This is the main reason why most people should avoid VC money. As a founder/employee all of your eggs are in one basket and the chance of having a billion dollar exit is practically 0. VCs get to raise billion dollar rounds, live off of the 2-3% management fees and go around spraying and praying with the hope of hitting a unicorn. If that doesn't work they take their top donkeys and try to pump and dump them, marking up their investments in the process in order to raise another round.
From Ben Thompson newsletter:
where would $1 have been best invested on March 25, 2015, when Altman wrote his post?
* Unicorn basket: Uber ($41.2 billion -> $53 billion), Palantir ($15 billion -> ~$26 billion), Airbnb ($10.5 billion -> $35 billion), Dropbox ($10 billion -> $7.4 billion), Pinterest ($11 billion -> $10.4 billion), and SpaceX ($10.1 billion -> $33.3 billion) = +$67.2 billion and a CAGR of 11.6%.
* SAP 500: From $2061.05 to $3,234.85, for a CAGR of 9.87%
* Big Tech: Apple ($714.84 billion -> $1,321.6 billion), Microsoft ($338.6 billion -> $1,210.1 billion), Google ($386.1 billion -> $938.6 billion), Amazon ($172.5 billion -> $929.6 billion), Facebook ($230.9 billion -> $595.1 billion) = +$3,152.06 billion and a CAGR of 23.14%
However, I did err by not including dividend payouts, which are basically reassignments of market cap to individual investors. Interestingly, this results in an annualized S&P 500 return of 11.7%, which actually beats the unicorn basket annualized return of 11.6%! More on this in a moment.
Which is an unfair criticism to Altman, because typical VC returns only mature 7~10 years later. If you put $1 into Uber in 2009 and exited at IPO, your returns would far exceed the S&P. This is a terrible financial analysis from Thompson, but I don't think that was his real point from the newsletter anyway.
That being said, the point still stands, investing in venture is generally NOT a good strategy in of itself. The general recommendation is less than 5% of your overall net worth.
But thats my point. This is a terrible analysis bc the data presented is not scoped appropriately to fit the narrative.
Then you need to compare that return to investing today in a basket of early stage companies. A year ago, stuff like lambda school + a bunch of dogs, plus some stuff I have never heard of.
Then measure returns of your basket vs s&p+unicorns.
The startup basket may or may not win, but we simply dont know yet.
I'm optimistic about cryptocurrency because I believe that every generation will invent a new way to legally take or inflate away the wealth of the previous generation. If an earlier generation was able to manipulate governments to the point that they abandoned the gold standard for fiat, then the new generation can easily manipulate governments to abandon fiat for cryptocurrency.
There is nothing the elites can do about it, there are too few of them. Centralizing economic forces are making them richer but also shrinking their numbers.
You should try to limit yourself to opportunities that could be $10 billion companies if they work (which means they have, at least, a fast-growing market and some sort of pricing power). The power law is that powerful. This is easy to say and hard to do, and I’ve been guilty of violating the principle many times. But the data are clear—the failures don’t matter much, the small successes don’t matter much, and the giant returns are where everything happens.”
This is just one type of company and limiting yourself to just that is limiting and a driver to some of the mind bubble issues in SV.
10x returns on seed investments is arguably too low to justify the risk.
VCs invest assuming roughly 90% of their deals will be written down to almost nothing. Of the last 10%, some will return some money back but few will break 1-3x. The last few need to be at least 10x to give a useful return to the LPs. Because remember the fund itself took 2% for expenses and has a 20% carry to overcome.
On the other hand, angels don't need a massive ROI to be effective. Since this is a small part of their portfolio (vs being their job), if they can write relatively small checks and get 10x back, the numbers work. Remember, they don't have the expenses or the carry to overcome. In addition, odds are angels are involved when it's still a Qualified Small Business so there's (near-)zero taxes on a significant portion.
- a mission that attracts talented people into the startup’s orbit
- a product so good that people spontaneously tell their friends about it
- a network effect and low marginal costs
- and a product that is either fundamentally new or 10x better than existing options.
- the startups need money, and for some reason, I can provide it before anyone else.
Cash on cash returns from seed investing in the biggest biotech companies are an order of magnitude lower than tech. Series a investments in the biggest biotech startups are about half that of tech. This is despite the fact that the companies grow to comparable sizes on comparable amounts of capital 
Value inflection happens later in biotech than software. Software startups can get product market fit on seed capital, but the biggest value inflection in biotech is human proof of concept, which costs tens or hundreds of millions
If you invest in biopharma you should focus on lower loss rates (ie do good technical diligence) and concentrate bets in winning companies
The common rule of thumb is that 90% of small businesses fail within 10 years.
I agree that for founders that take VC investment, the expectations of return need to be even higher than VC due to: higher volatility, extreme lack of diversification, and not getting preferential stock (must beat $invested or founders get $0 back).
I think the idea is that since such a high percentage of startups fail or provide low returns you need to find these huge wins to make money in the long run.
And finding one huge win every ~5 years might be easier than finding a bunch of smaller wins every year.
But if you're going after a niche market -- a computer vision-based tennis coaching app, for example -- your valuation will necessarily be lower than a company with broad appeal.
So instead of saying, "No, that's a small market" you could invest at a lower valuation and still make the same or higher return as with a unicorn.
Moreover, the probability of find a $10B+ exit happens only about 5 times per decade (10 years), so the chance that you got into one is very unlikely.
The thing to keep in mind with investment strategy is that the goal is to make money easily, or find the best way to make money easily. Not to make the best or most interesting products or anything, really. This advice is the best advice when you take that into account.
I think I’m self-aware enough to recognize that I am probably a slow mover, and this is one of the most annoying aspects of my personality that I would like to change. I get hung up on small details, iterate too many times, and want things to be “perfect” before I publish or share them.
Has anyone successfully changed this aspect of themselves? Sam mentions that this personality trait seems to be mostly invariant over time, but surely there are some habits that one could develop that lead to an eventual change (if not in personality, then at least in behavior).
But, if you want to get faster, one thing is to ask yourself - do I have enough information to make a decision; is it possible to get more information - almost always the answer is yes, but will the cost in money or time or other resources be worth the additional information for the decision - or do we discover just as much moving forward to discover if a decision is wrong. Another question is if a decision is wrong, can we recognize that outcome quickly and what is the cost to move to a different decision.
At the core, I was afraid to fail combine that with, as a technical person, I _really_ don't like to do things I don't like to do. But, things I don't like to do are absolutely at times necessary to do, i.e. answer a simple email from a customer; answer an angry email from an investor.
It took me about 5 years and some very large, public (to my circle) failures to realize that it is okay to fail. That I wasn't going to get better over night, over days or months - it would take me years.
I've incrementally improved and shed a lot of who I was. It was extremely hard and it's not for everyone - but if you are willing to try and take small steps, the payout is absolutely worth it.
Don't get trapped in the siren song of "it's okay to be slow". Speed is itself part of quality.
I know it's possible to change. The factors that cause me to slow are:
- Fear of trying too hard and seeing myself fail: Failure is inevitable. Earlier > Later.
- A misplaced confidence that I can knock it out late: You can't do this anymore.
- Uncertainty of the next action: Any action is better than no action 80% of the time. Just eat the other 20%
- Wanting to make things 'nice' (especially if I've already been slow): Present > Nice, and nice_delta(t) < nice_delta(t-1) so you'll be producing less nice per unit time as time goes on, so just release.
Hope this helps. I know it can be changed. I've done it. I have to do it again.
If the problem you're solving is all the libraries/sw for x are shitty / half baked, then it makes sense to take things slow, think it out, and design something robust.
If the problem you're solving is trying to validate a business idea / market idea, it might make sense to hack something shitty together to test that hypothesis.
For me, the issue has always been that I _personally_ identify myself with my code being robust / well designed, and that makes it difficult for me to put something hacky out there, but if I focus on the objective - to validate or invalidate a potential idea - it makes it clear how to prioritize my time / energy.
when you invest in disruptive technologies, being patient and a slow mover is your friend. Many fast mover friends of mine don’t have the guts and patience to go through volatile phases of some assets, and I outperformed them (even the ones who spent 14 hours a day trading profitably)
At the same time I would never work at a startup at any position again, because looking at a TODO list of 50 items is stressful and boring at the same time.
(Ark invest is the closest to what assets that I like, they are looking 5-20 years ahead and not at quaterly results).
I don't think this is a binary thing. Moreover, I think the ability to meld the two and manage the balance of decisions across a growing number of stakeholders is one of the biggest challenges for founders.
We unfortunately are unbalanced, and therefore move slower than I'd like (though everything always takes longer anyway).
I'm sure there are benefits to balancing out the two personalities if you can work well together.
I'm somewhat lucky that we are in a technically challenging space and the market will develop over a few years, but still, it's painful.
Sam, or SV’s, way of thinking is not the only path to success.
Im not fond of VC startups, but that doesnt mean it’s a wrong endeavor. Most of the apps we use on a dAily basis exist thanks to that model.
Don't count me in that 'we'; an app coming from a VC funded company is a red flag for me not to use that app. Any app that I've used from that category I've later come to regret. The last one was duolingo, and I now realise I was suckered there too.
Facebook (+ Whatsapp, IG)
etc, etc. I could keep going all day.
Ok, it's fine if you don't use them...but to see no value in these companies at all? Come on - that's ridiculous and I suspect you know that but want to push a few buttons.
What I don't like and would describe as unhealthy is the use of venture capital to massively scale software companies, usually in a 'free-service' model, until they have grown to monopolise the market and can then be 'monetised'. I think that is a very toxic model.
And no, I didn't mean to push buttons. I was only objecting to the assumption made in the original comment to which I replied. My viewpoint is far from unique, however much it may come as a surprise to you.
What really matters is how obstinate the founders are. And equally important is how much money they have.
It's much more predictable to invest in stocks even if they are the sum of human emotions.
Market is by far the most important factor. You can't do anything at all if no one wants to buy what you've made. Even founders without much experience will do quite well if there's market demand for what they're building.
Things that increase the small chance of success are addressable market size, timing, founder track record, and product-market fit. I agree with you on available capital since it enables teams to pivot multiple times, try things that might not work, and scale quickly at massive deficits by undercutting competitors and spending heavily on marketing.
"Resourceful" is switching plans and finding a way to make it work.
Addressable market and market fit changes as startup evolves. And founder track record only works because of network connections , VCs trusting you with money and the founder already being rich.
As with everything hamfisting money into startup increases it's chances. Uber for dog walking? electric scooters?
What's the saying.. When the wind blows hard enough, even chickens can fly.
The market is pretty important too.
I think the way most investors do it is probably by maintaining a “story” about how the world will change that most people haven’t realized, and then matching that story up with ideas they hear.
I’m not sure if there is a more robust or rational approach that actually works. The ideal investment plan would evaluate each idea/“potential market” on the expected value of market size, averaging various plausible scenarios according to their probabilities. But I don’t think many people can run a process like that without injecting a ton of priors about how the world will evolve... it all seems to devolve into an argument over which macro trends matter in the next 10 years or so.
For new industries, it's a ballpark guess. For example, no one knew the market size of social media before Facebook. The best you can do is look at related industries like online search advertising and guess as to how much more people might pay to target ads based on a social media profile versus a Google search.
Also, look at the early access features of cloud offerings. Those companies have 10's of product managers that listen to 10000's of customers.
And, they will not get into a market that is not 10B.
seed investors/VCs/etc are incentivized to discount public equity opportunities because they're trying to prove their own value to their LPs
Frankly, I have to wonder who is the audience for this post.
I had the same thought. My guess would be founders of "hot" companies. Altman is signaling that he knows all the ways to be a great investor (and presumably puts them into practice).
I plowed hundreds of thousands of dollars into startups that I wished I put in more "mundane" investments with better overall returns.
Startup investing is for those who seek:
* Some sort of personal glory
* Delude themselves into thinking it's a high quality investment
* Have had a one-exit "success" and now think they understand everything about everything
* Are in it for the philanthropy - building up "startup ecosystems". No, the next big hit will most likely NOT come out of Cincinatti or Indianapolis. Maybe the odd strike of lightning success, but there's no way to power an ecosystem with a few meager millions of dollars
* Are playing with other people's money
Angel investing is for the foolish or those with some sort of substantial inside edge / track on success that lets them beat the odds.
I don't see discussion of VC as a distraction any more than discussing bonds would be a distraction.
I think there's at least a kernel of truth to the "myth" about public/private investing that you mentioned. You won't become a billionaire working as a software developer and investing in index funds for the next 30 years, but you can if you invest in the next Facebook or Google early enough.
That said, most tech people I know are looking to work at the next unicorn, not invest in it.
most people will never have access to the best seed investments anyway
10 years ago kids were not making $300k out of school
and this bull market is unprecedented
everyone looks like a genius when everything is up.
but yes enjoy it while it lasts, totally agree.
And hopefully the kids making 300k/year+ are smart enough to save and invest 50% of their income.
It depends on your goals. Private investing has much higher risk/reward.
The idea that you can’t find the risk reward is untrue. I’d consider investing in biopharma to be equivalent in risk reward to early stage startup investing. The difference is that these companies go public early because that’s traditionally the only way they can raise.
And if you want to rev up the risk to make 10x-100x you can options trade in the public market as well.
I mean, Nancy Pelosi of all people will make $130K in Facebook call options expiring this week. http://clerk.house.gov/public_disc/ptr-pdfs/2018/20010631.pd...
Similar risk reward, but it seems harder to have any insight into a pharma startup's chances of success. Sure, it is easier to gauge potential market (% of people affected by condition X), but whether they will be able to develop a product is a total dice roll.
you can look at things that an early stage investor looks at like team, hiring, etc. beyond just progress.
IMO this decade will be absolutely massive for biopharma. Plenty of good opportunities, especially for those complaining that the reward is public markets is not as high as early stage.
As an investor, I can make an informed option whether there is a market for subscription indoor cycles like an Peloton. I could be wrong, but I can look up the market numbers and weigh them against my personal experience and world view. When it comes to pharma, almost nobody has domain expertise of the subject.
To put it another way, the leading risk in tech is market adoption, while the leading risk pin Biopharma is technical feasibility.
I want to say something snarky about bombarding a company with electrons to ionize it, but it's actually a pretty good metaphor.
I think the "help them" bit is good, too, and something a lot of VC's don't seem to be that good at.
I look forward to the day I meet a VC good at helping a company. I think, most of them are good at motivating founders by creating economics that displease the founder if they don't perform, but that's more of a stick than a carrot. I'd love to meet and hear about a VC truly focused on the carrot side of things.
One way in which such help materializes is in the form of a board, and the quality of that board can make a huge difference. It could even be a net negative.
That's super true. In my experience, it's always difficult to see investors as peers sharing the struggle with you, but who more than them can do it?
For any given startup, wouldn't the founders have much more at stake than does the VC? I'd expect the VC to have many concurrent investments, whereas the founders' whole life is wrapped up in that company.
I would think that owners of other businesses of similar size would be much more sympathetic.
This may or may not be true but it paints an innacurate picture. There's always a ton of highly talented people willing to be founders and start businesses. And there's always a ton of businesses with plenty of labor to start new projects. All you need to do is look at the insane number of brand new projects created on ProductHunt every single day. There's only enough consumer demand to satisfy a tiny percentage of those products created. This indicates a massive oversupply of highly talented labor.
The problem is opportunities. opportunities to build real value that people are willing to pay for, are sorely lacking. In short, everything that can be done (legally) has been done (the low hanging and mid hanging fruit). And, all that's left is the really really hard stuff.
Invest on a $20M SAFE Note in a 90 day old startup out of YCombinator, or write a check at a $30-35m pre-money valuation at a company doing $2-3m in revenue with 300% growth rate, metrics, referencable customers, the beginning's of a team....
Perhaps investing in a twitch channel or youtuber is similar?
I just wonder if there's any help or guides to doing this or if it's ever been done.
Apparently they are investing in podcasts with a lot of potential. And then when they become profitable they take a cut of the earnings.
Try your hand many times with your ideas, each time hitting up your built in wealthy network (VCs) you were indirectly or directly born into
Maybe you the rich get richer and you get to invest in startups or you give up and become a VC cause they are your people. If you become a VC or an angel you invest in rich kids because you want to make money; safer bets then investing in the poor kid.
Those who don't follow the above mold.. go ahead ...startup while working a full time job.. oops first, 2nd or 3rd didnt work.. damn now i have mouths to feed there go my startup dreams while richie richie is on his tenth living off other people's money. Now if your poor go ahead startup but you need to feed yourself.
You can't tell me Sam being a student at Stanford, and the benefits of a middle class upbringing, weren't big pros when he was being chosen for that first batch of YC investment. Would a high school drop-out with a GED, with the exact same idea and a co-founder with a similar background to them have been given the same opportunity? Would they have had other investors even remotely interested? Would they have had their company purchased for 43 million dollars?
I do not have a degree, I did not want to take tens of thousands of dollars of student loan debt on. I am 34, companies want a 4-year degree for most entry-level stuff now (and I'm not even CS). I still do not want to take on tens of thousands of dollars of student loan debt.
So change wealthy to "formally educated".
- Step 1: be born into a wealthy middle class family and/or qualify for lots of scholarships and/or qualify for lots of grands and/or be willing to take debt that might take you a decade or more to pay off for the hope of higher earnings
- Step 2: graduate and get a starter job that allows you to minimally service your student loan debt, obtain graduate degree while working
- Step 3: work those connections made with graduate degree, become boss of someone with 10x as much experience on the job with minimal real-world experience yourself.
Those that don't follow the above mold... go ahead... apply for promotions/better positions based on experience alone... oops 4-year degree required to get past pre-application screening, rejection "we're looking for someone with experience AND a 4-year degree", unfortunately the promotion is only open to employees with a 4-year degree so consider getting one... damn now I've been doing the job for the employer for 13 years and my boss has been in the industry for 5, and my boss also qualifies for the extra training the company provides as a manager and manager-level only awards making their CV even more impressive both internally and in the industry... damn, I'm taking home less this year because of the insurance increases... if I go get a degree, in 4-6 years I'll have 40-60k$ of student loan debt at 4.53% interest while only making 34k annually but I'd be eligible to apply for a position making 7% more!
> I look for founders who are scrappy and formidable at the same time (a rarer combination than it sounds); mission-oriented, obsessed with their companies, relentless, and determined; extremely smart (necessary but certainly not sufficient); decisive, fast-moving, and willful; courageous, high-conviction, and willing to be misunderstood; strong communicators and infectious evangelists; and capable of becoming tough and ambitious.
> The spectral signatures of the best companies I’ve invested in are remarkably similar. They usually have most of the following characteristics: compelling founders, a mission that attracts talented people into the startup’s orbit, a product so good that people spontaneously tell their friends about it, a rapidly growing market, a network effect and low marginal costs, the ability to grow fast, and a product that is either fundamentally new or 10x better than existing options.
This reads like a bad Tinder profile. It becomes problematic when aspiring entrepreneurs (I certainly have been guilty of this when I was just starting out) start believing they should now optimize for a certain founder profile that a particular investor (especially a well-known one, like Sam Altman) is looking for. Other investors have other profiles, I know of one who supposedly only invests in GSB graduates, even though his investment track record has very little to do with GSB. When you believe this as a young founder, you'll work hard to fit that profile and will reach out to them when you think you've finally marked off all the check marks, only to find out that the investors will back track on their thesis and find another reason not to fund you. The truth is that most investor theses, no matter how well formulated, break down in the face of FOMO, and will not matter much when it comes to writing checks. The paradox of raising money is painfully obvious: investors will want to invest the most when you least need it, not when you meet some random investment thesis.
It's important to realize that Sam Altman is human too, and makes mistakes like anyone else:
> However, sometimes bad founders have good ideas too, and investing in them is the chronic investing mistake that has been hardest for me to correct. (My second biggest chronic mistake has been chasing investments primarily because other investors like them.)
I'm willing to bet that in reality, most of Sam's investments looked more like this rather than meeting the high standards he laid out. I just wished he would be more humble to admit this.
Do whatever you want with your money. Maybe you'll be lucky. Maybe not. But there's many other ways to strike luck throwing money around.
Angels should be trying to do about 100 deals to break even.
Seeds roughly 50-60 deals
Angels who write 10k checks @ 100 deals JUST to break even extremely tough. Deal sourcing is so hard.
Anyone who thinks they can get by w/ < 100 as an Angel is largely fooling themselves. New VC's fall into this trap regularly. The pro's know the numbers and the pattern matching.
Fool's money is fool's money if you jumped too far w/o knowing what the pool is made of, so at least learn what the primary patterns are before you jump too deep.
Angel.co has a great article because there's enough data now to make some insights. TL;DR; any credible deal - get in on it.
But it needs to be law of large numbers, so don't start until you can support 100/60/30/5 deals for your size. No matter how good the idea/team sounds at the angel level, it's likely to fail. YC still has a 50% failure rate >5 years. Arguably they're the 'great filter'.
I'm not saying that if you can get it from an Angel willing to part with their money you should, but most angels get burned out / burned pretty fast. They should realize that most likely they'll be throwing away their money and never see a return. If they still want to give it to you, then go for it. But there are other ways.
Personally, getting it from customers is the best form of capital. You're actually validating your business and building something of value.
"The proposal would add additional means for individuals to qualify to participate in our private capital markets based on established, clear measures of financial sophistication."
I was there, and that was only half-true, or not really true.
I recall statements like “I’ve never had such a feeling of relief as the moment when I threw it out of a moving car window.” And early adopters generally complaining with almost brain melting frustration at any number of UX boondoggles.
I think people knew somehow it was the future, and couldn’t stop talking about their iPhones, but a lot of the talk was negative.
Without hindsight bias there might be a deeper lesson to learn from the iPhone, that “users love it” isn’t the perfectly accurate wording to summarize adoption conditions.
Oh man, I forgot about that. That was so annoying! I went to the iPhone from Motorola Q9h (and before that a Treo 650) and was like "What?!? I can't copy-paste?!?! What is this BS?!"
My nightmare is a boss who expects synchronous responses to emails.
I'm calling peak bubble in 2020, Softbank companies imploding all over the place... investors ratcheting up terms on later stage rounds, tons of IPOs at 40%+ below last valuation, and we're encouraging more people to invest.
Anybody doing angel investing should consider themselves a "patron of innovation", and assume zero returns.
From personal experience, if you pray on Tuesday evening and if it's a colder than usual morning on Wednesday, you pray on Thursday, I've found that it appeases the rain Gods.
This is comparable to 'founders need to have X quality and Y quality, and respond to emails quickly'. It's silly.
Except it's not silly if what these guys are doing is taking other people's money to invest. Then it all begins to make sense - in the past the priests talked to Gods via special powers. Today, nerds speak to the God of intellect and science. They need to put out predictions and rationalizations to reinforce faith in their ability to talk to the God of intellect and science. It's the same mechanism, the Gods have changed. We're playing a confidence and faith game over and over again.
The entire scientific grant system is based on priesthood, which is why anytime somebody actually makes a scientific breakthrough, the existing priest caste tries their best to ridicule and ex-communicate them while another set of priest-potentials fights to take credit for the discovery and establish themselves as new priests. Real science gets in the way of the priesthood system by undermining the credibility of existing priests.
Hence my bold prediction - within the next 10 years, there'll be a billion dollar start-up with founders who don't quickly reply to emails and whatever other voodoo Sam believes he possesses to tell success from failure apart - it's all hubris, besides the trivialities of 'willing to work hard, intelligent, goal oriented'.
Why is it necessary for writers to over-complicate with this type of phrasing any points that they are trying to make? My thought is it distracts.
Why not just use 'qualities of the best companies'?
I point this out because if you are a startup and you are doing marketing you should avoid anything other than simple language that pretty much anyone can understand.
I could infer what the writer (Sam) meant from the context but there is no reason I should have to do that.
Also little organization or structure in the presentation.
I agree it's not the kind of thing you want to do when marketing to the general public, but the target audience for an essay on how to invest in startups isn't the general public.
And there is a wide divide between people that might invest in startups (someone's uncle or mother) vs. 'the general public' (ie 'watches family feud').
Also to your exact point I am sure there are vastly more people that would be able to understand what was meant by 'a bug that you can exploit' vs. 'spectral signatures'.
I am thinking that someone pitching investors and using what amounts to (or appears to be) an invented or recently invented way of referring to a concept would not have a good reception either.
(...) sounds more arcane than qualities. Therefore it makes the sentence more impressive?
Style over substance.
Realising that there's a "Sam & Max" in the Altman family made me giggle :)