Vinod Khosla: “I Feel Sad Sometimes For YC Companies That Get So Much Hype”(techcrunch.com)
techcrunch.com
Vinod Khosla: “I Feel Sad Sometimes For YC Companies That Get So Much Hype”
http://techcrunch.com/2012/09/12/vinod-khosla-y-combinator/
37 comments
I make about 5 angel investments per year, several of which are YC companies. When I'm pitched by entrepreneurs, it's because they want my help, not my money.
Khosla may have a point. The last few deals I did were five-figure investments at eight-figure valuations. Statistically (my small number of investments) and mathematically (my small piece of large valuations), I'm not going to get rich off the investments. I just do it for fun.
But there may be other folks out there like me, who feel they can help -- but who also like the idea of making money. They might be more active if valuations were smaller, as they were in the olden days.
This is hypothetical. But as an entrepreneur & small angel investor who isn't backed by $1B LPs, it's hard to justify my investments from a financial perspective. I just find 'em fun and like helping when called on. I also find blackjack fun. (I don't really find blackjack fun, but illustrating a point. maybe poker is a better example since there's some skill involved).
That said, PG (and team, and YC alumni) seem to do a fine job of investing early, at low valuations, and mentoring. In other words, PG, Vinod is worried that YC is disrupting the angel investor business. Which is kind of bad-ass.
Khosla may have a point. The last few deals I did were five-figure investments at eight-figure valuations. Statistically (my small number of investments) and mathematically (my small piece of large valuations), I'm not going to get rich off the investments. I just do it for fun.
But there may be other folks out there like me, who feel they can help -- but who also like the idea of making money. They might be more active if valuations were smaller, as they were in the olden days.
This is hypothetical. But as an entrepreneur & small angel investor who isn't backed by $1B LPs, it's hard to justify my investments from a financial perspective. I just find 'em fun and like helping when called on. I also find blackjack fun. (I don't really find blackjack fun, but illustrating a point. maybe poker is a better example since there's some skill involved).
That said, PG (and team, and YC alumni) seem to do a fine job of investing early, at low valuations, and mentoring. In other words, PG, Vinod is worried that YC is disrupting the angel investor business. Which is kind of bad-ass.
Forgive me if these questions are well known or answered elsewhere but I am genuinely interested
How did you invest in some YC companies at 25k levels - was this Pre-yc investment?
Did you come across these (and others I guess) via friends nd family, or are you well known as an angel? (for a given value of well known)
if as your edit says you have been disrupted, where next? Or rather, if the secret seems to be finding talented teams and mentoring them (rather than great ideas), where will a small investor get attention when YC has worldwide reach?
Edit: is it fair to say that mentoring and experience are all well and good but handing over enough cash that a small company just cannot go bust (ie the 150k each YC supposedly gets) actually more useful - telling people not to do something may help but paying for their survival while they learn the lesson is pretty good too.
I have sometimes thought it would be a good idea for governemnts to pay young people entrepreneur stipend - basically YC for anyone. It has to beat some of the ways I spent my twenties, certainly must beat welfare, and probably would make mcjobs just unbearable.
ps
thanks for doing fuckedcompany - it made not being a millionaire in 2002 seem normal again instead of the nagging worry I had not noticed the free money machine outside.
How did you invest in some YC companies at 25k levels - was this Pre-yc investment?
Did you come across these (and others I guess) via friends nd family, or are you well known as an angel? (for a given value of well known)
if as your edit says you have been disrupted, where next? Or rather, if the secret seems to be finding talented teams and mentoring them (rather than great ideas), where will a small investor get attention when YC has worldwide reach?
Edit: is it fair to say that mentoring and experience are all well and good but handing over enough cash that a small company just cannot go bust (ie the 150k each YC supposedly gets) actually more useful - telling people not to do something may help but paying for their survival while they learn the lesson is pretty good too.
I have sometimes thought it would be a good idea for governemnts to pay young people entrepreneur stipend - basically YC for anyone. It has to beat some of the ways I spent my twenties, certainly must beat welfare, and probably would make mcjobs just unbearable.
ps
thanks for doing fuckedcompany - it made not being a millionaire in 2002 seem normal again instead of the nagging worry I had not noticed the free money machine outside.
> How did you invest in some YC companies
I'm usually introduced by friends-of-friends.
> at 25k levels - was this Pre-yc investment?
I removed dollar amounts from my original post, because each deal is different (and because of nda's and such). But in my example I'm talking about post-yc investments (which of course means I don't deserve a low valuation).
I'm usually introduced by friends-of-friends.
> at 25k levels - was this Pre-yc investment?
I removed dollar amounts from my original post, because each deal is different (and because of nda's and such). But in my example I'm talking about post-yc investments (which of course means I don't deserve a low valuation).
"I have sometimes thought it would be a good idea for governemnts to pay young people entrepreneur stipend - basically YC for anyone."
I'm not sure that'd work out so well. For the folks who read Hacker News, sure, they're probably going to be productive (or at least work hard and learn things) if you pay their living costs. However, I know a lot of people from high school & college who, if you paid their living costs, would play video games, smoke weed, or bum around in front of the TV all day. Hell, a good number of them do that already, and live off of boyfriends/parents.
I'm not sure that'd work out so well. For the folks who read Hacker News, sure, they're probably going to be productive (or at least work hard and learn things) if you pay their living costs. However, I know a lot of people from high school & college who, if you paid their living costs, would play video games, smoke weed, or bum around in front of the TV all day. Hell, a good number of them do that already, and live off of boyfriends/parents.
I know but ... My conjecture is that the vast majority of people, put in a situation where they are socially, culturally expected to deliver a better world, and given the time to do so, will.
I know it's pointlessly naive, but otherwise it's mcjobs all round.
I know it's pointlessly naive, but otherwise it's mcjobs all round.
They have to be given the means and direction as well. That's the main missing ingredient: a lot of people have time and expectations, but they don't know where to start. A lot of the people I know in this situation simply spin their wheel in unemployment-related anxiety because they can't think of any concrete first steps that will lead to making a better world.
[deleted]
"I have sometimes thought it would be a good idea for governemnts to pay young people entrepreneur stipend - basically YC for anyone"
Don't know about the US, but things like this exists in some countries[1] as well as in the EU IIRC. Of course, they don't just give out money to everyone :)
1 - http://bit.ly/OrRiYK (google translated)
Don't know about the US, but things like this exists in some countries[1] as well as in the EU IIRC. Of course, they don't just give out money to everyone :)
1 - http://bit.ly/OrRiYK (google translated)
Do you still have my email? Drop me a line.
Another point: A founder of a "hyped" company can always turn down an investor at a high valuation for another investor at a lower valuation (that presumably offers some other sort of value-add).
The situation Vinod describes would therefore only exist if founders either:
a) Didn't agree with him about the role of an early investor, or
b) Were not optimizing for their company's success.
------ edit ------
It's also worth nothing that if (a) above were common and I were a price-sensitive value-add investor I'd give interviews exactly like the one Vinod gave to Techcrunch.
I'd attempt to convince entrepreneurs that they shouldn't focus on valuations and should instead focus on the benefits investors (like my firm) provide. This isn't an uncommon argument (though it normally happens behind closed doors). Google Ventures, for example, is known to make it [1].
1. http://www.forbes.com/sites/tomtaulli/2012/07/19/when-fundin...
The situation Vinod describes would therefore only exist if founders either:
a) Didn't agree with him about the role of an early investor, or
b) Were not optimizing for their company's success.
------ edit ------
It's also worth nothing that if (a) above were common and I were a price-sensitive value-add investor I'd give interviews exactly like the one Vinod gave to Techcrunch.
I'd attempt to convince entrepreneurs that they shouldn't focus on valuations and should instead focus on the benefits investors (like my firm) provide. This isn't an uncommon argument (though it normally happens behind closed doors). Google Ventures, for example, is known to make it [1].
1. http://www.forbes.com/sites/tomtaulli/2012/07/19/when-fundin...
That's a very pg way of arguing, but I think it doesn't pay to simplify that much in this case. Both a) and b) can be the product of imperfect information.
If a lot of new investors are trying to enter the market, the only thing they can really compete with the likes of Khosla Ventures with is valuations. Experienced investors are pricing things based on future they feel their experience can help bring about - but newer players can outbid them by simply being less informed. That could lead to a significant over-valuations (by upping the immediate value and reducing the long term prospects) which is going to be bad for the startup.
If a lot of new investors are trying to enter the market, the only thing they can really compete with the likes of Khosla Ventures with is valuations. Experienced investors are pricing things based on future they feel their experience can help bring about - but newer players can outbid them by simply being less informed. That could lead to a significant over-valuations (by upping the immediate value and reducing the long term prospects) which is going to be bad for the startup.
It's due to adverse selection.
They are able to raise at higher valuations BECAUSE there is more interest. And I do think that people can smell hits early, so there is more interest.
I learned my lesson: I passed on Dropbox at $20m pre, because I felt I needed to invest at lower valuations to be profitable. I was wrong.
They are able to raise at higher valuations BECAUSE there is more interest. And I do think that people can smell hits early, so there is more interest.
I learned my lesson: I passed on Dropbox at $20m pre, because I felt I needed to invest at lower valuations to be profitable. I was wrong.
I was reminded of the advice to not polish the UI of a prototype too much lest it create inflated expectations (http://headrush.typepad.com/creating_passionate_users/2006/1...). Balsamiq's mockups dramatically use this idea.
Also it seems like a pretty thinly-veiled jab that he and investors like him provide better advice than YC and associates, which when laid bare seems quite dubious.
For some reason I see this as a more interesting criticism than simply seeing the pitches as too polished.
As a young company I would guess that it's difficult to compare an investor offering a lot of money and an investor offering incredible resources and guidance — especially if the latter is offering you less money.
Because of the attention that YC companies attract and the amount of energy that goes in to preening their pitches I would wager that YC companies are often faced with this tough decision.
As a young company I would guess that it's difficult to compare an investor offering a lot of money and an investor offering incredible resources and guidance — especially if the latter is offering you less money.
Because of the attention that YC companies attract and the amount of energy that goes in to preening their pitches I would wager that YC companies are often faced with this tough decision.
True, but they also get lots of help solving it. We have a database of all the investors containing feedback from previous YC companies they've invested in, and the YC partners also give a lot of advice by email (as the whole world now knows).
[deleted]
I think he is looking for the next Zuckenberg to say: "give me $50k and here's 25% [of the next Facebook]. What, we need to incorporate?" but YC has done the initial steps.
LMAO. Vinod must be going senile if he forgot the KPCB hype around Bloom Energy.
Not to mention Segway, which was going to supplant the car like cars supplanted horse and buggies.
And those are just the two examples that spring to mind. I'm sure I could come up with a slew if I went back to Y2K (anybody remember the whole kereitsu hype?)
Not to mention Segway, which was going to supplant the car like cars supplanted horse and buggies.
And those are just the two examples that spring to mind. I'm sure I could come up with a slew if I went back to Y2K (anybody remember the whole kereitsu hype?)
I like to think about this criticism in the context of Twitter's recent API pullback and push towards advertising.
When a start-up raises at a valuation that is high, most assume current owners win and new owners lose. Yet I contend that everyone loses.
Setting a val that is too high means the profits needed to achieve a decent return are sky high. More importantly they are different from the early investors/founders.
How much of Twitter's recent strategy is being driven by their multi-million dollar investors (at multi-billion vals) wanting clarity on an exit plan? These guys put large quantums of money in and are pushing hard for dollars back. IMHO, they'll tank the company - all because they raised too much at too higher val.
At the end of the day it's best to have everyone in the company (post-deal) feeling like they got a good deal. Kinda like a partner/wife - you never want to feel like you're the one that's trading down in the relationship.
Same can happen at seed.
Disclosure: I invested in a YC company this round.
When a start-up raises at a valuation that is high, most assume current owners win and new owners lose. Yet I contend that everyone loses.
Setting a val that is too high means the profits needed to achieve a decent return are sky high. More importantly they are different from the early investors/founders.
How much of Twitter's recent strategy is being driven by their multi-million dollar investors (at multi-billion vals) wanting clarity on an exit plan? These guys put large quantums of money in and are pushing hard for dollars back. IMHO, they'll tank the company - all because they raised too much at too higher val.
At the end of the day it's best to have everyone in the company (post-deal) feeling like they got a good deal. Kinda like a partner/wife - you never want to feel like you're the one that's trading down in the relationship.
Same can happen at seed.
Disclosure: I invested in a YC company this round.
"At the end of the day it's best to have everyone in the company (post-deal) feeling like they got a good deal. Kinda like a partner/wife - you never want to feel like you're the one that's trading down in the relationship."
By definition someone is trading down. If the valuation is low, the company and its people lose out on potential money. The FB approach (extreme valuation), while discouraging most people, at least maximized value for those that liquidated at the IPO.
By definition someone is trading down. If the valuation is low, the company and its people lose out on potential money. The FB approach (extreme valuation), while discouraging most people, at least maximized value for those that liquidated at the IPO.
Of course Vinod Khosla has an agenda. However, I know some very smart and helpful investors who don't do convertible notes and/or won't touch YC companies because they think they're overpriced (I'm not one of them).
There is no one-size-fits-all for this. Some companies need certain investors to help them, some are better off getting cheap capital. A smart entrepreneur would decide what his/her company needs and optimize accordingly.
There is no one-size-fits-all for this. Some companies need certain investors to help them, some are better off getting cheap capital. A smart entrepreneur would decide what his/her company needs and optimize accordingly.
As someone who graduated from the last class (S12) I definitely take issue with the "too much polish" on slides comment. PG tells us many times to NOT spend weeks making a pitch deck because it will likely change dramatically during practice. Sure, we are coached and our pitches evolve, but this happens over the course of a few days and we still keep our slides extremely simple because we have 2:15 to speak.
During his TechCrunch Disrupt talk, Khosla explained that the key role of early investors is not funding, but personal attention and guidance.
This particular criticism made me chuckle as one of my fondest memories of my time at YC is of pg giving me advice and feedback in the yc kitchen while preparing the evening dinner for 50+ founders.
This particular criticism made me chuckle as one of my fondest memories of my time at YC is of pg giving me advice and feedback in the yc kitchen while preparing the evening dinner for 50+ founders.
So he's complaining that YC startups won't get the guidance they need from VCs, and hence won't be successful. But isn't that part of the model? That they now have access to a YC network that could give them guidance and insight? Possibly in place of VC?
I remember very clearly queueing in Waterstones Old Street
to buy a book on Marimba - it had sooo much hype that even I thought I needed to get upto speed now
Yes, hype is death to expectation management, but it sure beats everyone ignoring you
this is not the fault of YC companies nor even pg. Just live with it. And keep polishing those pitches :-)
edit : bit more positive
Yes, hype is death to expectation management, but it sure beats everyone ignoring you
this is not the fault of YC companies nor even pg. Just live with it. And keep polishing those pitches :-)
edit : bit more positive
Wow, it's been a while since I've thought about Marimba and their Castanet product. Back then I was working at their competitor (of sorts,) PointCast.
Reminds me also of CriticalPath
Reminds me also of CriticalPath
Wow, Pointcast. What a trigger for my mental Wayback Machine. I woke up to my Pointcast feeds every morning for a long while in college, but I haven't thought about them in years.
Is this like 1st world problems for startups?
Irony: A YC company just won Disrupt.
Woohoo! It's one I invested in. They fit my current investment thesis PERFECTLY, too.
And your current investment thesis is...? :)
businesses that are rentseeking because they have a phone number or address yet the actual work is done by a group of people who are typically independent contractors and are paid only a small % are eminently ripe for disruption.
there are hundreds of industries like this. black car service - the drivers are independant contractors. mechanics, too. there are many more.
there are hundreds of industries like this. black car service - the drivers are independant contractors. mechanics, too. there are many more.
@pud - my apologies I seem not to be able to reply directly - I suspect I edited my post after you replied.
Thank you for a fast reply. And at the risk of seeming rude, if you came on board as an advisor post-YC it was clearly for experience, but how, even as friend of friend did you sell yourself to them (they presumably enjoyed demo day with VCs throwing them money so there was competiton)
Thank you for a fast reply. And at the risk of seeming rude, if you came on board as an advisor post-YC it was clearly for experience, but how, even as friend of friend did you sell yourself to them (they presumably enjoyed demo day with VCs throwing them money so there was competiton)
Any downloadable slick slides that can cause "so much hype that they get valuations"? For someone who don't know how to make one, it'll be blessing.
He is spot on, from reading this board it seems like people think you can use a formula to create a successful start-up, just follow YC's template and you will soon be running a successful company. Get a co-founder,produce a slick presentation...etc.
If your start-up is really good you should just be able to explain in in a few sentences a swift demo and your done, and if you really believe in it then you should not be going with X other cookie cutter start-ups to chase a few dollars from some company with not exactly a good record.
You should have multiple investor's lined up and you should be choosing them not the other way around.
If your start-up is really good you should just be able to explain in in a few sentences a swift demo and your done, and if you really believe in it then you should not be going with X other cookie cutter start-ups to chase a few dollars from some company with not exactly a good record.
You should have multiple investor's lined up and you should be choosing them not the other way around.
It's simply false though that raising money at a high valuation means you don't get investors that help you. If anything it's the opposite; the startups that raise at the highest valuations also tend to raise money from the best VC funds.