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Paul Graham: Some VCs Push For Large Rounds, Even When Startups Don't Need Them

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Re: Paul Graham: Some VCs Push For Large Rounds, Even When Startups Don't Need Them

#21

Post by kalininalex »

adventured wrote: post #3
e3pi wrote: post #2

"Graham also released some metrics on Y Combinator: it has 564 startups total. Of the 285 that have valuations, the total valuation of the companies is $11.6 billion." !

I wonder which companies are skewing that the most, anybody have a list of the top Y Combinator companies? Obviously the average of $46 million doesn't provide a clear picture at all.

It would be interesting to know what the median valuation is. Half the startups will be above it, and half below it. This would provide additional interesting details.

Re: Paul Graham: Some VCs Push For Large Rounds, Even When Startups Don't Need Them

#22

Post by natejenkins »

mashmac2 wrote: post #11

Fred Wilson (Union Square Ventures) just wrote about something similar in his blog post today. http://www.avc.com/a_vc/2013/06/valuation-vs-ownership.html Edit: mentioned in the article - I should read more carefully!

'We are also very much focused on what is in the best interest of the entrepreneur. You might ask "how can taking $2mm for 20% be better than taking $5mm for 20%?" and you'd be right asking that question. The answer is you can get the other $3mm later at an even higher price. That has been the history of many of our investments.'

Can someone explain to me how this makes sense. I'm still going to have to give away x percent of the company to raise another $3mm. What am I missing here?

Re: Paul Graham: Some VCs Push For Large Rounds, Even When Startups Don't Need Them

#23

Post by benjamincburns »

malandrew wrote: post #19
benjamincburns wrote: post #16

Earlier quoted context omitted.

> would you talk to a lot of the startups in the current batch about collectively sticking to a lower percentage like 15% I'm not a lawyer or even a particularly skilled investor, but that smells like an SEC violation. Even if it wasn't, I think it'd be something akin to price fixing. Would someone who knows more care to chime in? Am I wrong?

Isn't the current situation of 20% as a bottom limit the same? The US has a history of cartel like behavior in finance. Just look at the percentage charged for IPOs [0]. I'm sure if you created a similar graph for venture capital financing that you'd see a black line on the graph just like the one created by Mark Abrahamson, Tim Jenkinson, and Howard Jones. Trying to break that 20% barrier would seem acceptable. Afte…

Some questions:

Do you believe that the 20% as a bottom limit is the result of a group colluding with intent, or is it just the result of a type of evolutionary convergence?

By chain rule, as long as the market has some modicum of elasticity, isn't fixing supply analogous to price fixing? Maybe I'm assuming that the supply of appealing early stage equity is much lower than it is? Or is something flying over my head and this has nothing to do with supply of said equity?

I definitely agree on the bigger point. The whole early stage equity market is weird as hell, and it seems like there are plenty of opportunities to manipulate/exploit it.

Re: Paul Graham: Some VCs Push For Large Rounds, Even When Startups Don't Need Them

#24

Post by paulsutter »

malandrew wrote: post #9

"Graham suggests that if one reputable venture firm were to break this non-spoken 20% Series A agreement, the best startups would instantly flock to that firm. “It’s going to happen,” Graham says. “You might as well anticipate it and look bold.”" pg, Any plans on using the collective attractiveness of YC to help push that 20% stake down? e.g. would you talk to a lot of the startups in the current batch about collecti…

Founders Fund only took 16% during the Quantcast Series A, and they expressly said at the time that they didn't have a specific target for ownership percentage.

I remember this because other firms wanted 20% or more.

Re: Paul Graham: Some VCs Push For Large Rounds, Even When Startups Don't Need Them

#25

Post by johnrob »

natejenkins wrote: post #22
mashmac2 wrote: post #11

Fred Wilson (Union Square Ventures) just wrote about something similar in his blog post today. http://www.avc.com/a_vc/2013/06/valuation-vs-ownership.html Edit: mentioned in the article - I should read more carefully!

'We are also very much focused on what is in the best interest of the entrepreneur. You might ask "how can taking $2mm for 20% be better than taking $5mm for 20%?" and you'd be right asking that question. The answer is you can get the other $3mm later at an even higher price. That has been the history of many of our investments.' Can someone explain to me how this makes sense. I'm still going to have to give away x p…

I agree, that didn't make much sense. It seems like the post was targeted more towards LPs than startups.

Re: Paul Graham: Some VCs Push For Large Rounds, Even When Startups Don't Need Them

#26

Post by joshu »

malandrew wrote: post #9

"Graham suggests that if one reputable venture firm were to break this non-spoken 20% Series A agreement, the best startups would instantly flock to that firm. “It’s going to happen,” Graham says. “You might as well anticipate it and look bold.”" pg, Any plans on using the collective attractiveness of YC to help push that 20% stake down? e.g. would you talk to a lot of the startups in the current batch about collecti…

It doesn't work that way. The VCs have covenants and agreements with their investors that make them try to get to a certain target ownership.

Re: Paul Graham: Some VCs Push For Large Rounds, Even When Startups Don't Need Them

#27

Post by ScottBurson »

natejenkins wrote: post #22
mashmac2 wrote: post #11

Fred Wilson (Union Square Ventures) just wrote about something similar in his blog post today. http://www.avc.com/a_vc/2013/06/valuation-vs-ownership.html Edit: mentioned in the article - I should read more carefully!

'We are also very much focused on what is in the best interest of the entrepreneur. You might ask "how can taking $2mm for 20% be better than taking $5mm for 20%?" and you'd be right asking that question. The answer is you can get the other $3mm later at an even higher price. That has been the history of many of our investments.' Can someone explain to me how this makes sense. I'm still going to have to give away x p…

"... at an even higher price" is perhaps unclear; I presume he meant "... at an even higher valuation". That is, the total percentage of the stock you have to sell to the investor to raise the money is less if you raise in two stages than if you get it all up front.

There's an assumption here: that you actually manage to make demonstrable progress in the business between the first and second round. If you think it's going to take longer to show progress than the amount of time $2M will give you, then you should raise more to start with.

Re: Paul Graham: Some VCs Push For Large Rounds, Even When Startups Don't Need Them

#28

Post by malandrew »

benjamincburns wrote: post #23
malandrew wrote: post #19

Earlier quoted context omitted.

Isn't the current situation of 20% as a bottom limit the same? The US has a history of cartel like behavior in finance. Just look at the percentage charged for IPOs [0]. I'm sure if you created a similar graph for venture capital financing that you'd see a black line on the graph just like the one created by Mark Abrahamson, Tim Jenkinson, and Howard Jones. Trying to break that 20% barrier would seem acceptable. Afte…

Some questions: Do you believe that the 20% as a bottom limit is the result of a group colluding with intent, or is it just the result of a type of evolutionary convergence? By chain rule, as long as the market has some modicum of elasticity, isn't fixing supply analogous to price fixing? Maybe I'm assuming that the supply of appealing early stage equity is much lower than it is? Or is something flying over my head a…

I would say culture and sometimes intentional and sometimes unintentional collusion.

Investments are made in other industries all the time and the percentage owned after an investment can vary dramatically, from fractions of a percent to majority ownership. What makes VC investments so special that its own nature would result in settling upon a nice conveniently round number like 20%?

Plus, the 20% isn't fixed in stone. It's an asymptote. It's not unusual for it to range as high as 30 to 35%. I'd love to see a graph like the one in the IPO study. I'm sure it would be very illustrative of collusion.

Re: Paul Graham: Some VCs Push For Large Rounds, Even When Startups Don't Need Them

#29

Post by malandrew »

joshu wrote: post #26
malandrew wrote: post #9

"Graham suggests that if one reputable venture firm were to break this non-spoken 20% Series A agreement, the best startups would instantly flock to that firm. “It’s going to happen,” Graham says. “You might as well anticipate it and look bold.”" pg, Any plans on using the collective attractiveness of YC to help push that 20% stake down? e.g. would you talk to a lot of the startups in the current batch about collecti…

It doesn't work that way. The VCs have covenants and agreements with their investors that make them try to get to a certain target ownership.

More details please.

Re: Paul Graham: Some VCs Push For Large Rounds, Even When Startups Don't Need Them

#30

Post by jfarmer »

natejenkins wrote: post #22
mashmac2 wrote: post #11

Fred Wilson (Union Square Ventures) just wrote about something similar in his blog post today. http://www.avc.com/a_vc/2013/06/valuation-vs-ownership.html Edit: mentioned in the article - I should read more carefully!

'We are also very much focused on what is in the best interest of the entrepreneur. You might ask "how can taking $2mm for 20% be better than taking $5mm for 20%?" and you'd be right asking that question. The answer is you can get the other $3mm later at an even higher price. That has been the history of many of our investments.' Can someone explain to me how this makes sense. I'm still going to have to give away x p…

He's speaking as a buyer of equity. Later, equity will be worth more (i.e., have a higher price) so that same $3MM will be less dilutive. Conversely, from the entrepreneur's perspective, that same $3MM will be "cheaper" in the future.

Depending on the math, you could easily wind up with the same amount of cash raised but less dilution overall.

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