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Newsflash: Founders Don't Really Care About AngelGate

blog.wepay.com

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Re: Newsflash: Founders Don't Really Care About AngelGate

#21

Post by waxman »

edanm wrote: post #19
waxman wrote: post #13

I'm not losing sleep over it (too busy hacking), but it's easy for We Pay to say they don't care: they've already raised 3 rounds http://www.crunchbase.com/company/wepay . The essay was edited by PG, himself. Clearly the angels have treated them well. I think the more pertinent conversation should be around what the hell do some of these angels offer to entrepreneurs, anyways? Money is a commodity these days. Plus, r…

"What the hell do some of these angels offer to entrepreneurs, anyways? Money is a commodity these days." As a founder, I'll take a stab at that. I haven't been to YC or raised money, but from my perspective, here's why I would: 1. They offer advice. For a first-time entrepreneur, this is probably enough reason to work with angels right there. 2. They offer networking. Good angels are supposed to know everybody, incl…

Fair points. Having raised money from angels before, here are some of my thoughts:

1. Advice: This is clearly extremely valuable, even for experienced entrepreneurs. That's probably why a company like Chartbeat (serious revenue, and part of Betaworks) raised a $3 million round from strategic angels, when they probably didn't need the money http://techcrunch.com/2010/08/31/chartbeat-3-million/ . That said, if you're taking on angels for non-monetary reasons, then you still have to think about their value-add in monetary terms (at least, generally). Is this person's advice worth 10% of my company? Also, you could get their advice by asking them to sit on a board of advisors (or directors) for a token sum of equity (2. Networking: This is certainly a huge contribution of the top angels (and frankly, it's probably, more than any other single factor, what separates the Conways/PG's/Dixons of the world from every one else). Again, though, you can potentially gain access to the same networks through less "expensive" means: i.e. connecting with these people in some other way, whether as a friend, or a mentor, or an advisor, etc., but not necessarily as a full-fledged investor. If their network really IS that valuable, though, surrendering a large chunk of equity might absolutely be worth it, provided that they are excited about your start-up. (EDIT: I'm not recommending you "hack networking" in an unethical way. If somebody is providing you value through their network you should certainly reward them for it. At the same time, you shouldn't just surrender a quarter of your company because some says they have a lot of contacts).

3) Money: Agreed. Money makes the world go round. Most hacker/founders, though, only need to cover their living expenses to get projects off the ground. $70k/year for two boot-strapping founders is very different than a million-dollar angel round. Also, people billed as "top-tier" angels are obviously commanding a premium for their investment (a higher % of the company for less money). Just make sure you're getting your money's worth.

I think in certain cases angels are definitely worth it, but I think it's essential to weigh the costs of equity with what they're actually giving you.

Re: Newsflash: Founders Don't Really Care About AngelGate

#22

Post by tptacek »

dmpayton wrote: post #15
melvinram wrote: post #9

Earlier quoted context omitted.

Actually, no one earns anything until the customer writes a check or pulls out their credit card.

Which they generally won't do until there's something to pay for. We are the first step.

That's not even close to true. People take pre-orders on products all the time. Blank even recommends the approach in _Epiphany_.

Re: Newsflash: Founders Don't Really Care About AngelGate

#25

Post by alexyim »

I particularly liked the last paragraph.

"Ron’s advice to Angel investors is analogous to Paul’s advice to founders: focus on what really matters. Focus on anything else is at best distracting and at worst disingenuous and destructive. Entrepreneurs get distracted sometimes, and, I guess, so do angel investors."

Re: Newsflash: Founders Don't Really Care About AngelGate

#26

Post by 1gor »

Of course, founders should care about AngelGate.

The premise of the whole drama was that there may be a collusion between individuals who are involved in early stage financing of startups.

A startup founder is by definition in a weak position commercially when facing prospective investors. An engineer puts a significant chink on his life in his venture, he does not have a portfolio of alternatives. This fact is very well known to the party on the opposite side of the table, to the investor that is.

For a rational investor, a startup investment is a high financial risk. It is not a well-researched public stock, it is an option. But it's OK, since it is a game he is in. He knows that most of his portfolio will be worthless, but a few (maybe one) stars in the portfolio will potentially make him wealthy(ier).

So, when two parties are facing each other at the negotiating table, the investor looks at the founder as a sort of a 'disposable' asset. After the deal is struck and the venture goes under, the investor is financially damaged, but he is alive and will have another termsheet discussion sometimes this week. The founder is left picking up the pieces of his life.

That's why the balance of power at the negotiating table is very important. The founder has a single recourse -- there should be competition between suppliers of money. Now, the AngelGate has shown us that such competition may be a myth. There may appear a cartel between technically-savvy suppliers of money. The market is small anyway, and when the bulk of the suppliers can fit at a restaurant table...

The article is quite dangerous in its goal. So what, instead of addressing the issue -- how to prevent collusion of early-stage investors -- the hackers can go back to work and focus on putting more hours in their startups? Really?

Let me suggest a few points that should come out of this scandal before all is forgotten and quiet.

- reputation of the individuals involved in AngelGate should suffer. This will give a chance to potential new entrants on the scene (new investors). Game theory tells us that 'tit for tat' strategy is the most viable in the long term. The cost of future collusion will be higher, and the founders will benefit from that.

- there should be a discussion about how to prevent cartels in the startup field. Maybe a self-regulating body should appear eventually in this market.

- any experts in the field of private equity (lawyers etc.) should seize the opportunity to provide impartial advice to the founder community (via blogs etc.). Angels have lost credibility, the void should be filled. We speak about standard sample term-sheets, financing terms etc.

- a credit should be given to Michael Arrington who has performed a function normally done by a regulator in the marketplace. Founders should probably supply him with more information from now on.

Re: Newsflash: Founders Don't Really Care About AngelGate

#30

Post by nandemo »

tptacek wrote: post #22
dmpayton wrote: post #15

Earlier quoted context omitted.

Which they generally won't do until there's something to pay for. We are the first step.

That's not even close to true. People take pre-orders on products all the time. Blank even recommends the approach in _Epiphany_.

I think melvinram are dmpayton are both right. The entrepreneur only knows there is actual demand for his product when someone pays or makes a promise to pay for it.

But logically the product still comes first. The entrepreneur might take a pre-order on a product that's not available yet, but it must exist at least notionally.

Say you want to buy a kg of rice from me. You might buy it on the spot for $5. You might pre-order and pay me $3 now, and I promise to deliver it in December. You might pre-order and promise to pay me $5 in December, when I'll deliver it (a forward contract). I might deliver it now and you promise to pay me $6 next month. All those transactions are essentially the same, only the settlement details (and risk, etc) change.

In all those cases the existence of the product, or at least an expectation that a specific product will be available sometime, is a pre-condition for the transaction.

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