Ask YC: Can I become a VC? | Hacker News Reader

Ask YC: Can I become a VC?

29 pointstricky55 comments

I'm a hacker who'd love to invest in other people's startups. I, of course, don't have enough savings on hand to do any significant damage.

Is there anything out there like a micro-VC or investors club for tech startups? Say n people put up $x each to fund a project. What are the implications? Would it work? If so, who's in?

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Thats a pretty interesting idea - I have participated in a real estate investment syndicate which was basically 4 guys I knew and trusted, plus myself - We pooled our money together and purchased 2 four-plexes - Its a great experience and has netted us a nice, although not huge, return - We sold one of the units and re-invested in raw land in the path of development. We're all under 30, so we figured we would invest in more speculative properties (raw land) and wait for the higher return.

Anyhow, that was slightly off topic, but an investment syndicate with say $500k-$1 million would be interesting as a seed stage 'micro'fund - As mentioned in a previous comment, the cost of legally setting up this type of fund might be expensive with other legal implications as well.

I would definitely be interested in something like this though! Everyone has got to start somewhere right? Just like my buddies in the RE investment, we started out small, but we are certainly making progress, have made a return and have property in our name.

That's very similar to what I did with some friends. We are a group of 4, one of us is the active project manager. We are in our 4th project already and the current one is even more exciting and profitable than the others. 3rd and 4th projects were in Bulgaria though, we recognized the US bubble pretty early.

I'd be really interested to participate in small scale tech investments as well. In a year or two I'd like to start something like that if it's not yet available. Again, it is my feeling that there are interesting opportunities in the countries with rapidly growing economies.

The real estate here in Bulgaria may be a bubble too, although it hasn't bursted yet. Vacation properties' prices are already falling. Few people can afford to buy a place to live in Sofia. For those who can, quality is another problem. There are a lot of expectations connected with future better standard of living (result of entering EU) factored into the prices.

I completely agree with you, which is not surprising since I am Bulgarian myself as well and I follow the news on a daily basis. In our case we were lucky because we acquired properties early enough, so we have substantial equity already without even risking to develop anything.

Anyway, I think we are deviating from the topic and from the geek world in general. But it was nice of you to comment so I couldn't resist!

Feel free to contact me personally, BTW, it'd be a pleasure to get in touch with you and share experience.

As far as I know there's no reason why it wouldn't work, as long as you can find a bunch of rich people and/or pension funds willing to give you lots of money. There are presumably legal issues involved with setting it up as a proper venture fund, but it should be fairly straightforward once you hire the right lawyer.

But of course, finding a bunch of rich people and/or pension funds willing to give you a lot of money is the hard part, and by "hard" I mean "almost certainly impossible". But hey, good luck!

"as long as you can find a bunch of rich people and/or pension funds willing to give you lots of money"

I had a VC explain to me that the primary skill needed to be successful was the ability to raise money from the limited partners, not to be a great picker of companies.

Isn't this like saying "the primary skill needed to be a software entrepreneur is the ability to get purchasing managers to write checks, not the ability to write good code"?

I think I get what you're saying: I wish there was something established that I knew about, but for now I've seen this: http://couchtycoon.net/

I had this idea earlier this year. However, after talking with a couple of lawyers, non of them felt comfortable with any sort of structure for doing this. The way they are setting this up makes me pretty uneasy (not to mention that it isn't even U.S. based). If you're going to be dealing with U.S. securities, it should be within the laws of the U.S . I think if anyone can get around the SEC laws and structure something that IS legal, P2P investments could be a really great thing. I'm not sure if that's happening EVER though.

I'd love to hear more about what you learned from your lawyers. shoot me an email if you get a minute.

There's Zopa, which probably inspired Couchtycoon. Zopa does P2P loans rather than investments (like Prosper, I guess). I don't know what the state is in the US, but it's all above board in the EU. There have been a few companies looking for funding - I noticed one from www.billster.net - but the problem is that given the size of the loan and the rates you're likely to get, a tech startup is far better off looking for VC or a government grant.

I'm interested in CouchTycoon (EU-based is fine for me), but it seems like it's more of a trading platform than an investment platform. Share trading for non-listed companies. The site looks a bit dodgy too. I'll wait and see what happens when it comes out of Beta.

> Is there anything out there like a micro-VC or investors club for tech startups?

Yes, there are many of these.

> Say n people put up $x each to fund a project. What are the implications?

You would have $nx. :-)

> Would it work?

That depends on what you mean by "work". People do it. Some of the people who do it even make money doing it.

> If so, who's in?

Ah, there's the rub. The trick is:

> I'm a hacker who'd love to invest in other people's startups. I, of course, don't have enough savings on hand to do any significant damage.

If you don't have your own money to invest then you need to convince other people to let you play with their money. That is not such an easy thing to do. Starting an investment fund is not fundamentally different from starting any other kind of business. But you can't just join the VC club and start raking in the cash any more than you can just join the entrepreneur's club and start raking in the cash. At root they're the same club.

If you're really smart or if you're really good at sales you can apply for entrepreneur-in-residence positions at venture capital companies.

It also works out very well if you move to where the startups are. Silicon Valley. Washington. New York City. London. Tel Aviv.

if you're really good at sales

any particular reason you need to be good at sales to be an entrepreneur-in-residence?

You either bring to the table the tech aspect of entrepreneurship or the business/sales side.

To become an EIR you have to have relevant experience and a successful prior career / first venture

I guess I wasn't verbose enough in introducing that into my point. Yes, you do need to be successful and really smart with technology or sales in order work as an EIR.

I think he means, specifically, "have sold or IPO'd a company you founded".

We're now just going around in circles.

it's http://www.founderscoop.com/ that you want to lookup

a community of founders with equity interest in companies working with the coop

i'd suggest getting some experience working for a VC or a seed fund before setting up your own shop.

Working for a VC or a seed fund probably only gives him technical part of the VC operation, such as how to read/interpret term sheets. The real talent/insight of picking bets, probably can not be learned. I think even YC has to revisit its portfolio from time to time to find clues. And in the case like black swan, the experiences based on unexamined faith may be a big problem.

Maybe he can work in YC as intern....

If you do start your own VC firm, take these considerations into account:

_____________________________

So far, the "design spec" for the next-generation vc seems to be:

1. Invests $250-500k

2. Gets back to the applicants with a yes/no decision in 24 hours (can't find the pg essay).

_____________________________

Taken from here: http://news.ycombinator.com/item?id=163717

Virtually no modern VC gets back $250k-500k decisions to applicants in 24 hours.

That's the point (see the referring link for pg's discussion on why this would be a lot closer to ideal.)

There is a world of difference between cutting 8 $20k checks from 100+ applicants and cutting 1 $160k check on the fly. Yes, it would be awesome if we could just pull $200k out of the sky on a day's notice. But unless the dollar goes somewhere very unpleasant, that isn't going to happen.

I assume the world of difference you're mentioning is the due diligence process that an angel investor or a VC takes the startup through, correct?

I generally rebel at the idea of describing what VCs do as a "process" --- it's mostly a system combining the most salient attributes of a good-'ol-boys club and the recording industry. But yeah, at a certain point, probably around $100k, you're in that system. Not the YC system.

Ideal from the point of view of the entrepreneur, perhaps, but why is this ideal from the point of view of the investor?

If you can make your small dollars large, you can do whatever you want with them, and that includes investing in businesses.

Of course, this is high risk stuff. You'd probably have an easier time talking ten of your friends into pooling savings and finding a decent index fund.

you're going to need a lot of contacts - as a VC, you're a matchmaker between investors and capital-needy high potential businesses. Have you got enough contacts that you can access the best prospects, and turn away asshole investors and only work with the ones that trust you and won't be breathing down your neck for returns? If not, do something to get all those contacts, and a reputation. Work for a VC, go do an MBA, go to ever goddamn OpenCoffee that's out there (and ideally infiltrate the comp sci campus at your local universities).

Don't you have to be a "qualified investor" to invest, for equity, in a private company? I think you want to talk to a lawyer before you try this.

I think the "qualified investor" rule is for investing in certain types of (venture/hedge) funds, i.e. handing your cash over to someone else to invest. So your investors would need to be qualified investors, but not yourself. Otherwise, there're an awful lot of friends & family investors who are breaking the law...

I'll second the "talk to a lawyer before you try this" advice.

You can take on unqualified investors. This happens all the time with family, friends, etc. The problem is when you're publicly seeking investors. If you're doing that, they must be high-net worth investors.

Talk to a lawyer; don't act on YC comments. For instance, Google for Brad Feld explaining that nonaccredited investors (including friends and family) can rescind their investments at any time.

Brad also comments on large companies having issues with holdings by nonaccredited investors. I have direct experience with this: I executed options in a startup in the mid-90s and was able to negotiate a significant premium on my stock holding when the startup's acquirer refused to allow nonaccredited stockholders.

This just seems like something not to fuck around with.

I'd love to do this too. It would be great to have a stock market for very early stage startups. SEC regulations make it tough though.

I doubt you will ever be able to have a stock market for private companies. There are reasons why they make companies be public in order to have their securities on the open market. Doing this would undue all of that, would be rampant with fraud, and would implode quickly.

A one-on-one buying/selling system could work but you could never emulate the way the stock market works, it would be far to easy to manipulate stocks and the company has way too many incentives to fool investors with no regulating body. If a regulating body was created, it would cost the startups too much to comply.

The stock market would have to be privately run, and the company running it would set rules for all listed companies ( such as stock purchased by investors is preferred, employee shares cannot be sold until certain milestones are hit, etc). There would be a cost of compliance with these rules, but I bet it would be more efficient for the startups than raising money through the existing Angel/VC route. Some of the compliance could be automatic, such as reporting software that integrated with Salesforce or Google Analytics.

You cannot simply set up a "private stock market" to bypass SEC rules. To purchase non-registered securities, you need to make more than $200k/year or have more than $1MM in assets, and attest to "accredited investor" status.

Maybe the market could be run out of a foreign country? Or perhaps the investments would be funneled through a holding company that was SEC registered? In other words, the holding company would own the stock in the startup, and the small time investor would purchase contracts from the holding company that would pay back cash in the event of a liquidity event for the desired startup.

Actually, there are special SEC regulations for stock markets for private companies. There are some extra restrictions on them* but they are there. Look up Goldman Sachs trading platform for unregistered securities.

* To my (sparse) knowledge, the major restrictions are that only 400 owners max for any 1 company and all investors have to be institutional investors with minimum assets of over $100 million. Still, the traded companies have far lower regulatory requirements.

There are markets run inside of some large private companies (Bloomberg being a good example), but these are available only to employees.

i think alot of VCs invest other peoples money

so yes you can!.. now go convince a bunch of wealthy people to give you money

i think alot of VCs invest other peoples money

Essentially all VCs invest other people's money. If you invest your own money, you are an angel investor, not a VC.

1. all VCs invest a small amount of their fund's capital out of their own pocket

2. there are some surprisingly large "angel" funds out there that do VC bite size deals

Well.. not exactly. I'm thinking more along the lines of investing "our" money. The P2P comment hit it on the head.

Say 100 people think project x is viable. Each person throws down $1k and gets a small piece. You have 100 people interested in seeing the company to fruition who may or may not be able to lend a hand using their own expertise... managing the noise may be tough.

I've been thinking a lot about this problem and recently had a similar, in-depth discussion with a group of friends. The essential model is a VC firm that pools together the small investments of private individuals, presenting that pooled capital to startup X, and splitting up the equity that's exchanged for the investment among the individuals who invested in it. Those investors, in addition to just money, would offer the Startup X whatever resources they can provide. At first glance, it seems like a great model, and it very well could be viable, if you can think through the following problems and come up with solutions:

- Privacy concerns. Someone has raised the issue on this thread already- private companies are not like public companies; they do not have to disclose their operations, finances, etc. because it is not in their own interest to do so. In this model, what's to keep a competitor from making a small investment in the company and finding out the nitty-gritty details of Startup X's strategy? For this model to work, privacy would have to be granular, meaning only the VC firm that pools together the investments is privy to all of Startup X's private information, while the individual investors do not get total access. Would individual investors still pursue such an investment, when they do not have access to complete information? The answer is uncertain.

- VC resources- As far as Startup X is concerned, if they are a viable business with high potential, why would they accept money from this VC instead of going a traditional route, where they can get access to experienced VC's with resources, connections, and expertise? A discerning entrepreneur would realize that, while these individual investors certainly could have something to contribute by way of resources and could even provide strength in numbers, the fact that they are making small investments might mean that they are small-time investors and are not that successful in the field. That, to me, would indicate that they don't have the kind of resources from a VC that I need for success. If I were in that position, I'd rather even take money in the form of a loan, given the previous privacy concerns I've mentioned.

- As tricky said, "managing the noise". Let's, for the sake of argument, say that Startup X DOES get 100 investors that can each offer some resources that would be of help to the firm. Of course, if you are an individual offering your money, time, and resources to a firm, you have a strong opinion on what the firm should do. As a startup in this situation, I could imagine facing a lot of pressure from a number of opinionated individual investors in a situation where you are not equipped to handle that pressure. An early-stage firm should focus on building a product and positioning itself to users, not on delivering results to its investors. In fact, startups already face enough pressure, in many cases, from VC firms to cash out early-- you think they'd want to take on even more?

These are just some of the problems I came up with. I'm sure there are numerous more, but hopefully one day one of us can think through the equation and figure out a good solution. I'm CERTAIN that this model will succeed one day, if only because early-stage investments are getting smaller and smaller to reflect the lower costs of entry for web-based startups. Let's think away.

Ahh, well in that case you've got all sorts of new problems.

If it's structured so that the fund owns the share and the 100 people own the fund then you have the problem that there's all sorts of regulations saying that only "accredited investors" (ie. very rich people) can invest in venture capital funds.

Or if it's structured so that the 100 people own small shares directly, you're setting the company up for all sorts of troubles in the future. In particular, a lot of later-stage VCs and/or potential acquirers won't like it if there's a hundred tiny shareholders floating around -- too much potential trouble involved.

That said, there might be a way to do it, and I'm not a lawyer, etc.

i dont know why people over here are giving an impression that its difficult or not that possible - i think it is 100% possible - if Angels can do it and VCs can do it and Seed funding people can do it then why not you ...

according to pg's essay http://www.paulgraham.com/startupfunding.html - there are 3 phase of funding - Seed, Angel and then VC. YC model comes under pre-seed funding phase (am i right?), nevertheless what is interesting is that there is a GAP between all these phases. It would be nice if someone fills one of these gap... they might be called as micro-seed or micro-angel or micro-vc or pre-angel or pre-vc etc... but there is definitely this gap to be taken care of by some smart investor(s). Just recently I was talking about this to one of my friend and he did showed little bit of interest, so i'm sure you will also find few investors. If nothing works then just find couple of partners and get in to pre-seed funding, though you should have some talent to pick brilliant ideas/people/companies to invest in... sometime its like looking for needle in a haystack (but not impossible). Good Luck.

EDIT: read pg's essay which i'm sure will motivate you : http://www.paulgraham.com/googles.html : you just need to create a business model that makes win-win game for all.

Something that angels, VCs, and "seed funding" ventures all have in common is accredited investor status.

do i need to be accredited investor if i'm helping my friend and he is readily giving me equity in his startup?? does model like YC requires such accredition? if yes, then i think the law is not favoring startup growth, is it? : there has to be some way out or may be rules are only for the people who are investing over million $$.

I am not a lawyer and am probably wrong. But, the way I understand it, if you "buy" equity in your friends startup, you can at any time demand your money back, or sue your friend.

There are all sorts of weird little rules about equity people ignore. For instance, if you have an LLC, there are rules about people drawing salary and simultaneously holding equity in the company. Most probably won't bite you in the ass if you're just working with friends on a company, but they may take on significance when you try to start your own private VC firm.

thx - too tricky though - i wish there is some knowledge base available for this kind of investments.

Maybe work through an interest group on prosper.com?

i read this post again and again and realized that most of the comment is for you becoming a VC - a VC is someone who invests other people's money, are you sure you want to do that??? because what i understand from your question is you just want to invest along with other like minded people, right?

couple of months a go even i didn't knew that a VC is different than an investor...becoming a VC (or running a VC firm) and becoming an investor, both are different and distinct. Both have pros and cons along with different sets of roles and responsibilities.

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