The Hacker's Guide to Investors

http://paulgraham.com/guidetoinvestors.html

by byrneseyeview • 19 years ago

59 46 19 years ago

'Most investors are "bottoms" in the sense that the startups they like most are those that are rough with them. When Google stuck Kleiner and Sequoia with a $75 million premoney valuation, their reaction was probably "Ouch! That feels so good."'

I don't think I've read a funnier paragraph about venture investing. Brilliant observation.

usablecontent2• 19 years ago

The fact that PG has been a founder and an investor just helps things.

owinebar2• 19 years ago

It's not just investors. This is a good practice anytime you're trying to sell a big ticket item to a potential customer. It gives them permission to believe the price is worth it.

usablecontent2• 19 years ago

"Since valuations are made up, founders shouldn't care too much about them. That's not the part to focus on. In fact, a high valuation can be a bad thing. If you take funding at a premoney valuation of $10 million, you won't be selling the company for 20. You'll have to sell for over 50 for the VCs to get even a 5x return, which is low to them. More likely they'll want you to hold out for 100. But needing to get a high price decreases the chance of getting bought at all; many companies can buy you for $10 million, but only a handful for 100. And since a startup is like a pass/fail course for the founders, what you want to optimize is your chance of a good outcome, not the percentage of the company you keep." [Excerpt taken from the Essay]

This is exactly the reason Technorati is finding it hard to sell, whereas MyBlogLog got sold within no time and Newroo even before they could launch the product.

rms2• 19 years ago

It's telling that the "comment" link for this essay goes here and no longer to Reddit.

ecuzzillo• 19 years ago

That might be bad; it means that this community will grow in the same way as Reddit did. Which was fine for a while, and maybe it'll be fine here because the powers that be here are less religious about not messing with the content.

pg3• 19 years ago

We're determined to keep the site focused, however many users we get. We kill submissions that are egregiously off-topic.

byrneseyeview2• 19 years ago

Since a social network's value increases at something approaching the square of the growth rate in users [1], it makes sense for wealthy backers to be active participants early on -- which is probably why Peter Thiel has a LinkedIn profile and Tom updates his Myspace.

[1] And a user's incentive to join correlates with the average desirability of other users, in terms of whatever the network focuses on. Link-finding ability for reddit, popularity for Facebook/Myspace, sexual attractiveness for dating sites, disposable income for business networking sites, etc.

mynameishere• 19 years ago

_That means they're less likely to stick you with a business guy as CEO, like VCs used to do in the 90s. If you seem smart and want to do it, they'll let you run the company_

"Let you run the company" ? Surely a single round of funding doesn't take majority ownership from the founders?

wmorein• 19 years ago

There are a number of ways that a VC who owns less that 50% of the company can still push through changes like this.

In some cases this will flat out be a condition of investment, so it is agreed on in advance. If you are really anxious to close the deal it is easy to see why you might agree.

In other cases the composition of the board might be such that a majority might vote for a CEO change. This can be the case when, in addition to the founders and the VCs on the board, there are "independent" directors who might vote with the VCs. If the independents+VCs is greater than 50% of the board, they can usually make a change of CEO.

If the VC does not have 50%, but no individual founder does either, it is possible for the VCs to convince some of the non-CEO founders that it would make sense to bring on "professional" management to increase the possibility of success. Particularly if the founders have some disagreements, this can be tempting.

One other thing that can happen is that as a company goes out to pursue additional rounds of financing, the existing VCs can use that process as leverage to force a change. For example, if they say that they won't invest their pro-rata share in a new round, that can often be a warning sign to other investors. So, the VC might threaten to withhold that investment to convince the CEO to step down.

Majority ownership means a lot, but it is not everything.

PhilipBaddeley2• 19 years ago

Oh yes it can! It is called the Investor Agreement. A 10% shareholder or less can control the company if the terms are in the agreement. Most agreements are not publicly available so it is difficult to know what is going on when you compare deals. Have you ever made an angel investment and then regreted that you did not have more control? VCs have. It is like who wins in the end, it all depends on the x of the VC investment. It is not what it says on the can, it is what's inside that matters.

ashu• 19 years ago

The essay says "You should not start a startup which requires a lot of money". But some startups genuinely require much more money than webapps do. What should a person do in that case, other than being at the mercy of the investors?

rms2• 19 years ago

You just can't do it until you're old enough to either have a lot of money or you have enough connections to get a lot of money.

sethjohn• 19 years ago

I suspect there's a hidden upside to a startup that require a lot of money...it's going to be more difficult for competitors to get off the ground as well.

MobileDigit• 19 years ago

What is 'fuck-you money'?

jey• 19 years ago

http://www.urbandictionary.com/define.php?term=fuck+you+money

http://www.everything2.com/index.pl?node_id=680458

http://www.google.com/search?q=jfgi

davemc500hats2• 19 years ago

in most places, $5M or more.

however in Silicon Valley or New York, probably more like $10-20M.

(note: in some beach towns in thailand or se asia, FU money can be had for under $1M... maybe even a few hundred thou).

still working on mine, btw ;)

- dave mc

boris• 19 years ago

I remember a few years ago Paul was proclaiming that as the cost of starting a company keeps going down, VCs will become extinct. It is interesting to see how the perspective is changing. Now Paul says you need investors to gain advantage over competition even though, oftentimes, a startup needs very little to make a product that people want.

brlewis• 19 years ago

Even more interesting is that he reiterates the advantage of having investors in this essay, which also acknowledges the huge time-cost of funding. This implies that the benefits are worth this high cost. One could disappoint customers or fall behind competitors while engaged full-time in funding.

pg3• 19 years ago

VCs are not identical with investors.

owinebar2• 19 years ago

I can't tell why point 22 shouldn't be titled "Sometimes you need capital other than sweat equity". It's not clear to me why this couldn't come in the form of debt. The only type of debt I recall Paul mentioning is the convertible kind.

I mean, other than the fact you'd have to talk someone into giving you that loan at a reasonable interest rate. Talking investors into giving you the money as a bet for an astronomical interest rate would be easier for companies with no collateral. Still, if you have a revenue stream and can show how a capital expenditure would increase it, it would at least be worth considering.

ido• 19 years ago

You need publicity to make people aware they want your product. If you are not famous (or have a famous investor, like ycombinator), publicity costs a lot of money.

PhilipBaddeley2• 19 years ago

Great essay. How about turning it into a "rich illustration" so everyone can see it and talk about it? Look at my site to see what Dill can achieve http://www.equityfingerprint.com/. Anyone like the idea?

aaaaaa• 19 years ago

This story is really poor without Venture Hacks http://www.venturehacks.com/

smranta• 19 years ago

"Google came along three years later and kicked Yahoo's ass" ha ha.. its cool to read it from Y!ou.

and a very cool article. great points.

syncman• 19 years ago

Great essay, Paul. There are indeed a lot similarities between Vcs and women behaviour patterns. (angels are more like asking a good male friend for some borrowed money...simple, direct, no hiding terms...) Take the "investors" from the subtitles and replace it with "women" and the information is going to work just as right.

I will think more on your points..

thanks again

avocade• 19 years ago

Very inspiring, Paul. I'm so sad I missed the talk. Here's hoping you have a gig somewhere around the time of WWDC in June!

davemc500hats2• 19 years ago

best piece i've read about angel / venture investing in a long time. nice job :)

note: i'm one of a small group of ex-geek angel investors out here in silicon valley, altho admittedly i'm small fry compared to most others. i've done 5-6 deals averaging ~$25-50K, and only because i'm crazy and my wife isn't watching too closely ;) i was fortunate to be at PayPal from 2001-2004, but not so early that i'm rich enough to retire just yet... maybe someday.

enjoyed the article; keep up the great writing!

- dave mcclure http://500hats.typepad.com/

hparash• 19 years ago

In your articles, the target content of an annotation hyperlink should also have a hyperlink that takes the user back to the place in the original content where they were at...

sustento• 19 years ago

Great article in many ways but i nearly fell off my chair when i saw the photos of the team at Redpoint.......that was scary.

web_madness• 19 years ago

VCs look for Sergey & Page? It seems to me that the hype about these two was pure PR, but who actually brought all the business to the company (including the AOL deal) is Omid Kordestani - who, as little as it is known, was third in amount of stock owned, and also has half of the company report to him.

alex_from_ita• 19 years ago

I would like to comment your (P.G.) other essay, about Unions (An alternative theory of Unions): I'm sorry i'm posting here, I did'nt found the link to comment the exact essay.

What you said (and what you usually says) is right from the point of view of a person non really interested in the quality of other people's life.

Is quite obvious to see that the world is producing a lot more than before and that the difference between poor and rich is becoming wider (in USA, your country, more than in Europe, but we are copying you in this too...): the question is not if they were paid more than they were entitled for, and now their price is "the right one".

The question is: which kind of society are we building? Which kind of countries are we shaping? Which world we want to live in? A world made of people who can stand, one beside the other, without slave (official or unofficial...).

You want a society where the stronger eats the weaker. It's not the world I want. I don't want to earn so much, it's not there happiness. Is not buying things that brings happiness: I'd rather prefer a society where the state take part of the resources to take care of people that are lessa ble or lucky or whatever...

I want a better Atene not a better Sparta. And if you have studied philosophy (that you wrong said not teaching nothing to people...very unlucky words) you would had known that no society can resists in such a disparity. You know history better than me: our time, in the west, is not so full of revolutions, but just few years ago we were killing each others...remember that if you push someone's shoulders against a wall, you force him to fight or die.

loveit• 19 years ago

FOUR STARS, THE FIFTH STAR RAN ACROSS THE STREET. loveit

ncm• 19 years ago

The essay neglects what happens to the 9 of 10 companies that don't, as far as the VCs are concerned, pan out. Closing them down means they have to give any remaining money back to the investors -- including their own fees they had already pocketed. Any dollar the company doesn't spend before it dies means money from the VC's own pocket.

The solution is to drain the company. The VCs install executives they owe favors to, at massively inflated salaries. They make the company hand over millions to "market research" and outsourced marketing companies. They make the company sign big service and equipment contracts. Each of these deals means a kickback or a favor owed. Best of all is if the money goes to one of the properties not being drained, or somebody the VC owes, or personally owns stock in.

It's no accident so many companies folded after buying unnecessary enterprise-grade Oracle and Vignette licenses.

dlweinreb• 19 years ago

Having been a co-founder of two VC-backed startups, I can say that everything in this essay makes a lot of sense, sounds very plausible, and is entirely consistent with my experience. Great essay!

holy007lotus• 18 years ago

I am overwhelmed ... seriously I never had such a precise dose about investors.

I am reading all articles one by one for last 6 hours.

And I will continue doing so. Because everything I find here so right and complete.

thanks a lot...

The Hacker's Guide to Investors

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