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Paul Buchheit: Angel investing, my first three years (paulbuchheit.blogspot.com)
227 points by paul on Jan 4, 2011 | hide | past | favorite | 85 comments



It's ironic that YC membership might become exactly the kind of credential to investors that a college degree is to employers, given PG's distaste for such things. Makes me a little sad, actually.


Only if PG becomes as perfunctory as colleges.


Fortunately we have powerful forces keeping us in line. If we make a bad decision, we tend to have that fact thrust in our faces within a year, if not sooner. Whereas college admissions officers do not, as far as I know, look at applicants' later careers to determine whether they chose well. Even if they did, they'd have to wait 5-10 years.


Say a company is rejected by YC. Do you want to hear about their future success, like fundraising right afterwards? Being a fan of YC and hoping YC learns from its "mistakes" seem synchronous from where I sit.


Yes, definitely. We say so explicitly in the email we send to the groups we don't invite to interviews.

When a startup we rejected does well, we usually know about it without them telling us though. And when one does we go back and try to figure out how we missed them. We've already made several changes in the application process because of good startups we missed.


Can you say which changes?

What about something that seems too radical for the model, like energy sources or medical devices? Those lessons could take 3-5 years to become obvious.


1. The video.

2. We now have YC alumni read the applications too.

We'd be happy to try funding energy sources or medical devices, but we just don't get many applications for that sort of thing.


Speaking as a guy in medical devices, I would love for a YC-like organization to exist for my industry, though I think the structure of any such organization would be quite different than what PG & Co. do now.

Just three examples: First, the capital requirements of a med dev company are much higher than a software company. 11K + 3K*n wouldn't even cover the early biocompatibility and animal trials needed to demonstrate proof of concept.

Second, there is less measurable progress in 10 weeks relative to a software company, due in part to the length of the aforementioned trials.

Third, there's no ability to release a minimum viable product to customers and quickly pivot based on their feedback. That's partly because in medical technology 'customer' is an unclear concept and partly because your product won't get used in a meaningful way until feasibility human trials, which are at minimum several months after prototypes are created.


http://news.ycombinator.com/item?id=1986883

...making great progress with the newly re-branded his "innie" and his/hers "outie" models. Since I'm bootstrapping (at the moment) my target markets are individual consumers, though the long-term roadmap calls for FDA Pharmaco-Therapeutic classification and Class II medical device approval by year 3.

What if I told you that this product sits at the forefront of a $15bn industry. Is that something you might be interested in?


I second the question "Which changes?", you know what they say about the higher information value of surprises.


I'm surprised that the average investment is actually that small. (Yes, we've been hearing of this trend overall, but still, ~30 companies per million?) Is an average of < $38K all that companies want/need, or all that they will take?


Since my goal was to learn without losing too much money, I generally made smaller investments. (and of course there are other people investing, so the total round could be $1M or more)


What kind of share did those investments generally get you?

On another note regarding the low amount of money, having someone like paul around is worth considering as extra value with the investment similar to when 37Signals took money from Jeff Bezos.


How low do you think its possible to go in terms of investing? As an experiment, lets say I decided to save up $1000 and try my hand as a venture capitalist. Do you think it could work out, or its pointless to even try because other costs, like administration time etc. would get in the way?


Well, you'd have to be an accredited investor: http://en.wikipedia.org/wiki/Accredited_investor

(Though I assume that friends and family rounds have some way around that, so maybe if you know someone that's looking for super-early investment, you could invest.)

But even so, from my limited knowledge (mostly drawn from reading stuff posted here) I think $25k is pretty much the least that people tend to invest.


joshu said he invested usually $10-25k per investment. I think $10k would be a better lower bound approximation.


10k is too small, really. It is mostly a way for me stay in the game. On one hand, startups have rejected that as an amount, wanting 25-50k. On the other hand, I have wanted to do my usual 25k and only bee able to get a 10k allocation.

The better the deal, the less I invest, paradoxically.


Why's that?


Better deals are harder to get more dollars into. It's not a choice, just a consequence.


That makes sense, thanks a lot.


As jack... commented, you could invest as 'friends and family' round. I am not accredited investor. But I have made a few small investments up to 10k (I call them my pay it forward) to friends and close acquaintances with 'no pedigree' who are trying to start a business.


That's not all the companies want/need. Paul is most likely one of several investors for each company he invests in, probably through convertible notes which are becoming "the norm": http://paulgraham.com/superangels.html


Yes, sorry I was unclear. There are always other investors.


Would be nice to hear what you have learned from those six companies two of which are dead and four are zombies.


"A few companies (such as ScanScout) were acquired by other private companies, so I include those in the "still alive and doing well" category, since it was not an exit from the investor perspective (no liquidity)"

How common is it for investors not to get liquidity in this situation?


Acquisitions made primarily with private stock really fall into two buckets:

- Those where the private stock is worth more than cash. It would have been a good bet to get pre-IPO Google stock instead of the same amount in cash.

- Those where the acquiring company stock is equally risky and the acquisition is made as a last-ditch effort (fire sale, consolidate investor portfolio, etc)


To elucidate drusenko's point:

As to commonality, who knows?

As to preferability: it is very, very rarely preferable for an investor to be in this situation.


Looking back, what are some warning signs that you can identify from some of your failed investments that you'll look for in the future?


Identifying the winners is more important than identifying the losers. It's the investments you don't make that kill you.


Yeah, but not making the bad bets is a good idea.

Big mistakes, so far:

    - startup has no lead investor
    - startup is raising too little
    - generally, not having an investment thesis
Curiously, I've been working on taking stock of my angel portfolio as well lately, though it seems gauche to talk dollar numbers.


Yes, avoiding bad investments is definitely good. However, I think people have a natural cognitive bias towards loss-aversion, which means that we need to be careful that we aren't focusing too much on that side of things (e.g., we should focus 20% on avoiding bad deals, and 80% on not missing good ones).


Talk dollar numbers... I think I'd be safe in saying, we're all ears. :-)

The problem with bad bets is that they take money from your good bets. If Paul's only bets were Heroku and Mint, he would probably have a much larger return.


Ok.

I tend to invest $10-$25k. There was one for $50k (which is a loser) and one for $40k (which returned a bit.)

The better investments tended to have smaller allocations for me. Hotter deals tended to go on to Series B.

I've spent maybe $800k on investments. The unrealized value of the portfolio is approximately $1.6m, most of which is in one company. Since the original investment was only $25k and my first actual investment, if I had just stopped there I would be doing way better.

I cannot conclude that I am actually any good at this.


That's actually quite good. You and Paul are both ahead of the game, and it seems to be the case that there are quite a few exits. It _seems_ like if you're in there long enough you eventually hit a Groupon, Facebook, Google, or happen to be in during a big boom. At worst you're out $1M.

Not bad odds, although I think you and Paul have opportunities that most of us would never see (and rightfully so).


You have to compare the numbers annualized (which is hard to do, since the data isn't in) and then compare that to contemporaneous treasury returns (and maybe the stock market i guess) to get a real sense if it's good or not.


What % of stocks do you take aprox?


The better opportunities tend to have higher valuations. Most things are at $3-4mm pre at the very least (and I tend to pass on lower-end stuff than that.) Divide it out :)


I think this maxim should be qualified as applying only to startup investing, and YCombinator investing in particular.

If you're otherwise getting 20% returns, investing 20% more money annually in losing investments will trash those returns. And 20% would be pretty good for the VC industry nowadays, or a hedge fund, or even Berkshire Hathaway.

With investments like Heroku, YC is probably doing better than 20% and can afford a winner-based strategy - but this will rarely be a viable mode of thinking in finance generally.


Interesting. One way you just made me think of this is considering what a 'great' investment return is. Let's say it's 20%.

If you're getting 20% already, you might as well expand your base looking for more 1000x returns, and not cry too much about bad placements; this investing business has a significant opportunity cost risk which means you probably want to err on the side of putting some money in. If you're over 'great' returns, you can afford to do that, and should.

On the flip side, if you're under 'great' you probably want to figure out how to prune your choices away a bit first.


I find myself asking non-YC companies why they aren't yet in YC

Are there any legitimate excuses for a startup not to be in YC, other than rejection? I can't think of any (especially when you read http://paulgraham.com/equity.html).


Not in my opinion :)

If an established entrepreneur like Joshua Schachter starts a company, then I'm going to invest no matter what, but for everyone else...

Watch the Facebook movie and imagine what would have happened without Sean Parker. (I think Zuck would have lost control of the company) YC provides that same kind of value (minus the drugs and women, unfortunately).


wait, you don't provide drugs and women? i was misinformed.


All the drugs are down the street at the institute of transpersonal psychology. I think Myron and Jean Stolaroff live within biking distance as well.


what is this i don't even


You ever read What The Doormouse Said? It's all about how LSD influenced the birth of the Internet. Basically the Stolaroffs introduced all the most important technologists in silicon valley (e.g. Doug Engelbart) to LSD. These folks picked up on the mystical ideas that 'everything is one' and 'we're all connected', and set out to recreate this metaphysical vision using computer hardware. And now YC is building software that runs on this platform. Just goes to show that reality is not only stranger than we suppose, it's stranger than we can suppose.


what's the unicode emoticon for bonghit noises?


LSD, you're doing it wrong.


Ever read "Just So Stories"? :-)


This comment is interesting to me. Does this mean you wouldn't invest in a company that YC rejected? Does it mean you wouldn't invest in a company that didn't even apply to YC? Are you going to be angel investing at all now that you've joined YC?


I still invest in non-YC companies, but there's a much higher bar (e.g. I already know the founders, or they have a lot of traction).


"That said, finding the next Google and buying a 1% stake is my current billion dollar plan :)"

Facebook, Google etc.. did not go through incubators and they were not started by "established entrepreneurs". If you are looking for a 1% stake in the next google do you think that your preference toward companies that go through incubators will cause you to miss the next big thing?


YC is not an incubator, and nothing like it existed when Google and Facebook were started. As I mentioned in the parent comment, I think the closest match is Sean Parker, and he owns a very nice chunk of Facebook :)

There's a very good chance that the next Google or FB will be part of YC, because YC is a smart deal for founders, and therefore it will attract the smart founders, and those are the people likely to start the next Google or FB.


paul - it sounds like you don't like to be the original investor going in with an unknown commodity -- that an accurate assessment? if not YC, what are other filters for you?


"Because YC is a smart deal for founders, and therefore it will attract the smart founders"

YC might be a good deal but that does not mean it will attract "the" smart founders. Yes it will and does attract some smart founders but just because you dont want to do YC does not mean you are not smart or that you are less likely to have the next big thing. If anything this "All smart founders will go to YC" attitude is one of the main reasons you are more likely to miss out on the next big thing.

Whoever is out there creating the next big thing might not even know that YC exists and if he does there are a plethora of other reasons (life and work related) which may cause him/her to not want to apply. Even if they do apply PG has said his strong suite is not picking who gets in and they pass on good people all the time so you are not only hoping that you see the next big thing but that YC sees them too. All these additional criteria make it less likely that you will find the next big thing IMHO.


Given that I have finite time and money, I need good heuristics for deciding who to talk to. YC is one very good signal, but obviously not the only one.


Well you're only making 10% using YC as your filter.


This is silly, and also mean. The man has put $1mm of his personal money into funding startups. I bet you that almost all of these startups had close to zero revenue. Furthermore, he's politely answering questions in this low-noise, low-traffic forum! I bet almost nobody got that kind of access to funders in 1999.

Secondly, if you actually parsed through the article, you're considering book value of his un-exited investments to be $0.

Do you have any investments like this you've made? I might be interested in taking them off your hands for an _excellent_ price compared to their $0 value.


Angel investing is not altruism, it's business. I don't do angel investing because I'm not comfortable with the risk profile, and to hear that a popular angel is only making 10% reaffirms my analysis.


While investing is business, the blog post is definitely altruism, which is why I encouraged you to be more polite.

I re-read the article to make sure my second point also holds: the 10% (over three years, so really more like 3% if you are looking at IRR) is only calculated on actual current exits.

About half his portfolio is still indeterminate. Barring seriously weird circumstances, he will do very well overall on this crop of investments, especially considering that he started in 2006.

That said, keep on with your current strategy. Everyone has a place.


"Only" made 10%, and starting in 2006 and proceeding directly through to the world bottoming out? I think the previous commenter you are responding to must have been joking.


Sadly, one cannot give trolls the benefit of the doubt.

http://news.ycombinator.com/item?id=1963971


This gives me an idea; perhaps PG could deliver some sort of anonymized hash of poster IPs to us so that a user can choose to ignore everyone from the anonymized IP.

I'm reminded of old-time slashdot -- I banned jonkatz from showing up anywhere on my slashdot pages. It was bliss.


Yes, but his real position isn't 10%. It's 10% plus a stake in Weebly, Wufoo, and a dozen other companies that are still alive. Discounting those to $0 isn't exactly accurate.


What's silly or mean about evaluating one(selve)s performance?


Off the top of my head:

  1. Incompatibility with current investors
  2. Unable to move to SF (long list of reasons)
  3. Incompatibility with YC philosophy
Regarding #3, YC has a certain way of viewing the world and doing things and I think it's definitely valid to just disagree with them enough that you wouldn't want to sell them 6% of your company.


I wouldn't participate in YC because I have a pregnant wife and young son, and I am not interested in leaving them alone while I take a semester of YC. YC doesn't provide that much money and YC isn't the only way an entrepreneur can find a support network.


I don't think Paul's point is that YC is incredibly valuable because of the support network, although that is definitely a factor. Its that you won't get screwed around by investors as much and simply in terms of seed/Series A valuation differentials between YC and non-YC companies (all other things being equal) you'd probably be getting a better deal (in terms of equity ownership) even if YC's average valuation was 50% what it is.


i can think of several reasons

   - startup is outside yc's sweet spot
   - founders already have a good network
   - timing is wrong


With respect to #2: Even if you have a strong network already (barring a previous exit) you could probably get at least a 6.4% (1/(1-.06)) bump in your Seed or Series A valuation just with YC's brand in this funding climate.


For me personally, I doubt it.

I think the article you are referencing has significant problems, but I won't go into them here.


He did say, "barring a previous exit", which excludes you.


Also, I'd guess that Josh would get a much better deal from YC if he did apply.


A 6.4% bump only buys you back the 6% of equity that you lost if you're selling the entire company during the Series A.


I wonder what areas are outside of that sweet spot. Hardware and enterprise software are a couple that immediately come to mind.


This thread: http://news.ycombinator.com/item?id=2054847 discusses WakeMate's recent safety recall of chargers. There was some discussion there regarding whether YC is a good match for hardware companies or not, given its small investment and YC's lack of experience with hardware.


At least from my understanding there's a relocation component to it. I've certainly been in startups where the non-financial cost of relocating is larger than the return one would be from being in YC.

In fact, I suspect that is probably one of the biggest reasons why many startups don't do it.

Also "enterprise" startups (those not targeting consumers) I think will gain a lot less from being in YC.


If you've already taken money and your investors wouldn't be cool with it.


Then you have bad investors.


No matter how much YC kool-aid you may be quaffing, there are probably legitimate reasons for existing investors in an angel round to think twice about giving up some percentage of the company (e.g. 6%) for chump change and access to a "network" that they probably think they can provide just as well.


Actually Id have thought geography (combined with family and work) would have been one of them, but I think I am just not ballsy enough to pack up and move across the ocean!


Here's one: YC is way too expensive for some startups.


Established founders is certainly a good reason I think.


This reminded me of the Ignite talk David Cohen (TechStars) gave on the math behind angel investing: http://www.youtube.com/watch?v=54vmDhBImkw

These are GREAT returns when you remember that most angel investors lose money. But I'm not surprised Paul is doing well. It's obvious that his motives are in the right place and he's been hands-on with enough technology that he understands this stuff better than most. Paul is a huge asset to YC. This just goes to show (again) how lucky YC are to have him on their team.


That's usually not how the quality of returns is measured.


Have you tried to estimate the value of the still active but illiquid startups?

Heroku was winter 08 not summer, btw




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