I don't have a whole lot to say about investor incentives because I've been a bootstrapper for ~13 years now, but this (useful!) piece is missing one bit of incentive that my experience suggests is pretty important.
For corporate investment, either direct or through investor arms, an important incentive some companies might have is to constrain your M&A options down the road. Between information rights, potential board control, investment terms themselves, or simple signaling, taking investment dollars from a giant company might make it difficult to do deals with that company's competitors. I feel like that's something that happened to a pretty big startup I worked for before.
Much-needed article. Worth adding some color on AngelList syndicate incentives:
Syndicate leads are compensated by earning carried interest on the additional capital that follows them. [1] [2] [3]
Carry creates leverage for syndicate leads. Which is cool because syndicate leads have a bigger stake in a company's success, and often want to help the company more.
This also means a lead may want to invite as many investors as possible in order to get more $ into their syndicate and create more leverage. If left unchecked, this would create conflicts with a founder's interest in privacy.
Part of AngelList's job is to ensure lead behavior doesn't conflict with a founder's interests. Here's some of what we do:
* 80% of syndicate deals in the last 4 months were private (invite-only).
* AngelList has tools to block specific users / competitors from seeing information about a deal.
* Probably the most interesting tidbit: AngelList is undergoing a professionalization of capital. Most syndicate deals have fewer than 20 investors participating, and much of the capital is institutional. These investors are vetted by AngelList and act more like LPs in in a VC fund (for example, most institutional investors on AngelList have signed confidentiality agreements)
If you've got ideas or questions about syndicates, feel free to ask below or email me at kapil@angel.co
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[1] Some syndicates (both on and off AngelList) do charge 0% carry, but they're uncommon.
[2] Leads earn carry deal-by-deal vs. on a portfolio basis, where gains net out losses. This creates a different set of incentives, but IMO doesn't impact founders much. (http://avc.com/2016/02/fund-level-vs-deal-by-deal-carry/)
You might want to add the best kind of "investor" to the mix: a really large, patient and interested customer. They might understand they are underwriting 1.0 with a large check and work with you closely on tailoring the system.
Their incentive is to get the service to themselves as quickly as possible hitting all their required features.
The downside is that they may insist on over-fitting the solution to their particular needs.
> The downside is that they may insist on over-fitting the solution to their particular needs.
They will have a strong sense of entitlement regarding this, considering how helpful they are being with their investment and their willingness to deal with pre-1.0 bugs and instability.
That just means you have to choose this kind of customer carefully, because you'll have to do what they want, and you should make sure that what they want will also be wanted by other customers in the same space.
That's a pretty big downside, especially when you need to go counter to their wishes in order to serve a broader market, or pivot to something different entirely that won't serve them at all.
I worked in one such situation where a small group at megacorp did pilot our alpha product and drove a lot of feature requirements. I was main point of contact for pilot. It was lot of work and some frustration but after a year of this pilot work, referral from this little group resulted in over $20M in revenue for the product from other groups within Megacorp. Over $100M of revenue from other customers in next few years was easily attributable to referral from this small group at megacorp.
I was at a company that was the big customer asking for special features etc. It was great for us, and I think the provider really appreciated the steady paycheck, the massive patience and customer testing and so on.
We definitely had our own way of doing things and we had to sort out if this made sense. (Should we change our way of doing things? Should they incorporate it in the software?).
Maybe they felt much worse about it in their private time and complained about us after we left. I never felt it.
One piece that should be be included is the time horizons of these investors - I.e. Hedge funds with <3yr holding periods (probably less than that) at one end of the spectrum and sovereign wealth funds and endowments at the other with essentially 20+ year time horizons...
That's an important point. Time horizons can substantially alter how investors view their investments. For the most part, though, early stage companies are raising from investors who should be planning on long holding periods.
It might be worth adding something about traditional private equity investors given the difference in the methods that may be used to create returns and the way this [mis]aligns with the startup model.
I get that this might fall under the crowd-funding category, but you also might want to add debt vehicles, including crowd-based advanced ordering platforms like kickstarter.
There's no equity exchange, but then again that's true of the government grants as well.
That's an increasingly important group, but I don't think of people who pre-order as investors. Even though those people provide the capital to build your business, they are customers, not investors, and should be thought about differently.
So which one is YC? A seed investor, an accelerator or a VC firm?
> Notably absent in this year’s list are Y Combinator and RockHealth–both programs now classify themselves as seed funds rather than accelerators, and asked us to respect their evolution into a new model.
Government grants usually have pretty direct and explicit incentives that really have no connection with 'helping the government'. With many of the SBIR grants (NSF, NIH, etc.) the incentive is to either 'create jobs' or 'spur innovation' (read: produce patents).
This seems to miss a very important incentive, which is to change the world in a specific way.
For example there is a growing informal network of angels and VCs associated with the SENS Research Foundation / Methuselah Foundation community and the so-far handful of companies that are emerging from the past years of research funding into treating aging by repairing its root causes. The goal here is as much to produce specific new capabilities in medical science and get them to the clinic as it is to make money. In many cases these investors have the view that the only use for making money is to funnel it back into growing this research and development community.
There are analogous groups in other spaces.
This is an important motivation because it lets you look further than just for-profit funding. If I were launching a fund today, I'd try to set it up as 90% for-profit, 10% non-profit investment, with the latter going to nudge promising research across the line into startup viability. With the right connections in the research community, a group that is split between scientists, advocates, and funding sources can be meaningful minority owners in the creation of an entire new field by shepherding the research and seed funding the startups. Modern day early stage life science research, and proving mouse studies, are so cheap in comparison to later development for the clinic that this is a great investment model.
One reason most people don't do this is that they don't understand how to understand the spaces they invest in at the level of research and seeding new companies, and finding things that are a year or two away from viability, and could be pushed across the line with a little money and coordination, and the people who do understand that typically have little interest in investment. It is very hard to gather the necessary knowledge and will in one room.
I'd like to get people's opinions on how Baqqer can integrate some traditional funding / sponsorship / support on the resources we're getting to makers, inventors, and developers.
We already have crowdfunding options for both individuals and projects, pre-orders for products, but are now considering how to offer even more through larger funding options for people and startups -- specifically thinking about how we can merge these two models that makes sense for the community.
For corporate investment, either direct or through investor arms, an important incentive some companies might have is to constrain your M&A options down the road. Between information rights, potential board control, investment terms themselves, or simple signaling, taking investment dollars from a giant company might make it difficult to do deals with that company's competitors. I feel like that's something that happened to a pretty big startup I worked for before.