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Investor Herd Dynamics

paulgraham.com

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Re: Investor Herd Dynamics

#11

Post by moogabi »

dfabulich wrote: post #6

"VCs will sometimes ask which other VCs you're talking to, but you should never tell them." Why not? (Unless I missed it, the article doesn't explicitly say.)

My guess is that in negotiations the risk of telling them who they are competing against outweighs the benefit of keeping them guessing. I suppose they could think you are bluffing and not really talking to any other VCs at all, but if they believe you actually are meeting with other VCs, I could see the benefit of keeping them in the dark.

Re: Investor Herd Dynamics

#12

Post by robertlaing »

tkiley wrote: post #7

It seems like the earliest investor in a multi-party round invariably gets shortchanged in the literal dollar value of the deal. If committed investors raise the valuation of a startup, would it make sense for a startup to offer a slightly-sweetened valuation for the first investor to commit? I understand that no one likes to have the price raised on them later, but perhaps the underlying truth of increasing valuatio…

That's something I've seen angel investors argue about on panels but never really agree on.

Good post by Mark Suster here: http://www.bothsidesofthetable.com/2012/09/08/should-investo...

Re: Investor Herd Dynamics

#13

Post by beat »

pg wrote: post #4
rjvir wrote: post #3

Seeing that YC's demo day is coming soon, it's awesome to be able to peer into PG's mind - this essay along with "How to Convince Investors" must be the exact advice relayed on to the current YC batch.

That is exactly right. I'm trying to get a complete guide to fundraising done in time for Demo Day, so I don't have to repeat all this stuff verbally (and incompletely) yet again. There is at least one more coming on fundraising tactics.

Thanks for sharing this with all of us outside the YC world! I've really appreciated the shower of wisdom in your recent burst of essays, and I'm sure others appreciate it too.

Re: Investor Herd Dynamics

#14

Post by robrenaud »

> The best investors aren't influenced much by the opinion of other investors. It would only dilute their own judgment to average it together with other people's.

I don't know anything about startup investing. But I do know about machine learning. And you can often improve an ensemble predictor by adding (many) weaker features and averaging them with an already strong predictor.

One shouldn't confuse the prediction of an average predictor with the average of a bunch of predictions that come from a pool of on the whole mediocre predictors. Averaging is really a strong operation for prediction. Of course, it does help if the individual predictors are themselves independent or uncorrelated with each other, which I guess tends to be very untrue in a herd.

Re: Investor Herd Dynamics

#15

Post by beat »

moogabi wrote: post #11
dfabulich wrote: post #6

"VCs will sometimes ask which other VCs you're talking to, but you should never tell them." Why not? (Unless I missed it, the article doesn't explicitly say.)

My guess is that in negotiations the risk of telling them who they are competing against outweighs the benefit of keeping them guessing. I suppose they could think you are bluffing and not really talking to any other VCs at all, but if they believe you actually are meeting with other VCs, I could see the benefit of keeping them in the dark.

VCs are a small world. And VCs need each other more than they need you (as an individual startup). Most entrepreneurs will climb that VC hill once or twice, ever. But VCs will partner together on deals for years, decades. So if your negotiations really have you pitting one VC against another, it's likely that you will lose, not them. After all, there are always other startups.

Re: Investor Herd Dynamics

#16

Post by marpeluso »

dfabulich wrote: post #6

"VCs will sometimes ask which other VCs you're talking to, but you should never tell them." Why not? (Unless I missed it, the article doesn't explicitly say.)

Every situation is different, and the reasons for not sharing names change depending on the the stage of the discussions. For example, if discussions are advanced enough to involve negotiations on valuation, in general, you want potential investors to compete, not collude. Unless you know the parties involved well enough to know that they will not join forces to work against you in negotiating valuation and/or governance, it is not a good idea to share the names of other VCs you are talking to.

Re: Investor Herd Dynamics

#17

Post by anigbrowl »

jessaustin wrote: post #8

I'd always wondered if anyone could upstage PG on HN. Apparently, Elon Musk can.

Heh, true. However, this short essay contains more useful actionable advice for HN readers than is typical even for PG, so I hope it doesn't get overlooked. Very very impressed, here.

Re: Investor Herd Dynamics

#18

Post by nadam »

Can someone point to a link which explains the math of startup fund raising? I was thinking about it, and what I get is a paradox:

I assume the definition of raising money is that the original owner gives some percentage of the company to a new owner, and the new owner gives an amount of money to the company.

Let's say the company's valuation is 1 million dollars. Let's say the owner sells 10% for 0.1 million dollars.

In a perfect market the company's new valuation is obviously 1.1 million dollars: the original value in the company's resources (people, etc...) plus the 0.1 million in the bank.

On the other hand in a perfect market perfect owners made a deal in which the original owner's wealth is the same before and after the deal.

Before the deal he was worth 1million. After the deal he is worth 0.9*x, where x is the new valuation of the company.

So:

1million dollars = 0.9x

x = 1.1111' million dollars

So which is the correct new valuation: 1.1, or 1.1111'? Or something different?

Maybe the deal have to be made in infinitely small pieces, so the result is coming from some kind of differential equation?

Re: Investor Herd Dynamics

#19

Post by anigbrowl »

tkiley wrote: post #7

It seems like the earliest investor in a multi-party round invariably gets shortchanged in the literal dollar value of the deal. If committed investors raise the valuation of a startup, would it make sense for a startup to offer a slightly-sweetened valuation for the first investor to commit? I understand that no one likes to have the price raised on them later, but perhaps the underlying truth of increasing valuatio…

What's lost in absolute $ terms is (IMHO) more than made up for by being known as the early bird, which status will yield other opportunities. In game theory terms being early is not optimal in a single round but close to optimal in the iterated competition that more often prevails.

Re: Investor Herd Dynamics

#20

Post by kken »

nadam wrote: post #18

Can someone point to a link which explains the math of startup fund raising? I was thinking about it, and what I get is a paradox: I assume the definition of raising money is that the original owner gives some percentage of the company to a new owner, and the new owner gives an amount of money to the company. Let's say the company's valuation is 1 million dollars. Let's say the owner sells 10% for 0.1 million dollars…

>In a perfect market the company's new valuation is obviously 1.1 million dollars.

Why? It is still 1 million dollars. The only difference is that the owner now owns 0.9M$ worth of company shares and 0.1M$ cash.

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