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Might be smart to "diversify risk" in an investor sense, but as a startup, you're more akin to a team than an investor.
It seems akin to a pitcher betting against his own team in order to make money himself. Sure, he might come out ahead, but that's not the point of the team.
If you really want to invest in other startups, put up some cash.
From a practical perspective, one largely buys insurance to smooth out either cash shocks or future decreases in earning potential rather than for diversification. Having a startup fail is not going to be a cash shock. Your earning potential if your startup fails should go up, because you're worth six figures on the open market trivially, and you probably were not paying yourself that previously.
Apologies for the snark, but if my goal was to maximize expected return, I think I'd probably not do a startup at all and get a nice salaried job with a government contractor. Startups are risky! And it's hard enough for me to judge the risk/reward of my own startup, let alone someone else's. If I wanted to take out some risk, I'd rather cash out some equity using more traditional means and putting it some place safe…
Isn't being "all-in" part fo the reason a startup needs to stick together - especially at the outset?
Seems like there's an adverse selection problem here. (And, relatedly, a signaling problem.) This is not an attractive option for companies at the head of the distribution or anyone aspiring to be there, and to the extent that you talk about it, VCs are going to read that as "You're a loser planning on losing." From a practical perspective, one largely buys insurance to smooth out either cash shocks or future decreas…
Then I'm going to read VCs investing in lots of companies as losers planning on losing.
VCs hedge their bets, almost by definition. What's wrong with founders doing the same?
I'm not really in favor of this particular proposal, but the idea of one-standard-for-you-another-for-me is a major turnoff.
Seems like there's an adverse selection problem here. (And, relatedly, a signaling problem.) This is not an attractive option for companies at the head of the distribution or anyone aspiring to be there, and to the extent that you talk about it, VCs are going to read that as "You're a loser planning on losing." From a practical perspective, one largely buys insurance to smooth out either cash shocks or future decreas…
Agreed. I just wrote an essay about this underlying issue of founder risk management [1], in response to PG's recent essay, and along the way I had this exact idea (swapping equity with other startups), and abandoned it because it seemed too complicated, as well as the adverse selection problem.
If it were to work, a major key would be the OP's first bullet point (in the "Gotchas" section of the original proposal) -- implementing a voting system, to ensure the startups in the pool are high quality.
Seems like there's an adverse selection problem here. (And, relatedly, a signaling problem.) This is not an attractive option for companies at the head of the distribution or anyone aspiring to be there, and to the extent that you talk about it, VCs are going to read that as "You're a loser planning on losing." From a practical perspective, one largely buys insurance to smooth out either cash shocks or future decreas…
--VCs are going to read that as "You're a loser planning on losing."-- Then I'm going to read VCs investing in lots of companies as losers planning on losing. VCs hedge their bets, almost by definition. What's wrong with founders doing the same? I'm not really in favor of this particular proposal, but the idea of one-standard-for-you-another-for-me is a major turnoff.
It's a terrible argument, however, for convincing a VC to fund you.
Earlier quoted context omitted.
--VCs are going to read that as "You're a loser planning on losing."-- Then I'm going to read VCs investing in lots of companies as losers planning on losing. VCs hedge their bets, almost by definition. What's wrong with founders doing the same? I'm not really in favor of this particular proposal, but the idea of one-standard-for-you-another-for-me is a major turnoff.
That's a great argument for proving that startup founders are a braver group of people than VCs. It's a terrible argument, however, for convincing a VC to fund you.
All else being equal, it seems to me that a founder with a smart approach to managing risk is a better bet than one who is reckless about it.
Seems like there's an adverse selection problem here. (And, relatedly, a signaling problem.) This is not an attractive option for companies at the head of the distribution or anyone aspiring to be there, and to the extent that you talk about it, VCs are going to read that as "You're a loser planning on losing." From a practical perspective, one largely buys insurance to smooth out either cash shocks or future decreas…
--VCs are going to read that as "You're a loser planning on losing."-- Then I'm going to read VCs investing in lots of companies as losers planning on losing. VCs hedge their bets, almost by definition. What's wrong with founders doing the same? I'm not really in favor of this particular proposal, but the idea of one-standard-for-you-another-for-me is a major turnoff.
Earlier quoted context omitted.
That's a great argument for proving that startup founders are a braver group of people than VCs. It's a terrible argument, however, for convincing a VC to fund you.
When did founding a startup become about proving how brave you are? That seems like a very poor standard of evaluation. All else being equal, it seems to me that a founder with a smart approach to managing risk is a better bet than one who is reckless about it.
It's not. What I was trying to say (perhaps unclearly) is it seems like you're arguing a moral point, that since VCs can diversify to reduce their risk, it's only fair that founders get to do the same.
And that's true. If you're founding a startup, and want to pool equity with other startups, nobody is going to prevent you. But VCs might be less inclined to fund you too.
So it's a question of what matters more to you -- taking more risk and perhaps getting more funding, or having less of both.
Seems like there's an adverse selection problem here. (And, relatedly, a signaling problem.) This is not an attractive option for companies at the head of the distribution or anyone aspiring to be there, and to the extent that you talk about it, VCs are going to read that as "You're a loser planning on losing." From a practical perspective, one largely buys insurance to smooth out either cash shocks or future decreas…
But, like you said, no one wants to admit that they might fail.