How angel investors are destroying young gullible programming talent

Successful startups can come in many shapes and sizes, though some highly respected people like Steve Blank take the view that what you are building cannot legitimately be called a startup unless it shoots for the moon and seeks to massively scale. I think that Mr. Blank's view reflects VC thinking, and it is a legitimate point of view from that perspective. All small-scale businesses, in that view, are and will always remain "small businesses" unless they aim for massive growth and for a transformative commercial outcome, in which case they are true startups. High risk. High reward. High failure rate. But, in this view, you are not doing a true startup unless that is the view in mind. Of course, any such startup will necessarily require large infusions of capital in order to aim that high, and this assumes it will be VC-funded.

I strongly disagree with this VC-only view of startups (that is, with its being the only legitimate form of startup), and the founders I have worked with for years have tended to reject it as a working approach to their startups. These sorts of founders have always valued the independence of keeping control of their ventures and of seeking to build it to the optimum level for their needs and then either selling it or keeping it as a longer-term business that is solidly profitable. Even in the days when it took far more capital than it does today to launch the prototypical Silicon Valley startup, it is amazing how many such independent startups managed to thrive and flourish in the nooks and crannies of the startup world. The founders behind such companies had all the exceptional qualities that solid entrepreneurs need in order to conceive winning ideas and to execute them well.

In today's environment, such independent startups are thriving and flourishing all the more as the capital needs for launching a startup have sharply declined. The independence of the entrepreneur, and the corresponding power of control over one's own company, is stronger than ever. This is solidly confirmed today in Silicon Valley and elsewhere as early-stage startups are proliferating while VC-backed ventures have been comparatively stagnant. In this sense, it is perhaps a new era for startups. Those that want to build their company independently, or even those who ultimately plan to seek significant outside funding but wish to defer such funding until they can build solid value and minimize dilution, are in the ascendancy and this trend is possibly a permanent one.

All that said, the founders who fit in this "independent" category have never, in my experience, seen investors as the enemy. There is an antipathy to VCs who propose shark-like terms but never to quality VCs who can legitimately take the company to the next level. Maybe they don't want to take the risks associated with such a course, but the founders see it as one legitimate option to consider - to consider and reject for many of them, perhaps, but to consider nonetheless. They are not harmed by the presence of such VCs but rather helped in that their choices are broadened for situations where such a path might become attractive to them.

Whatever may be said of VCs, though, there has never been any general antipathy to angels as a potential investment source. Angel investors have always come in all varieties. Many are successful entrepreneurs in their own right and they not only can invest money into a promising venture but also other talent and expertise that can help guide the venture. I have seen such situations firsthand, over and over again, where such contributions have proven invaluable to the startups involved and much appreciated by the founders. It is precisely by this means that founders often can raise the comparatively modest amounts of capital that would be too much for the founders themselves to risk but that are essential to building the venture to the point where it can become commercially feasible. Such companies have nowhere to go without such capital, and the angels are there to supply it on terms that are often reasonable and very much in the interests of not only the angels but of the founders also. To categorically write off this sort of investment as coming from some congenitally hostile source that must be resisted at all costs by founders is a mistake. Some ventures, of course, will want strictly to self-fund. But not all do. Indeed, from my experience with having worked with countless founders, I would say that most do not want to limit themselves strictly to self-funding because they themselves see that pure self-funding will not enable them to realize their goals for their venture.

I am not saying that all angel investments are good or that all angel investors are benign. It is a shark's world out there and, whenever entrepreneurs are taking investment money, they need to watch their backs. But to dismiss angels as a category is to dismiss the idea that founders should have a broad range of choices before them in seeking to build their companies, and such a categorical dismissal is a serious mistake for most ventures. It is like saying that, because there are risks in a certain direction, I as an entrepreneur will never walk that path even while my competitors keep that option open for themselves and perhaps use it to outrun my venture through needed capital infusions that can often take a company to a better level.

My advice to founders: don't be gullible in allowing yourselves to be cowed into taking in investment money for no good purpose other than to brag about being a legitimate startup (this is good advice from this piece); but don't become so narrow-minded about investment options that you box yourselves into a strictly self-funded venture in cases where that may not be in your startup's best interests.

In other words, forget categorical rules in this area. Consider angels and their investments in light of the bona fide needs of your venture and, if they can meet those needs, then by all means avail yourselves of the value they offer (and, yes, do it on the best terms you can and watch out for the vultures). If they don't meet your needs, and you see more value in building a long-term profitable company without looking to be acquired, then by all means avoid investments that will only complicate your company and your life.

But by all means keep a balanced view of this or you will only arbitrarily limit your own legitimate options for building a successful venture.

Now people come knocking on our door looking to invest. When you're solidly profitable and growing, suddenly these people looking to buy a chunk of your business don't seem like such a sweet deal - unless they really have enough capital and connections to safely push you into a much larger market.

There's a whole LOT of businesses that outside investors make zero sense for. Generally the kind that can reinvest their revenue for growth should avoid it. I almost always ask folks who have early revenue why they think they need to raise and suggest that they figure out a way to grow without an investor. If there was a way to reliably invest in a startup that was going to produce a revenue stream rather than exit someday then I think that would be awesome in general.

Also, I only update my blog like twice a year.

(And, finally, I am trying to build revenue-producing projects on my own. I don't talk about them because I am mostly just embarrassed.)

At the end of the day angels (and VCs) are handing you wads of cash to build your company. This might save you years of scrimping and saving just to have enough savings to bootstrap for a year or two (and forget about it if you have any serious capital expenditures). Should they just be cutting 5, 6, 7 figure checks out of the goodness of their heart? No, it's your responsibility as an entrepreneur to know what you are getting into. And I should add that that is much easier today with the wealth of good solid information about term sheets, etc, that is available today on the web for free compared to as recently as 10 years ago where you basically had to learn things the old-fashioned way (ie. personal connections, apprenticeships).

That said, yeah, bootstrapping is better if you can possibly do it, because you take all the risk and you reap all the rewards. But to say that the very idea of aspiring to build a large company is koolaid sold by angels is ridiculous. It's the fundamental silicon valley dream; painted by history, not some snake oil pitch.

For instance:

> Angel investors are not interested in companies that create value and that can hire one or two people, while making a steady profit.

That goes for some angel investors but definitely not for all of them, in fact the majority of the angel investors that I know of are doing exactly that.

> The investors are interested in blow-out companies – companies that either grow huge, or that will be bought by other companies. Those are the only types of companies interesting for the angels.

No, those are the only types of companies interesting for the VCs whose only way to recover their massive investments is a sizeable exit, not a lot of piddly little dividends over the years.

I think it's wrong to lump 'angels' and 'vcs' on the same heap like this, and even between VCs (and individual deals done by the same VC) there is a lot of difference.

Partnering with an angel or a VC that has a similar risk profile to your own is a good way to avoid such issues, and that starts by defining what your risk profile really is.

- The angels that invested in our company have jobs/companies, families, and dozens of other small investments. They don't have time to ensure we build any particular type of company, even if they wanted to.

- Every time we ask them for advice, they put exactly zero pressure on us to take the company in any given direction.

- The article assumes angel investors cunningly collaborate to craft their blogs to raise a generation of an entrepreneurs that behaves in a certain way. With all due respect, that's nonsensical. There is a similar argument that could be made about survivor bias, but the article implies conscious intent which simply isn't there.

- Most angel investors make investments because they love technology and the startup world and want to use their money to affect positive change in the world. Often times they invest in people for no reason other than that they like them.

- And finally, running a small company is almost as time consuming and stressful as running a large one, except you get no pay off. You also learn far, far less. I'd much rather get a rewarding job (of which there are plenty) - the stress is lower, the pay's much better, and there's opportunity to learn from other people.

Salesmanship is a fact of life. Even great products need effective marketing. People only use products they've seen. A company must find an audience and prove to them that the company is worthy of their money. Blogging and hanging around social sites accomplishes this faster than anything else. It means immediate feedback from tens - if not hundreds - of people, and a company can rapidly change its plans accordingly. Maybe I'm not reading the right angel investing blogs, but what I've seen is very up-front about the risks (although they obviously are outweighed by the rewards :D).

Caveat emptor!

Try not to lump it all into programmers vs investor, because no matter what happens afterthat distinction is made someone will lose.

Some things I wish were touched upon:

- How do angels"investing money because they want even more money back" differ from VCs?

- What are some examples of these malicious angel blog posts? What bait is in them exactly?

- "Those are the only types of companies interesting for the angels." Why?

- Why is "a simple product company that has a large market and that will pay your bills quickly" right for the young programmer? Why is it better than what angels supposedly advocate?

- How do you distinguish between "ambitiously dumb" and disruptive innovations?

I agree with some of the bigger ideas here, especially: "Don’t see venture capital as your aim. Don’t see seed investments as your aim. Don’t build only things that google may acquire." but the post does little to back up a pretty sensationalist title.

One of my tenants wanted to start a small brick-and-mortar store. He needed $30K to get inventory, and he could only get a bank loan for $15K. He was glum and depressed one day, and I suggested to him "have you considered equity financing?"

The next day he came around and asked me if I was serious -- I told him I'd chip something in if he got others to. I bought $2K worth of shares, and other people, like the leader of his coven, bought shares too.

Now, from my perspective, the $2K meant that he was going to keep paying the rent, and I could lose that much money if the apartment was vacant for a few months, so it's a pretty risk free proposition. If I cashed out now, I'd get at best a small capital gain, but I wouldn't have done any better in the stock market.

Of course, I'm not a "serious" investor and I wasn't systematically thinking about how to make money -- but this gives some idea of the scale of investment that's required to succeed at a "lifestyle" business and how it's just not worth it to somebody who's already rich...

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For a current venture I'm thinking a lot about finding "investors" who are interested in payments in kind that can be delivered quickly (a year or so;) Roughly, I'm looking for a certain kind of "investor/customer" who can pay me $10k now, expect to get $20-40k worth of value over the next year, and leave me with an asset that generates $2-5k a year worth of cash flow. This "moving revenue backwards in time" makes a big chunk of my balance sheet weightless, could let me grow fast w/o sinking in a lot of my own capital... And rather than diluting my equity, it incorporates the "voice of the customer".

Of course, there's nothing wrong with getting fantastically rich (or soemthing), you probably wouldn't be building something if not for the payday.

It's absurd to focus only on that, though. I know I couldn't sleep at night if I made a million (or 10) bucks selling a worthless company to a bigger company. That's not why I want to create.

Don't get it twisted though, I'm not saying every company that doesn't feed the poor, clothe the needy and solve the issues of world peace and universal justice is misguided. I'm simply saying it's worth aiming for something/anything beyond the financial gain.

Oh my! While he has a good point in there somewhere I think he pretty much lost it by letting his imagination get out of hand.

But some entrepreneurs are in the game to build exactly those huge companies; I'm one of them. I don't think I'm just gullible by wanting this: it just sounds like a better use of my time, despite the risk in it. (Of course, I'd rather a small business that makes me a steady income over nothing at all.)

Also, to address the point of the advice given by angel investors. I think for some of them (pg being a notable example), you can read a lot of their writing before they became angel investors, and this can tell you a lot about the type of advice they gave before they had their own financial incentive.

I think 37signals said it better: http://gettingreal.37signals.com/ch02_Fund_Yourself.php

There isn't much to fund anyway. If you're building a webapp: hosting is cheap and the infrastructure is open source; the OS is open source, the tools/frameworks are open source, the languages are open source (python/ruby/etc), the editors are open source (I don't need an IDE, thank-you-very-much).

Now, you need money for your living expenses, but you can finance that by getting a (boring) day job for a year or so.

Maybe cause I don't live in/around SF, but the whole investor cycle was never in my mind when I worked on projects. I ended up on the hobby-turned-business track.

Now these probably aren't going to get you Facebook/YouTube-sized exits, but can do quite well. And if financial freedom and lifestyle autonomy are your ultimate goals, you can achieve that.

Whatever their motives, angel investors want entrepreneurs to build big, meaningful companies. And the money they provide helps them to that.

I'm more inclined to believe that, like the app store, most people trying this are actually making peanuts, but I'd love to be wrong.

Alert the press! Call the White House! Shocking revelation!

Nothing to see here. Move along now...