Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

As Angel Investors Pull Back, Valuations Take a Hit

wsj.com

Post reply on HN
Print view View original

91–100 of 117 posts

Re: As Angel Investors Pull Back, Valuations Take a Hit

#91

Post by hkmurakami »

pcmaffey wrote: post #79

This is why I'm conceptually attracted to convertible notes. Valuations always seemed like an illusion...but then caps became status quo as stand-in for valuation. I understand, buyers want to know the price they're paying... But it's still an illusion. That said, there seems to be a very functional solution: discounts. I don't understand why they are not used more. Why not develop industry models for expected value…

A and B round investors need protection / investor rights / board seats, and you don't get many of these things with a convertible note.

(Since you don't own the shares, you don't actually own the votes)

Re: As Angel Investors Pull Back, Valuations Take a Hit

#92

Post by crpatino »

aetherson wrote: post #57
crpatino wrote: post #41

Earlier quoted context omitted.

Median income does not mean what you think it means. There are basically 4 socioeconomic classes in modern society: the disposessed, the working poor, the middle class and the wealthy class. You can split hairs and make different cuts, but if you follow this model. * The disposessed is the people that fell through the cracks. They are struggling to survive usually for multiple issues that are holding them back, even…

I think that "median income" means "half of all households make less than this and half of all households make more than this."

And if more than half of households are one unexpected expense away from bankrupcy, what does that mean?

Re: As Angel Investors Pull Back, Valuations Take a Hit

#93

Post by jacquesm »

api wrote: post #74
bsder wrote: post #63

Earlier quoted context omitted.

> anything that hasn't been implemented yet doesn't even qualify to be discussed in other terms than hypotheticals. Except that once you implement it, investors start anchoring to how small your numbers are. Catch 22. I work with an actual IoT startup. Hardware--implemented. Backend and frontend--up and running on Azure migration to AWS ongoing. Customers who pay? Yep--and they love it. So, investors? "Ick, haaaardwa…

> Except that once you implement it, investors start anchoring to how small your numbers are. Catch 22. Are investors really that irrational?

At the risk of upsetting those that pay my bread & butter, yes, for the most part. And then there are tons of buts.

The first one: but they're usually good at judging people.

The second: some of them do hire tech people to help improve the odds (because that's all this is, playing the odds, improve them enough and you can do very well at this).

The third: they're past masters at the other end of it, protecting the exit. This is important because without an exit there is no return worth measuring (dividends don't really count as a rule, but an IPO would be nice if the company survives the lock-up period or if the VCs get to float their shares or a large chunk of them).

Obligatory lame VC joke: Q: Why does a venture capitalist walk into the negotiation room backwards? A: So they keep sight of the exit.

The fourth: there are at least as many irrational founders as there are irrational VCs, if not many many more.

Finally: Trust is everything. Break the trust at any point and you can kiss any investment goodbye. Have broken tech, a broken business model, a good attitude and team willing to put in the time and the effort to fix the tech and the model (or even an outright pivot) and I wouldn't rule out that you get funded.

Fun fact: the one thing that keeps on being repeated back to me whenever we (one of my clients and me) go to do tech dd on any one of the companies they've signed a terms sheet with is that no matter how many other investors have already been in that position and no matter how many times that company has already seen due diligence teams it will be the very first time that they actually get to really show their tech, both the good and the bad. This never ceases to amaze me, the amount of sloppy homework on the part of VCs and the usual suspects of companies that do dd (usually the big legal and accounting firms get hired and they then farm out the bits to various parties) is scary and this costs quite a few of them many millions of dollars annually. Even so, it's good advertising for me so I really shouldn't complain.

Re: As Angel Investors Pull Back, Valuations Take a Hit

#94

Post by mbesto »

jacquesm wrote: post #54
mbesto wrote: post #53

Earlier quoted context omitted.

Unfortunately angels rarely do due-diligence. The fees to do this for a portfolio approach (which VC's model is) are much too high.

The amount of money you spend on a due diligence should be related to the size of the investment. Under 100K investment 5 to 10% should be enough to keep you out of trouble. A couple of hours (or a full day) of an expert in the field that you're going for would amount to maybe $1K to $3K depending on the field. Easy money for the expert and a very cheap insurance for someone putting down 20 to 100K of their hard earn…

I don't disagree, but there aren't enough "experts in the field" to supply your proposed demand. In a typical diligence round, you usually have financial/accounting, legal, commercial and ops/tech diligence. Are you suggesting they find a finance expert, a ops/tech, and commercial expert and pay them $1-3k each and on each investment?

Re: As Angel Investors Pull Back, Valuations Take a Hit

#95

Post by jacquesm »

jonesb6 wrote: post #82
jacquesm wrote: post #51

Earlier quoted context omitted.

> There has been a flood of folks entering the "startup game" who seem to be planning for their IPO before they've even gotten a product off the ground. Again, anecdotally, I'm observing a noticeable increase in fraud among founders who are trying to raise money unscrupulously, especially with novice investors. FWIW I'll back you up on this, definitely a complicating factor for novice investors. Free tip to novice in…

I'd counter that free tip with a dose of the real world. That less then $50,000 is rent and payroll. If I'm a software start-up with a Sure I'm going to tell you all about our sales projections, remember when you asked to hear them in the meeting, and yes the projections will be optimistic (but still fundamentally sound). No I will not go into too much depth about all the reasons we pushed launch back two months (the…

10 to 250k is what a single angel will invest. Usually these team up for a larger seed round depending on their ability to fund.

Sure, $50K is peanuts, but then again, compare it to what YC offers and it's actually not all that weird. Usually seed funds do not get you enough money to go on a hiring spree and collect your favorite list of valley talent. But it might just be enough to get you to the point where you can demo your stuff and get a larger round. Essentially that's all that seed funding is, a way to get in front of a group of larger investors after doing some more product development.

There are dishonest people both on the founders side and on the investors side, no exclusivity there for either group.

Rare to see a career based on dishonesty last very long, word definitely gets around.

Re: As Angel Investors Pull Back, Valuations Take a Hit

#96

Post by jacquesm »

mbesto wrote: post #94
jacquesm wrote: post #54

Earlier quoted context omitted.

The amount of money you spend on a due diligence should be related to the size of the investment. Under 100K investment 5 to 10% should be enough to keep you out of trouble. A couple of hours (or a full day) of an expert in the field that you're going for would amount to maybe $1K to $3K depending on the field. Easy money for the expert and a very cheap insurance for someone putting down 20 to 100K of their hard earn…

I don't disagree, but there aren't enough "experts in the field" to supply your proposed demand. In a typical diligence round, you usually have financial/accounting, legal, commercial and ops/tech diligence. Are you suggesting they find a finance expert, a ops/tech, and commercial expert and pay them $1-3k each and on each investment?

Assuming the angel has at least one of those skills will save some money and assuming that it's not a single person funding the round yes, that's precisely it, whatever skills the group of angels does not bring to the table they'll have to farm out.

Otherwise you might as well go to the casino and put all your money on 'black'. Better odds that way.

I used to work quite a bit for angels (I'm priced out of their range now I guess) and contrary to A rounds the number of bad deals proposed to angel investors is substantially higher. By the time you get to an A round there has already been a significant shake-out, all of which means some angel or group of them have lost a bunch of money.

Contrary to what people believe angel investments are a lot harder to get right than later rounds. There are many more start-ups that die prior to receiving an A round than afterwards and the amounts are low enough that doing proper due diligence is not in the cards. But an abbreviated dd is (much) better than none at all.

Re: As Angel Investors Pull Back, Valuations Take a Hit

#97

Post by jorgecurio »

staunch wrote: post #84
gmarx wrote: post #58

Earlier quoted context omitted.

I like this comment but I'm unsure how to parse the penultimate paragraph. What counts as "their products in Silicon Valley"?

The false narrative told in Silicon Valley is that VCs are in a constant search to fund new innovative technology products. That they consider it their job to actively seek out great new products to fund. In reality, they sit around waiting for winners to emerge and then try to pounce (traction). Or they back people that have such prestigious credentials no one will blame them if it fails (reputation). Palmer Luckey…

this has been my suspicion that it's a game of hot potatoes where the goal is to pass it to the next sucker for profit. Almost like a Ponzi scheme where the last guy to buy the company bears all the risks, often the public IPO market, while the train of VC and underwriters have already made their money.

The guys who work for VC has to make number of investments and it's not like investing in the stock market, it's far far riskier and uncertain (hence the huge returns). So it makes sense that they would gravitate towards low risk bets by betting on momentum to piggyback on.

This explains why there's crowding towards 'hot & flashy' startups on techcrunch and not as much to individuals focused on technological innovation. This crowding naturally leads to unicorns with unsound valuations that I've been qustioning.

The comments on HN after some hiatus is starkly different than those of 2014 or 2015. In 2014 I said the bubble will pop and I was ridiculed and downvoted to hell. In 2015 more people agreed and now majority of the comments are people ringing alarm bells now.

I think the coming years where unicorns drop left & right, we will also witness the beginning of the end for Twitter & Facebook and towards a decentralized, peer to peer, cryptographic replacement.

Re: As Angel Investors Pull Back, Valuations Take a Hit

#98

Post by jorgecurio »

If these large startups with crazy valuations are now in danger of not being able to raise a bigger round to sustain their burn rate, and the crowd mentality of VCs sour, how realistic is it to expect any of these companies built on lack of due diligence in testing out the viability of their ideas to last? For example: startups delivering food. nobody done it before because everyone knew it was dumb unless you owned the entire delivery chain, and even then the margins were razor thin and they convinced bunch of VCs that an Android app was going to fix the broken business model.

Re: As Angel Investors Pull Back, Valuations Take a Hit

#99

Post by roymurdock »

bsder wrote: post #63
jacquesm wrote: post #51

Earlier quoted context omitted.

> There has been a flood of folks entering the "startup game" who seem to be planning for their IPO before they've even gotten a product off the ground. Again, anecdotally, I'm observing a noticeable increase in fraud among founders who are trying to raise money unscrupulously, especially with novice investors. FWIW I'll back you up on this, definitely a complicating factor for novice investors. Free tip to novice in…

> anything that hasn't been implemented yet doesn't even qualify to be discussed in other terms than hypotheticals. Except that once you implement it, investors start anchoring to how small your numbers are. Catch 22. I work with an actual IoT startup. Hardware--implemented. Backend and frontend--up and running on Azure migration to AWS ongoing. Customers who pay? Yep--and they love it. So, investors? "Ick, haaaardwa…

Have you looked at more conventional forms of funding? If you already have meaningful revenues, why not just get a small business loan from a commercial bank? I've never done it, but I expect the interest rates are laughably low at the moment if you have decent credit and some assets (hardware, so yes) to back the loan. Plus, you wouldn't have to give up any equity.

Re: As Angel Investors Pull Back, Valuations Take a Hit

#100

Post by simonebrunozzi »

bsder wrote: post #63
jacquesm wrote: post #51

Earlier quoted context omitted.

> There has been a flood of folks entering the "startup game" who seem to be planning for their IPO before they've even gotten a product off the ground. Again, anecdotally, I'm observing a noticeable increase in fraud among founders who are trying to raise money unscrupulously, especially with novice investors. FWIW I'll back you up on this, definitely a complicating factor for novice investors. Free tip to novice in…

> anything that hasn't been implemented yet doesn't even qualify to be discussed in other terms than hypotheticals. Except that once you implement it, investors start anchoring to how small your numbers are. Catch 22. I work with an actual IoT startup. Hardware--implemented. Backend and frontend--up and running on Azure migration to AWS ongoing. Customers who pay? Yep--and they love it. So, investors? "Ick, haaaardwa…

Curious to hear what startup yours is. Mind to share the name?
Post reply on HN