This link has been bookmarked by 34 people . It was first bookmarked on 30 Jun 2013, by Boris Mann.
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09 Mar 17
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One consequence of funding such a large number of startups is that we see trends early. And since fundraising is one of the main things we help startups with, we're in a good position to notice trends in investing.
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will the future be better or worse than the past? Will investors, in the aggregate, make more money or less?
I think more. There are multiple forces at work, some of which will decrease returns, and some of which will increase them. -
There are two big forces driving change in startup funding: it's becoming cheaper to start a startup, and startups are becoming a more normal thing to do.
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When I graduated from college in 1986, there were essentially two options: get a job or go to grad school. Now there's a third: start your own company. That's a big change. In principle it was possible to start your own company in 1986 too, but it didn't seem like a real possibility. It seemed possible to start a consulting company, or a niche product company, but it didn't seem possible to start a company that would become big. [4]
That kind of change, from 2 paths to 3, is the sort of big social shift that only happens once every few generations. I think we're still at the beginning of this one. -
it will be a big enough deal that it takes almost everyone by surprise, because those big social shifts always do.
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One thing we can say for sure is that there will be a lot more startups. The monolithic, hierarchical companies of the mid 20th century are being replaced by networks of smaller companies.
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This process is not just something happening now in Silicon Valley. It started decades ago, and it's happening as far afield as the car industry. It has a long way to run.
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two forces are related: the decreasing cost of starting a startup is one of the reasons startups are becoming a more normal thing to do.
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The fact that startups need less money means founders will increasingly have the upper hand over investors. You still need just as much of their energy and imagination, but they don't need as much of your money. Because founders have the upper hand, they'll retain an increasingly large share of the stock in, and control of, their companies. Which means investors will get less stock and less control.
Does that mean investors will make less money? Not necessarily, because there will be more good startups. The total amount of desirable startup stock available to investors will probably increase, because the number of desirable startups will probably grow faster than the percentage they sell to investors shrinks. -
There's a rule of thumb in the VC business that there are about 15 companies a year that will be really successful. Although a lot of investors unconsciously treat this number as if it were some sort of cosmological constant, I'm certain it isn't. There are probably limits on the rate at which technology can develop, but that's not the limiting factor now.
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Right now the limiting factor on the number of big hits is the number of sufficiently good founders starting companies, and that number can and will increase. There are still a lot of people who'd make great founders who never end up starting a company. You can see that from how randomly some of the most successful startups got started. So many of the biggest startups almost didn't happen that there must be a lot of equally good startups that actually didn't happen.
There might be 10x or even 50x more good founders out there. As more of them go ahead and start startups, those 15 big hits a year could easily become 50 or even 100. -
Are we heading for a world in which returns will be pinched by increasingly high valuations? I think the top firms will actually make more money than they have in the past. High returns don't come from investing at low valuations. They come from investing in the companies that do really well. So if there are more of those to be had each year, the best pickers should have more hits.
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This means there should be more variability in the VC business. The firms that can recognize and attract the best startups will do even better, because there will be more of them to recognize and attract. Whereas the bad firms will get the leftovers, as they do now, and yet pay a higher price for them.
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Nor do I think it will be a problem that founders keep control of their companies for longer. The empirical evidence on that is already clear: investors make more money as founders' bitches than their bosses. Though somewhat humiliating, this is actually good news for investors, because it takes less time to serve founders than to micromanage them.
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What about angels? I think there is a lot of opportunity there.
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Now an angel can go to something like Demo Day or AngelList and have access to the same deals VCs do. And the days when VCs could wash angels out of the cap table are long gone.
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I think one of the biggest unexploited opportunities in startup investing right now is angel-sized investments made quickly. Few investors understand the cost that raising money from them imposes on startups. When the company consists only of the founders, everything grinds to a halt during fundraising, which can easily take 6 weeks. The current high cost of fundraising means there is room for low-cost investors to undercut the rest. And in this context, low-cost means deciding quickly.
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If there were a reputable investor who invested $100k on good terms and promised to decide yes or no within 24 hours, they'd get access to almost all the best deals, because every good startup would approach them first. It would be up to them to pick, because every bad startup would approach them first too, but at least they'd see everything. Whereas if an investor is notorious for taking a long time to make up their mind or negotiating a lot about valuation, founders will save them for last. And in the case of the most promising startups, which tend to have an easy time raising money, last can easily become never.
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Will the number of big hits grow linearly with the total number of new startups? Probably not, for two reasons. One is that the scariness of starting a startup in the old days was a pretty effective filter. Now that the cost of failing is becoming lower, we should expect founders to do it more.
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The other reason the number of big hits won't grow proportionately to the number of startups is that there will start to be an increasing number of idea clashes. Although the finiteness of the number of good ideas is not the reason there are only 15 big hits a year, the number has to be finite, and the more startups there are, the more we'll see multiple companies doing the same thing at the same time.
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Mostly because of the increasing number of early failures, the startup business of the future won't simply be the same shape, scaled up. What used to be an obelisk will become a pyramid. It will be a little wider at the top, but a lot wider at the bottom.
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there will be more opportunities for investors at the earliest stage, because that's where the volume of our imaginary solid is growing fastest.
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That opportunity for investors mostly means an opportunity for new investors, because the degree of risk an existing investor or firm is comfortable taking is one of the hardest things for them to change.
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I think the biggest danger for VCs, and also the biggest opportunity, is at the series A stage.
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Right now, VCs often knowingly invest too much money at the series A stage. They do it because they feel they need to get a big chunk of each series A company to compensate for the opportunity cost of the board seat it consumes.
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the amounts being raised in series A rounds are not determined by asking what would be best for the companies. They're determined by VCs starting from the amount of the company they want to own, and the market setting the valuation and thus the amount invested.
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The reason I describe this as a danger is that series A investors are increasingly at odds with the startups they supposedly serve, and that tends to come back to bite you eventually. The reason I describe it as an opportunity is that there is now a lot of potential energy built up, as the market has moved away from VCs's traditional business model.
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You can't fight market forces forever. Over the last decade we've seen the percentage of the company sold in series A rounds creep inexorably downward. 40% used to be common. Now VCs are fighting to hold the line at 20%. But I am daily waiting for the line to collapse.
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The big successes only have to get a tiny bit less occasional to compensate for a 2x decrease in the stock sold in series A rounds.
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If you want to find new opportunities for investing, look for things founders complain about. Founders are your customers, and the things they complain about are unsatisfied demand.
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the more general recipe is: do something founders want.
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revenue and not fundraising is the proper test of success for a startup.
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companies' market caps do eventually become a function of revenues, and post-money valuations of funding rounds are at least guesses by pros about where those market caps will end up.
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If idea clashes got bad enough, it could change what it means to be a startup. We currently advise startups mostly to ignore competitors. We tell them startups are competitive like running, not like soccer; you don't have to go and steal the ball away from the other team. But if idea clashes became common enough, maybe you'd start to have to. That would be unfortunate.
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24 Sep 14
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peloton
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obelisk
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imprinted
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digging in their heels
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inexorably
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gauge
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presumptuous
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18 Jul 13
Tim Muller"Y Combinator has now funded 564 startups including the current batch, which has 53. The total valuation of the 287 that have valuations (either by raising an equity round, getting acquired, or dying) is about $11.7 billion, and the 511 prior to the current batch have collectively raised about $1.7 billion. [1]
As usual those numbers are dominated by a few big winners. The top 10 startups account for 8.6 of that 11.7 billion. But there is a peloton of younger startups behind them. There are about 40 more that have a shot at being really big.
Things got a little out of hand last summer when we had 84 companies in the batch, so we tightened up our filter to decrease the batch size. [2] Several journalists have tried to interpret that as evidence for some macro story they were telling, but the reason had nothing to do with any external trend. The reason was that we discovered we were using an n² algorithm, and we needed to buy time to fix it. Fortunately we've come up with several techniques for sharding YC, and the problem now seems to be fixed. With a new more scaleable model and only 53 companies, the current batch feels like a walk in the park. I'd guess we can grow another 2 or 3x before hitting the next bottleneck. [3]" -
06 Jul 13
Yan Thoinet"Startup Investing Trends" http://t.co/VTQ5Vzx4Ck by (@paulg) #ycombinator @cleantechba #businessangels
Startup investing trend http://t.co/WoPj06MjyS by @paulg #ycombinator #businessangels #startup
G+: "Startup Investing Trends" http://t.co/VTQ5Vzx4Ck by @paulg #ycombinator
Startup investing trends http://t.co/f4BltPAC0X
Startup investing trends http://t.co/f4BltPAC0X "Biggest danger for VCs & also biggest opportunity, is at series A stage" #ycombinator -
02 Jul 13
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The monolithic, hierarchical companies of the mid 20th century are being replaced by networks of smaller companies.
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investors make more money as founders' bitches than their bosses
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When the company consists only of the founders, everything grinds to a halt during fundraising, which can easily take 6 weeks.
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If there were a reputable investor who invested $100k on good terms and promised to decide yes or no within 24 hours, they'd get access to almost all the best deals, because every good startup would approach them first.
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if an investor is notorious for taking a long time to make up their mind or negotiating a lot about valuation, founders will save them for last. And in the case of the most promising startups, which tend to have an easy time raising money, last can easily become never.
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the number has to be finite, and the more startups there are, the more we'll see multiple companies doing the same thing at the same time. It will be interesting, in a bad way, if idea clashes become a lot more common.
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What used to be an obelisk will become a pyramid. It will be a little wider at the top, but a lot wider at the bottom.
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They do it because they feel they need to get a big chunk of each series A company to compensate for the opportunity cost of the board seat it consumes. Which means when there is a lot of competition for a deal, the number that moves is the valuation (and thus amount invested) rather than the percentage of the company being sold.
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the amounts being raised in series A rounds are not determined by asking what would be best for the companies. They're determined by VCs starting from the amount of the company they want to own, and the market setting the valuation and thus the amount invested
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Now founders would prefer to sell less, and VCs are digging in their heels because they're not sure if they can make money buying less than 20% of each series A company.
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series A investors are increasingly at odds with the startups they supposedly serve, and that tends to come back to bite you eventually.
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Which means the first VC to break ranks and start to do series A rounds for as much equity as founders want to sell (and with no "option pool" that comes only from the founders' shares) stands to reap huge benefits.
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You can't fight market forces forever.
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If you want to find new opportunities for investing, look for things founders complain about
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I've given two examples of things founders complain about most—investors who take too long to make up their minds, and excessive dilution in series A rounds—so those are good places to look now. But the more general recipe is: do something founders want.
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01 Jul 13
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investors make more money as founders' bitches than their bosses
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it takes less time to serve founders than to micromanage them
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it's becoming cheaper to start a startup, and startups are becoming a more normal thing to do.
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The monolithic, hierarchical companies of the mid 20th century are being replaced by networks of smaller companies.
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The fact that startups need less money means founders will increasingly have the upper hand over investors.
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You still need just as much of their energy and imagination, but they don't need as much of your money.
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I think one of the biggest unexploited opportunities in startup investing right now is angel-sized investments made quickly.
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Some VCs lie and claim the company really needs that much.
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Marco Venanzi.@paulg startup investing trends piece reads like a commercial for @Venture51 http://t.co/n2NiVFnrHF
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Teddy McWilliams"Right now the limiting factor on the number of big hits is the number of sufficiently good founders starting companies, and that number can and will increase."
Btw, this is n amazing article in general and is like a welcome guide to the investing world -
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Y Combinator has now funded 564 startups including the current batch, which has 53. The total valuation of the 287 that have valuations (either by raising an equity round, getting acquired, or dying) is about $11.7 billion, and the 511 prior to the current batch have collectively raised about $1.7 billion. [1]
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Will the number of big hits grow linearly with the total number of new startups? Probably not, for two reasons. One is that the scariness of starting a startup in the old days was a pretty effective filter. Now that the cost of failing is becoming lower, we should expect founders to do it more. That's not a bad thing. It's common in technology for an innovation that decreases the cost of failure to increase the number of failures and yet leave you net ahead.
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30 Jun 13
Boris MannStartup Investing Trends: http://t.co/mEqwD6mfIN
– Paul Graham (paulg) http://twitter.com/paulg/status/351473105857814529
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