Looks like he won't fund you if billionaires find your company before he does, and he can't get the cheap equity he'd like. Makes sense for him, but you're also better off not raising from him in that particular scenario. He calls this 'cap table is messed up', whereas he's just late and out-priced by the bigger boys. Your cap table is just fine.
The funding market, like that for employment and marriage, clears at different prices for different individuals.
I'd say the number of founders who can truly aspire to get funded by the "Big Boys" (and have the choice you talk about) is relatively small - for example my lack of connections in the US precludes me from raising from them because I can't get a proper warm intro. You need to align a lot of stars.
That being said, I think he was referring to the complexity of multi-note cap tables (and time and mental effort required to deal with their preferred stock classes etc. vs 5 equivalent other deals using a vanilla structure) rather than the billionaires outbidding him. He talks more about it in another post [1].
Having been on a desk that traded exotics I very much agree that (unnecessary) complication in financial products is not a good thing, and is usually associated with people hoping you'll slip up.
He does come off as pretty arrogant, but in the cap table example I thought it was the raising new money at a lower valuation that was the problem. Most investors wouldn't want to be in such a down round; and I guess one source of down rounds is too rich initial investors?
> I want to hear that you are building a unicorn — or at least, trying.
Is this the mentality of the whole startup/venture capital universe? (Excuse me for being disconnected, this is a completely separate world from mine). Are there no venture capitalists, or young startup kids who want to build companies that just grow slowly and organically, and that are profitable throughout, rather than trying to build some service at breakneck speed while pumping up a valuation and hoping for an "exit"? Is there no venture capital invested with a horizon of a decade or three?
Is venture capital in software just basically buying lottery tickets in 100 startups, hoping to find one unicorn (success) instead of zero unicorns (failure)?
There are plenty of companies trying to grow slowly, via organic growth. Or even not grow at all (think about a restaurant - usually no growth is intended). There are even plenty of tech companies in that bucket.
However, VCs generally don't invest in these companies, for a variety of reasons. The bottom-line is that it doesn't make sense financially for the VC model, and it's not what the people who give the VCs money want.
VCs will often get money from pension funds, etc. These are companies managing billions of dollars, of which they allocate let's say 1% to VCs, with the idea of making a huge interest on their investments. E.g. typical real-estate or stock investments will give you a %5-%20 interest, and VCs are supposed to give you much higher numbers.
Again, this doesn't mean that there aren't plenty of tech companies out there who aren't looking for VC money or to grow rapidly, although there are structural reasons why lots of tech companies should look for that kind of growth (mostly, tech companies have way more ability to scale than e.g. restaurants). But most of these "smaller" companies are simply less visible - for obvious reasons, bigger companies are more visible, therefore more talked about.
BTW, let me just correct one misstatement - VCs are aiming for huge exits, but they are investing for often long time horizons - I think the typical time to an "exit" is 11 years these days, so it's not like they're trying to do a quick exit - quite the opposite, if a company exits after 3 years, it's almost certain they haven't become a unicorn.
VC firms invest other people's money and those people have money in a specific fund entity. Each fund has a specific structure that has various rules on stuff like minimum investment sizes, ownership and time to return the investors' money.
Also, as 9 out of 10 investments, on average, will fail, the 1 that wins has to be big enough to balance out the losses, plus make a profit for the investors that's much greater than putting their money into public stocks, bonds, banks, etc. That's why each investment has to have the potential to be a billion-dollar-plus company, or it doesn't make sense to make the investment in the first place.
Very different from angels who are a) happy to wait b) happy to get 3-4x on their money.
> as 9 out of 10 investments, on average, will fail, the 1 that wins has to be big enough
This is misleading. It is only because they pursue high risk ventures that 9/10 fail and they are only picking high risk ventures because they dream of x1000 returns. They could use a different investment thesis to choose lower risk, lower payoff companies and have a portfolio where only 1/10 fails.
The VC reasoning is that the 1/10 success is not just x20 for an overall x2 return but actually x100 or x1000. I think VC performance over the years has proven this false, especially if you exclude the top VC as outliers, but its glamorous to be a high-rolling gambler so the myth that "VC as unicorn hunter" is the optimal strategy continues.
>It is only because they pursue high risk ventures that 9/10 fail and they are only picking high risk ventures because they dream of x1000 returns.
But your explanation for their motives is also misleading. A huge constraint on VC's investment strategy is the smaller amount of money they are given. VC's are not giant multi-billion dollar private equity funds like Blackstone/Apollo/Carlyle. (E.g. Blackstone $18 billion fund.[1])
A VC fund may be small like $50 million. Or a more well-known prestige VC can raise $500 million. The recent news of a VC like a16z raising $1.5 billion is a new anomaly.[2] However, the $1.5b is still a fraction of what the private equity guys raise.
With a small $50 million fund, that's not enough money to buy management control of the more stable mid-cap and large-cap companies. Therefore, using a portion of a small $50m fund to write a $500k check to a (riskier) YC company is more meaningful than buying $500k worth of Exxon or Apple stock.
VCs are shooting for 25%+ returns and it's very difficult to do that with large-cap companies. Even Warren Buffett hasn't been able to do it over a given 10-year period.
>They could use a different investment thesis to choose lower risk, lower payoff companies and have a portfolio where only 1/10 fails.
If someone can figure out a consistent way to take $50-$100m and return 25%+ by having only 1/10 failures, that would be an amazing investment thesis. I'm unaware of any industry expert who has that track record.
Sure, VCs could invest in less risky, less rewarding companies, but then they wouldn't be VCs. VCs are an asset class defined by their risk portfolio. Taken on their own, they are clearly using a suboptimal strategy. But no one invests all their money in VCs. As part of a diversified portfolio, it's actually their high risk strategy that hedges againsts other kinds of risks (like the risks that the old, stable companies underperform).
There are, but the people that like to bootstrap slowly growing companies that are profitable along the way are usually more wary of handing over power and shares into the hands of an investor.
As an investor, I would prefer people that flock towards me and hand over their power with flying colors in return for some money.
Investors take on high risk when investing in a startup, but that risk is localized. They typically have a diversified portfolio so that the successes outweigh the failures. As a result their local risk tolerance can be high.
Founders, on the other hand, are typically investing their time, energy, etc., mostly in their company. Their risk isn't localized, so they can't have as high of risk tolerance. As such, they need a higher EV in order to justify an equivalent probability of failure.
Giving up power lowers your EV. In the event of an exit, people with power get paid.
As such, founders should be looking for investors who are collaborators. The investor you're describing should be avoided at all costs, because they're just looking for patsies to take on unreasonable risk for their own gain.
The collaborative model isn't bad for investors--it doesn't have as high of reward if it succeeds, but there's also lower risk because being involved in a company gives you a better idea of when to invest more or pull out.
But this model isn't popular with investors because it takes more work.
> Is there no venture capital invested with a horizon of a decade or three?
Sadly, no.
You might get angel funding for that, but realistically most investors want a quickish exit rather than a long relationship. For long-term businesses you're reliant on friends-and-family or remortgaging your house.
Also implicit in the "unicorn" model is the idea that the unicorn will be a global monopoly on a particular type of service. Would you be able to get investment to start a small local taxi service in a world where Uber and Lyft exist?
(Note that HN's own Pinboard.in (idlewords/Maciej) is self-bootstrapped. It can be done. You're just much less likely to hear about it.)
>> Is there no venture capital invested with a horizon of a decade or three?
> Sadly, no.
Actually, there is one 20 year fund that I know of. All other funds are 10 year funds.
Bill Gates "Breakthrough Energy Fund" is a 20 year fund, which is an astonishing duration. Every other VC fund I have ever heard of, is a 10 year fund. A 10 year fund means that the intended time from fund creation, to distributing all the cash returned, is within 10 years. Which is almost impossible with startups, but that's VC how funds are structured.
I don't think this is accurate. Almost all VC funding wants your company to be a unicorn, and the typical time horizon until a successful IPO, say, is 11 years.
Put another way, if you're exiting quickish-ly, you're almost certainly not the unicorn that the VC is aiming for.
> Even (sorry) when you’re with your family. I want you obsessing about your company.
Looks like it only takes 1 reason why I will avoid you as a person (and not just as an investor). This is not a healthy mentality, this is not a good "reason", this is not something we should celebrate in our line of work.
This is something that should be struck down, called out, and shamed.
Personally, I'm not a huge fan of the start up world these days, due to a lot of clashing ego's. But I can respect Jason for telling it straight.
I don't think anything should be "shamed", just because it's not something you agree with. Allow people to operate however they want, it's a free country after all.
Yes, which would be fine if other people weren't involved and didn't have to suffer the consequences, especially children that have absolutely zero control over their situation. But, it's pretty dangerous territory to actually advocate in favor of neglecting one's children/spouse. You don't get do-overs with your children/spouse, and they can be harmed in ways that may not manifest themselves until later.
Having said that: if you don't have a spouse/children, then go for it.
> I don’t want you in the office 100 hours a week. Actually, I don’t even want you in the office 40 hours a week — I want you out with customers But when you’re home. When you’re out to dinner. When you’re relaxing at the beach. Even (sorry) when you’re with your family. I want you obsessing about your company.
My last startup we met with an angel investor who was like this. The money isn't worth it, we turned him down, and ended up going with someone more reasonable. Reasonable people attract connections and connections are great for your startup.
And we all did pretty well in the end... without all the unhealthy hyped-up stress caused by working for someone like this. Investors are your boss, make sure you like them. If you have a good idea, hell if you have just an OK idea and can execute... people will line up to give you money.
I dislike the majority of his post but most of the people I've known to achieve ''success'' at the highest levels spent years in this zone where they obsessed near 24/7 about their work. It sucks to write that family comes second to work. But if you want to build (and run) a billion dollar company, or become a neurosurgeon, or be a SEAL team commander - then, for awhile at least, it's probably true, and I'm not sure we do anyone any favors by pretending otherwise.
I agree with you, but he does make it pretty clear that he is not interested in doing "pretty well". He even says that if a $50m exit is your definition of success then he doesn't want to talk to you.
He's not looking for "pretty well". He's looking for unicorns, and ask any investor who's looking for a unicorn if they would fund a founder who wants a chill life with work life balance. Good luck.
I think when a startup is bootstrapped and gaining traction it's almost always the opposite nowadays,i.e. 22 reasons why I don't need your money.
Even for my teeny tiny startup (2008) I had several VCs calling us everyday wanting to invest. I really think if you're in a position where your on the VC's mercy for funding, it means your startup needs more work on the product.
My favorite part is the apology for the title in the first line of the post, in a sentence which was interrupted halfway through my reading it by a pop up asking for a subscription to their email list (or whatever). Disruption, indeed.
I think this is an unfair characterisation of both the post and what is implied about its author.
I've followed Jason Lemkin for about a year (mostly on Quora) and he seems like a former successful SaaS entrepreneur trying to figure out the rules of SaaS as a VC (he also organises a major conference), and to share his experience with the world at large. A lot of the stuff he writes is not obvious to me and clearly based on lessons learnt the hard way.
Writing is hard and writing about a fuzzy subject (there are no "rules of business" beyond very broad generalisations) is even harder, especially when the opinions expressed are not going to be much appreciated by the target audience.
He happens to have picked the list format to note down his thoughts of the day. This is very different from clickbait spam.
give the guy his credit, though. he has been pretty active and blunt on funding related questions/topics, and to his credit, he started companies and successfully sold them. His sentences, and so on, are sometimes broken, but what he's trying to tell i think is somewhat solid.
See what he's trying to say, not how he's trying to say.
> If you don’t take an amazing VP intro I give you. I’m out.
Um, MY personnel get to choose who comes into the company that they work at. Thanks.
This alone throws huge red flags about this investor.
I may have a million good reasons for rejecting your "stable boy". Number 1 is: he's a "stable boy". I have NEVER seen a "stable boy" cause anything but problems.
A truly amazing VP is probably already employed somewhere else and I have to crack him loose rather than worry about rejecting him.
I got a really strange vibe from this article. Sounded like the author is in the business of selling VPs/CxO. At least it felt a bit odd that this was explicitly mentioned a couple of times (the bit about not taking a VP intor was really irky). I've heard that the management team is more important for SaaS businesses (as are old school sales people) but I dunno...was a bit odd.
Several of his points boil down to "Tell me how special it would be to have me as an investor, so that I can tell you you need to accept a low valuation from me."
At least, I think they do. He might also just have a great desire to be flattered.
One thing I find a bit weird is the investor focus on SaaS. The desire for Hardware/science based startups seem to get talk about a lot, but almost every one of these "how to pitch"/"what I'm looking for as an investor" articles is focused on SaaS.
I know this particular investor is exclusively SaaS, but isn't there a wider desire for hardware/science based startups? Or is it all just talk?
A SaaS allows them to track growth easily. You have n susbcribers who pay x a month. It costs y to bring them in and they use the product for z months. It a matter of then looking at the numbers and knowing how much ghr company will be worth in a given time period.
Other types of tech products are not as straightforward. Becomes more of a coin toss. Not that a SaaS is a safe investment.
A very prominent investor told me that hardware founders need some sort of celebrity attached to their name to raise money. Yes, there are exceptions, but they are rare. Investors know hardware is hard and the lead times are longer, so they see that as added risk which makes them less likely to invest.
Many investors, as a rule, won't even consider hardware and there are very few that specialize in hardware. It's a bit of a catch-22 with investors that say they want you to be different, because most of them really want you to be like everybody else. The majority are trying to ride the next wave, only a very small number are actually trying to find it independent of "signalling."
Every investor is different, every company is different, but if you're doing something unconventional you're probably going to have a very hard time. And now that Pebble has essentially failed, that's going to make investors a lot more wary about investing in consumer electronics.
The irony here is that a lot VCs break these rules with either LPs or entrepreneurs: #1 can't see the future (herd behaviour), running VC as a lifestyle business rather than building a platform like a16z, NEA, YC, 500; #5 lack of understanding of the competition (or where they sit in the pecking order); #6 I wouldn't want to work for you (arrogant, or just not that sharp); #7 too slow/too late (slow or non responsive); #9 party round (I don't lead); #10 you pay your 1% on AUM with your 2% management fee; #14 on a fishing expedition with entrepreneurs without being upfront about it; #20 not being aggressive enough -- sitting around waiting for your network to drop deals in your lap #22 VC as a lifestyle business, living fat off your 2% management fee (>$100m funds).
The truth to the "irony" is that those are the actual deals that investors want to invest in. This post is for the rest.
If you are the hottest company on the market, none of this post applies to you. But 99.9% of the startups out there are not.
I see a lot of people on this thread saying this guy is arrogant, etc., but I think that's taking it the wrong way. He's just providing his point of view, and it's not just his. Any investor would feel that way and this guy is just verbalizing it so the founders can get a better sense of how to interact with investors.
But like I said, if you're hot, then you're the one who says "22 reasons why I won't raise money from you".
That goes both ways. The best VCs I've met are also the ones working the hardest and are the most professional. They're also the least likely to be following the herd and the ones you most want on your captable. As an LP they are also the hardest funds to get into. Still those funds represent 5-10% of the funds out there, so the other 90% are falling into the mediocre or worse category. Still most entrepreneurs will take their money because most entrepreurs don't have the track record or traction to be choosey. It's still a buyers market.
I am not sure if my perception is distorted because of HN but is there a class of investors that do not obsess with unicorns and regularly invest with the target of 10x-100x profit?
Number 12 surprised me given the number of billionaires that would've failed it. Most are hyperfocused and opinionated early on to the point they don't care who they piss off or destroy to dominate the market they're creating. He'll either get the ones that are consistently good on P.C./P.R. at the beginning or filter out the unicorns he might have gotten.
That would be my guess based on what I've seen. How many unicorns or higher have his venture firm created in practice?
Yeah, selecting for founders who are PC-compliant seems mildly retarded, to say the least.
The charitable reading is that the guy has a way he wishes the world were, and is trying to impose that vision on people he funds; which I mean, go with god dude.
There's a huge difference between being able to speak nicely despite being a dick, and not being a dick.
I don't care if someone curses or is blunt about how they think something sucks, but one joke about how a certain person from sales who keeps bringing customers to hostess bars has a "nice but unfortunately expensive hobby", or to refer to engineers as "the autists", or to be glad that "the monkey is gone" when a black person leaves the room (all things I have heard from execs)... That does not show how bold and disruptive someone is, it just shows they are a terrible person. Maybe still a successful terrible person, but I still want nothing to do with people like that.
They'll probably still attract talent, though. That will get their startup going. At some point, it cleans its act up a little on the way to the acquisition or IPO. What I see happening.
Always people willing to work with or under assholes so long as they might get rich. Hell, it might be the default model of employment for a good chunk of the American workforce now that I think about it. Just with wages instead of riches or IOU's from failed startups. ;)
I agree to a certain respect, but that's VC. You want to bootstrap a company and make a good living? I'm with you 100% of the way, but VC is not going to be a good fit, I think. If you're not giving them 20:1 ROI, they aren't even breaking even (because most things fail). In reality, they want significantly more. Let's say they put in $1 million for even 20%. They need an exit with a valuation of $100 million to get their 20:1. And if they aim for that, they'll go out of business because it's such a risky business. You have to aim for an exit with a valuation of at least a billion. I don't blame him for saying it the way it is.
My personal opinion is that if you are interested in building a solid business rather than striking gold in them thar hills, you are better off with other sources of funding. Hell, if you are doing SaaS, you can probably self fund it...
Yeah, I guess I shouldn't post before coffee. Its so depressing coming here in the morning to see, every day, 10 different versions of the same 2 posts fetishizing 'disruption' and 'unicorn worship'.
I think we would all be a little happier with some hubris, and fewer delusions of grandeur.
Ignoring time considerations and otherwise oversimplifying,
[Expected return] = [Probability of a non-zero return] * [Expected return | Return > 0]
VCs tend to think that the first factor will always be low, so they want the second one to be high.
So far, so good. But now let's complicate things a bit more.
1. Actually, the set of all possible outcomes is partitioned into at least three sets:
{Zero or very low payouts}
{Decent but not great payouts}
{Huge payouts}
Especially in the middle case, VCs' interests may not be aligned with founder/employees', because of the preferred/common stock distinction and some onerous terms that VCs impose on deals.
Also, VCs' benefits aren't just cash, but also reputational, which is another reason why their interests aren't perfectly aligned with companies' ...
... yet past the earliest stages, VCs tend to control the board, and run things for their benefit.
2. It's possible to have other kinds of interest than the classical VCs'. For example:
A. If you lend against genuinely good collateral, you have a good chance of getting your money back, and can be more restrained in what piece you take of the upside.
B. Seed investors who offer notes with unclear conversion prices often are doing something similar, but with worse odds. Often, they're hoping for a chance to invest in the next round of the best companies, which makes sense only if they assume such an investment will be very beneficial to them.
3. Dave McClure at 500 Startups trumpets the idea of factoring "singles and doubles" into his return calculations.
Someone wrote this deleted comment, which I started replying to:
>
I'm having trouble envisioning what sort of SAAS startup's only operating cost is the price of their domain.
I understand that "operating costs" (also development costs) are deducted only from net, not gross profit?
In other words, if I buy a nail from a wholesaler for $0.25 and sell it to you for $1.00 I've made gross profit of $0.75 (because I subtract what I bought it for.) I thought my operating expenses weren't involved?
By that metric, if I buy a license to resell a "wholesaler's" ebook (proxy product) or software license for $1 and sell it to you for $5, that implies gross profit of $4 (or 80%).
On the other hand, if i had written the ebook or software myself and it costs me $0 to email it to you / email a license, I would make $5 gross profit ($5 from you plus $0 to generate a license key which I can do for free), yielding 100% gross profit.
Isn't that what these words mean?
btw since the comment had read "I'm having trouble imagining" and then got deleted, perhaps they did imagine some examples - could that poster share?
It's my impression that gross profit includes marginal costs, but not overhead.
I can't speak for the author, but every SaaS company I have been involved with had marginal costs such as customer support. When you are a tiny company and these tasks are performed by founders you could perhaps roll these costs into overhead and claim 100% gross profit. But as a growing company it would become clear that you need to hire someone for every X customers.
But selling you a nail for $1 also has some potential support costs - so is it wrong to say that if I buy a nail for $0.25 and sell it to you for $1.00 that has gross profit of $0.75?
But the average customer's support costs might be more than $0.75 -- so would you say that by buying for $0.25 and selling for $1.00 to you, it's actually a loss leader? (I'm really trying to get you to buy more expensive products from me)?
Overall I would like confirmation if this is really what is meant. It doesn't seem to me that support costs would be taken out of gross profit - that is what I think would be taken out of net profits. . .
But I'm sure accountants have well-defined rules on this so I would like to heir their take.
> Almost everyone has competition. I get worried if you have no respect for your competition, but sometimes, I can get past that. But not understanding your competition? That’s a No.
What does such investor expects to hear in if you are Twitter or similar company entering a blue ocean (creating your own market)?
Twitter had plenty of competition. All existing social media was competition for Twitter. Email was competition for Twitter.
Competition isn't about some other founder doing the same thing you're doing. It's about all the ways people can already do the things you're trying to sell them.
That is my point - nobody was doing microblogging before Twitter, they literally invented new mode of communication. Yes, it could have failed but not because email or social media would steel their users.
Isn't the idea of a SAFE to avoid having to place a valuation on a startup with no revenue for a seed round? And if you are taking 2 million round at a 10 million valuation, you are a bit beyond that...
