Paul Buchheit: Angel investing, my first three years
paulbuchheit.blogspot.com
paulbuchheit.blogspot.com
When a startup we rejected does well, we usually know about it without them telling us though. And when one does we go back and try to figure out how we missed them. We've already made several changes in the application process because of good startups we missed.
What about something that seems too radical for the model, like energy sources or medical devices? Those lessons could take 3-5 years to become obvious.
2. We now have YC alumni read the applications too.
We'd be happy to try funding energy sources or medical devices, but we just don't get many applications for that sort of thing.
Just three examples: First, the capital requirements of a med dev company are much higher than a software company. 11K + 3K*n wouldn't even cover the early biocompatibility and animal trials needed to demonstrate proof of concept.
Second, there is less measurable progress in 10 weeks relative to a software company, due in part to the length of the aforementioned trials.
Third, there's no ability to release a minimum viable product to customers and quickly pivot based on their feedback. That's partly because in medical technology 'customer' is an unclear concept and partly because your product won't get used in a meaningful way until feasibility human trials, which are at minimum several months after prototypes are created.
...making great progress with the newly re-branded his "innie" and his/hers "outie" models. Since I'm bootstrapping (at the moment) my target markets are individual consumers, though the long-term roadmap calls for FDA Pharmaco-Therapeutic classification and Class II medical device approval by year 3.
What if I told you that this product sits at the forefront of a $15bn industry. Is that something you might be interested in?
On another note regarding the low amount of money, having someone like paul around is worth considering as extra value with the investment similar to when 37Signals took money from Jeff Bezos.
(Though I assume that friends and family rounds have some way around that, so maybe if you know someone that's looking for super-early investment, you could invest.)
But even so, from my limited knowledge (mostly drawn from reading stuff posted here) I think $25k is pretty much the least that people tend to invest.
The better the deal, the less I invest, paradoxically.
How common is it for investors not to get liquidity in this situation?
- Those where the private stock is worth more than cash. It would have been a good bet to get pre-IPO Google stock instead of the same amount in cash.
- Those where the acquiring company stock is equally risky and the acquisition is made as a last-ditch effort (fire sale, consolidate investor portfolio, etc)
As to commonality, who knows?
As to preferability: it is very, very rarely preferable for an investor to be in this situation.
Big mistakes, so far:
- startup has no lead investor
- startup is raising too little
- generally, not having an investment thesis
The problem with bad bets is that they take money from your good bets. If Paul's only bets were Heroku and Mint, he would probably have a much larger return.
I tend to invest $10-$25k. There was one for $50k (which is a loser) and one for $40k (which returned a bit.)
The better investments tended to have smaller allocations for me. Hotter deals tended to go on to Series B.
I've spent maybe $800k on investments. The unrealized value of the portfolio is approximately $1.6m, most of which is in one company. Since the original investment was only $25k and my first actual investment, if I had just stopped there I would be doing way better.
I cannot conclude that I am actually any good at this.
Not bad odds, although I think you and Paul have opportunities that most of us would never see (and rightfully so).
If you're otherwise getting 20% returns, investing 20% more money annually in losing investments will trash those returns. And 20% would be pretty good for the VC industry nowadays, or a hedge fund, or even Berkshire Hathaway.
With investments like Heroku, YC is probably doing better than 20% and can afford a winner-based strategy - but this will rarely be a viable mode of thinking in finance generally.
If you're getting 20% already, you might as well expand your base looking for more 1000x returns, and not cry too much about bad placements; this investing business has a significant opportunity cost risk which means you probably want to err on the side of putting some money in. If you're over 'great' returns, you can afford to do that, and should.
On the flip side, if you're under 'great' you probably want to figure out how to prune your choices away a bit first.
Are there any legitimate excuses for a startup not to be in YC, other than rejection? I can't think of any (especially when you read http://paulgraham.com/equity.html).
If an established entrepreneur like Joshua Schachter starts a company, then I'm going to invest no matter what, but for everyone else...
Watch the Facebook movie and imagine what would have happened without Sean Parker. (I think Zuck would have lost control of the company) YC provides that same kind of value (minus the drugs and women, unfortunately).
Facebook, Google etc.. did not go through incubators and they were not started by "established entrepreneurs". If you are looking for a 1% stake in the next google do you think that your preference toward companies that go through incubators will cause you to miss the next big thing?
There's a very good chance that the next Google or FB will be part of YC, because YC is a smart deal for founders, and therefore it will attract the smart founders, and those are the people likely to start the next Google or FB.
YC might be a good deal but that does not mean it will attract "the" smart founders. Yes it will and does attract some smart founders but just because you dont want to do YC does not mean you are not smart or that you are less likely to have the next big thing. If anything this "All smart founders will go to YC" attitude is one of the main reasons you are more likely to miss out on the next big thing.
Whoever is out there creating the next big thing might not even know that YC exists and if he does there are a plethora of other reasons (life and work related) which may cause him/her to not want to apply. Even if they do apply PG has said his strong suite is not picking who gets in and they pass on good people all the time so you are not only hoping that you see the next big thing but that YC sees them too. All these additional criteria make it less likely that you will find the next big thing IMHO.
Secondly, if you actually parsed through the article, you're considering book value of his un-exited investments to be $0.
Do you have any investments like this you've made? I might be interested in taking them off your hands for an _excellent_ price compared to their $0 value.
I re-read the article to make sure my second point also holds: the 10% (over three years, so really more like 3% if you are looking at IRR) is only calculated on actual current exits.
About half his portfolio is still indeterminate. Barring seriously weird circumstances, he will do very well overall on this crop of investments, especially considering that he started in 2006.
That said, keep on with your current strategy. Everyone has a place.
I'm reminded of old-time slashdot -- I banned jonkatz from showing up anywhere on my slashdot pages. It was bliss.
- startup is outside yc's sweet spot
- founders already have a good network
- timing is wrongI think the article you are referencing has significant problems, but I won't go into them here.
In fact, I suspect that is probably one of the biggest reasons why many startups don't do it.
Also "enterprise" startups (those not targeting consumers) I think will gain a lot less from being in YC.
1. Incompatibility with current investors
2. Unable to move to SF (long list of reasons)
3. Incompatibility with YC philosophy
These are GREAT returns when you remember that most angel investors lose money. But I'm not surprised Paul is doing well. It's obvious that his motives are in the right place and he's been hands-on with enough technology that he understands this stuff better than most. Paul is a huge asset to YC. This just goes to show (again) how lucky YC are to have him on their team.
Heroku was winter 08 not summer, btw