Can a $310M startup avoid due diligence?
svgossip.substack.com
svgossip.substack.com
It's worth noting that any US person investing this way is required to be an accredited investor, which is another way of saying they've proven they can afford to lose that $20k (or whatever they're putting in).
The accredited investor rules in USA seem draconian, but if it weren't for them, we'd be absolutely drowning in fake tech companies taking money from retail investors. (Today those fakes are in crypto, where you can pretend your investment offering is a utility token or maybe a donation to a revolutionary DAO that just happens to issue tradeable crypto-tokens in return, and hide behind pseudonyms to make it harder for SEC to find you eventually.)
I don't know about that - it hardly seems draconian, it's a trust-based system, entirely reliant on self reporting. Most of the time you just have to check a box that says you are an "accredited investor". Sometimes they want you to upload a few bank statements.
I've been part of a non-zero amount of deals where there was one, or more, parties who've made that false claim. In an open group I participate in there are some early Angels and want-to-be investors. I've observed folks attempting this shortcut. And every time it's fucked over multiple people. So, yea, it's trust based - and truth will out.
Another outcome was that the folk buying in had to buy out the non-RegD parties - and crushed them on the price so those investors got a better price, the fraudulent actors didn't see the gains they thought, the company now has more % owned by new investor group than originally thought (which changes the control balance) and the founders are grumpy and distracted and mad at folk they thought were cool (and all that has a down-pressure on productivity while everyone involved gossips for a few weeks)
Edit: of you're getting your FFF round, it's all private, that group can be unqualified and you mark the deal as a Loan, so when you raise your Angel round you'll pay them back, or start the payback - and let the Angels know that's happening. Part of the investment to service debt.
I didn't express any attitude about the current rules around "accredited investors", I merely expressed what the current status quo appears to be, i.e. the system is largely based on self reporting. Obviously, there are all sorts of problems with that.
For what it's worth, I don't particularly like the current rules around "accredited investors", they seem pretty arbitrary, and at the same time too lax (self reporting) and too restrictive (obviously, these rules give rich people access to a lot of opportunities not available to others).
https://news.bloomberglaw.com/securities-law/startups-and-cr...
> Individual investors with an annual income or net worth less than $107,000 can contribute either $2,200 or 5% of their annual income or net worth, whichever is greater. The old rules limited them to the lesser of those two numbers.
> Investors with annual incomes or net worth greater than $107,000 can contribute up to 10% of the highest number.
https://news.bloomberglaw.com/securities-law/startups-and-cr...
1. Anyone can invest all they want in a diversified portfolio of approved investments (non-penny-stock public companies, mutual funds and exchange-traded funds with modest fees, insured bank accounts, etc.).
2. Anyone can also invest in any other dumb investment; you just have to go to the local office of the SEC and get a Certificate of Dumb Investment. (Anyone who sells dumb non-approved investments without requiring this certificate from buyers goes to prison.)
3. To get that certificate, you sign a form. The form is one page with a lot of white space. It says in very large letters: “I want to buy a dumb investment. I understand that the person selling it will almost certainly steal all my money, and that I would almost certainly be better off just buying index funds, but I want to do this dumb thing anyway. I agree that I will never, under any circumstances, complain to anyone when this investment inevitably goes wrong. I understand that violating this agreement is a felony.”
4. Then you take the form to an SEC employee, who slaps you hard across the face and says “really???” And if you reply “yes really” then she gives you the certificate.
5. Then you bring the certificate to the seller and you can buy whatever dumb thing he is selling.
6. If an article ever appears in the Wall Street Journal in which you (or your lawyer) are quoted saying that you were just a simple dentist, didn’t understand what you were buying and were swindled by the seller’s flashy sales pitch, then you go to prison.
No matter what they've signed, that's still a million people who've gotten their money stolen and they'll be out for blood, communicating on forums, in-person, etc. Beyond the brute fact that a million people have had money stolen, which is bad, there's the secondary problem that if just another 1% of that million still complains to newspapers, there's no way that the government could arrest 10,000 people at once without major public backlash, especially if those people play their cards well and can spin a media story of "victims of financial fraud further being punished by the government." If you've got 10,000 examples to choose from, there are bound to be sympathetic stories which capture the public attention.
And then at that point, if the government chooses not to prosecute those cases, the floodgates are loose and the "Certificate of Dumb Investment" has lost most of its power and purpose.
The crucial point from the original proposal is the following:
> If an article ever appears in the Wall Street Journal in which you (or your lawyer) are quoted saying that you were just a simple dentist, didn’t understand what you were buying and were swindled by the seller’s flashy sales pitch, then you go to prison.
The implication (the WSJ is just a stand-in) being that if lawyers representing you even talk about this investment, let alone try to bring a court case, you go to jail. No law like this exists at the moment and I'm saying such a law would quickly become toothless because it would be nigh impossible for the government to enforce.
> As far as "the big problem", people win the lottery every day. It's still not a sound investment strategy (unless you have some sort of edge).
Yes and that's precisely why there's still a lot of people who buy lottery tickets. My point is telling people upfront that something is a losing proposition and then taking away the ability to complain if they do it and lose anyway isn't enough of a disincentive to prevent people from doing something if they are convinced that they're the lucky ones or that "this is the real deal," a slap in the face at your local SEO office be damned.
https://www.overcomingbias.com/2007/03/paternalism_is_.html
https://www.lesswrong.com/posts/PeSzc9JTBxhaYRp9b/policy-deb...
The story is about companies whose business model is simply to take investment money. They do not try to provide the service they claim.
There are all sorts of penalties for bad behavior on behalf of companies. Of course, that doesn't guarantee they'll make money, but I think it's a very valid point that we're allowed to waste our money on all sorts of dumb bullshit, but not on something like investing in startups, which at least has a possibility, however remote, of resulting in some sort of return.
Why do you think we have these rules, since a free-for-all is the default? Is this a barrier to entry that protects the rich, or a barrier to getting ripped off that protects the less rich? Or both?
Chesterton's fence and all that.
You are allowed to throw all your money away if you want.
These rules are (at least partly) protecting you from having someone take your money under false pretenses.
You're correct that I'm allowed to throw my money away if I want, so why am I not allowed to do this?
Yes. Everyone I know going to a casino can be asked how much they plan on losing a day. Almost all will respond with reasonable (for their finances) answer. The others still have an answer that I may think is unreasonable, but that's just a greater percentage of disposable income going to gambling than I think makes sense.
I don't even think most gambling addicts think they are going to make money, any more than most smokers don't think they're immune to cancer. There are some areas (poker, sports betting) where a lot of people think they will make money, but that's because they're games of skill and some people can make money there. And people overestimage their own skill.
Casino gambling is only a financial strategy in the most unlikely scenarios, like the infamous MIT blackjack team.
By and large it’s a recreational activity. There’s the dopamine hit from the risk and another dopamine hit from your host paying for everything because you’re willing to spend 6-8 hours at the tables on your vacation. The slots are definitely a worse value proposition even with the higher comp rate.
The simple fact is that recreational gambling is less about strategy and edge and more about proper risk management. If your bankroll lets you Kelly bet at a level the marketing execs want to see then you will have a good time with predictable max losses.
I can’t imagine being entertained by slots, but if someone is and the house edge isn’t completely obscene, which sadly the gaming board permits, then even there there’s a reasonably priced vacation to be had with a Kelly betting strategy.
The wikipedia page[1] is decent enough. Some searching will find various gambling and math sites that go into further detail, but I don't have one in particular I'd recommend over the encylopedia page. The super simple overview is that one always bets a fixed percentage of one's bankroll. That means as one wins one's average bet goes up and as one loses it goes down. The Kelly criterion is how one determines the optimal percentage.
Strictly speaking the correct Kelly bet for a house advantaged game is zero, so it only applies when the player can gain an edge, such as with blackjack advantage play or sports betting[2]. It's not too difficult to adjust the strategy for a house advanced game. The player just has to reckon what the comps (which are predictable, being based on play time and average bet size) and the rest of the experience are subjectively worth. For many persons the correct bet size is zero! If one is playing for entertainment and comps and not with an advantage over the house, then one can expect to spend a significant chunk of one's bankroll!
[1] https://en.wikipedia.org/wiki/Kelly_criterion
[2] My understanding is that it's possible for a savvy sports bettor to have better knowledge of the true odds than the bookie and thus make advantaged bets. On the other hand, far more persons believe that they do than actually do.
Only for the very first round. For every subsequent round it’s a game of consolidation. That’s a very ugly game.
A lower possibility than the casinos or lotteries, if we're talking retail investment in early stage startup pitches you have no affiliation with. The reluctance of everybody to acknowledge this is the reason the law exist. Most people walk out of casinos having lost some of their money. Most retail investors in random business propositions will never see any of that money again.
When gambling is restricted, gamblers generally don't argue it's a conspiracy to prevent them getting rich. The delusion that retail startup investment isn't the bigger gamble with worse odds (unless you're in the leagues where you can personally prod the founders on a daily basis) is why accredited investor rules exists. It'd be a lot easier to believe arguments relaxing them were sound if the people making them were arguing it was depriving them of fun rather than depriving them of the opportunity to get rich.
What do you think is the expected return of investing in a private company? I don't have data to back this up, but I'd bet it's negative — especially if you hold common stock, or whatever non-preferred equity retail investors would get.
And if, on top of that, we relaxed the guard rails preventing people from being scammed? I think the odds would be much worse than you'd find in a casino.
Anyway, I’m not proposing anything. I’m fine with the current status quo.
Casinos have to be licensed and follow particular requirements about e.g. payout rate. Companies can solicit investment from the public, they just have to register and follow particular reporting requirements; a company with $310M can certainly afford to be public (there was a time when IPOs were much smaller than that).
That actually isn't true. In the US, almost all states have restrictions on gambling.[1] These are generally enforced by criminalizing or requiring government oversight of those offering gambling services.
This effect was really well illustrated for me Golden Sun (Red Rising saga book #2) by Pierce Brown. The protagonist is telling an older general about how he isn't worried about a scheming snake oil politician type and is corrected about why they are dangerous. Because "Liars make the best promises."
> “Pliny is a leech,” I say. “A liar as much as you’re an honest man.” “And that makes him dangerous. Liars make the best promises.”
Gold supplier/Audited supplier badges on Alibaba were sold for 6 digit sums, and bribes to get out of blacklist were going even higher.
Of course, Reg CF has a host of its own challenges for founders (which I can attest to firsthand..). Also most accredited investors aren't necessarily onboard with it (they prefer private financing where they get more say in the terms). Still, it's a step in the right direction because it gives normal people the opportunity to invest, while also requiring companies to provide actual due diligence documents and comply with SEC laws before accepting money.
Their valuations seemed high, they made crazy promises and and then investors were pretty upset.
Companies with 100k in revenue, 800k in debt raising at a 9 mil valuation cap.
Crypto is an example of both. More people get scammed, more regular people accumulated wealth. Outside of that look at startups, regular people are locked out of early stage investment (including many of us in the industry).
I understand the trade off but find it frustrating I’m constrained for my own good. It feels like being held down to the level of the (uncharitably stated) dumbest person.
im sorry what? investing in startups is one of the best way to create wealth? you have a source that talks about average and median returns on investments across all startups?
The entire bet with startups if you're not rich enough to fund via an incubator is picking a team or company you think is good and kicking in some smallish amount of cash (~10k), angel list basically. If you're in the industry you may be better positioned to do this than a random person. We can do this by going and working for a startup and dumping money in to exercise options (arguably even riskier since now your job is also tied to its success), but not by just kicking in some cash unless you hit the accredited investor threshold.
I should be able to choose to do this if I want to. Instead I can only put money in after the company is public and a lot of the early return has already been taken by people rich enough to be allowed to buy in earlier.
Meanwhile I could go and gamble at a casino on slots without any proof that I'm rich enough to waste money that way.
If not, you can also qualify by passing the Series 65 exam, which is a 3-hour multiple-choice test that anyone can take.
You'll probably find that the biggest barrier is finding good startups who will take your money. The ones interested in taking a small amount of cash from some random person are also the least likely to succeed.
Part of this is the result of the existing regulations making it a pain to do so.
Our experiences may vary. I have far more visibility into people scammed left right and centre where I'm at. Those who did make money on sketchy schemes are lucky outliers (who of course believe themselves to be savvy risk takers fair enough ; I see most of them as incorrigible Russian roulette players who got lucky but not wiser).
Anyone who has become wealthy through crypto became so because they gambled. And, bitcoin has a history of being manipulated. I had a friend who was part of a network that communicated to him when to buy and sell bitcoin. He mentioned "the whales" a few times when talking about it.
But these people are of course not "gambling", because they bet at 50 horses at once. And for all their experience, they continuously fail. It all seems very arbitrary.
Personally, I think "gambling" is the wrong word. It's high risk investing. When I put all my chips on "red", that's gambling. When I read about a startup, believe in their idea and see potential, yet am proven wrong, I made an investment mistake. It's not gambling unless one blindly invests without any research.
Think carefully about what the word "draconian" means. There is no organization that is responsible for tracking or allowing membership in the club of "accredited investors." This article suggests 1 in 10 USA households meets the definition:
https://dqydj.com/accredited-investors-in-america/
Look around on Google and you will find many different estimates. Since there is no central organization that actually tracks this number, it is impossible to point to an official number.
If an unaccredited investor invests in a small startup, there is no penalty for the investor. Because of that, I would not use the word "draconian."
The accreditation requirements are not absurdly stringent (eg $200k annual income). I think there’s a clear argument that people who do not meet those requirements can neither accurately judge the risk of their prospective investments nor afford to lose their investment (high likelihood). The current crypto markets are perfectly bearing this line of thinking out.
Retail investors are free to invest in public companies where there are significantly more fraud protections in place.
https://www.sec.gov/smallbusiness/exemptofferings/regcrowdfu...
Rich people, whom are already in a situation of privilege, have unique access to the number one way to exponentially increase their wealth: an early seat at the table.
The basis for this distinction is that they're rich. It's kind of insane to award rich people with extra perks. The other basis for the distinction is that they're smart, and we're stupid. Whether you're stupid or smart apparently is based on the random number of 200K. Below it you're obviously not very smart.
Preventing self harm is quite an arbitrary point. I'd say the greatest self harm one can inflict is regarding your health. Death seems worse than losing money. Yet there's basically no protection at all against this self harm, hence we have an obesity crisis, diabetes crisis, inactivity crisis, sleep crisis, mental health crisis, public health is in a terrible state. This is all fine though, just don't lose money.
While throwing a (likely bankrupt) fraudster in jail might be emotionally satisfying, it doesn't get your money back.
These laws are aimed at protecting 87-year-old Aunt Minnie, who has some money in the bank that her late husband left her.
Lotteries and casinos are recognized as a form of entertainment - gambling - people may not behave rationally and they may end up ruining their lives, but there is a certain folk wisdom that gambling just loses money and you shouldn't do it (except for fun).
Investing has different norms and expectations. Few people think that financial analysis is "fun" in the same way that going to a casino or buying lottery tickets is fun - so the "entertainment" value isn't there in the same way. But many financially unqualified people will be bamboozled by con-artists who take advantage of the apparent "respectability" of investing.
Somehow the regular people are smart enough to know the lottery is entertainment but they aren’t smart enough for investment wizardry. It’s just incidental, I guess that the government profits significantly from the lottery.
Listen, I’ve heard and understand the arguments “why” investors must be accredited. But I can’t help but find myself hearing these arguments and thinking “this is the government codifying the wealth gap”. When Slick Rick scams someone, it’s the worst thing ever. But when the government scams us all, it’s just the way the world works.
But hey, Powerball is just entertainment! Right?
This is a pretense. They're recognized as things that generate huge sums of money for nothing for the owners of lotteries and casinos. They refer to them as "entertainment" to abandon responsibility for serious consequences. Cigarette companies would be happy to sell "smoking entertainment."
edit: to be fair, nutritional supplements have basically lobbied their way into the same thing.
The other side is that gains to the upside (private equity, other alternatives only available to accredited investors and QP's) aren't available to the masses, which further feeds the gap.
Didn't they change the rules so you don't need 200K salary / 1M in non-house assets to be an accredited investor, but you need to pass one of the financial services exams (Series 7, etc.)?
https://www.sec.gov/corpfin/amendments-accredited-investor-d...
That doesn't happen on good opportunities which the well connected keep to themselves until it is the time to finally hand the bag over...
Hey maybe we don't have any path to 100B (is 1B just for chumps?), and maybe our margins aren't B2E-style 99%, but I'd much rather be making something people want rather than...
And then I hear my wifes voice in my head: "You can't pay yourself that little forever...". Maybe I'm the fool.
Strange world.
“Bad request”
Can I learn more?
Everybody just focuses on two possible outcomes that are easy to define -- what is the probability it goes bust and what is probability it is going to add a letter to FAANG.
I think the answer is laziness. If you invest money you shouldn't care much about the size of the company you are investing. From a purely financial point of view should be looking at return on your investment where return is defined as an integral over all possible future payouts adjusted for their probability and adjusted for your risk tolerance.
If an investor wasn't lazy they wouldn't be an investor and have a real full time job, OR they would be Jason Calacanis.
I'm not saying that they are bad people, I totally understand the appeal of getting a cushy, but potentially profitable job.
If you have a safe path to 20% or even 100% returns, just get a loan. There's absolutely not point in the VC process at that level... or reason for them to exist.
Undoubtedly, there are many successful founders with talent and brains that were able to exit successfully, and to those people, kudos. But a tremendous amount of immense family wealth is controlled by people that are in no way, shape or form smarter or more talented than the average person. Their wealth just demands an unhealthy amount of control and influence in whatever it is they're investing, regardless of how knowledgeable they are.
I saw it in multi-family real estate about 5 years ago. A multi-family property company I was associated with was making an absolute killing (and still are) when all of a sudden, leadership wanted to start investing in AI because their investors demanded them to.
They signed a massive deal with a custom software shop to build them an AI tool to decide which properties to buy, and the entire project was an absolute joke. It wasn't AI of any kind, it was just a dashboard that pulled data from various real estate APIs for things like walkability score, etc. But they showed their investors and called it "AI", who absolutely loved it, not knowing at all what actually was, partially because these execs were old school real estate guys that didn't understand themselves what the tool really was either. They raised millions more for their next fund, and the whole time I'm wondering how what this company was doing wasn't fraudulent.
In the end, it didn't even matter, the next fund performed incredibly well and at the following Christmas party, one of the employees involved in the project received a $50k Escalade as a gift to reflect the success of the "AI" project.
I will never again assume that just because someone has a ton of money knows anything about they're talking about.
You'd have to be an idiot to think otherwise.
I look at the ultra-wealthy make a diagnosis of obsessive compulsive disorder
Also, $7.5m is still low enough to be threatened by healthcare costs and end-of-life care and such (x2 for a couple, plus if a kid gets very sick before they're out, or even after but you don't want them to be ruined by it, et c). Not enough to wipe it out, probably, but enough to diminish it substantially if you get a bad roll of the dice. I wouldn't even need that much to stop having any motivation to try to make more, if I lived somewhere with decent universal healthcare where having your savings eaten by the healthcare/hospice-care industry is practically unheard of.
Theranos
ZERA food recycler
Nikola electric truck
What are your favourites?
https://www.washingtonpost.com/wp-srv/style/longterm/books/c....
Apples and oranges. Most of the wealth is not most of the wealthy people.
Well, apparently they did know, how to increase their avaiable money. And this is what matters to most people, not solving real problems. The problem seems, that those 2 things are not really aligned often.
Any schmo can open a Wealthfront account with no minimum balance that returns somewhere in the realm of retail investment returns, but only people with obscene amounts of money can go invest in the real estate firms like the one I referenced, which return many times more to the investors than anything in retail would. That firm was returning many multiples above anything you could invest in on the retail side. So having a million dollars to put into these kinds of firms winds up making so much more percentage-wise than the tens of thousands that I can put into my retirement account. It's a self-perpetuating system that allows the wealthy to continue out-earning everyone else. That's how wealth inequality works in a nutshell.
I could give you the name of the firm so you too would know how to make that kind of money. Only, you wouldn't be able to without being able to make the minimum required investment. It's not that they have some secret knowledge about making money, it's that they can buy access to the high-return investment firms that you and I just can't.
So true. My rich uncle once told me "The hardest million I made was my first million". Then you look at how the banking system works: the more money you have in the bank, the more money the bank pays you. But if you don't have enough money in the bank, then the bank charges you. So it's actually more expensive to be poor than it is to be rich, and the richer you are, the faster you become richer.
It's as if you're first place in Mario Kart, and all you get are stars, while the last place car keeps getting banana peels that they then slip on. Not a very fun game, but that's life.
Not only banking, everything is more expensive, when you are poor.
Miss a payment, because the money was gone before the end of month? You still have to pay it fully, plus fees.
Can only afford a old car? Pay more with repairs and tax.
You need money but have low bank reputation? Pay way higher interest rate - if you are lucky to even get the loan.
You get screwed over, but cannot afford a lawyer? Bad luck.
Etc. etc.
... ish?
Generally speaking, rich people may not be smarter than anyone else but they probably aren't dumber. In other words, they are likely to be making fewer mistakes and taking more favourable risks, even if they aren't particularly any more likely to spot an extraordinary opportunity.
You're kind of proving my point here though by making the argument that rich people probably just make better decisions than the working class. It's not really about making better decisions as it is about having access to better financial opportunities that others don't have. As I stated elsewhere, the real estate firm I described offered massive returns that you could not dream of getting in retail investment situation, but it required a minimum $1M investment, which obviously excludes most people.
I could give you the name of the firm so you too could know how to make that crazy money, but if you don't have the million, you're SOL. It has nothing to do with how smart you are, it has everything to do with how much money you have.
His observation was that a "normal" person has to work hard to find ways to make money. A person with lots of money to spend has people queuing at their door, offering ways to make even more money. It becomes a case of picking the best opportunities from the menu.
Isn't that the smartest possible way to deal with investors who demand AI?
The products worked great so nobody cared. Nor should they.
To be clear, the companies started as AI. They just pivoted until they found a market and product that matched.
When I go to a landing page, I expect to be given a reason to give the company my money. (And in fact I'm hoping to be convinced of that, because it means my life is better.) I visited your landing page and do not know what problem you are claiming to solve. It looks like a competitor for Digital Ocean, but DO is easier to use and just as cheap. IMO your landing page should make me say "I want to give them my money so I don't have to think about [problem] again."
1. What do you sell? Hardware or some kind of management software? Looks like latter, then why there is image of PiBox all over the page?
2. What is cluster? Is it a single PiBox/another Linux or something more? Word "cluster" implies to me there are many somethings grouped, what are these somethings?
3. Price plans mention proxied traffic. What it is and how does it fit into big picture?
4. I signed up, clicked add cluster -> "Bring YourOwn" and nothing changes, it still offers me to buy PiBox with shipping date in July(!! I know it's not your fault, but damn). How do I add my own "cluster" (whatever it is)?
5. Once logged in, I can't get to the homepage anymore, it is all dashboard now.
1. We sell both hardware and software, although our software works with almost any computer that runs Linux - it doesn't require our hardware and can run on anything that can run Kubernetes. Obviously, this is somewhat "the deep end" for many users, so our PiBox comes plug-n-play ready.
2. Cluster is a Kubernetes term, which we really should stop using, although we have a core value of educating instead of shielding our users - so we've tried to keep the "upstream" terminology as much as we can. It simply means "one or more Linux servers". Most of our customers simply run one machine as their "cluster", but a small handful have dozens of machines in the same group.
3. We're trying to bundle everything that's needed to host apps and websites at home. For most users, home internet connections aren't very good for this - the IP address changes often, and sometimes ISPs do not even allow port 80 or 443 to be exposed to the internet - we solve this by proxying traffic directly to your cluster, bypassing firewalls and avoiding the need for port-forwarding, router configuration, etc. This means you can plug in a PiBox, install, say, PhotoStructure, and access `photos.home.erulabs.k8g8.com` (for example), without needing to know anything at all about networking or firewalls or DNS. We also offer backups, as another example of trying to make home-hosting "complete".
4. Ack! I broke this last night! Thank you for pointing that out, fixed now!
5. You can click "home" in the footer, but yes, some polish there would be nice... One day we'll hire a proper designer ;)
Thank you for the feedback, very much appreciated.
This should be written somewhere on your website. A good simple use-case description like this cuts through some of the jargon to quickly explain what is is you're actually helping a user to do apart from describing features and technical ways you enable them to do actually do that thing.
edit: so this is on the site, but I had to scroll down further. I'd highly suggest moving the "What would you say you do here" at least to the top of the black box it is in, if not the top of the page.
It is much more informative, while the other paragraphs are more confusing to read first, I left the page without scrolling down further.
a lot of sites do this, see github.com (I'm not a fan of the pattern)
1. Get VC style investment, become unicorn, pay yourself 500-1000k a year immediately, ride the roller-coaster. Ending = derail ? feel burned, but have some dosh to show for it, possibly swallowing feelings of contempt towards investors due to overriding decision that forced you to watch your baby burn : Homerun, now watch everything you worked for be monetised into a souleless husk of it's innocent beginnings, you can't help but feel you sold out, quit once you had enough, dosh to show for it.
2. No investors, go the hard way, grow slow. If you make the right decisions, you will be able to afford to gradually increase your salary to something modest, and eventually perhaps even "good", you maintain full control of your product and peace of mind of ownership and decision making. OR, you keep making the wrong decisions, you burn through all your money, possibly burn through your enthusiasm too if you don't know when to quit.
#1 can be risky for the soul 2# can be risky for the pocket
If you aren't very materialistic and don't want expensive toys, #2 can be quite attractive because of the sanity you are able to create for your everyday worklife... the other thing is that just because it isn't a 100B business idea, doesn't mean it isn't a good business idea, it might just have a different scale, maybe it can't pay 10k workers and a pile of investors, but it could pay pay 10 or 100 people with the same salary, minus all the corporate BS... it just takes longer to get there. VCs want relatively quick money, but that is only applicable to certain ideas that can reach a certain scale, even then it comes at a non monetary cost that can be hard to stomach.
Excluding backups, essentially the pitch is, 'Pay us money to run a server to serve apps you have never heard of.' Are Element, Jellyfin, NextCloud things you expect your target customers to know about?
My perception is that Plex is moderately well known, I suggest you highlight that.
Disclaimer: I work for Google, all opinions are my own.
I may have misunderstood, this appears to be B2B?
Edit: I went on the blog. My current understanding is:
"KubeSail" is the physical box (some sort of pi with a sata adapter).
"KubeSail Templates" is some standardized wrapper around opensource cloud software.
"KubeSail Platform" is some sort of B2B deployment platform for the open source wrappers.
Have you had businesses try to make this part of an internal provisioning process?
It looks like you're aiming for hobbyists, but I'd take a guess you could be integrating with businesses at a premium.
PhotoStructure is one of our favorite YC friends - and for example - a “buy a photostructure box!” Button on their site will hopefully be a great source of revenue for both KubeSail and PhotoStructure.
We’d love to sign some large enterprises (and we’re working on that too) but we’re extremely keen on making open source / self-hostable software financially viable for its authors (and easier to use for its users!)
I'm hoping that KubeSail can help my less-technical users self-host the stuff they care about. It's certainly a tall order, but it seems like the pieces are coming together...
Similarly, the article conflates A16Z leading the seed round but not the follow on round as being some kind of smell. A16Z certainly do lead follow-on rounds, but it isn't the norm. (It would be interesting to know if they exercised pro-rata or not, but even that isn't necessarily indicative of anything.)
I don't know if there is or isn't fraud here, but the only evidence seems to be that Kagan was good at fundraising, raise a lot in a frothy market on little traction, and did not succeed at building the product or a successful business.
One of the best things about the tech ecosystem is the lack of stigma around failure. I hope people don't lose sight of that as round sizes and valuations spike.
There are any number of reasons a lead investor in your seed doesn't lead your Series B, and there is no way to know a16z did not want to lead in the first place. A different fund may give a larger check/different terms/ a partner you want on board and you may accept that instead etc.
There are many companies with outsized valuations that do not justify the revenue or any other metric, it is neither new to this wave (or even the dotcom wave) nor is it all that uncommon. On the surface it doesn't look like there is anything out of ordinary Kagan has done yet.
It is high risk industry after all, if investors put strong filtering criteria then they risk loosing on deals which were actually legitimate or became legit with funding, it is risk VCs are quite aware of and willing to take.
A Buyer should be beware of what he is getting into, accreditation is a thin shield,With Increasing SPAC listings and inflated markets even public listing won't protect them from early stage startup shenanigans these days companies like Nikola (anyone can invest ) do exist.
Typically everybody wants a new investor to lead the next round. A completely inside round is usually a sign that a company is in trouble (though it could mean the deal is so sweet the insiders don’t want to share).
As in investor, a newcomer is reassuring that you aren’t simply in love with the business.
And for management, investors, and of board, someone new setting a price guarantees that the new price wasn’t determined on some sweetheart basis.
If you look up Crunchbase where A16Z are the lead investor and organize the list by company name, you see that it's more likely they have lead at least 2 rounds: Charthop (seed, A, B), Compound (seed, A), Clubhouse (A,B,C), Databricks (A,D,E,F), Descript (seed, A), Fivetran (B,C,D)...
Founders can also prefer the previous investor because often you can get lower dilution, you already know the investors, no additional board seats and get the round done in one day vs multi week or month raise.
Founders sometimes can also prefer choosing a new lead investor but I wouldn't say it's typical at all that everyone wants a new investor.
Another multi-stage investors, Sequoia, WhatsApp raised all their rounds from Sequoia and no-one else. Sequoia also led Stripe's seed, Series A and have participated in every round so far.
In the end it's the founder who chooses the lead investor.
A friend of mine runs a fashion business that has worked with actual A-list celebrities, yet turns away orders because they lack the cash to make the stuff.
Others have had a hard time getting appointments with VCs to show their deck, and others have had a tough time getting those that are in touch to put any money in.
But in the news it's story upon story about firms getting piles of money thrown at them. What's more is several of the ones I know about have pretty much nothing for a business, and due diligence would reveal it.
So if you come to them with a pitch for a business with solid fundamentals and a clear map to profit, they will not be interested. Why? Because even if you deliver 100% on your promise, it won't be enough for them to recoup the bets they made on a dozen other risky ventures. If you hit it out of the park, you better be on target to be a billion dollar unicorn. Otherwise, what's the point? They need to make up the millions upon millions of dollars they've been betting.
In that sense, it's much better to have a story about a juicer that will be sold to billions of people and replace the concept of juice as we know it. Or to have a story about how you will revolutionize the world of medical testing even though the technology is science fiction. VCs don't care, they just want a story. All this talk about due diligence is them trying to feel better about their bets. Really if your idea was sound it wouldn't be something VCs would find interesting in the first place (because then it would be obvious and therefore not valuable to the tune of billions).
Total investment: $724m, approx. Waltons: $150m, Rupert Murdoch: $121m, Cox family: $100m, DeVos family: $100m, Carlos Slim: $30m, etc. I count at least $559m from non-vc sources [1].
And then you have hedge funds like Partner Fund Management: $96m. Whether you consider them a traditional vc or not, per their lawsuit, Theranos faked blood test results. I guess you can blame them, but I'm not sure how much duedil is going to catch wholesale fraud.
MedVenture, a vc, did due diligence and didn't invest. GV turned them down.
VCs certainly didn't make Walgreens not do duedil before partnering with Theranos. etc.
I don't think Theranos is proof that vcs are, as a class, incompetent and just want a story.
[1] https://www.wsj.com/articles/theranos-cost-business-and-gove...
- Hard to scale a celebrity fashion business in practice and as a story. A family friend started a successful jewelry company popular w/ Hollywood types and it's growing great, just nothing like Splunk, Notion, SpaceX, etc. There are outliers here - why everyone loved D2C co's like Dollar Shave Club - but gotta fit that growth model.
- Much of VC is largely story driven and, at least in b2b, rides a delegated sales/marketing motion (vs product/tech ROI motion). Once the first big money is in (pure pitch), there's a funny treadmill. Each round gets spent on artificially pumping numbers (big marketing, big sales, ...) enough to hit the next round before the money runs out. As long the #'s match what looks good in a deck, the co is largely good. However, most investors don't actually do truly deep diligence to identify whether the core is hollow, just that if there's enough that in 18mo + 36mo there's a good enough story on getting a bigger investor in. That can easily be something like "ignoring company quality, is there any sort of market demand here?" Each startup has issues and VCs often have surprisingly little time (ex: read up on Tiger), and you only hear about the Yes's and not the Passes (startups just need 1-2 Yes's), so not surprising to see some dumb/ok-money float in. So 7 years and $100M+ of funding later, sales/marketing-driven customers probably start churning out and the leads are burned, and oops... but maybe it's ok and they've exited. Bringing back to the founders, it's not that they're building a great company, but that they can sell that story and delegate operations to the 'adults' (sales/marketing/engineering) who keep the façade alive through the hollow growth of an otherwise busted product. There's probably a similarly unsatisfying set of common stories for consumer co's ;-)
They claimed to have solved real time speech recognition and translation, and claimed to have over $300M in annual revenues. None of that was true. Their speech recognition software did not work, and they had very little revenue. Their management went to prison and it was one of the biggest financial frauds in modern European history at the time.
I thought its downfall was more related to straight-up accounting fraud, with fake sales, hidden loans, etc.
"They had this room with a whole wall of computers and you talked into a microphone and the computers would do the speech recognition. Then they put your sample through a translation program, and the program would convert it to another language. They were demonstrating the Holy Grail of speech recognition in 1999. It turned out all that was done by a man behind the curtain, literally the Wizard of Oz. The man behind the curtain just typed it in; everything else was an illusion."
From page 37 of this columbia.edu PDF.
https://www8.gsb.columbia.edu/valueinvesting/sites/valueinve...
This is just not true, even for a venture backed company like this. The Board of Directors should be approving all executive comp; seems like a baseless claim to suggest there isn't some basic governance at play here
And while technically you should inform the board of executive comp changes, it’s not like the investors generally care that much in the early stages or there is some box they have to officially check. You could just go to your payroll system and increase your comp. They don’t come to check your payroll or accounting unless they suspect something so it’s not that hard fly under the radar for some time.
Uhh, investors are definitely going to demand seats on the board after funding
I work for a startup that has raised a bit over $30M, with no board seats given up.
As CEO, the Board is your boss. If you instruct payroll to bump your salary up without proper approval you will probably be looking for another job.
These investors have a basic fiduciary duty to their LPs to make sure there is no blatant fraud, and you don't get to billions under management and not understanding this.
You're overestimating the formalness of the early stage startup corporation practices or board (seed-series b) and the reporting requirements. Most of the time it's like any other meeting, you chat about what's going well, what's not and how to improve. It's not like public company board at all, there most definitely are no committees (maybe on paper). If you need approvals, like for employee option grants, you just send them an fyi and a docusign (this case the approval is also after the fact. You already gave someone an offer and the accepted it. It would be hard to go back to change it so approval is just a rubber stamp.)
It's up to you as board define what kind of board meetings you have and what's on the agenda. At the end of the year, most VCs ask you submit some basic financials, cap table etc but for example the CEO's salary is not one of those numbers. The BOD might be also completely fine with $500k/year salary.
As the startup grows and matures, the practices mature too but likely that won't happen before ~100 employees or after Series B.
I can assure you that as CEO, I could go to our payroll service increase my salary. We don't even have a payroll or HR department. No-one would really know until maybe next year when accounting gets done. Obviously, I wouldn't do that but if you don't care about your reputation and there to scam then it's very easy to do. If the investors find out, they might not be able to get rid of the CEO that easily, since like I said before, the founder(s) could control the board by votes or by seats. It's also unlikely these investors would cause any publicity around this because it's embarrassing to them and pushing a founder out could hurt their reputation (like when Benchmark kicked Travis out of Uber), they would just more likely walk away.
Where do you think all that printed money during pandemic actually went? Only a minuscule amount was given to plebs, rest goes to shady startups and gets diluted.
Such evaluations also make naive founders believe that they can get a similar amount. If you aren’t in the club, you won’t ever see a dime of this funny money.
I don't have overwhelming amounts of sympathy for the accredited investors who buy into these schemes at petty individual scales, but I do have sympathy for the honest employers and employees trying to survive in a faithless economy.
> Insiders familiar with Kagan tell SV Gossip that he’s preternaturally talented at pitching, blessed with a version of the famous Steve Jobs reality distortion field that lets him work investors into a frenzy while somehow not having checked off any of the milestones, metrics or other objective criteria they typically look for.
Holmes is probably right now wondering why she got prosecuted for doing the same thing that other people do and go on to raise even more money the next time around at the next company, and I get it.
That is like L6 FAANG money. Even if you're just defrauding rich investors, you're still likely putting more than an L6 amount of work. I don't think these entrepreneurs are doing doing it for the money like the author is implying. I think they genuinely enjoy being an entrepreneur, sometimes to a delusional extent as with Elizabeth Holmes.
An IT-outsourcing company focusing on new tech just gets passed around as some AI SaaS tool, without having any public docs or advocacy. The shadiest part is how they've raised $124mn from Softbank, General Atlantic et al & yet nobody knows any financials.
For a Bangalore based company they sure did spin up new origin stories like California based etc at every round, hype like 200 "self evolving networks" etc. Half of their marketing copies mention existing tools & the other half says they are yet to build said tools.
I think if you're going to suggest this about a particular startup, you probably should have some documentation this is actually happening.
"Launched 2 hours ago". Can't look at other articles without subscribing.
Maybe this is their MVP?
"Keep the client on the Ferris wheel, and it goes, the park is open 24/7, 365, every decade, every goddamn century. That’s it. Name of the game."
Someone downvoted my comment. Stay classy, HN.
This article discusses what went wrong with their finances, but doesn't discuss what happened with the product (app search, app deep-linking): https://www.axios.com/behind-the-fall-of-quixey-1513301224-0...
A "search engine for apps" sounds stupid nowadays because it's impossible on iOS. But back then, jailbreaking was quite popular. Many Quixey employees (and many people in silicon valley) had jailbroken iPhones. iOS 3 was pretty limited and limera1n worked on every iPhone. Piracy was still mainstream. Spotify sounded stupid back then because Grooveshark was so much better. It was inevitable that Apple would cave in and open up its platform any day. And if Apple didn't do that, Android would eat their lunch.
Then Steve Jobs died, and Tim Cook released the iPhone 4S, the first iPhone you couldn't jailbreak easily. The rest is history.
Mobile was a new landscape, and it was a tough problem to solve. Plus they were going up against Google so there was a sense of FOMO if you weren't in on it. The thinking was, maybe there's a 1% chance it pays off and Quixey beats Google.
(Google employee now: views are my own)
Supposedly Tether has been given $75 billion and nobody's asking any tough questions, so what's a few hundred million between friends?
https://www.bloomberg.com/news/features/2021-10-07/crypto-my...
I have a view into family offices and there is a lot they can do, I am just wondering more about if there is a relationship between this startup and that family office to make this worth that family offices' time, or if that family office really just has that much cash to place. Many times family offices can have a large limited partner of the family that is their non-profit foundations, which is basically dead capital that can be used to spruce up any investment, and so that is what it is used for. Many quick raises are done by institutional investors that are just endowments.
The founder of Coupang was one of Christensen's students; the check he put in turned out to be one of the all-time great investments.
Rose Park is flooded with cash and credibility (but under-indexes on access vs. traditional VCs), so they're working hard to get into a lot of deals.
https://www.forbes.com/sites/alexkonrad/2021/03/15/rose-park...
Interesting. I would like to see more of that. I am also curious about the evergreen fund structure. I helped form a hedge fund with an aggressive sidepocket , where sidepockets act like a VC fund but without burdening the limited partners with capital calls. But being even more flexible really makes the subscription documents and prospectus complicated, and making additional funds are expensive and time consuming, even as just a family office without outside investors, the separate limited partners are just entities that the family has formed before. Pooling assets from trusts, retirement plans, individual family members, and non-profits like foundations.
I'm mostly confused/inspired by which offshore feeders are being used.
This is just downright false. The founders alone do not decide C-suite compensation - that's reserved for the board of directors (which should be a combination of one or more founders plus other individuals selected by the investors). Travel expenses and other "piggy bank spending" would also have to be reported in quarterly or yearly financial reports to the shareholders.
If what this article says is true, the investors deserve just as much blame as the founder.
By contract silicon valley seems to throw money at people. Much more money, for much lower percentages. If someone can talk the talk and make the right noises they can game this system. Failed 4 times? Well that's great! They are experienced. They know the problems and will succeed this time.
Maybe rich people forget, but if you give the average person a million dollars ... that's a lot of money! Crime shows I watch a typical amount someone will literally kill for is $50,000.
https://medium.com/@phillish/my-worst-mistake-as-a-homeowner...
https://www.glassdoor.com/Reviews/Made-Renovation-Reviews-E4...
https://medium.com/@phillish/my-worst-mistake-as-a-homeowner...
https://www.glassdoor.com/Reviews/Made-Renovation-Reviews-E4...
I think the problem becomes that because VC is such an insular environment, no VC firm wants to be caught talking about how portfolio company isn't successful. As a result, they'll politely decline to lead follow-on rounds, but still allowing the startup to tout the investment from top tier VC firm as social proof for the next round.
50M must buy a lot of Kool-Aid
And lawsuits bring more attention to the allegations.
If you were preparing a suit for pure harassment/SLAPP purposes, what sections of this reporting would you highlight in your filing? Keep in mind, the court document will be pored over & commented-on by libel experts, & turn up in future searches about the company and its principals.
As for what to take objection with, I'm not sure. Probably something spinable like being compared to Steve Jobs (positive) and ending with "somehow not having checked off any of the milestones, metrics or other objective criteria they typically look for." But I don't think it's really going to turn up in any news stories anyway.
As for "poured over by libel experts". I have not idea who would do that or why.