8 ms·

Investor Herd Dynamics

224 points by tlammens 13y ago

deleted 13y ago
[deleted]
rjvir 13y ago
Seeing that YC's demo day is coming soon, it's awesome to be able to peer into PG's mind - this essay along with "How to Convince Investors" must be the exact advice relayed on to the current YC batch.
- pg 13y ago
  That is exactly right. I'm trying to get a complete guide to fundraising done in time for Demo Day, so I don't have to repeat all this stuff verbally (and incompletely) yet again. There is at least one more coming on fundraising tactics.
  - earbitscom 13y ago
    Would love to see some info about the difference in strategy for raising in a toxic industry/vertical.
  - beat 13y ago
    Thanks for sharing this with all of us outside the YC world! I've really appreciated the shower of wisdom in your recent burst of essays, and I'm sure others appreciate it too.
cperciva 13y ago
After you raise the first million dollars, the company is at least a million dollars more valuable, because it's the same company as before, plus it has a million dollars in the bank. This seems a bit specious. Sure, the lower bound on the pre-money valuation for investor #2 should be the post-money valuation for investor #1, not the pre-money valuation for investor #1; but the valuation per share won't necessarily be any different.
- johnrob 13y ago
  Startup valuations are not accurate. Your comment essentially proves the point: If an investor is going to fund a company at valuation X, they prefer that X is a combination of cash and stock and not purely stock. This implies that a dollar of valued startup is not worth a dollar, which should be an axiom. A 3 MM dollar company comprised of 2 MM stock and 1 MM cash is more desirable than one with just 3MM in stock.
  - deleted 13y ago
    [deleted]
dfabulich 13y ago
"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.)
- moogabi 13y ago
  My guess is that in negotiations the risk of telling them who they are competing against outweighs the benefit of keeping them guessing. I suppose they could think you are bluffing and not really talking to any other VCs at all, but if they believe you actually are meeting with other VCs, I could see the benefit of keeping them in the dark.
  - beat 13y ago
    VCs are a small world. And VCs need each other more than they need you (as an individual startup). Most entrepreneurs will climb that VC hill once or twice, ever. But VCs will partner together on deals for years, decades. So if your negotiations really have you pitting one VC against another, it's likely that you will lose, not them. After all, there are always other startups.
- marpeluso 13y ago
  Every situation is different, and the reasons for not sharing names change depending on the the stage of the discussions. For example, if discussions are advanced enough to involve negotiations on valuation, in general, you want potential investors to compete, not collude. Unless you know the parties involved well enough to know that they will not join forces to work against you in negotiating valuation and/or governance, it is not a good idea to share the names of other VCs you are talking to.
- larrys 13y ago
  "Why not? " One thought that comes to mind is if you mention that you are also talking to "Sam " then "Bob" (who you are having a conversation with) can start to game Sam, or Sam can game Bob (when Bob mentions it to Sam later if they know each other). So in terms of general business "loose lips sink ships" this is something to avoid. So either party can play mind games with the other. And depending on the relationship of the two this could create a problem. Other thing is that this gives the VC you are pitching a chance to drop things in your mind about the other VC that might affect your judgement. "Oh well he's a great guy but the one thing you need to consider is..." My guess is PG might feel that the type of people in YC don't have enough experience to manage this situation properly so it's really similar to an attorney saying "don't say anything let me do the talking".
tkiley 13y ago
It seems like the earliest investor in a multi-party round invariably gets shortchanged in the literal dollar value of the deal. If committed investors raise the valuation of a startup, would it make sense for a startup to offer a slightly-sweetened valuation for the first investor to commit? I understand that no one likes to have the price raised on them later, but perhaps the underlying truth of increasing valuations could be restated in a different way so it seems more like a discount to the first-in vs a price-hike to the last in.
- robertlaing 13y ago
  That's something I've seen angel investors argue about on panels but never really agree on. Good post by Mark Suster here: http://www.bothsidesofthetable.com/2012/09/08/should-investors-in-the-same-round-of-financing-ever-get-different-prices/ http://www.bothsidesofthetable.com/2012/09/08/should-investo...
- anigbrowl 13y ago
  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.
  - harryh 13y ago
    But it's very rarely known who is the early bird in investment rounds.
    - ganeumann 13y ago
      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.
    - deleted 13y ago
      [deleted]
jessaustin 13y ago
I'd always wondered if anyone could upstage PG on HN. Apparently, Elon Musk can.
- anigbrowl 13y ago
  Heh, true. However, this short essay contains more useful actionable advice for HN readers than is typical even for PG, so I hope it doesn't get overlooked. Very very impressed, here.
robrenaud 13y ago
> The best investors aren't influenced much by the opinion of other investors. It would only dilute their own judgment to average it together with other people's. I don't know anything about startup investing. But I do know about machine learning. And you can often improve an ensemble predictor by adding (many) weaker features and averaging them with an already strong predictor. One shouldn't confuse the prediction of an average predictor with the average of a bunch of predictions that come from a pool of on the whole mediocre predictors. Averaging is really a strong operation for prediction. Of course, it does help if the individual predictors are themselves independent or uncorrelated with each other, which I guess tends to be very untrue in a herd.
nadam 13y ago
Can someone point to a link which explains the math of startup fund raising? I was thinking about it, and what I get is a paradox: I assume the definition of raising money is that the original owner gives some percentage of the company to a new owner, and the new owner gives an amount of money to the company. Let's say the company's valuation is 1 million dollars. Let's say the owner sells 10% for 0.1 million dollars. In a perfect market the company's new valuation is obviously 1.1 million dollars: the original value in the company's resources (people, etc...) plus the 0.1 million in the bank. On the other hand in a perfect market perfect owners made a deal in which the original owner's wealth is the same before and after the deal. Before the deal he was worth 1million. After the deal he is worth 0.9*x, where x is the new valuation of the company. So: 1million dollars = 0.9x x = 1.1111' million dollars So which is the correct new valuation: 1.1, or 1.1111'? Or something different? Maybe the deal have to be made in infinitely small pieces, so the result is coming from some kind of differential equation?
- kken 13y ago
  >In a perfect market the company's new valuation is obviously 1.1 million dollars. Why? It is still 1 million dollars. The only difference is that the owner now owns 0.9M$ worth of company shares and 0.1M$ cash.
  - nadam 13y ago
    I thought the money goes to the company, not the original owner. I think this is what pg suggested in the article.
    - fragsworth 13y ago
      If a company owns cash, and you own a percentage of that company, it is not really different from owning a percentage of that cash. The rest of the company still has the same value, plus some (unclear) amount from having successfully raised money.
- sdpurtill 13y ago
  All your questions can be answered in the Transparent Term Sheet from Founders Fund: http://foundersfund.com/termsheet http://foundersfund.com/termsheet It has a calculator that provides economic breakdowns and a supporting article defining the key terms of a term sheet.
LekkoscPiwa 13y ago
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-capital-is-broken/ http://blogs.reuters.com/felix-salmon/2012/05/07/how-venture... http://www.verisi.com/resources/venture-capital-performance.htm 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.
- lsc 13y ago
  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.
jacquesm 13y ago
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.
- speeder 13y ago
  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.
pixelmonkey 13y ago
I wrote about this issue a couple years ago, observing similar behavior. I used a modified horse gambling game as a metaphor for the investor dynamic. "It's easier to play the option than the bet." http://www.pixelmonkey.org/2010/12/13/its-easier-to-play-the-option-than-the-bet http://www.pixelmonkey.org/2010/12/13/its-easier-to-play-the... In this new race, small signals have a big impact. Charge ahead suddenly and you might get your 3 spots filled. Convince a top-tier gambler to go to bat for you, and you’re all set — your other two spots will fill up quickly. If you’ve been in the race before and had your spots filled up quickly, you’ll likely get them filled up quickly when you enter the race again.
stevenj 13y ago
Does this mean that in most deals the investors involved don't know who else is in the syndicate until after-the-fact, if there are others?
oz 13y ago
"[2] Founders are often surprised by this, but investors can get very emotional. Or rather indignant; that's the main emotion I've observed; but it is very common, to the point where it sometimes causes investors to act against their own interests. I know of one investor who invested in a startup at a $15 million valuation cap. Earlier he'd had an opportunity to invest at a $5 million cap, but he refused because a friend who invested earlier had been able to invest at a $3 million cap." I'm not surprised, per se, but rather always amazed whenever I hear stories of rich people acting in ways inimical to their economic interests. One would think that an experienced (I guess) businessman, such as a VC, would be somewhat more rational than that. Then again, this is an article about 'Investor Herd Dynamics', so I suppose that should inform my opinions about human behaviour.
buro9 13y ago
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.
- shykes 13y ago
  If you have the luxury to choose from multiple committed investors (and I recommend you triple-check your assumption that these people are indeed committed), then I would use that leverage to set the bar for your ideal terms. Importantly, terms can have many dimensions: in addition to the dollar amount and dilution, you can set expectations in terms of your stage, your focus, autonomy in changing direction etc. You can also filter by personal fit with the investor, how soon they hope for liquidity, their personal track record and reputation (not the firm's), etc. Just like a great hire, you should be wow-ed and be excited to work with them. The more explicit the expectations, the better! Get to know them, ask them about their styles and priorities, check their track record with previous entrepreneurs (not just active investments! their loyalties may be mixed and they will lack the perspective). It seems like you also have the luxury of not raising money at all for another X months (another assumption I assume you've quantified and triple-checked), so that makes it easy to walk away if the bar is not reached. Just like any other deal, your leverage is only as strong as your plan B. I may be stating the obvious. In any case, good luck! "Shut up and take my money" is always a good problem to have.

224 points by tlammens 13y ago

deleted 13y ago

[deleted]

rjvir 13y ago

Seeing that YC's demo day is coming soon, it's awesome to be able to peer into PG's mind - this essay along with "How to Convince Investors" must be the exact advice relayed on to the current YC batch.

pg 13y ago
That is exactly right. I'm trying to get a complete guide to fundraising done in time for Demo Day, so I don't have to repeat all this stuff verbally (and incompletely) yet again. There is at least one more coming on fundraising tactics.
- earbitscom 13y ago
  Would love to see some info about the difference in strategy for raising in a toxic industry/vertical.
- beat 13y ago
  Thanks for sharing this with all of us outside the YC world! I've really appreciated the shower of wisdom in your recent burst of essays, and I'm sure others appreciate it too.

cperciva 13y ago

After you raise the first million dollars, the company is at least a million dollars more valuable, because it's the same company as before, plus it has a million dollars in the bank. This seems a bit specious. Sure, the lower bound on the pre-money valuation for investor #2 should be the post-money valuation for investor #1, not the pre-money valuation for investor #1; but the valuation per share won't necessarily be any different.

johnrob 13y ago
Startup valuations are not accurate. Your comment essentially proves the point: If an investor is going to fund a company at valuation X, they prefer that X is a combination of cash and stock and not purely stock. This implies that a dollar of valued startup is not worth a dollar, which should be an axiom. A 3 MM dollar company comprised of 2 MM stock and 1 MM cash is more desirable than one with just 3MM in stock.
- deleted 13y ago
  [deleted]

dfabulich 13y ago

"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.)

moogabi 13y ago
My guess is that in negotiations the risk of telling them who they are competing against outweighs the benefit of keeping them guessing. I suppose they could think you are bluffing and not really talking to any other VCs at all, but if they believe you actually are meeting with other VCs, I could see the benefit of keeping them in the dark.
- beat 13y ago
  VCs are a small world. And VCs need each other more than they need you (as an individual startup). Most entrepreneurs will climb that VC hill once or twice, ever. But VCs will partner together on deals for years, decades. So if your negotiations really have you pitting one VC against another, it's likely that you will lose, not them. After all, there are always other startups.
marpeluso 13y ago
Every situation is different, and the reasons for not sharing names change depending on the the stage of the discussions. For example, if discussions are advanced enough to involve negotiations on valuation, in general, you want potential investors to compete, not collude. Unless you know the parties involved well enough to know that they will not join forces to work against you in negotiating valuation and/or governance, it is not a good idea to share the names of other VCs you are talking to.
larrys 13y ago
"Why not? " One thought that comes to mind is if you mention that you are also talking to "Sam " then "Bob" (who you are having a conversation with) can start to game Sam, or Sam can game Bob (when Bob mentions it to Sam later if they know each other). So in terms of general business "loose lips sink ships" this is something to avoid. So either party can play mind games with the other. And depending on the relationship of the two this could create a problem. Other thing is that this gives the VC you are pitching a chance to drop things in your mind about the other VC that might affect your judgement. "Oh well he's a great guy but the one thing you need to consider is..." My guess is PG might feel that the type of people in YC don't have enough experience to manage this situation properly so it's really similar to an attorney saying "don't say anything let me do the talking".

tkiley 13y ago

It seems like the earliest investor in a multi-party round invariably gets shortchanged in the literal dollar value of the deal. If committed investors raise the valuation of a startup, would it make sense for a startup to offer a slightly-sweetened valuation for the first investor to commit? I understand that no one likes to have the price raised on them later, but perhaps the underlying truth of increasing valuations could be restated in a different way so it seems more like a discount to the first-in vs a price-hike to the last in.

robertlaing 13y ago
That's something I've seen angel investors argue about on panels but never really agree on. Good post by Mark Suster here: http://www.bothsidesofthetable.com/2012/09/08/should-investors-in-the-same-round-of-financing-ever-get-different-prices/ http://www.bothsidesofthetable.com/2012/09/08/should-investo...
anigbrowl 13y ago
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.
- harryh 13y ago
  But it's very rarely known who is the early bird in investment rounds.
  - ganeumann 13y ago
    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.
  - deleted 13y ago
    [deleted]

jessaustin 13y ago

I'd always wondered if anyone could upstage PG on HN. Apparently, Elon Musk can.

anigbrowl 13y ago
Heh, true. However, this short essay contains more useful actionable advice for HN readers than is typical even for PG, so I hope it doesn't get overlooked. Very very impressed, here.

robrenaud 13y ago

> The best investors aren't influenced much by the opinion of other investors. It would only dilute their own judgment to average it together with other people's. I don't know anything about startup investing. But I do know about machine learning. And you can often improve an ensemble predictor by adding (many) weaker features and averaging them with an already strong predictor. One shouldn't confuse the prediction of an average predictor with the average of a bunch of predictions that come from a pool of on the whole mediocre predictors. Averaging is really a strong operation for prediction. Of course, it does help if the individual predictors are themselves independent or uncorrelated with each other, which I guess tends to be very untrue in a herd.

nadam 13y ago

Can someone point to a link which explains the math of startup fund raising? I was thinking about it, and what I get is a paradox: I assume the definition of raising money is that the original owner gives some percentage of the company to a new owner, and the new owner gives an amount of money to the company. Let's say the company's valuation is 1 million dollars. Let's say the owner sells 10% for 0.1 million dollars. In a perfect market the company's new valuation is obviously 1.1 million dollars: the original value in the company's resources (people, etc...) plus the 0.1 million in the bank. On the other hand in a perfect market perfect owners made a deal in which the original owner's wealth is the same before and after the deal. Before the deal he was worth 1million. After the deal he is worth 0.9*x, where x is the new valuation of the company. So: 1million dollars = 0.9x x = 1.1111' million dollars So which is the correct new valuation: 1.1, or 1.1111'? Or something different? Maybe the deal have to be made in infinitely small pieces, so the result is coming from some kind of differential equation?

kken 13y ago
>In a perfect market the company's new valuation is obviously 1.1 million dollars. Why? It is still 1 million dollars. The only difference is that the owner now owns 0.9M$ worth of company shares and 0.1M$ cash.
- nadam 13y ago
  I thought the money goes to the company, not the original owner. I think this is what pg suggested in the article.
  - fragsworth 13y ago
    If a company owns cash, and you own a percentage of that company, it is not really different from owning a percentage of that cash. The rest of the company still has the same value, plus some (unclear) amount from having successfully raised money.
sdpurtill 13y ago
All your questions can be answered in the Transparent Term Sheet from Founders Fund: http://foundersfund.com/termsheet http://foundersfund.com/termsheet It has a calculator that provides economic breakdowns and a supporting article defining the key terms of a term sheet.

LekkoscPiwa 13y ago

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

lsc 13y ago
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.

jacquesm 13y ago

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.

speeder 13y ago
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.

pixelmonkey 13y ago

I wrote about this issue a couple years ago, observing similar behavior. I used a modified horse gambling game as a metaphor for the investor dynamic. "It's easier to play the option than the bet." http://www.pixelmonkey.org/2010/12/13/its-easier-to-play-the-option-than-the-bet http://www.pixelmonkey.org/2010/12/13/its-easier-to-play-the... In this new race, small signals have a big impact. Charge ahead suddenly and you might get your 3 spots filled. Convince a top-tier gambler to go to bat for you, and you’re all set — your other two spots will fill up quickly. If you’ve been in the race before and had your spots filled up quickly, you’ll likely get them filled up quickly when you enter the race again.

stevenj 13y ago

Does this mean that in most deals the investors involved don't know who else is in the syndicate until after-the-fact, if there are others?

oz 13y ago

"[2] Founders are often surprised by this, but investors can get very emotional. Or rather indignant; that's the main emotion I've observed; but it is very common, to the point where it sometimes causes investors to act against their own interests. I know of one investor who invested in a startup at a $15 million valuation cap. Earlier he'd had an opportunity to invest at a $5 million cap, but he refused because a friend who invested earlier had been able to invest at a $3 million cap." I'm not surprised, per se, but rather always amazed whenever I hear stories of rich people acting in ways inimical to their economic interests. One would think that an experienced (I guess) businessman, such as a VC, would be somewhat more rational than that. Then again, this is an article about 'Investor Herd Dynamics', so I suppose that should inform my opinions about human behaviour.

buro9 13y ago

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.

shykes 13y ago
If you have the luxury to choose from multiple committed investors (and I recommend you triple-check your assumption that these people are indeed committed), then I would use that leverage to set the bar for your ideal terms. Importantly, terms can have many dimensions: in addition to the dollar amount and dilution, you can set expectations in terms of your stage, your focus, autonomy in changing direction etc. You can also filter by personal fit with the investor, how soon they hope for liquidity, their personal track record and reputation (not the firm's), etc. Just like a great hire, you should be wow-ed and be excited to work with them. The more explicit the expectations, the better! Get to know them, ask them about their styles and priorities, check their track record with previous entrepreneurs (not just active investments! their loyalties may be mixed and they will lack the perspective). It seems like you also have the luxury of not raising money at all for another X months (another assumption I assume you've quantified and triple-checked), so that makes it easy to walk away if the bar is not reached. Just like any other deal, your leverage is only as strong as your plan B. I may be stating the obvious. In any case, good luck! "Shut up and take my money" is always a good problem to have.