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How to Invest in Startups (samaltman.com)
446 points by eusebio 8 months ago | hide | past | favorite | 134 comments



> 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 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.


I have a feeling that this is all past results that don't guarantee future performance. It is tuned to the time when Google, Amazon and Facebook were created - but this evolution phase is over.

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%

"""

plus correction:

"""

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.

"""


> where would $1 have been best invested on March 25, 2015, when Altman wrote his post?

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.


This is weird, because if you are talking about tenor of 10 years, you need to include the 90% of companies that exited at $0.


Of course you include them - the whole point of VC investing is that even if most of your companies exited at $0, the 1 10,000%+ return made up for it.


It was not a criticism to Altman - I only quote it for veracity - the important part is the data. Altman's bet was that there was no bubble in 2015 and that his unicorn basked would not lose money, and he was right.


> the important part is the data. Altman's bet was that there was no bubble in 2015 and that his unicorn basked would not lose money, and he was right.

But thats my point. This is a terrible analysis bc the data presented is not scoped appropriately to fit the narrative.


Wrong timeframe for the startups. For Uber, the timefime would have been 2011 with its series A and B, not late stage growth rounds. You buy in at the $60M valuation with the potential for billions, not actual valuation in the billions. In 2015, the "unicorn" to invest in would have been something like Pendo.


I agree that investing in the SP500 and Big Tech might be better for an individual investor without access to earlier rounds. For anyone reading your comment though, it's worth keeping in mind that the stock price is not just based on current and past performance, but also the expected future value of the unicorn (specifically: the present value of expected future dividends). A unicorn can grow exponentially and still show ordinary stock price appreciation, if that degree of exponential growth was already "baked into" the stock.


Those companies you list are just big companies that havent gone public yet. They should be added to your s&p bucket.

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.


VCs aren't all the same. Despite Sam Altman's advice there are many which pursue a lower risk / lower return model, possibly focused on a particular vertical. They may be less famous and won't necessarily have offices on Sand Hill Rd, but their money is the same color.


This advice sounds overfitted to the current economic environment which is founded on fiat and is therefore highly artificial and not based on real value that people earned doing useful things. Once the fundamentals of finance change, this advice will be no longer valid. The tech economy is based entirely on monopolizing user attention, this is not a natural state of things. The current winner-takes-it-all tech economy has created a much bigger and growing army of highly skilled losers, there are enough of them that they can distort society and governments. I think Bitcoin, Brexit and Trump are the product of a growing class of people who are just beginning to exercise their collective power.

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.


“ 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.

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.


The purpose of start up investing is to find companies that are going to become more valuable. In order to do that you need to predict what other later stage investors are going to find valuable. You're not there to change the world, you're there to flip a dog-walking service for 10x return. So that dog walking service better be run by a tall white guy who practices yoga and constantly talks about transforming the world.


10x returns are great for VCs will billion+ portfolios.

10x returns on seed investments is arguably too low to justify the risk.


You have that exactly flipped.

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.


This is an overstatement. For most VCs, if failure rates within your portfolio exceed 50%, it gets hard to generate top quartile returns (unless you stumble on the rare unicorn). A more typical distribution for an early stage institutional investor (ie not a seed fund but a fund that leads investments, sits on boards, etc) is 40% of the fund failing. 25% producing >3x return (ideally with at least one or two >10x). and 35% sitting in middle.


i don't think you understood my point at all


I don't think I did either. Can you try and explain it?


It seems your analysis isn't very generous. Your example would likely fail the litmus test laid out in the first paragraph on at least these points (at the very least):

- 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.


I'm sure the wag founders are talented. I'm sure that some of wag's customers love it. I'm sure that you can argue that it has the same network effect as uber. I'm sure the founders of wag will effuse about a paradigm shift in the canine ambulatory marketplace of ideas.


You are missing the main point.

- the startups need money, and for some reason, I can provide it before anyone else.


One example of a type of company where decacorn-or-nothing investing doesn't work is biotech / pharma, which is the second biggest VC sector after pharma

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 [0]

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

[0] https://www.baybridgebio.com/blog/anatomy_of_a_decacorn.html


Well there are a lot more types of successful company than there are companies that are successful investments from outsiders. A high school friend of mine has a successful house painting business that does millions of dollars per year but he grew it the old fashioned way by bootstrapping and I don’t think it would have ever been a viable investment candidate.


The problem with anecdotes about successful friends, is that you don't know how many unsuccessful friends you had (time and money invested for no return), and you don't know the volatility of those investments (extra returns required for extra risk). E.G. VC funds have huge volatility and aim for 20% p.a. return for LP, which implies that individual founders have higher volatility and need higher returns than that to cover opportunity costs.

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).


> 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.

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.


Right, but that is just one way to do it. In the hypothetical scenario that every investor chased only $10B+ potential companies exclusively, $100M-$1B companies would be super cheap and those could be profitable wins.


Maybe, but I'm skeptical that you could make a significant return on a collection of smaller (let's say $100M) companies. Statistically, most of them are going to fail, so the return on each of the successful ones needs to be pretty high in order to come out on top, but I just don't see how that could be the case unless their starting valuations are incredibly low. I can't see that being nearly as profitable as a single $50B unicorn.


You'd be right if the valuations of startups were independent of their eventual market size. In that case, it makes no sense to invest in a smaller company.

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.


Can you list any of the companies you invested in? I'm very skeptical that start-ups are just sitting around that have this potential would allow any random angel person to invest.

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.


And it is how you should think when you join a startup, which is an investment by itself.


What?! This almost reads like you're saying the market rewards behavior that doesn't really create a variety of competitive and useful products.

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.


> but people tend to be either slow movers or fast movers and that seems harder to change. Being a fast mover is a big thing; a somewhat trivial example is that I have almost never made money investing in founders who do not respond quickly to important emails.

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).


I think there are areas where slow movers have an advantage. For instance, an area where the cost of an iteration is high - a slow mover may have an advantage planning and executing the iteration.

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.


I struggle with this daily.

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.


I changed myself to handle this and then reverted. I'm trying to fix it again. I think the key thing is related to something else they say about effective founders: when faced with a hard problem they must solve, they run towards 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.


I've worked on this part of myself alot, and I think the core idea that changed it for me is clearly articulating the problem you're solving and not over identifying yourself with your work product.

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.


I’m successful by taking advantage of it:

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).


In my experience, a great founder should be good all three of these: 1) thinking fast, 2) thinking slow, and 3) knowing when to think fast or slow. It's easier to determine if someone isn't great at thinking fast (or doesn't know when they should think fast), for example if they don't respond quickly to an important email.

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.


As a fast mover, with a team of slow movers, I'd suggest that you can recognize your slow mover tendency and team up with a fast mover.

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.


Some comments in here seem to miss the point. Sam’s perspective here is from an investor’s pov. He’s not saying that everybody should build a unicorn. From a VC/Angel perspective it only makes sense to invest in those kinds of companies. So if you’re not that kind of company, you probably shouldn’t bother running after VC money. Instead, build a profitable business over which you have full control and can support you, your team and preferably make you financially independent.

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.


VC != Angel. The only thing they have in common is exchanging cash for equity. Little else is the same.


> 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.


So these companies are red flags and regrettable experiences for you?

Spotify

GitHub

Dropbox

Facebook (+ Whatsapp, IG)

Google

Twitter

AirBnB

Slack

Uber/Lyft

Amazon

etc, etc. I could keep going all day.


There's only two on that list that I use and both on the desktop, not as an app. One that I regret signing up for and am in the process of moving away from; the other I use anonymously and would like to see displaced.


You don't use Google Maps? No LinkedIn? Stripe? Square? SpaceX? Tesla? Unity? Epic Games? Twilio? Docker? Elastic? Cloudflare? Android? YouTube?

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.


I see SpaceX and Tesla as different. They are engineering/manufacturing companies and have a legitimate need for venture capital to help meet the very heavy capex demands on such companies in their first 10 or so years. (I also wouldn't include Cloudflare).

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.


Sometimes it feels like a lot of the attempts to find themes and trends in terms of what makes startups successful are very much in hindsight. I'm not saying you can't tune your vision to some degree to identify strong startups, but it seems like a lot of the time people are looking at successful/strong founders and then identifying any of the traits they have as markers of success. I guess there is a pattern though? There's a reason successful VCs continue to succeed and aren't just one hit wonders..


The only pattern is "resourceful" founders and plenty of money. Saying there is science behind investing in early stage startups is like saying there is science in finding out successful humans. It's all hogwash. Market size, MRR, ARR TAM, PAM, CAM, WHAM are all absolutely irrelevant and just straws that investors like to clutch to when they have no idea what to do. (Microsoft started writing basic programs with just few thousand basic programmers, facebook was hotornot app, google was a search app etc etc)

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 far more important than founders or how much money they have. How much money they have is almost irrelevant because if there's an opportunity there they can get traction and if they get traction, they can always get more money. Start ups don't fail because they didn't have enough runway, they fail because they don't get traction.

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.


I don't really agree with the first part. The world is packed with startup founders who are obstinately cranking away on ideas years after it's become obvious to everyone that it will never work.

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.


This is why I quoted "resourceful" because this is not intelligence or anything quantifiable. Success has almost nothing to do with intelligence, if intelligence can even be precisely defined. I remember the CEO of Redhat quoting that he decided to do a startup because he thought he was not intelligent enough for working.

"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 only pattern is "resourceful" founders and plenty of money.

The market is pretty important too.


What are some ways to determine how big a market is currently and how big it will be?


Ooh, good question. (How big a market is currently is a matter of simple research, so I’m mostly interested in trying to guess about how a market will change.)

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.


What types of data would one look at to try and back up that story?


talk to potential customers. Don’t ask them if they like the product idea. Try to understand if the problem it solves is a burning problem.


For mature industries you can probably look at published government stats or aggregate the financials of leading companies.

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.


open-source projects from big companies. But when they are young. For example, TensorFlow 0.5, etc.

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.


my "tin foil hat conspiracy" is that all the talk in tech about startup investing just distracts everyone from real wealth creating opportunities that already exist in public markets that literally anyone can access.

seed investors/VCs/etc are incentivized to discount public equity opportunities because they're trying to prove their own value to their LPs


VC is an industry unto itself, a discrete sport even, and essays like this are defined in terms of that industry: the business of "exits" by acquisition or IPO. Opportunities that anyone can access are thoroughly offtopic.

Frankly, I have to wonder who is the audience for this post.


>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).


This is not conspiracy, but it's truth. People who have very little leverage or access to superior deal flow should NOT be investing in startups, which, with very few exceptions, provide minimal, if any returns.

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.


Investors should allocate money to both, if possible.

I don't see discussion of VC as a distraction any more than discussing bonds would be a distraction.


I'm more thinking more from the perspective of your average tech person who might be considering angel or startup investing. There's a very real "myth" that the only way to strike it rich is to invest in private startups vs public investing.


Your average tech person shouldn't be considering angel investing in my opinion, and should only allocate a small portion of their portfolio to VC. It's under-performed the public market since the late 90s, and I don't think that's going to change any time soon, but it could in theory.

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.


Yes, more tech folks should read "The Millionaire Next Door."


right...and if you want to rev up the risk then buy deep in the money options in large cap tech stocks

most people will never have access to the best seed investments anyway


Most folks don't realize how simple it is to set themselves up for life if they start investing early and consistently. This is especially true on a "tech" income. This stuff is not taught in school.


ehh this is all relatively new.

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.


Yes. I've been working and investing since the late 90's. It's never been like this. Very crazy.

And hopefully the kids making 300k/year+ are smart enough to save and invest 50% of their income.


> There's a very real "myth" that the only way to strike it rich is to invest in private startups vs public investing.

It depends on your goals. Private investing has much higher risk/reward.


Most people who aren’t named Sam Altman will never access the best seed investments. I would’ve invested in Stripe in 2012 too but couldn’t even if I wanted to.

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...


> I’d consider investing in biopharma to be equivalent in risk reward to early stage startup investing.

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.


it's definitely a gamble...not sure how to necessarily measure whether it's any more or less than early stage tech investing, though. at least your investment is liquid, which is big, and the timeline for trials, readouts, etc. is known relatively far in advance.

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.


Both are obviously a gamble, but pharma is more of a black box than tech.

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.


"The spectral signatures of the best companies I’ve invested in are remarkably similar. "

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 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.


In our customer portfolio we have several of these. But definitely not all of them. VCs good at helping companies are usually early stage. Later on you're more or less expected to fend for yourself unless a crisis hits.

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.


YC (if that counts) and a16z have a reputation for being very good at it.


> Finally, I’ve found that most of the time when founders call asking for vague help, what they are really asking for is emotional support from a friend. Invite them over to your house, make them tea or pour them a drink, and start listening to their struggles.

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?


> 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.


You're very right. What I was referring to was actually relative to the external world. IMHO it's easy to fall in the trap of seeing investors as "antagonists" you gotta win over, ready to spot any weakness even AFTER investing in you, but in truth, they're actually really rooting for you. With the major exception of vested employees, there's no one else that will root for you as much as they do


> It seems that more people want to be investors than founders

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.


I think the returns are in the Series A.

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....


As a fellow aspiring essayist and man of letters, please greet this comment with a bit of forgiveness for I assure you I have the utmost empathy for anyone tasked with writing an essay in the genre of "generalizable advice for startup founders and investors" or "observations on capitalism and the role of startups therein". But let my gripe also be recorded as follows. Why must we continually imbibe to the dogma of successful angel investors with such utter disregard for critical thinking? Upon first glance I noticed the recycling of the old trope the iPhone, which I've seen before in this essayist's prose. Steve Ballmer pointed out that it was the bundling of the iPhone with AT&T contracts that allowed it to expand, not some merry band of first generation iPhone lovers. I recall with equal love and loyalty my Creative Zen Mosaic mp3 player, circa 2009, which led to no such outcome for Creative, not for lack of my extreme love and admiration. And let it also be known that the essay commits no shortage of fallacies, most notably the straw man fallacy, in which we are led to believe that most investors think only about the current size of the market. Either we are supposed to believe that those in positions of wealth, power, and influence, have no concept of how markets might change in size over time, or might not have a concept of time altogether. Both equally unlikely. Instead, we tell ourselves smugly, that investors must all be robber baron caricatures like the oilmen of yore or the real estate tycoon who now inhabits the white house, completely unaware of the changing and dynamic nature of the world, and that we, though we may be poor, might be able to create fabulous wealth with this secret knowledge.


Anyone know anything about investing in podcasts? Like, suppose you find a fresh new one, where it has a lot of potential but just needs more practice/exposure/equipment. And you want to help them get there quicker by giving say $20,000 in hopes they hit it big and their show becomes very profitable down the road.

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.


What's the exit / return for the investor? You're better off just sponsoring it or finding sponsors for them and splitting the proceeds or just giving it all to them. But investors? I don't think there's a rational strategy here.


Poking around I found this: https://pod.fund/

Apparently they are investing in podcasts with a lot of potential. And then when they become profitable they take a cut of the earnings.


It's basically a high interest unsecured loan on future revenues. It's very much the Mr. Wonderful model from Shark Tank. 7-15% return on revenues for 3-5 years on $25k-$50k investment. Maybe it makes sense for some, maybe it doesn't. But as an asset category? I wouldn't be plowing money into podcasts expecting much of a return. The successful podcasts don't need your money.


This sound pretty interesting, I wonder if the bar to entry is so low for an individual that external investment is not needed.


There's glimpses of this out there. Leon Neyfakh created the podcast Slow Burn while working for slate. But he wanted to make a second podcast called Fiasco, but Slate wasn't on board with it or Leon was tired of slate or something and Leo had to do it on his own. But the problem was, Leo didn't have the funds to quit his job at Slate and make Fiasco. This would be a very heavily reported podcast, traveling, interviews, research, editor, producers etc are all needed. So Luminary got in contact with Leo, and funded the whole thing. Gave Leo enough money to make Fiasco with the condition that Luminary has an exclusive on the show. So there's an example of how a company gave Leo the funding to make it happen and is possibly getting back that money somehow.


Step one: Be born into a upper middle class to uber wealthy family with connections to even more money & power (was in an incubator out of 10 of us 1 succeeded; sold his company for $350 million & his father was a VC)

Step two: 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

Step three: 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.


And, at least anecdotally, I've found similar to be true for just people in general. Being from a family with means acts as a de facto dues card being invested in (education, upbringing, connections) and a college degree acts as a de facto dues card for general employment.

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!


Sam Altman has this weird style of writing with such an authoritative voice to sound convincing with very little substance to back up his claims (my other favorite one is the one about "life advice" when he turned 30 years old [1]). It would be perfectly fine to convey the same thoughts by just being a bit more humble and make it clear that these are just his (unfounded) opinions.

> 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.

[1] https://blog.samaltman.com/the-days-are-long-but-the-decades...


I call it the Hacker (News) Essay style and it's a persuasive essay style. Paul Graham writes in the same style. So I see its adoption as the result of the master-apprentice process. It is most effective with 20:20 hindsight because nobody can predict the future.


Fool me once. Fool me twice. Oh heck, fool me three times. But I'm not going to be fooled again. I've stopped investing in startups (so-called angel investing) when I realized that it's a fools' errand to invest in super early stage startups or in "convertible notes" or "pre-seed rounds" without any sort of informational or operational leverage. I'd rather invest in myself and other asset classes.


I've never considered investing, but certainly from looking at it from the prospective founder side, it seemed rather unfair; angel investors seem to barely end up with a better valuation than subsequent investors, despite taking substantially more risk.


Bingo. Angels = Fool's Funding. If you're going to take money, take it from "professional" investors who are investing other people's money. If you are looking to invest your own money, invest with professionals / index funds / professionally managed funds.

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.


But fool you ten times, and you get Dropbox.


10x that number and you're on the right track (still hoping for a Dropbox).

Angels should be trying to do about 100 deals to break even. Seeds roughly 50-60 deals VC's 30 PEG 5-10

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.


Is that 100 startups with ideas, you would be willing to build yourself?


As an investor, no, don't limit yourself to ideas you would build yourself. Know just enough to decide whether the idea has merit and the team is worth the trouble.

Angel.co has a great article because there's enough data now to make some insights[0]. 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'.

https://angel.co/blog/venture-returns


The typical angel investor will never see a Dropbox. The numbers game doesn't work without some sort of unfair / assymetrical access.


Fair enough, but then how is an entrepreneur like myself expected to get the necessary capital to create an operation?


Customers? Various non-angel funds? Personal savings? Credit cards? Crowdfunding? Debt? These are all the approaches people have used.

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.


That's why it's called "building a business" and not "hustling a couple dentists out of a few million dollars."


The accreditation rules really bother me. Excluding people based solely on wealth is silly. I think you should be able to take a test to prove you know enough to invest.


Eh. The U.S. education system has taught me that anyone* can beat any* test. Seems like there's value in saying "if you really fuck up, you are at least have a background that says this will not be your entire livelihood."

*almost.


The SEC is discussing changing this: https://www.sec.gov/news/press-release/2019-265

"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."


You don't have to be accredited to invest. However, other accredited investors won't want to share the cap-table with you.


‘ For example, although the iPhone was derided for not having many users in its first year or two, most people who had an iPhone raved about it in a way that they never did about previous smartphones.’

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.


I think part of what kept the iPhone going forward was the inevitability of the many minor flaws and missing features (Copy+Paste!) being added in the near future.


>and missing features (Copy+Paste!)

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?!"


> I have almost never made money investing in founders who do not respond quickly to important emails.

My nightmare is a boss who expects synchronous responses to emails.


Potentially really bad timing on this post.

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.


It would also be interesting to see how to short startups.


Interesting that both sama and pg have both used the phrase "spectral signature" in articles published within a week of each other.


Step 1 is really: "be unlike 70-90% of the United States and actually be able to qualify as an investor. Good luck getting there."


For those who don’t think public markets present enough risk, Nancy Pelosi is set to net $130K off Facebook call options expiring this week http://clerk.house.gov/public_disc/ptr-pdfs/2018/20010631.pd...


Can you share the link for all Congress? or how does one browse these declarations?


Yes you can easily search by congressperson on that website


For some reason made me think of Matthew McConaughey speech in The Wolf of Wall Street


Not a single thing about modelling? Do VCs even know basic accounting? Does anybody care about balance sheets, income statements and reports? "Accounting is the language of business", if you believe that old guy from Nebraska.


side question - are these "invest in pre-ipo shares" services that offer private shares to semi-public investors worth looking at ?


Off topic: I can't subscribe to this blog with any of my emails (at the bottom of the page), getting a "Invalid email" for literally any valid email address I would enter.


If you swap the context of investing in start-ups to the extreme of praying to the correct Gods to get rainfall, you'll be hard pressed to find any differences.

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'.


Maybe it just makes Sam’s life easier if his founders respond to emails fast


> The spectral signatures of the best companies I’ve invested in are remarkably similar

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.


To many people (including me), this type of phrasing doesn't distract. It draws a more vivid image of what he means. I suspect the same is true for you with other turns of phrase; before the spectral signature thing, for example, he calls investor laziness "a bug that you can exploit" rather than directly saying "other investors should do this thing so you will have an advantage if you do it".

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.


We will have to disagree on the point I guess. To me it's just a typical barrier that both tech people and attorneys throw up to keep out newbies and/or make it more difficult for them. And it's also somewhat (for lack of a better way to put it ) 'snotty' you could say.

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.


I don't think it distracts, I think it's an intentional deflection and abuse of the phrase to make something pseudoscientific sound much more rational than it really is.


> The spectral signatures

(...) sounds more arcane than qualities. Therefore it makes the sentence more impressive?

Style over substance.


Thanks to Jack Altman, Max Altman, and Luke Miles for reviewing drafts of this

Realising that there's a "Sam & Max" in the Altman family made me giggle :)




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