Seattle angel investor says few investors add value (2016)(blog.capitalandgrowth.org)
blog.capitalandgrowth.org
Seattle angel investor says few investors add value (2016)
http://blog.capitalandgrowth.org/jon-staenberg/
46 comments
10x means much lower probability of failure in order to get any ROI at all. Failure, sadly, is a lot harder to avoid than founders and VCs would like. 100x means the overwhelming majority of investments can fail and you still make out like a bandit.
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> I’ve been doing this long enough to know that the next big thing won’t happen as quickly as people expect. I am therefore willing to forgo those 100x returns and get 10x on things that are more certain and nearer term.
If only more founders thought like this too.
If only more founders thought like this too.
"I don't want to make a little bit of money every day... I want to make a fuckton of money all at once!"
https://www.youtube.com/watch?v=BzAdXyPYKQo
https://www.youtube.com/watch?v=BzAdXyPYKQo
Haha! Classic:
"If you show revenue, people will ask how much and it will never be enough. The company that was the 100x or the 1000x becomes the 2x dog.
But if you have no revenue you can say you are pre-revenue. You are a potential pure play. It is not about how much you earn. It is about how much you are worth.
And who is worth the most? Companies that lose money. Pinterest, Snapchat. Amazon has lost money every quarter for the last effing 25 years and that Bezos m*cker is the effing king"
"If you show revenue, people will ask how much and it will never be enough. The company that was the 100x or the 1000x becomes the 2x dog.
But if you have no revenue you can say you are pre-revenue. You are a potential pure play. It is not about how much you earn. It is about how much you are worth.
And who is worth the most? Companies that lose money. Pinterest, Snapchat. Amazon has lost money every quarter for the last effing 25 years and that Bezos m*cker is the effing king"
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The sad part is if you strip the over the top hyperbole, it's actually a pretty true to life situation. I've seen founders deal with that problem first hand.
As always, it depends. If you're in a land-grab market with $100 billion potential and take the slow route, you'll be squeezed. If, on the other hand, you choose a market with a low ceiling, you'll likely be forced to finance with retained earnings and/or debt.
'Market' is often very fluid. Large companies may be in government consulting, but as you scale down there is plenty of room for various specialties in that same 'Market'.
You find this all over the place as 800$ Aeron chairs and 40$ iKea chairs are both in the same and very different markets.
You find this all over the place as 800$ Aeron chairs and 40$ iKea chairs are both in the same and very different markets.
Reagan45(1)
That's how pretty much every Angel invests. They want to exit at the B or C round, or have an acquisition in the mean time.
Angels and VCs are more often than not at odds because they have different economics they are playing for.
An angel puts in 250k? They would be thrilled with a 10M exit. Along comes a VC with a 5M A round and suddenly they need a 500M exit to feel like it was a success.
Angels and VCs are more often than not at odds because they have different economics they are playing for.
An angel puts in 250k? They would be thrilled with a 10M exit. Along comes a VC with a 5M A round and suddenly they need a 500M exit to feel like it was a success.
Who considers 10x settling?
Institutions whose portfolio economics demand 1000x returns or bust.
And also some of the individuals (angels) investing alongside the above institutions.
And also some of the individuals (angels) investing alongside the above institutions.
That's some really dumb money if it needs 1000x returns somewhere to beat index funds.
Hey - when the median return of an investment in a VC portfolio is 0, that alpha has to come from somewhere.
And you know what? It's a valid strategy for those with the skill (or luck) to execute repeatedly. Sequoia earns their 3 and 30, or however much they charge.
All I'm saying is that when a company takes VC funding, the goal of the VCs can override the goals of earlier, individually less powerful investors (i.e. the angels). So while an early angel might be fine/thrilled with a 10x exit, the VC might not be because their risk/reward profile differs from the angel. Thus, when investing in companies intending to seek venture capital, one must be aware of the high payout, low odds bet into which they are entering.
Of course, there are ways to mitigate this like secondary market liquidity or institutional investors buying stock from earlier angels as part of a round. But the point still stands.
And you know what? It's a valid strategy for those with the skill (or luck) to execute repeatedly. Sequoia earns their 3 and 30, or however much they charge.
All I'm saying is that when a company takes VC funding, the goal of the VCs can override the goals of earlier, individually less powerful investors (i.e. the angels). So while an early angel might be fine/thrilled with a 10x exit, the VC might not be because their risk/reward profile differs from the angel. Thus, when investing in companies intending to seek venture capital, one must be aware of the high payout, low odds bet into which they are entering.
Of course, there are ways to mitigate this like secondary market liquidity or institutional investors buying stock from earlier angels as part of a round. But the point still stands.
You're comparing apples to oranges since LPs are at least partly looking for assets with lower amount of correlation to these public markets that they're already exposed to
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Money is plentiful.
The core, unscalable challenge is finding smart and motivated investors whom can add value.
For example, take Raj Parekh:
- nice guy
- hustler's hustler
- can act as anything from investor to sales to VP, without getting too bossy, just unblocks problems and moves forward
- knows the enteprise space
That's the ideal investor:
competent, helpful, humane, relentlessly resourceful and generally willing to roll up sleeves as an equal part of the team.
The core, unscalable challenge is finding smart and motivated investors whom can add value.
For example, take Raj Parekh:
- nice guy
- hustler's hustler
- can act as anything from investor to sales to VP, without getting too bossy, just unblocks problems and moves forward
- knows the enteprise space
That's the ideal investor:
competent, helpful, humane, relentlessly resourceful and generally willing to roll up sleeves as an equal part of the team.
"Yeah, it pretty simple. If it is hard to raise money figure out how you don’t have to—get to profitability.
That discipline is healthy. There are very few companies that have the hyper-growth that allows them to forgo profitability in the short-term and everyone wrongly assumes those examples are the norm, whether it’s a Facebook or a YouTube."
I think more Silicon Valley CEOs need to internalize this. They may have heard it, but from the looks of it, they have not internalized it.
That discipline is healthy. There are very few companies that have the hyper-growth that allows them to forgo profitability in the short-term and everyone wrongly assumes those examples are the norm, whether it’s a Facebook or a YouTube."
I think more Silicon Valley CEOs need to internalize this. They may have heard it, but from the looks of it, they have not internalized it.
It depends on your team/product. Are they going to build, max, a 1B business? Sure, than 10x is fine. Do they have potential for a 10B - 100B business? Than 100x return makes sense, because land grab and consolidation will likely be an aspect of the business - which requires significant capital and therefore returns.
As OP said, very few companies are in this realm. While many people assume this is the status-quo, it's not anymore.
The whole point of venture investing is that you are playing in that realm. You won't get far in venture fundraising if you are stating that you would take a <100M exit. Regardless of how rare.
The whole point of venture investing is that you are playing in that realm
Or at least you think you are. Have you heard of Engineer's Savings Time? It's the tendency for engineers to underestimate the amount of time it will take to complete a task, and it's based on the difficulty of estimating on one hand, but also ego on the other. This is reversed for the same reasons in the investor world: overestimating the amount of business power a company has.
They're both subject to the impossibility of predicting the future, but contrary to decades of thinking and writing going into software estimation, it seems like relatively less effort has been dedicated to revenue/profit estimation. Of course, when I put it in those words it appears possible I just have a blind spot, but I think the problem remains.
Or at least you think you are. Have you heard of Engineer's Savings Time? It's the tendency for engineers to underestimate the amount of time it will take to complete a task, and it's based on the difficulty of estimating on one hand, but also ego on the other. This is reversed for the same reasons in the investor world: overestimating the amount of business power a company has.
They're both subject to the impossibility of predicting the future, but contrary to decades of thinking and writing going into software estimation, it seems like relatively less effort has been dedicated to revenue/profit estimation. Of course, when I put it in those words it appears possible I just have a blind spot, but I think the problem remains.
I think what you describe is common, if not just part of the way everything works. So, not a blind spot, but also not something to dwell on. The in-determinant nature of forecasting - especially with respect to revenue/profit estimation - is almost moot when you're trying to determine if a nascent company is going to be able to make 200M a year in 7 years time. That's why you see so many of the factors for venture funding following well worn qualitative pathways: Tons of users, market size, stickiness, monetization capability, founder grit etc...
They are proxies for expectations based on past experience, given the glut of quantitative measures that aren't strongly correlated.
In the end, you're playing in the unicorn league if you think you are.
They are proxies for expectations based on past experience, given the glut of quantitative measures that aren't strongly correlated.
In the end, you're playing in the unicorn league if you think you are.
Maybe, but that circular logic doesn't help establish legitimacy. And if we can agree on that, then where does the investor industry's legitimacy lie? "We have the money, by various mechanisms, and everything else is a fairy tale?"
What is legitimacy? Sounds itself like a fairy tale.
No, the concept of a "legitimate investor" is not a fairy tale. Unless that's what you're saying, that the entire VC industry is illegitimate, that it exists outside the world of dependable knowledge? Why would LPs give GPs money if that was the case? It seems to go against all financial sense.
If this were true, YC's batch sizes would be getting smaller, since they only invest in companies that could become as big as Airbnb or Dropbox. But the batches are getting bigger.
Maybe this is true for investors outside of YC's deal flow, though. That would have some interesting implications.
Maybe this is true for investors outside of YC's deal flow, though. That would have some interesting implications.
Somebody made the point in another thread that YC has become a staffing firm for the YC investees that actually are able to scale. So ultimately the cost to YC of all those investments turns out to be pretty small.
I think they do this to maximize the surface area for success. Investing in more companies but keeping the bar high, increases the likelihood of finding the AirBnBs and DropBoxs. After all, the cost of funding each company is miniscule in the grand scheme of things.
True, but the assertion was that nowadays very few companies are capable of reaching Airbnb-size valuations. YC is probably far more qualified to judge this than we are, and since their batches are getting bigger, the assertion seems false.
> That’s what everyone says but how many 100x’s are there really? I’ve been doing this a long time and there just aren’t that many.
> I don’t have the same pressures of a fund in liquidity, timing or the need for 100x returns. If I can consistently get 5x to 10x I’d take that all day long.
How many investors, angels, VCs or otherwise, focus on the 5x-10x return deals?
And are 5x-10x deals safer, meaning that more of a sure thing, than the 100x deals in terms of return? I.e. are VCs being rational by focusing on the 100x deals since 5x-10x deals aren't safer, or are they forgoing safer and better returns of the 5x-10x for the chance to become movers and shakers of the largest players?
> I don’t have the same pressures of a fund in liquidity, timing or the need for 100x returns. If I can consistently get 5x to 10x I’d take that all day long.
How many investors, angels, VCs or otherwise, focus on the 5x-10x return deals?
And are 5x-10x deals safer, meaning that more of a sure thing, than the 100x deals in terms of return? I.e. are VCs being rational by focusing on the 100x deals since 5x-10x deals aren't safer, or are they forgoing safer and better returns of the 5x-10x for the chance to become movers and shakers of the largest players?
I've asked a VC this question before. They said that in theory going after 5-10x returns sounds great but in practice no successful VC firms use this strategy. They all make their money from the few who "return the fund".
Well, I tend to think of VC's as investors who target insane growth companies so that kind of makes sense.
One of my good friends works in private equity and their investment targets are 100% focused on small banks who return an average of 2-5x.
Not quite the 5-10x returns but they have much higher success rates.
One of my good friends works in private equity and their investment targets are 100% focused on small banks who return an average of 2-5x.
Not quite the 5-10x returns but they have much higher success rates.
A friend of mine who graduated with honors from an Ivy econ program moved to Palo Alto and went into PE. I asked him why he didn't go into VC in the heart of venture capital.
He replied that PE was as close as you could get to formulaically printing money while seed-stage (and even later) VC was more like splattering paint at a wall and seeing what sticks, and that the former suited his personality better.
An interesting comparison; food for thought.
He replied that PE was as close as you could get to formulaically printing money while seed-stage (and even later) VC was more like splattering paint at a wall and seeing what sticks, and that the former suited his personality better.
An interesting comparison; food for thought.
I've heard the phrase "keep me updated" before ;) Perhaps they don't want to give honest feedback in case they later turn out to be wrong and want in?
It's a fairly honest reply. It means "you're not there yet". It's far from Yes, but it's not No; and a future Yes is not likely but not impossible.
You could try asking for specific things that require improvement but I don't think you'll get a useful answer in most cases. You'll hear some words back but all they will mean is "I am not in love with your company".
You could try asking for specific things that require improvement but I don't think you'll get a useful answer in most cases. You'll hear some words back but all they will mean is "I am not in love with your company".