The New Funding Landscape

by anateus • 16 years ago

246 51 16 years ago

ecuzzillo• 16 years ago

s/hoplessly/hopelessly/

Edit: If someone who downmodded feels like explaining, please do, because I thought it was a nice thing to do to correct typos in someone's essay.

jpwagner• 16 years ago

correcting typos should be reserved for when it causes confusion. in this case, no one thought he was describing a rabbit with no legs.

csallen3• 16 years ago

> So if some of the super-angels were looking for companies that could get acquired quickly, that would explain why they'd care about valuations. But why would they be looking for those? Because depending on the meaning of "quickly," it could actually be very profitable. A company that gets acquired for 30 million is a failure to a VC, but it could be a 10x return for an angel, and moreover, a quick 10x return. Rate of return is what matters in investing—not the multiple you get, but the multiple per year. If a super-angel gets 10x in one year, that's a higher rate of return than a VC could ever hope to get from a company that took 6 years to go public.

Very true, but this model doesn't seem sustainable to me, unless I greatly underestimate the number of companies that could provide that "quick 10x return" (or unless the amount of money invested remains small and constant year-to-year).

Imagine you start with $10M in investments this year and make 10x. To make the same return next year, you've gotta find enough companies capable of a 10x return to invest all $100M you now have. Should you succeed, the following year you'd have $1B to invest. In a very short amount of time, your limiting factor switches from the amount of money you have to invest to the number of quality companies you can find to invest in.

It seems their rate of return is going to significantly decrease, year after year, until they're forced to change their strategy to one more in line with what the VCs are doing.

hitonagashi• 16 years ago

That assumes that every valuation is aiming for the 'quick buck', the x10 return.

It could be that if the angels are less certain of whether a company can balloon, they demand the more exact valuation in the theory of making that a x10 portfolio member..

brk• 16 years ago

The scenarios are greatly simplified here, so it's hard make direct comparisons. But, on the surface it sounds like you're assuming the investment size stays relatively constant.

You might invest $10M in a web-type startup this year, and $1B in a radical new solar panel manufacturing facility 2 years later that promises to halve the price of solar-watts, etc. It also assumes that everyone wants to reinvest 100% every year, you'd get some investors who would be happy to just make back the $20M they lost in another market, and not keep doubling down.

So, I think the model is sustainable for longer than you might first guess.

metageek• 16 years ago

Excuse me, I went to upvote this, missed, and downvoted it instead. Sorry.

greendestiny• 16 years ago

That's assuming every single one of your investments gets 10x. Any kind of very naive exponential assumptions are going to look silly quite quickly. Besides other people would be willing to take on those investments even if they are too small for these incredibly lucky super angels.

csallen3• 16 years ago

Well, it's assuming your investments average 10x yearly. Of course some will tank and some will get more than 10x.

But my point is that, over 6 years, you won't be able to get 10^6, or really anywhere near that, because: (1) That would require re-investing all your returns, and as PG mentioned most of them have to go back to your limited partners. (2) Even if you could re-invest all your returns, it would be impossible to maintain an average of 10x yearly with that much money.

So the super angels can't really expect to find phenomenal success by just looking for quick exits. They need big exits too. Which means caring more about finding winners and less about valuations.

pg3• 16 years ago

You wouldn't reinvest all your returns. You'd distribute most of them to your limited partners (the people who supplied the money).

csallen3• 16 years ago

Right. I guess what I wanted to point out is that you may be overestimating the super angels' strategy and the returns VCs would have to get to compete ("10^6—one million x"). If the super angels can't reinvest all their returns, they won't actually make anywhere near that much. Even if they could reinvest it all, their returns would diminish each year.

So the question is, how much will they make with their current strategy? I don't know enough about the relevant numbers to do anything more than speculate. But if I had to, I'd bet the super angels are better off focusing on finding big winners than they are worrying about valuations and quick returns.

davidw• 16 years ago

I think some discussion of the changing economics of web startups would have been in order. The reason why smaller investments are becoming more common is because people can do more with less. So perhaps VC's will simply focus on other industries like biotech, which don't seem to have that "problem" just yet.

Also:

s/risk depends/Risk depends/

eande• 16 years ago

>Who will win, the super-angels or the VCs? I see the start-up companies and entrepreneurs the winners here for now. Question is how long this new arrangement with with super angels is sustainable.

mrshoe• 16 years ago

Angel investing is kind of a fad right now. Everyone's doing it. My gut instinct is that it's at least a mini bubble. In 3-5 years a lot of angels are going to be unhappy about negative returns, the stock market is going to be looking stronger, and they'll shift their money back to stocks and bonds.

Surely this huge influx of angel investors has contributed to the much higher valuations early stage startups have been exacting in recent months. When many of these new angel investors wind up losing money and angel investing is no longer the cool thing to do, those sky high valuations will probably return to normalcy.

These are just my personal predictions, and I could be completely wrong. During his talk, pg said he'd wondered if we might be seeing a bubble and decided that we're not. Who knows? Either way, I think that we, as entrepreneurs, should take advantage of the current situation.

philwelch2• 16 years ago

The question is who these angels are, really. More startups means hopefully more successful startups and hence more ex-founder angels. But there seems to be a weird trend of celebrities doing angel investing, and that will probably fade out of fashion.

rythie3• 16 years ago

It depends how much of their wealth they are investing. It could be that many of them want be part of the startup scene without working on a startup of their own. Wasn't that the orignal idea of angels? So a return is a bonus.

mloc2• 16 years ago

Everyone who made a few hundred thousand $ and their sisters, turned into angel investors in the valley in the recent years.

The reason in my opinion is the prestige that derives from being a startup investor. I know at least 5-6 people who do this with one semi-successful startup as their experience.

Naturally, this means more supply which results to higher valuations and more startups being funded. So, the bar gets lower and I expect that the returns are not going to be great for most.

runT1ME• 16 years ago

I think a question to ask though, is will these type of pastime angels continue to invest even if the returns aren't spectacular? Are they doing it for fun and some cash, or are they doing it because they think it's the best way to make money?

bkudria• 16 years ago

I asked PG to clarify his thoughts on why this isn't a bubble - he was referring to the SV landscape in general. His definition of a bubble, IIRC: when people overpay with the expectation that others will overpay even more. He doesn't think that's happening here.

(PG, feel free to correct me if I misinterpreted your answer)

rms• 16 years ago

Yeah... in my opinion there is clearly more money floating around startup investment than is strictly rational but it's a long way from a systemic bubble.

pg3• 16 years ago

At YC at least it's not mainly new angels who are driving up valuations. The investors in the last YC batch were pretty much the usual suspects. And this was especially true of the earliest investors in each startup. New angels usually aren't confident enough to move fast; they tend to straggle in at the end of the round.

netcan• 16 years ago

Are you sure stocks & bonds are a substitute for angel investing? It's an interesting question. Maybe it is to some extent, a hobby, a substitute for golf or travel.

iamelgringo• 16 years ago

Angel investing is kind of a fad right now. Everyone's doing it. My gut instinct is that it's at least a mini bubble

I disagree. I believe it's a long term trend that isn't going to change any time soon. Around 3-4% of the population in the SF Bay area are millionaires. The majority of those have probably created their wealth in Tech, so I think it's completely reasonable that the number of angel investors in the area could increase to the thousands. Right now, the Angel List only has around 450 angels listed, but that number seems to be growing quickly.

Not only that, but when Facebook, Yelp, Twitter, LinkedIN decide to start IPO'ing, there's going to be a huge motivation for investors to try and find the next Facebook/Yelp/Google/etc...

I'm sure the funding pipeline will slow down in a couple of years, but I also think that we're seeing a fundamental change in how Silicon Valley works.

dools• 16 years ago

Whoever they are - send some to Australia!! The funding situation over here is a travesty for anything that doesn't have a patent attached to it (in my experience, anyway).

chris123• 16 years ago

To Paul G: What's the ETA on the model convertible note you said http://news.ycombinator.com/item?id=1655585 you guys were releasing soon?

pg3• 16 years ago

Oops, yes, I should talk to someone about that.

notAdvertising• 16 years ago

Ok. Negative points for my last comment justified.

Here is my dilemma:

Our company has created an online application we call "Supertrainer."

The reason we named it "Supertrainer" is because we are providing personal trainers with tools that allow them to separate themselves from all other personal trainers out there. There is a tangible and measurable difference between the average personal trainer and the "Supertrainer," and as we continue development, this concept will become even more so apparent.

My question is... what evidence actually supports the claim for "Super Angels" to call themselves "Super". What separates these guys from all the other Angel Investors I've met, and all the other VC's I've met?

It certainly isn't the amount of money they're investing and it certainly isn't the number of companies they're investing in. Are they "riskier", and if so, how on Earth could you possibly quantify such a thing?

I challenge the name. If I am provided evidence that truly separates a "Super Angel" from the other kinds of investors out there, I may be able to accept such a claim, but as of now, it seems more like an overly hyped PR move.

I love what groups like YC are doing, but calling them "Super Investors" loses credibility in my mind.

lisper• 16 years ago

I don't normally downvote or harsh on comments because there are plenty of other people around here doing that, but in this case I'm going to apply the golden rule and give you some brutally honest feedback that I wish someone would give me if I were digging myself into a hole the way you are doing:

> I challenge the name.

If, as you say, you are trying to start a company then you should have twenty thousand more important things to do than to hang out here quibbling over some terminology that doesn't matter anyway. The "super angels" are what they are. What difference does it make if they aren't "super"? Or even "angels"? How is resolving this going to help you make your customers happier?

Those are rhetorical questions by the way.

nlavezzo3• 16 years ago

>> Or even "angels"?

...Wait a minute, they're NOT supernatural beings?

That awesome observation made me laugh out loud :)

mustpax• 16 years ago

The article is pretty even handed and you'd do well to respond to the contents of it rather than getting stuck on the term "super angel." pg describes the differences between angels and super angels in concrete detail; see if you have something to say about his assessment there.

wwortiz• 16 years ago

It certainly isn't the amount of money they're investing

It actually partly is, super angels (as discussed in the essay) are investing more money than angels, but there is another distinction (mentioned in the essay) they are investing other people's money.

Somewhat paraphrased summary from the essay on the definition of super angels: super angels are VC's who invest less but act more like angels.

jaxn• 16 years ago

I think the definition is based on Super Angels investing other people's money (usually alongside their own money).

VCs - investing other people's money (endowments, etc) Angels - investing their own money Super Angels - investing their own money and other people's money

cli• 16 years ago

I think you should read this: http://www.paulgraham.com/disagree.html

drusenko• 16 years ago

The reason you're being downvoted isn't that you're "biting the hand that feeds", but rather that you're being both pedantic and inaccurate.

Pedantic because your point on the name certainly didn't deserve the belaboring you gave it.

And inaccurate because, well, you're just wrong. The people being called "Super Angels" today are the same people that invested more money than your average angel, and in more startups than your average angel. For example: Ron Conway, Mike Maples, Aydin, Steve Anderson, Dave McClure, etc.

They were all pretty much considered to be in a different class before, but ever since some started investing others' money, they've now earned a new name.

danilocampos• 16 years ago

> As of now, few of the startups that take money from super-angels are ruling out taking VC money. They're just postponing it. But that's still a problem for VCs. Some of the startups that postpone raising VC money may do so well on the angel money they raise that they never bother to raise more.

I'm excited that this is the case. The way I see it, a small, focused group of people can get an extraordinary amount of good work done in a short period. The constraints of lean funding, to the tune of the $600,000 Paul describes, seem like the perfect way to keep focused for the first couple of years. Maybe they're an aberration, but my hat is off to 280 North for pursuing just this strategy. Raise a bit of cash, work hard, build cool stuff, stay focused. They got quite an exit out of it, (from any reasonable founder's perspective) but that's almost beside the point that they got to do their own thing without outside meddling. But maybe there are war stories I should hear before I commit to that position.

As soon as someone is shoving several million dollars into your pockets, they're also commanding you to spend it, which always seems to mean hiring people, bloating your team and throttling your momentum. (see Digg vs. Reddit) That sounds terrible. It also lets you delay figuring out how your company is going to actually generate some money one day, which strikes me as counterproductive.

I'd rather retain a nimble position. Communication is easy, focus is non-negotiable.

notahacker• 16 years ago

> Since angels generally don't take board seats, they don't have this constraint. They're happy to buy only a few percent of you. And although the super-angels are in most respects mini VC funds, they've retained this critical property of angels. They don't take board seats, so they don't need a big percentage of your company.

Though that means you'll get correspondingly less attention from them, it's good news in other respects.

Do many founders consider the additional attention given and influence wielded by VCs as an advantage of taking funding from them?

rythie3• 16 years ago

He doesn't mention crowdfunding at all as model, though it's clearly generating enough funding for several businesses.

philwelch2• 16 years ago

Really? Which businesses? And how do you avoid the obvious legal liability issues involved in crowdfunding?

rythie3• 16 years ago

The Gilf is a good example of something that needed investment to get started: http://www.kickstarter.com/projects/danprovost/glif-iphone-4...

My understanding is that the people funding these sites do not own any part of the business. Clearly for that reason it's not interesting to investors but can be to business owners.

gfodor2• 16 years ago

There's a startup idea in here. It sounds like super angels can be given a pitch and make a decision quickly. So, why not provide a website that can coordinate these pitches. Hell, maybe some angels would be willing to invest some small amount of money by just doing a live pitch over the web. Whatever the minimal barrier to closing a deal is, a startup should come along and automate to make it as fast and painless as possible. One could imagine a Groupon like model being applied here as well, with one super angel really going all out and meeting with the founders multiple times, and the others hopping on board with a click of their mouse after watching a less impactful pitch like a pre-recorded one or just reading the feedback from the "head" super angel.

huangm• 16 years ago

AngelList (http://angel.co/) is innovating a lot in this arena.

gfodor2• 16 years ago

Welp, there ya go. Wish this was around about 18 months ago :)

nlavezzo3• 16 years ago

2nd on this one. Great model.

lukis100• 16 years ago

BTW, a lot of what he writes is covered in a recent presentation he did: http://www.justin.tv/c3oorg/b/272030715

chrisaycock• 16 years ago

This recent discussion of angels vs. VCs is just like the debate of hedge funds vs. proprietary trading firms. What's happened in New York (and Chicago) is that they've gone after after completely different strategies.

Hedge funds have a lot of investor capital and must hold positions overnight, so they concentrate on portfolio construction. Prop shops don't have a lot of capital, so they can dabble in high-frequency trading where the concern is taking single positions as fast as possible, and often earning rebates from the exchange to provide liquidity.

Having worked for both types of firms, I can say that "quant trading" is a pretty broad term. I suspect "investing in start-ups" will come to mean different things. (PG hints at acquisitions vs. IPOs as a differentiating investing goal.)

nlavezzo3• 16 years ago

Wow, that was great. I think every entrepreneur even thinking about raising money should read this whole article. Twice.

This distills the current situation (as I've spent months piecing together through various means) as well as could be desired.

If you're at all concerned about raising money in the near future, get the scoop here and then spend your time building a great company instead of trying to figure out what the deal is with fundraising at the moment.

projectileboy• 16 years ago

What occurs to me reading this is that there's a big untapped market for super-angels in areas _outside_ of Silicon Valley. Sure, there's fewer investment opportunities (to put it mildly), but the super-angels in these areas simply don't exist, and the VCs in these areas are often buffoons.

Is this a legitimate opportunity, or would it simply not be worth the effort to find the few needles in all those haystacks?

c3o• 16 years ago

Dave's 500Startups seems to invest pretty much everywhere, including Asia and Europe.

bdr• 16 years ago

- Can the market really decide whether the VC value-add is worth it? Seems like it would be hard to measure, and that a lot of the information would not be public.

- If the bottleneck for VCs is board seats, why hadn't VCs already stopped taking board seats? Surely they thought of this. Implicit collusion? Entrepreneur ignorance?

- What, would the "mouse skins" analogy from the SS talk have been too distracting? Alas.

jcroberts• 16 years ago

Paul, I noticed some of the people posting edits/fixes (spelling, line break) got down-voted, and others wanted to argue/disagree about it. Silly. Personally, I like having others point out my mistakes; it's the best way for me to know about and fix them. With this in mind...

s/accomodating/accommodating/

I hope no offense is taken. ;)

And now, the more important stuff...

As you know, the terms often control the discussion, so kudos for your notes listing the various terms, i.e. "Super Angels" "Mini-VCs" and "Micro-VCs." Some have balked at the use of the adjective/term "super" as misleading, but the terms typically used, and their corresponding definitions don't have distinct lines. A potential resolution might be using the term "archangel" for the investments/investors beyond the typical "angel" round? Anyone fluent enough in English to know the term "archangel" will understand the implication of it being greater than "angel." --It's just a thought.

Another thought would be to break down the classifications by their most defining aspect, namely amount of capital. The lines will still be imperfect, and you have a better grasp of the numbers than I do, but the language would be generally more clear. I was thinking something like this:

seed: < 30,000

angel: 30,000 - 150,000

archangel: 150,000 - 1,000,000

vc: > 1,000,000

That would classify YC pretty much as you describe it, namely, as a "seed fund," or better said, specializing in "seed round funding." At present, I still not convinced my little idea above is any better than the currently confusing status quo, but at least it's an attempt.

EDIT: Uggh! Fix line breaks ;)

The New Funding Landscape

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