Investor Herd Dynamics

We're in a strange place right now, sat in the middle of two pieces of startup advice.

Piece of advice #1: "The time to raise money is not when you need it, or when you reach some artificial deadline like a Demo Day. It's when you can convince investors, and not before."

Piece of advice #2: The best time to raise VC money is when you have product/market fit and need rocket fuel to grow.

We were having conversations with investors to suss out the London startup scene (we feel like outsiders mostly having kept ourselves to ourselves) and to make connections with industry leaders who might make great advisors.

2 Weeks ago these conversations suddenly turned into "Shut up and take my money.". Once this started happening, it happened at every meeting, with investors swiftly upping the amount they believe we should take... we have a herd all telling us to take their money. We haven't done a proper pitch to anyone.

We were aiming at #2 (product/market fit), and have stumbled upon #1 (convinced investors forming a herd).

The problem is expectations. We are at seed stage, and are developing the product/market fit. We have customers lined up, but we're not yet seeing good traction with the existing customers we're engaged with. We want to carry on improving the product, testing as we go.

If we take VC money we very much believe we'd be under expectation to focus on growth before the product is the right one for the market (it has a lot of promise today, but it's not yet proving itself fully).

Our current view is to to explain to investors/VCs that we're still seed and take the money only if it doesn't come with conditions and is understood we're still seed.

Not a lot of wisdom out there on whether you should decline VC money. We're not of the belief that all money is good, especially if it proves to be a distraction from just making the a great product that customers really want.

This is a problem when noone wants to lead though.

Here at my company we tried to make a pre-A round of sorts (mostly because we are in Brazil, and investors here are unwilling to invest anything close to a A round here).

We had several people commit saying that if other people go, they will go too... But we found noone to commit as leader, and all the other commited investors refused to go without a lead investor, kinda annoying situation.

Happily our seed investor liked our recent results and expanded his seed investment instead.

thanks for the reply. The thing with inflation: true, it helps those in debt. But is destroys savers. Inflation is a simple mechanism of wealth transfer from savers to debtors. You described who the debtors are. I agree. Let me tell you who the savers are: mostly retirees (401k), elderly people who use their life savings to pay the bills, etc, and others like successful businessmen who just want to save. I just don't think that it is morally ok and I know that it is not economically ok (due to moral hazard) to just move wealth from people who worked and saved to ones who were irresponsible with their debt, took risks, and now want someone else to be responsible for that. Because there are more debtors than savers then simple political calculation says screw savers, let's rescue debtors as they are the majority of voters. And here we go:

Insurance premium for me is up 20% year to year. Food is up. Medication is up. Gas is up. All kinds of insurances are up. And all of these hurt common folk the most too. Guys living paycheck to paycheck. But those don't even get what the inflation is and how it translates to their daily lives. So the Government just continues printing.

Now talking about good times we have now in the IT. My answer to this consists of 2 points: (1) It's not only IT. Just read somewhere that some parameters of the housing market are as "hot" now as they were in 2007 in some areas (Las Vegas); cars are also selling as well as in 2007; etc. Which takes me to (2) The FED by keeping interest rates at 0 since 2008 was able not only to reinflate housing and IT bubbles but probably to create even more bubbles all over the place. So what I think and of course I may be wrong -- what you are experiencing with your new hires now is just another bubble built on cheap credit. Since 2008 the whole world has been buying US Treasuries like never before, funding US Government, financial sector and big businesses on unprecedented scale. The VCs I mentioned - how in the world can you be a VC and have worse return than S&P500 for the past decade? And still get funding! Why? Because with interest rates at 0% nobody wants to keep cash or money on deposits - everybody has to "invest" (or rather speculate). So that's what happening. If you do nothing with that cash you loose 10% year to year. So you invest no matter what. In IT, real estate, startups, whatever. Once the world stops buying US Treasuries on such a scale and actually starts selling them, the interest rates will go up. So then the question is why to invest in all these crazy startups, equities, bonds, real estate, etc. When just keeping cash at the bank deposit returns 5% a year? Or maybe even better at 18% (as it used to be the case in 1981). That's when you will see - sorry for putting it so bluntly - how much all these VCs, IT sector, real estate, etc. are really worth. Without cheap credit doing the work of life support.

BTW, I'm an (proud) US citizen, originally from Poland. As crazy as it may sound to you, after almost 10 years in the US (9 years IT experience) I decided to move back to Poland because I'm really worried that the US economy may face extremely serious crisis. Comparable to hyperinflation in Germany in 1920s. Think of me as of one of these tin hat guys or gold bugs ;-) My English sucks at times. I try to reread whatever I write, but sometimes I just write stuff and don't really care and well, it shows. My apologies, I tried to be better this time, lol. Nice talking to you btw.

I get you. You are a business guy doing his thing and you could care less about all the economics and politics BS. Honestly, I think that's great. I don't want to waste your time, so just saying hello and take care.

they really don't. I realize this is one of those conversations entreprenuers think VC's have a lot, but most VC's have ownership and $ thresholds they are aiming for in an investment - just splitting the baby in half with another VC firm doesn't get you there, and you'd be surprised at how many firms like working with firm a / b / c but hate d / e / f. The better argument for not revealing this is that its leverage - ie, the investor might think your other option is AH/Sequoia/Accel/Benchmark/Khosla/some other top-tier firm, while in reality it might be some relatively podunk firm - you get some potential benefit from that (and also potentially some downside if its the other way around).

The compromise position here is being honest but guarded - ie, especially if you are talking to one of those above - As a founder / CEO's, come back to the investor here and say we're talking to a couple of top-tier firms, which gives the signal effect to the investor that they need to sell / convince quickly while maintaining your leverage as an entrepreneur.

How the QE works is that these trillions and trillions are pumped from the FED directly to big zombie banks to help them stay afloat. As big banks spend these money by investing in bonds, equities, VCs, whatever, the economy as a whole starts feeling better, I agree. And the prices rise too. The problem is that the last ones to receive it still have to pay harsh inflation tax even though they didn't get much out of the benefit. It works like this (money creation): FED --> banks --> whoever banks loan money to or invest in (investment banks) --> VCs, real estate, homeowners (from your example), etc. --> whoever these folks spend money to. The poor gets poorer in that scenario, while rich get richer (and I'm a republican here, mind you)

So, to answer what you said -- newly created money benefits those who are first to receive it. If the owner of the printing press (the Government) makes it such that group A receives the money first and then decides how to spend it, then the group A will benefit at the expense of everybody else. If group A decides to spend it on people in group B then these folks will mainly benefit as well. And then group B spends on others, so on. The last one to receive it is the big looser. If the Government policy is to hand over the newly printed money to the healthcare companies - healthcare wins at the expense of everybody else. If the Government decides to spend it on the Travel industry - these folks win while we all get hit with the inflation. Etc, etc. It's not really rich vs poor debate, it is who gets the freshly printed money from the FED first is the one who benefits at the expense of everybody else.

That's why inflation is bad. Inflation is the reason why you see the gap between rich and poor - worlwide, not only in the US - getting bigger. Because somehow the FED always hands over newly created money to the banks. And I'm not a socialist saying it's bad on moral grounds - far from it. I'm saying that's a sick economy. The FED should be abolished and money should go there where the markets want the money to go. Without being influenced by politicians and their agenda. That's what - to me - true republicans hail - free economy. The FED needs to be abolished. And as can be easily shown this money creation process will create bubbles. If newly created money goes to IT, IT has a bubble. That's what happened when the FED printed in 1990s to go over Savings and Loan Crisis -- all the newly created money created IT bubble. To fight off the results of that bubble bursting they printed even more -- that's what caused to Housing Bubble. And when this one bursted (they always burst) - they created the US Treasuries bubble. The Ultimate Bubble. The Wholy Grail of Bubbles. Bubble in the reserve currency of the world. Bubble in everything across the spectrum. I'm not going to sit around in the US and wait for that one to burst as well.

Bauer Mayer Rothschild, 1838: "Let me issue and control a Nation's money and I care not who makes its laws"