TechCrunch
Paul Graham's Prescription For VCs: Move Fast, Take Less Equity
At the 500 Startups’ PreMoney Conference last week, Y Combinator’s Paul Graham gave a presentation in which he suggested a new way for Series A investments to get done. Graham provided a few suggestions for innovative early stage investors to differentiate themselves. It basically comes down to: move fast, and don’t over-invest in startups just to get a certain percentage of equity.
“One of the biggest things investors do not get about the fund raising process is what an immense cost talking to them imposes on the startups that are raising money, especially when a startup consists just of the founders. Everything completely grinds to a halt during fundraising,” Graham said at the conference.
Graham suggested that as a result, there’s room for an investor to undercut the competition by moving more quickly with early stage investments. If there existed a reputable investor who would invest $100,000 on market terms within 24 hours, they would be able to corner the market on the best startups, he said. That firm would be approached by all the worst startups as well, Graham said, but at least they’d see everything. In contrast, firms which have a reputation for taking a long time to make their investments would be approached last.
Another way that venture firms could differentiate themselves is by breaking from the typical 20 percent in equity that they ask for during Series A investments. VCs are investing too much and startups are raising too much during that fund raising period, but that could change if someone were willing to break ranks and actually invest less, but for less equity.
“I think the biggest danger for VCs, and also the biggest opportunity is in the Series A stage,” Graham said. “Right now, VCs knowingly invest too much in the Series A stage.”
When there’s a lot of competition for deals, the number that moves isn’t the amount of equity that VCs take, but the amount that they invest and thus the valuation of the company, Graham said. In the case of the most promising startups, Series A investors force companies to take more money than they want to raise.
“Some VCs lie and say that the company needs that much,” he said. “Others are more candid and admit that their business models require them to own a certain percentage of the company, but we all know that the amounts being invested are not determined by the amount that the companies need.”
It used to be that startups needed to give up that much of their company to raise money, but those days are over. With that in mind, Graham thinks that the first VC who breaks ranks and starts doing Series A investments for the amount of equity that the founder is willing to sell stands to reap huge benefits.
“If there were a reputable top tier firm that was willing to do a Series A round for as much stock as the founders wanted to sell, they would instantly get almost all the best startups,” Graham said. “And the best startups are where the money is.”
I talked to him about that theory and about how Y Combinator has scaled in the video above. (Skip ahead to about 5:30 to hear his thoughts on changing equity structures.)
Developers Are Lifting The Cloud, Not The Other Way Around
For all the attention this week about the cloud, it’s evident that it is pretty much a distraction when considering what is really happening. Developers are lifting the cloud, not the other way around.
The big guns of tech are aligning because they have to. It’s a defensive move to serve their existing customer base. It’s not like the old kings are showing substantial revenue increases for new software licenses. But consolidating power to offer legacy technology does show that the cloud is anything you want to call it.
In their new definition of the cloud, the IT-heavy enterprise gets a new version of that old-school database to run the software installed ten or 15 years ago. An operating system built for the desktop and client/server age can be recast as a cloud service. Older SaaS companies can work with former on-premise foes and happily proclaim that what worked for the past 14 years will be just fine for another two generations or more. Just like cowbell, there is never enough.
But these moves to align CRM and operating systems with legacy databases are not about innovation. They are simply meant to keep the status quo and offer the bread and butter business that have earned them billions in revenue.
The real innovation is in the new genre of databases, developer frameworks, social coding services and the APIs enriched with context through data analysis.
It’s not to say the cloud lacks value. It has plenty of that. The cloud is really all about value. Prices continue to drop for compute and storage. On Joyent, a developer can now pay by the second.
But look deep into the infrastructure and there are signs even there of the developer’s work. Hearing more about this idea of the software defined data center? It’s this concept that software, not metal switches, do the work with APIs connecting it all together. The APIs connect networks, data stores, all forms of clients and databases, etc. It’s the act of the network going to the app instead of the other way around.
So all the machines and the pipes are getting abstracted and the developer, arguably, is driving that change. The smartphone is a server. As again illustrated by Joyent with Project Manta, the big storage and network machines are now becoming part of the operating system. Compute and storage are coming together and in-memory databases make for split-second analytics.
Just.me Founder Keith Teare (who is also one of the original TechCrunch founders), said on The Gillmor Gang this week that the cloud is a constant, but it does nor constantly do the same things. The place for change is looking at how it is used. The real shift is how the cloud is consumed. Some of it is apps, some of it is devices while some data is pushed and some of it is pulled. The cloud is a data integrator (Message Bus) and a data store but not necessarily meant to be consumed just through a browser.
Andreessen Horowitz Partner Peter Levine said in an interview this past week that 15 to 20 years ago it was all Microsoft with the WinAPI. Every program and every API call was done to Windows. Now we see the entire disaggregation of the API. Companies now expect APIs. All of that has helped accelerate development.
It is the year of the developer, and that is evident with GitHub, which now has about 10,0000 subscribers signing up every day, Levine previously said.
For the past few years, the developer crescendo has lifted the cloud. The cloud players are interested in what the developers are doing. As Levine said, developers make it possible for us to have functioning super computers in our hands.
And so take another look when the news hits about more big legacy players happily talking about the greatness of the cloud. Sure it’s awesome, but it would be meaningless if it were not for all those developers using it to make all the cool things we use everyday on those supercomputers we have ready in our pockets to connect us to the world.
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