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I think this has the potential to be successful if done correctly. What's your business model, are you charging or taking a cut of the equity yourselves
How do you overcome the adverse selection problem? ie. only founders who know their startups are duds want to diversify their holdings?
1) We screen companies based on their quality, ex: a round raised within the last 3-6 months. 2) Founders get to interact with participating companies and rank them based on their insight. Only companies that are highly ranked get into a pool. A pool is also dynamic and founders in the pool can invite new startups based on their interactions. Overall, this is based on the concept that founders are often good judges o…
Given that venture returns are distributed by Power Law and not normally distributed it doesn't make sense to treat all sources of funding as equal
Earlier quoted context omitted.
I would suggest for this to work as a way to share risk, you would want to have a pool of companies whose returns are not correlated.
It works both ways. 1. In a verticalized approach, your startup risk approaches your sector risk, if pool is large enough. 2. In a stage based pool approach (sector agnostic), risk is more diversified but rankings will be less meaningful. For ex, a rocket company founder may not be a good judge of CPG companies.
Does it depend on what you are hedging against, maybe? i.e. "my startup not being successful" vs "the economy tanking/oil prices trebling/whatever".
Earlier quoted context omitted.
1) We screen companies based on their quality, ex: a round raised within the last 3-6 months. 2) Founders get to interact with participating companies and rank them based on their insight. Only companies that are highly ranked get into a pool. A pool is also dynamic and founders in the pool can invite new startups based on their interactions. Overall, this is based on the concept that founders are often good judges o…
I would add a distinction that an additional screening step should be based not only on whether a round was raised but also who it was raised from. Given that venture returns are distributed by Power Law and not normally distributed it doesn't make sense to treat all sources of funding as equal
Can you pool Asian/Latin and US startups?
Can you pool Asian/Latin and US startups?
Earlier quoted context omitted.
We are using this as a screening for adverse selection, but founders who are bootstrapped can also apply if they have proven traction (we have a few stellar startups who were highly ranked but never raised money)
How about 409A valuations for those who've bootstrapped? (You probably know what it is, but for non-founders or others who haven't been through it - https://carta.com/blog/what-is-a-409a-valuation/ )
How do you overcome the adverse selection problem? ie. only founders who know their startups are duds want to diversify their holdings?
1) We screen companies based on their quality, ex: a round raised within the last 3-6 months. 2) Founders get to interact with participating companies and rank them based on their insight. Only companies that are highly ranked get into a pool. A pool is also dynamic and founders in the pool can invite new startups based on their interactions. Overall, this is based on the concept that founders are often good judges o…
If a company has raised capital and done so recently, how would you compare this to the founder selling an equivalent amount of their shares in into that round (secondary)?
IOW, if a founder has liquidity and a priced round, in which situations is this better or worse?
How do you overcome the adverse selection problem? ie. only founders who know their startups are duds want to diversify their holdings?
Great point. We think founders/builders make the best investors. They can sniff out failure. Selection is done through peer ranking by the applicants themselves. Top make it in.