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Reasons I Won’t Fund You

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Re: Reasons I Won’t Fund You

#71

Post by dandare »

trelltron wrote: post #56
dandare wrote: post #47

> Almost everyone has competition. I get worried if you have no respect for your competition, but sometimes, I can get past that. But not understanding your competition? That’s a No. What does such investor expects to hear in if you are Twitter or similar company entering a blue ocean (creating your own market)?

Twitter had plenty of competition. All existing social media was competition for Twitter. Email was competition for Twitter. Competition isn't about some other founder doing the same thing you're doing. It's about all the ways people can already do the things you're trying to sell them.

That is my point - nobody was doing microblogging before Twitter, they literally invented new mode of communication. Yes, it could have failed but not because email or social media would steel their users.

Re: Reasons I Won’t Fund You

#72

Post by jasode »

duncanawoods wrote: post #63
riteshpatel wrote: post #62

Earlier quoted context omitted.

VC firms invest other people's money and those people have money in a specific fund entity. Each fund has a specific structure that has various rules on stuff like minimum investment sizes, ownership and time to return the investors' money. Also, as 9 out of 10 investments, on average, will fail, the 1 that wins has to be big enough to balance out the losses, plus make a profit for the investors that's much greater t…

> as 9 out of 10 investments, on average, will fail, the 1 that wins has to be big enough This is misleading. It is only because they pursue high risk ventures that 9/10 fail and they are only picking high risk ventures because they dream of x1000 returns. They could use a different investment thesis to choose lower risk, lower payoff companies and have a portfolio where only 1/10 fails. The VC reasoning is that the…

>It is only because they pursue high risk ventures that 9/10 fail and they are only picking high risk ventures because they dream of x1000 returns.

But your explanation for their motives is also misleading. A huge constraint on VC's investment strategy is the smaller amount of money they are given. VC's are not giant multi-billion dollar private equity funds like Blackstone/Apollo/Carlyle. (E.g. Blackstone $18 billion fund.[1])

A VC fund may be small like $50 million. Or a more well-known prestige VC can raise $500 million. The recent news of a VC like a16z raising $1.5 billion is a new anomaly.[2] However, the $1.5b is still a fraction of what the private equity guys raise.

With a small $50 million fund, that's not enough money to buy management control of the more stable mid-cap and large-cap companies. Therefore, using a portion of a small $50m fund to write a $500k check to a (riskier) YC company is more meaningful than buying $500k worth of Exxon or Apple stock.

VCs are shooting for 25%+ returns and it's very difficult to do that with large-cap companies. Even Warren Buffett hasn't been able to do it over a given 10-year period.

>They could use a different investment thesis to choose lower risk, lower payoff companies and have a portfolio where only 1/10 fails.

If someone can figure out a consistent way to take $50-$100m and return 25%+ by having only 1/10 failures, that would be an amazing investment thesis. I'm unaware of any industry expert who has that track record.

[1] https://www.google.com/search?q=latest+blackstone+fund

[2] https://www.google.com/search?q=andreessen+horowitz+latest+f...

Re: Reasons I Won’t Fund You

#73

Post by Smirnoff »

mattmanser wrote: post #54
bsder wrote: post #24

> If you don’t take an amazing VP intro I give you. I’m out. Um, MY personnel get to choose who comes into the company that they work at. Thanks. This alone throws huge red flags about this investor. I may have a million good reasons for rejecting your "stable boy". Number 1 is: he's a "stable boy". I have NEVER seen a "stable boy" cause anything but problems. A truly amazing VP is probably already employed somewhere…

I read this that he meant that you didn't at least meet the intro, not that you had to employ them.

What will that intro lead to? Someone getting a job or someone not getting a job and pissing off the investor?

Re: Reasons I Won’t Fund You

#74

Post by jaredklewis »

duncanawoods wrote: post #63
riteshpatel wrote: post #62

Earlier quoted context omitted.

VC firms invest other people's money and those people have money in a specific fund entity. Each fund has a specific structure that has various rules on stuff like minimum investment sizes, ownership and time to return the investors' money. Also, as 9 out of 10 investments, on average, will fail, the 1 that wins has to be big enough to balance out the losses, plus make a profit for the investors that's much greater t…

> as 9 out of 10 investments, on average, will fail, the 1 that wins has to be big enough This is misleading. It is only because they pursue high risk ventures that 9/10 fail and they are only picking high risk ventures because they dream of x1000 returns. They could use a different investment thesis to choose lower risk, lower payoff companies and have a portfolio where only 1/10 fails. The VC reasoning is that the…

Sure, VCs could invest in less risky, less rewarding companies, but then they wouldn't be VCs. VCs are an asset class defined by their risk portfolio. Taken on their own, they are clearly using a suboptimal strategy. But no one invests all their money in VCs. As part of a diversified portfolio, it's actually their high risk strategy that hedges againsts other kinds of risks (like the risks that the old, stable companies underperform).

Re: Reasons I Won’t Fund You

#75

Post by nickpsecurity »

frivoal wrote: post #26
maehwasu wrote: post #15

Earlier quoted context omitted.

Yeah, selecting for founders who are PC-compliant seems mildly retarded, to say the least. The charitable reading is that the guy has a way he wishes the world were, and is trying to impose that vision on people he funds; which I mean, go with god dude.

There's a huge difference between being able to speak nicely despite being a dick, and not being a dick. I don't care if someone curses or is blunt about how they think something sucks, but one joke about how a certain person from sales who keeps bringing customers to hostess bars has a "nice but unfortunately expensive hobby", or to refer to engineers as "the autists", or to be glad that "the monkey is gone" when a…

They'll probably still attract talent, though. That will get their startup going. At some point, it cleans its act up a little on the way to the acquisition or IPO. What I see happening.

Always people willing to work with or under assholes so long as they might get rich. Hell, it might be the default model of employment for a good chunk of the American workforce now that I think about it. Just with wages instead of riches or IOU's from failed startups. ;)

Re: Reasons I Won’t Fund You

#76

Post by TimJYoung »

mbrzuzy wrote: post #70
urda wrote: post #68

> Even (sorry) when you’re with your family. I want you obsessing about your company. Looks like it only takes 1 reason why I will avoid you as a person (and not just as an investor). This is not a healthy mentality, this is not a good "reason", this is not something we should celebrate in our line of work. This is something that should be struck down, called out, and shamed.

He mentioned he knows it isn't healthy. Personally, I'm not a huge fan of the start up world these days, due to a lot of clashing ego's. But I can respect Jason for telling it straight. I don't think anything should be "shamed", just because it's not something you agree with. Allow people to operate however they want, it's a free country after all.

Yes, which would be fine if other people weren't involved and didn't have to suffer the consequences, especially children that have absolutely zero control over their situation. But, it's pretty dangerous territory to actually advocate in favor of neglecting one's children/spouse. You don't get do-overs with your children/spouse, and they can be harmed in ways that may not manifest themselves until later.

Having said that: if you don't have a spouse/children, then go for it.

Re: Reasons I Won’t Fund You

#77

Post by CurtMonash »

Ignoring time considerations and otherwise oversimplifying,

[Expected return] = [Probability of a non-zero return] * [Expected return | Return > 0]

VCs tend to think that the first factor will always be low, so they want the second one to be high.

So far, so good. But now let's complicate things a bit more.

1. Actually, the set of all possible outcomes is partitioned into at least three sets:

{Zero or very low payouts} {Decent but not great payouts} {Huge payouts}

Especially in the middle case, VCs' interests may not be aligned with founder/employees', because of the preferred/common stock distinction and some onerous terms that VCs impose on deals.

Also, VCs' benefits aren't just cash, but also reputational, which is another reason why their interests aren't perfectly aligned with companies' ...

... yet past the earliest stages, VCs tend to control the board, and run things for their benefit.

2. It's possible to have other kinds of interest than the classical VCs'. For example:

A. If you lend against genuinely good collateral, you have a good chance of getting your money back, and can be more restrained in what piece you take of the upside.

B. Seed investors who offer notes with unclear conversion prices often are doing something similar, but with worse odds. Often, they're hoping for a chance to invest in the next round of the best companies, which makes sense only if they assume such an investment will be very beneficial to them.

3. Dave McClure at 500 Startups trumpets the idea of factoring "singles and doubles" into his return calculations.

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