t see seed investments as your aim. Don’t build only
things that google may acquire." but the post does little to back up a pretty
sensationalist title.

------
terra_t
Some businesses don't need "angel" money or don't need very much.

One of my tenants wanted to start a small brick-and-mortar store. He needed
$30K to get inventory, and he could only get a bank loan for $15K. He was glum
and depressed one day, and I suggested to him "have you considered equity
financing?"

The next day he came around and asked me if I was serious -- I told him I'd
chip something in if he got others to. I bought $2K worth of shares, and other
people, like the leader of his coven, bought shares too.

Now, from my perspective, the $2K meant that he was going to keep paying the
rent, and I could lose that much money if the apartment was vacant for a few
months, so it's a pretty risk free proposition. If I cashed out now, I'd get
at best a small capital gain, but I wouldn't have done any better in the stock
market.

Of course, I'm not a "serious" investor and I wasn't systematically thinking
about how to make money -- but this gives some idea of the scale of investment
that's required to succeed at a "lifestyle" business and how it's just not
worth it to somebody who's already rich...

\------

For a current venture I'm thinking a lot about finding "investors" who are
interested in payments in kind that can be delivered quickly (a year or so;)
Roughly, I'm looking for a certain kind of "investor/customer" who can pay me
$10k now, expect to get $20-40k worth of value over the next year, and leave
me with an asset that generates $2-5k a year worth of cash flow. This "moving
revenue backwards in time" makes a big chunk of my balance sheet weightless,
could let me grow fast w/o sinking in a lot of my own capital... And rather
than diluting my equity, it incorporates the "voice of the customer".

~~~
cageface
_I bought $2K worth of shares, and other people, like the leader of his coven,
bought shares too._

Coven?

~~~
joshu
Me too.

~~~
dmoney
<http://en.wikipedia.org/wiki/Coven>

Most likely the GGP meant it in the Wiccan sense.

------
sofuture
Maybe this is all just projection (Hey, at least I'm honest), but I think
there's something valuable being said here. About building something for it's
sake instead of building it solely for money. In the first case you're
actually creating something, in the second case you're moving _only_ towards a
payday.

Of course, there's nothing wrong with getting fantastically rich (or
soemthing), you probably wouldn't be building something if not for the payday.

It's absurd to focus only on that, though. I know I couldn't sleep at night if
I made a million (or 10) bucks selling a worthless company to a bigger
company. That's _not_ why I want to create.

Don't get it twisted though, I'm not saying every company that doesn't feed
the poor, clothe the needy and solve the issues of world peace and universal
justice is misguided. I'm simply saying it's worth aiming for
something/anything beyond the financial gain.

------
barrydahlberg
_...they are investing money because they want even more money back..._

Oh my! While he has a good point in there somewhere I think he pretty much
lost it by letting his imagination get out of hand.

------
lucisferre
What? People invest money to make money? No way!

------
edanm
There is nothing wrong with building small companies with "only" the aim of
living off their money, without being huge and world-changing.

But some entrepreneurs are in the game to build exactly those huge companies;
I'm one of them. I don't think I'm just gullible by wanting this: it just
sounds like a better use of my time, despite the risk in it. (Of course, I'd
rather a small business that makes me a steady income over nothing at all.)

Also, to address the point of the advice given by angel investors. I think for
some of them (pg being a notable example), you can read a lot of their writing
_before_ they became angel investors, and this can tell you a lot about the
type of advice they gave before they had their own financial incentive.

------
hasenj
I agree with his general idea,

I think 37signals said it better:
<http://gettingreal.37signals.com/ch02_Fund_Yourself.php>

There isn't much to fund anyway. If you're building a webapp: hosting is cheap
and the infrastructure is open source; the OS is open source, the
tools/frameworks are open source, the languages are open source
(python/ruby/etc), the editors are open source (I don't need an IDE, thank-
you-very-much).

Now, you need money for your living expenses, but you can finance that by
getting a (boring) day job for a year or so.

~~~
edanm
"I don't need an IDE, thank-you-very-much"

Plenty of IDEs are open source as well, and Visual Studio is free.

~~~
chmike
AFAIK not for commercial applications. But if it's for a web server
application, how would Microsoft know ?

~~~
edanm
The express edition is free for any application. The pro version does cost
money, but a lot of people can get by without it.

Also, there's the Bizspark program, which means a startup can get pretty much
every Microsoft tool they need for free, for 3 years.

------
arn
The evils of angel investors aside, there's a lot to be said about
bootstrapping and the ability to grow a small business and earning steady
income on the web.

Maybe cause I don't live in/around SF, but the whole investor cycle was never
in my mind when I worked on projects. I ended up on the hobby-turned-business
track.

Now these probably aren't going to get you Facebook/YouTube-sized exits, but
can do quite well. And if financial freedom and lifestyle autonomy are your
ultimate goals, you can achieve that.

------
aberman
You are telling programmers to "worry about making money; don't worry about
building products that can change the world."

Whatever their motives, angel investors want entrepreneurs to build big,
meaningful companies. And the money they provide helps them to that.

~~~
sofuture
You're reading that backwards. He's encouraging people to _build something_
rather than _attempt to build something for the sole purpose of selling it_.

~~~
jmtame
sometimes "building something" requires capital...

~~~
hasenj
You need to read 37signals blog, they have a series of blog posts called
“Bootstrapped, Profitable, & Proud”, in their own words: it's a series which
profiles companies that have $1MM+ in revenues, didn’t take VC, and are
profitable.

The latest in that series was about github:
[http://37signals.com/svn/posts/2486-bootstrapped-
profitable-...](http://37signals.com/svn/posts/2486-bootstrapped-profitable-
proud-github)

[1]: <http://bit.ly/ccc5C7>

~~~
jmtame
i said "sometimes." i have no idea what you're trying to build, and neither
does the author of this blog. for every company that has made it bootstrapped,
there's another example of one that made it without going bootstrapped.

raising money is what it is. some people need it, others don't. it doesn't
make angels "evil" because they don't align with your goal of building a
lifestyle business. it's not like they're forcing you to take their money, or
holding a gun to your head if you don't repay the money they risked on you.

------
cageface
Seems like a lot of blogs have been expressing this kind of sentiment lately.
Is it really that easy to make a livable income from the kind of simple web
app one or two people can build? How big is this market really? How many
people are actually doing this?

I'm more inclined to believe that, like the app store, most people trying this
are actually making peanuts, but I'd love to be wrong.

------
camworld
What, people with money and experience are taking advantage of the young and
intelligent by paying them crap and building profitable businesses on the
backs of the inexperienced?

Alert the press! Call the White House! Shocking revelation!

Nothing to see here. Move along now...

