Y Combinator Founder Paul Graham Issues New Warning to Start-ups

http://www.inc.com/kathleen-kim/y-combinator-advisor-sends-seed-funding-warning.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+inc%2Fheadlines+%28Inc.com+Headlines%29&utm_content=Google+Feedfetcher

by azazo • 14 years ago

188 56 14 years ago

inc.com

dclusin• 14 years ago

I'm a bit confused. Is the Google Ventures dig referring to companies that have already raised seed money from GV, and then try to get series A from them? Or is GV just doing this across the board for all startups that have raised seed rounds using convertible notes?

vnorby• 14 years ago

I don't know if this is true or isn't true, but Google Ventures' counter arguments are red herrings:

  "I don't know what Paul's thinking," Maris said.
  "It's just not true. Our portfolio speaks for itself."

and

  "We've already closed investments on companies from this class,
  so they don't seem to feel that way," Maris said.

Neither of those things mean that what PG is saying is false. Google Ventures is a desirable investor and entrepreneurs would be willing to trade lower caps for a Google stamp of approval on their round. The question is whether it's a matter of their policy to quote a cap at half of a company's existing one, and whether that is an ethical policy. Because they are skirting the question, it certainly makes them look guilty to me.

loceng3• 14 years ago

Guilty of leveraging their name and resources they perhaps offer?

slurgfest• 14 years ago

I am afraid that unless Google is compelling people to accept a deal by force, that using a good bargaining position is just the free market at work.

qq662• 14 years ago

How could it be unethical? I could offer Ferrari $500 for their latest model -- they would would tell me to stick it where the sun don't shine, but it hardly makes the offer unethical. If I was Jay-Z, they'd probably accept my offer for the publicity value, which is what Google is hoping happens to them.

blahedo2• 14 years ago

It'd be unethical if you knew $500 was undervalued and you thought Ferrari didn't, i.e. if they were inexperienced and possibly accidentally undervaluing their own car. Then you would be taking advantage of them.

archangel_one• 14 years ago

Ferrari hardly need Jay-Z (or anyone, really) for publicity, they're a household name on their own.

I do see what you mean, but I'm not sure the metaphor really helps because it reverses who's the big and famous player.

wololo• 14 years ago

Thought this was amusing:

From the article: Google Ventures managing partner Bill Maris blasted back, telling BI that Graham's accusations were "patently absurd."

First example from http://en.wikipedia.org/wiki/Non-denial_denial#Types: Characterizing a statement as "ridiculous" or "absurd" without saying specifically that it is not true

xanados• 14 years ago

I'm a little bit uncomfortable with that heuristic because sometimes things literally are absurd. I think in this case though, Bill Maris is literally not in a position to say whether they are coming in at half the value of other players. He probably doesn't know, or at least doesn't have as many data as Paul Graham.

rabidonrails• 14 years ago

^^ This is dead on.

Summary: PG warns that he sees a pattern at Google Ventures. Google Ventures isn't denying or confirming anything in regards to PG's statement.

Seems simple enough.

atakan_gurkan• 14 years ago

As ugly as it may be, this is _business_, a.k.a. capitalism. Trying to interpret it as everyday human interaction using concepts like "ethics" will fail. Skip this step and try to decide whether you are comfortable or not without using these models from your past (human interaction) experience.

pkaler• 14 years ago

I don't think the problem here is with Google Ventures. The problem is that founders don't understand convertible notes with caps. More by Mark Suster here: http://www.bothsidesofthetable.com/2012/09/05/the-truth-abou...

rdl3• 14 years ago

Independent of capped convertible notes being problematic under some assumptions (essentially, when the market turns down and you raise at less than the cap -- that's 90% of the problem, and 9% of the rest is when you don't then sell for enough to blow the pref out of consideration), an investor trying to lowball you on the cap is no different from lowballing on equity valuation.

If everyone is investing at $12mm, and an investor says "fine, but I'm special, give me $6mm or I won't invest", there's no difference if it's capped convertible note or equity (except that it's technically more difficult to do the investment as equity with different valuations; you can hack it by giving warrants or other benefits I think.)

jbigelow76• 14 years ago

Maybe it's not that the founders don't understand convertible notes. Maybe they are taking the funding at a lower valuation because they're willing to gamble on the likelihood of a (big money, not acqui-hire) acquisition by Google later down the road is more likely.

earbitscom• 14 years ago

Google Ventures, in my experience, tells entrepreneurs that they have little to do with Google. They do not invest in things because they are synergistic with Google, and they may even invest in things that compete with Google. They make it very clear up front that Google Ventures is a separate organization. At most, they may tap into their network within Google to assist you if it makes sense, but any investor worth their weight in Silicon Valley can connect you with Googlers and other important companies.

rdl3• 14 years ago

The phrase I've heard is "Google Ventures is not the Google of venture capital."

sjg007• 14 years ago

Google Vultures?

Vaismania• 14 years ago

It is in Google's nature to try and dip their feet everywhere

crisnoble• 14 years ago

The warning:

"According to the website, the incubator's prominent founder said: "If you're talking to Google Ventures you may be part of a pattern. The pattern is: you've already raised some money at a cap of $x. Then GV says they're interested and wants to invest at a cap of $x/2.""

dchest• 14 years ago

Source link http://www.businessinsider.com/paul-graham-y-combinator-goog...

pg2• 14 years ago

Just so everyone understands, I was not saying that Google Ventures is a bad investor and should be avoided. If we thought that, the email would have been a lot shorter. I was just talking about a structural problem that happens when you've already raised some money on a convertible note with a valuation cap, and an investor offers to invest at a lower cap.

That sort of offer puts founders in a bind, because if you take it (a) it can anger the earlier investors, and (b) perhaps worse, it can, like a "down round" give investors the impression that your prospects are getting worse.

My overall advice about fundraising is to do breadth-first search weighted by expected value. I.e. talk to every investor who's interested but focus on the most promising ones. This is one of many situations whose solution follows from that rule. An investor offering you money on worse terms is at least offering you money, which is better than nothing. But all other things being equal, the expected value of such an investor is lower than that of one willing to invest on the same terms as your existing investors, so you have any of the latter you should focus on them.

loceng3• 14 years ago

Perhaps Google is leveraging their name and their value as a resource? Google Ventures investing in you could also be seen as a strong positive signal too. And not that I know what those resources offered might be, and not saying it is fair to earlier investors, though I would give someone with say media reach more value than say a local silent investor who has nothing other than money to offer.

arkonaut• 14 years ago

Google Ventures is not the "Google" of venture funding. And there are about 5-7 firms that would have this type of brand-value that don't even consider these kind of tactics.

jilt• 14 years ago

Isn't common or even expected for founders and 1st round investors to get diluted by subsequent investment? This comes off to me looking like YC just doesn't want to get diluted, but that happens. Is that not the case?

joshu• 14 years ago

Dilution is usual and expected. A down round is different and worse. Please look it up.

mrkurt• 14 years ago

This is actually a "first round investor" coming in later in the first round and asking for better terms then previous (maybe only days previous) investors got. It's not an additional round of investing.

Traditionally you'd give later investors higher valuations/caps/etc, particularly if you were at or approaching the magical amount of money you need point.

davemc500hats• 14 years ago

Paul, re: your comment "all other things being equal" -- wouldn't you agree that some investors are not at all equal to others? (YC itself included)

seems that GV resources are worth something more than other investors checks by themselves. while i agree there are many investors who are "just a check", there are at least some who bring a lot more to the table than just capital.

anyway, i understand the timing issue of subsequent / lower cap deals, but i wonder if this isn't just a result of a sequencing problem for diff "hi-res" financing negotiations within a period of 30-90 days around the same raise.

pg2• 14 years ago

Sure, some investors are more helpful than others, and GV is probably above average for VC funds. But an investor would have to be really good to invest on a note with a lower cap than previous investors without messing up the startup's fundraising. It can work if the investor is a domain expert that the startup wants to recruit as an advisor, but not otherwise in my experience.

wamatt• 14 years ago

Coincidentally, I was just reading this rather insightful essay on press releases http://paulgraham.com/submarine.html yesterday, and remember a line that stood out:

>'why he's writing about this subject at all.'

Makes one wonder what PG today, would say in response to PG (2005) :p

timpeterson2• 14 years ago

@wamatt, agree regardless of the "why" PG's email feels petty, YCombinator and its way too many startups are jumping the shark

SkyMarshal• 14 years ago

With their business model, the more startups the more likely they are to get a homeruns and base hits, as long as they can maintain a minimum standard that's strongly correlated to outcome (which PG seems to have figured out). It's an odds and numbers game.

rapind• 14 years ago

You started me of on a trail that ended up here (so far): http://www.nytimes.com/2012/07/23/business/venture-capital-f...

Pretty interesting stuff, possibly even inspiring some ideas.

mathewgj• 14 years ago

I'm sure this is both true and reasonable for some companies that did notes with absurdly high caps earlier (which many have) and are now raising more money. Nothing to see here.

trips2• 14 years ago

So is GV consistently approaching startups that are already being funded, i.e., making offers after the project has had a little time to mature?

TinyBig• 14 years ago

Why are startups often disasters internally, as PG says in one of the linked articles?

rsbrown• 14 years ago

This was my favorite line from the article, actually.

The quote in question: "Practically all start-ups internally are disasters"

Not just "often", but "practically all" start-ups. It's true in my experience, and not necessarily a bad thing. Of course, it would be great if everyone acted thoughtfully, didn't let ego get in the way, planned things just enough (but not too much), etc., but that's not just not the way it happens.

Acknowledging this fact, getting okay with it and still forging a highly functional team in the midst of such chaos and tragedy is the key. That's a tall order.

calpaterson• 14 years ago

One of the worst mobile website I've ever seen. I can scroll down on the article, so I click "go to full site". That takes me back to the main page, which is annoying, but I manage to click back to the article, at which point I am put through to the article on the mobile site again. And that's on top of the fact that I have to view a loading throbbler for a text article. Chrome for Android and the Android Browser

markmm2• 14 years ago

If Google are willing to invest in your startup then why the hell would you turn that down?, it's like turning down a BJ from a supermodel, because she demands you do it at her house.

Evbn• 14 years ago

That's not what an investment is.

markmm2• 14 years ago

Did Apple,Google, Facebook, Twitter or Microsoft use an incubator company? Why do people think they are required to be successful?

papsosouid• 14 years ago

It seems pretty hypocritical to be warning people "don't let google rip you off with lowball offers" when you run a company whose business model is "rip off college kids by taking a huge stake in their company in exchange for nothing". Wouldn't "dear google, please don't out-compete us in the ripping off college kids game" have been more honest?

duncan_bayne• 14 years ago

Meta: the Inc.com mobile website offers an horrible experience on my Desire w/ ICS + Chrome. Slow, cluttered and buggy (wouldn't let me scroll to the bottom, kept bouncing back).

It's text content. Why not just a nice simple HTML page: instead of all the 'HTML app' cruft on top?

Y Combinator Founder Paul Graham Issues New Warning to Start-ups

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