[ChuckMcM]

Perhaps, and this would not surprise me in the least, it is vanity investing. Something which has some traction, clearly is scratching some itch, and is under valued relative to that traction. Here we are in June, a couple of months from April and it has 50,000 active users. With a bit of virality that gets to maybe 250K or 300K. Conceptually simple (probably not patented or otherwise circumscribed) the team is probably 2 maybe 3 people. So with the two founders and maybe an employee, its an easy Acqui-hire at $3M. So you put in your 1.2M, get prodded, sell for $3M and double your money in what, 6 months? A year? And I agree with your 1+M$ is nothing to sneeze at, a lot of good can be done with that. Welcome to the gangsta school of high tech investing :-) If you have the capital to play with you can lay down bets like this, and it is exactly like laying down a million bucks on the 'pass' line at the casino. If they get an acquihire you get your money + 100% back, if they manage to keep the shine and traction going maybe you get back 2x or 3x your money, or maybe they fizzle and fade and people move on and you are out a million bucks. I was familiar with a guy who was a 'player' and he mortgaged his house for nearly a million dollars and put it all into a 'winner' startup/concept which, in his case, did not win. It was an "interest only" note with a big payment at the 5 year point, at which time he turned the house over to the bank. Very sad.

I will take exception though to the 'dumb money' comment. It is dumb to gamble, but even smart people do it, it is a risk/reward trade-off. Smart people can look at the fundamentals here and see there is a possible 'flip' opportunity, high risk, high reward, short time to closure. The trick will be to see in 3 years if it hasn't flipped or exited by then. But that only tells you the payoff. I bought a $66M lottery ticket the other day, 'dumb' ? Sure it was $2 put at risk. I chose not to buy a $2 soda. Probably not a smart allocation of capital, but the soda would have been turned into piss in short order, the lottery ticket has potential right up until the drawing :-).

[ejain]

I'm guessing that with $1.2M in funding, the valuation is more likely to be something like $12M? So a $3M "aquihire" might not be such a good deal...

[ChuckMcM]

As long as we are guessing ...

Well there is a seedier way think about it, and I don't like it but I recognize that it is not uncommon.

I would not be surprised if some investor gave the company a 'high' valuation (ie lead the round), invested in their preferred shares, and demanded a 2x or 3x liquidation preference. Let's say you are right and that I am right and there are 3 employees, and lets guess that they are sharing in say 80% of the "equity" but there shares are "common" not "preferred." The employees and founders feel awesome! "Look its worth $12M and we are millionaires!" and they go about their business trying to make it more awesome and cool. Except they can't make it more awesome enough and they need more money. The original investor says "Oh sure, I'm in but I don't want to lead this round." and the founders go out stumping for money, but they can't find anyone who agrees with their original valuation much less an even higher one. What to do? what to do! And the money is running out, and there are people to feed and spouses or significant others who are getting worried. And the "Blam!" the investor mentions they could use an exit to his pal a BigCorp who offers to buy them out in an acqui-hire "terms of the deal not disclosed" and the founders are hired and given 'earn out' packages that force them to work at BigCorp of 3 maybe 4 years, meanwhile our investor clears their liquidation preference, doubles (or maybe triples the cash) in their pocket and if they are participating preferred takes another bite at what ever is left over for the common stock.

Ok so all this evilness speculation speaks poorly for the folks who just invested $1.2M in Yo. Neither I nor probably anyone else really knows what they saw in the company to make them feel that they could get their money back, but it is critical to remember that investors are in it to make money, if the founders get some too that is a "nice to have" but isn't essential. This lack of alignment gets sometimes missed when people like Jacques are wondering "What the heck is going on here?" An investor doesn't care if its a 'down round' if they are getting 2x their money back in under 5 years. Using the rule of 72[1], getting double your money in 4.8 years is a 15% rate of return. A "win" in anyone's book.

[1] https://www.directinvesting.com/drip_learning_center/rule_of...