[adventureful]

His billion dollar marker is drastically high. He has been living in dotcom fantasy land for far too long.

There's no reason you can't raise $250k for 25% from an angel investor, to build a $10 or $20 million business. That's a helluva result to put it mildly. You know, building an actual business that produces actual profits, not vaporware built-to-flip companies that produce nothing and only exist in a tiny corner of the economy.

The stock market hasn't moved in real terms in 13 years or so. Interest rates are on the floor. Any investor outside the big VC game would kill for a 10 or 20 fold return over 10 or 20 years. There's a beautiful thing called dividends, which a successful business can pay to its owners. Dixon doesn't seem to know anything about that however, as his assumed scenarios require the big exit and ignore any other possibilities.

If you take $250k, and you build a $10 or $20 million valuation business, it's not difficult to kick off a very nice dividend to the investor that provides a stellar return on their capital. AND if you ever choose to sell, said investor also gets their big exit as well. You can also buy their stock back at the higher valuation and they get their exit that way. These types of results are common in the real economy, but not so common in the fantasy dotcom economy.

[gruseom]

This comment is an exemplar of how not to behave on HN.

It is as insulting ("dotcom fantasy land"? "Dixon doesn't seem to know anything"?) as it is wrong: Chris's post is explicitly about "the VC model" as opposed to "investors who are less aggressive about returns". Since he's recommending that fewer startups pursue that model, you could hardly have missed his point more completely.

But it's the tone that is inappropriate, that sharp-elbowed nastiness that strives to pack something mean in every phrase. I know it feels good to write this way; I've done my share. But it really is like peeing in the swimming pool, and not underwater either.

[geoffschmidt]

Chris is not talking about this. He's talking about venture capital, where (1) you typically need to raise at least $2M (otherwise the firm can't justify the board seat), (2) the money for the investment came from a venture fund that was raised from limited partners, and the fund's lifecycle is structured such that the investments need to see liquidity within 5-10 years.

As for angel investors, the angel deals you hear about on HN and TechCrunch work differently from what you're talking about. They don't buy common stock and they wouldn't receive dividends even if you paid them. Instead the angels receive a debt instrument that turns into series A preferred stock once you raise venture capital. If you fail to raise venture capital, the angel writes off the investment as bad debt and walks away. Historically these deals wouldn't even fix a value on the company, though the conversion caps that are now in vogue are effectively valuations.

One reason it's done this way is that just the legal fees for issuing series A preferred stock easily run to $50-75k. That money is spent drafting the protective provisions that make the stock "series A preferred" rather than "common". Another is that, historically, angels have found that the big wins are so big that they make the rest of the portfolio irrelevant.

So sure, if you can find an angel that will buy $250k of common stock in a tech company that has no chance of a big upside, go for it, but I think you're going to be looking for a long time. Of course you're right that many businesses are financed through small common stock deals, but these are more often small businesses like your local restaurant or auto mechanic, where the business model is well understood but there is no chance for this 10x return on capital you mentioned, and the money usually comes from friends and family, not from professional investors.

[geoffschmidt]

More succinctly, if you're able to build a $20M business on a $250k investment, the money to build the business came from your customers -- you've used customer financing, which Chris described in his blog post as the most desirable form of financing.

[il]

I doubt a business going from 0 to $20M in <5 years while paying out millions in dividends along the way is common anywhere. You have to remember that for investors it's all about IRR. That kind of IRR on the 1 out of 10 investments that gets to that level isn't interesting to any real investor. Your focus on profit and dividends is misguided. Taking money out of a company in its early stages is a suboptimal strategy for value creation.

I rewrote my comment several times to make it less rude, but your advice is completely wrong and I hope nobody seeking investment follows it.

[rdl]

Is IRR really the thing VCs are trying to optimize? Since they're once and done with the money, and have limited bandwidth (board seat capacity), I think total returns are their goal -- they'd rather have their $500mm fund make $2b investing 100% vs. have their $500mm fund invest only $250mm total in its lifetime and make $1.5b.

[il]

I was thinking about angels in this case.