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Investor Herd Dynamics

paulgraham.com

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Re: Investor Herd Dynamics

#31

Post by ganeumann »

harryh wrote: post #29
anigbrowl wrote: post #19

Earlier quoted context omitted.

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.

But it's very rarely known who is the early bird in investment rounds.

It is by the other investors. And the best investment opportunities come when other investors ask you to be in a syndicate for a deal they're leading. They may do this because they hope that next time you're the early-bird investor, you will remember them when you are helping form the syndicate.

Re: Investor Herd Dynamics

#32

Post by ganeumann »

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.)

Sigh. I do this all the time as an early-stage investor. But I don't do it to game the valuation, I do it so we can share the task of due diligence. Maybe I understand the market/customer and the other VC knows the founders, or vice-versa. It's nothing sinister, it's just a more efficient way to get the information I need quickly and cheaply.

There is a lot more than gut judgement involved in deciding to give somebody I just recently met a large sum of my money. I don't let other VCs dilute my judgement but I certainly listen to them when they have more knowledge of the relevant facts about a company, its people, its product, or its market.

Note that I'm an angel investor, so I try to make sure the cost of due diligence is proportional to the amount I'm investing. If I were a fund and writing million dollar checks, I would spend the time to do all the due diligence myself.

Re: Investor Herd Dynamics

#33

Post by [deleted] »

harryh wrote: post #29
anigbrowl wrote: post #19

Earlier quoted context omitted.

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.

But it's very rarely known who is the early bird in investment rounds.

[deleted]

Re: Investor Herd Dynamics

#34

Post by LekkoscPiwa »

Company isn't necessarily worth $1m more because it has $1m in the bank. Think of the dot-com bubble in 90s. All these companies with millions in their bank accounts that never sold anything to anyone for even one cent. But were burning through cash like crazy. Would you invest in them just because they have millions on the bank account?

The market is washed with cheap money courtesy of the FED. According to one study VCs in the US gave worse return in the past decade than blue chip stock. High risk, high return companies have had worse performance in the past decade than low risk, low return. This is not good statistics at all.

http://blogs.reuters.com/felix-salmon/2012/05/07/how-venture... http://www.verisi.com/resources/venture-capital-performance....

The market is drunk on the money provided by the FED. We'll all have horrible hangover after all is said and done. (i.e. the FED eventually rises interest rates).

edit: I love it how people down vote just because I said something opposite to what PG claims. And then no response neither ;-) Somehow this actually makes me feel good! Because it looks like I'm right as nobody replied.

Re: Investor Herd Dynamics

#35

Post by joshu »

ganeumann wrote: post #32
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.)

Sigh. I do this all the time as an early-stage investor. But I don't do it to game the valuation, I do it so we can share the task of due diligence. Maybe I understand the market/customer and the other VC knows the founders, or vice-versa. It's nothing sinister, it's just a more efficient way to get the information I need quickly and cheaply. There is a lot more than gut judgement involved in deciding to give somebod…

Same here.

There are a bunch of investors out there that I know, like, and trust.

Also slightly less importantly, there are investors I don't necessarily trust.

The composition of the syndicate is an important signal.

Re: Investor Herd Dynamics

#36

Post by jacquesm »

ganeumann wrote: post #32
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.)

Sigh. I do this all the time as an early-stage investor. But I don't do it to game the valuation, I do it so we can share the task of due diligence. Maybe I understand the market/customer and the other VC knows the founders, or vice-versa. It's nothing sinister, it's just a more efficient way to get the information I need quickly and cheaply. There is a lot more than gut judgement involved in deciding to give somebod…

Big difference, angel and VC are not interchangeable in this discussion and the article explicitly mentions VCs, not angels.

Re: Investor Herd Dynamics

#37

Post by jacquesm »

This is spot on. When I found out that a fellow entrepreneur had been pushed and pulled around trying to get funding for months without any solid commitment I put two of the angels involved on the spot in a meeting and asked them if I committed a certain sum of money for how much we could count on them. The round closed with 5 investors within a few days.

All it takes is for someone to cross the bridge of commitment and others will follow. The fact that I'm probably two orders of magnitude poorer than the other investors probably helped in embarrassing them to make a move, it was literally peanuts to them and the company went on to moderate success.

Re: Investor Herd Dynamics

#38

Post by [deleted] »

jacquesm wrote: post #36
ganeumann wrote: post #32

Earlier quoted context omitted.

Sigh. I do this all the time as an early-stage investor. But I don't do it to game the valuation, I do it so we can share the task of due diligence. Maybe I understand the market/customer and the other VC knows the founders, or vice-versa. It's nothing sinister, it's just a more efficient way to get the information I need quickly and cheaply. There is a lot more than gut judgement involved in deciding to give somebod…

Big difference, angel and VC are not interchangeable in this discussion and the article explicitly mentions VCs, not angels.

[deleted]

Re: Investor Herd Dynamics

#39

Post by ganeumann »

jacquesm wrote: post #36
ganeumann wrote: post #32

Earlier quoted context omitted.

Sigh. I do this all the time as an early-stage investor. But I don't do it to game the valuation, I do it so we can share the task of due diligence. Maybe I understand the market/customer and the other VC knows the founders, or vice-versa. It's nothing sinister, it's just a more efficient way to get the information I need quickly and cheaply. There is a lot more than gut judgement involved in deciding to give somebod…

Big difference, angel and VC are not interchangeable in this discussion and the article explicitly mentions VCs, not angels.

He does say that, that angels cooperate more with each other than VCs do. So yes.

But I think the salient point is whether the investor is asking who the other investors are so they can cooperate with them, compete with them, or collude with them. And that depends on the investor, not whether they are an angel or a VC.

Re: Investor Herd Dynamics

#40

Post by lsc »

LekkoscPiwa wrote: post #34

Company isn't necessarily worth $1m more because it has $1m in the bank. Think of the dot-com bubble in 90s. All these companies with millions in their bank accounts that never sold anything to anyone for even one cent. But were burning through cash like crazy. Would you invest in them just because they have millions on the bank account? The market is washed with cheap money courtesy of the FED. According to one stud…

the business cycle goes up; the business cycle goes down. We all know this to be the case, and the business cycle is obviously up, so quit whining and get to work.

If you have no name, this is the time to make your name. If you have a name, this is the time to make money with that name. These are the times in which you have the most leverage.

Yes, of course, the business cycle will go down again. when will it change direction? How sharp will that transition be? Nobody knows. Worrying about that is... trying to know the mind of god. We all have a set of tools, a set of resources and abilities. We need to use those resources and abilities to make enough money (or enough notoriety) that we will be able to deal with the thin times. Now is the time to run hard, not to wonder about macro. There will be plenty of time for that during the next downturn.

Sitting here and complaining about the business cycle doesn't help you, it doesn't help me, and who knows, maybe some people feel that it brings that day of "the business cycle goes down" closer to now. That was the primary reason why I'd guess you got down-voted.

The other thing? Do you remember the '90s? I worked through the crash. It was not at all obvious ahead of time, which companies would come through, and which companies would not. I mean, it seems obvious now, sure, but it was not obvious then.

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