Feels a bit like this whole issue is conflicting the management team with the investors - which is obviously very common in the startup world.<p>Need to take a step back and look at the primary purpose of acquiring investors: taking capital from them now in exchange for future cash flows to them later. To maximize this in favour of our business, we need to take the most money for the minimum amount of equity sold.<p>Now look at the primary purpose of the management team: to use the assets and resources placed in their care to create the highest future cash flows possible. This includes the tasks that Chris is conflating with investors: secure deals, find the best lawyers and accounts, getting meetings with difficult people. The management team is then compensated directly for their efforts.<p>The above is how it works in traditional companies. The investors invest capital and decide on the management team. The management team actually runs all facets of the business. In the startup world this relationship is not as simple, as the founders are both the primary shareholders and the management team itself.<p>What Chris is proposing is not as outlandish as it sounds - he is proposing joining the investors as part of the management team by selling shares to them for cheaper. If a share is worth $10 on the open market, but we sell it at $5 in exchange for valuable help from investors, then we are doing something very simple: we are paying these investors to be part of the management team, and in this case we are paying them $5 per share. This is a good option to take if the skills they bring are worth the $5, and a very bad option if we could hire better/more skills by taking the $10/share and then directly hiring on the market.<p>TLDR: Nothing to see here - you can pay people in equity or in cash, and the choice is as difficult as it ever was.
"Chris is doing something very smart: he’s fishing in a smaller pool. There may be fewer fish, but he’s got them all to himself."<p>This is the mistake. This pool is not merely smaller (that may not even be the case), but investors in it have a lower ratio of value to cost. Which is precisely the reason someone who fishes in this pool has it all to himself.<p>I.e. the argument here is not akin to "Since this restaurant is too crowded, I'll go to that other equally good restaurant that's empty, but rather "Since this restaurant is crowded, I'll go to that other one that is deservedly empty."<p>I find it odd to be arguing this side of the case, because I'm usually the one telling founders not to chase high valuations. But these arguments are simply fallacious.
I think this is a well meaning but misplaced assessment of Chris's goals. I thought his point was more along these lines:<p>Angel Investors are helpful for the resources the provide. One is financial and two is non financial (intellect/network connections etc) It seems like Chris has decided that the focus at YC companies has become too much on the former and not on the latter. He seems willing to reduce the amount of value he receives via the monetary piece (not less dollars, smaller valuations) in exchange for much higher value on the non monetary piece. "I'll give you a lower valuation in the hope/expectation that you'll be much more vested in our success and thus leverage your non monetary resources towards our success."<p>In a nice reinforcing circle: by taking a lower valuation he creates, or perhaps reinforces, the right economic incentives to do that.<p>On a side note I thought he was extremely brave to challenge the system with his original post.
What you talk about is a kind of "blue ocean strategy" applied to investors.<p><i>Red investors oceans represent to all the industries in existence today – the known Investor space.
In the red oceans, investors boundaries are defined and accepted, and the competitive rules of the game are known.
Here start-ups try to outperform their other start-ups rivals to grab a greater share of investment demand.
As the funding market space gets crowded, prospects for high valuation and rapid investments are reduced.
Products become commodities or niche, and cutthroat competition turns the ocean bloody; hence, the term red oceans.</i><p><i>Blue investor oceans, in contrast, denote all the industries not in existence today – the unknown investor market space, untainted by start-up competition.
In blue oceans, investment demand is created rather than fought over.
There is ample opportunity for high valuation and rapid investment.
In blue oceans, start-up competition for funding is irrelevant because the rules of the game are waiting to be set.
Blue investment ocean is an analogy to describe the wider, deeper potential of investor space that is not yet explored.</i><p>(Adaptation of Wkipedia article on blue ocean strategy for investment for start-ups)<p>In your article the "guilder-investing angels" are the blue ocean for investment in start-ups.
The title of this article is on pitch to me. PG's comment does not come across as a "calling out." It comes across as a general conclusion based upon his experience and data.<p>On the other hand Zacharias's blog describes observing and responding to feelings that there was a disconnect between the funding features available to his YC class and his entrepreneurial gut.<p>As a "pre-cofounder" (I love the term) he was in a position to take a different course. He also enjoyed the advantage of friendships with potential investors.<p>I can't help but see what he describes as extending some of the fundamental YC processes beyond the point where YC kicks the baby birds out of the nest. YC works because of the trust founders place in the partners. It works because founders don't worry about the investor screwing them over, and it works because founders can spend more energy building rather than negotiating terms.<p>This appears to be what Zacharias did. He was careful about who he sold his company to and conscientious about the price of shares which are likely to be worthless.<p>It was a personal strategy - right for Zacharias. PG is right that it is poor as a general strategy for YC companies.
That is true not just for angels, but for VCs as well - Elon Musk feels strongly about that - "Always Go With A High-Quality VC Even If The Valuation Is Low"<p><a href="http://statspotting.com/2012/12/elon-musk-always-go-with-a-high-quality-vc-even-if-the-valuation-is-low/" rel="nofollow">http://statspotting.com/2012/12/elon-musk-always-go-with-a-h...</a>
<i>"...and get the very best of the guilder-investing angels in their round."</i><p>I can understand the reasoning but are the 'best' of this pool as good as those from the dollar-pool? Wouldn't the really good/useful ones be trying to enter the dollar-pool anyway? (NB I'm not aware of the back-story yet)<p>Edit: Just read both pieces and I agree that they're both right. I see this as a difference between Angel vs VC. Angels sometimes get involved because they can imagine having a useful impact on their portfolio. If an Angel takes a tiny slice of a company which also has VCs and 'YC valuations' then they may feel they have no real 'clout' or ownership in the company (not everyone wants a board seat). Even though the economic argument may be to take-whatever-you-can-get that doesn't make it <i>fun</i> or worth your time.
I'm not sure how the leaps from "price-sensitve" to "smart money", and "price-insensitive" to "dumb money" were made. I think it's much more accurate to divide it amongst "price sensitive" and "value sensitive" investors. Yes, there's still classifications such as "dumb money" and "smart money", but they're often misused when discussing topics like this. And I've yet to see any posts on early stage val's of the biggest companies in the past few years, which could explain how "smart" or "dumb" either is. I also haven't gone through the presos of funds of both types to see who's getting the best returns, but I can remember anecdotally that both classes of investors had had success. (Kauffman Foundation would have some good data on this.)<p>I will say that one nice thing about pricing on the higher side is it requires more conviction on the part of your investors. Thus, it will be those that are committed to your company, despite a higher relative price. (All investors are price-sensitive, it's just to what degree.) So by pricing it higher you end up with the same result as CZ and DS are seeking, except you keep more of the company.<p>And as far as the price-sensitive, there are many reasons, aside from them just being "smart": a) they're trying to raise a fund and need lower valuations, "better" numbers, for potential LPs (since LPs are usually investors with a more traditional mindset on finance, and thus more price-sensitive), b) their existing investors want to see lower valuations, "better" numbers, c) they're able to get "good deals" (I'm not mocking this, I'm just noting it's a value judgement, not something concrete) at lower valuations, d) they care more about potential multiples on their own fund(s) more than investing in the outright best companies, and any number of other reasons.<p>Hunting for the cheapest relative startup isn't necessarily "smart" (nor is investing in say uncapped notes), and investing in "expensive" startups isn't necessarily dumb (nor is haggling over price).
I'm now curious if there are a segment of investors who use valuation to drive their decisions, even if its irrational to do so (valuation in Chris' case was a 2x factor, whereas success vs non success is a 100x one). If they exist, it may be worth targeting them.
I don't think either position is more right than the other. I think both have valid points. Chris' genius move isn't something that magically allowed him to find gold...it was merely a tradeoff of equity for the ability to handpick your investors and advisors.