[kevinmobrien]

One of the frustrating things about early-stage in my experience is that there is little correlation between VC and market interest; our experience (also cybersecurity) has been that we're generating a significant amount of interest from (now) customers and prospects, but VCs tend to say either "we just can't get to conviction, not sure why" or "you're amazing, everything makes sense, but security isn't our sweet spot".

So far, angel investors have been much easier to work with, although admittedly we chose to focus on customer growth once we had that first round of disappointing VC results.

I think, per the other comments, your background makes a difference (assuming you're talking post-Matasano) in how the message was delivered.

[lpolovets]

(I'm a VC.)

I think a lot of VCs explicitly (or at least implicitly) prescribe to Warren Buffet's advice of only investing in things they understand. So if you talk to a VC focused on security, they're much more likely to invest than a VC who is kind of interested in security but has never invested in it. That VC, in turn, is more likely to invest than someone who is not particularly interested in security. If an investor really likes marketplaces or security companies or B2B SaaS or whatever, there are enough great companies in each of those segments to make it okay to ignore the other segments.

It's also valuable to remember that partners at larger VC firms often lead 1-2 investments per year. Their performance is determined by the 3-5 decisions they make during a VC fund's life. It's hard to stake 20% of your performance on something you feel like you don't fully understand.

Angels and smaller seed funds are sometimes easier to work with because the former are motivated by more than financial returns and don't have their salaries/jobs at stake with each decision, while the latter make a lot more investments per partner.

[tlogan]

> I think a lot of VCs explicitly (or at least implicitly) prescribe

> to Warren Buffet's advice of only investing in things they

> understand.

This is very very true.

And entrepreneurs MUST not take money from VCs who do not understand the market. Sadly sometimes VCs think they do know but they actually don't know what they don't know.

The worst marriage is when both entrepreneur and investor don't know what they don't know.

[brobdingnagian]

This sounds like unsubstantiated BS. This whole thread is full of hubris.

[kevinmobrien]

Agreed on all points, and thanks for weighing in from the VC side of the table.

For clarity's sake, I've sat on tremendously effective boards at the companies I have either run or had a senior role at, and I think there's incredible value to be had from a good VC relationship. The economic realities of raising can be frustrating, but it's a reflection on the industry rather than the individuals, I believe.

Early stage investment is just plain hard, and I think your point about the quantity of deals led is key.

[curiousjorge]

Just from an investor/trader point of view, it's shocking that they would even subscribe to Buffet's style of investing which is suitable for non-tech stocks. There is a great deal of false confidence in an unusually high risk high rewards investment. Rather, wouldn't it make more sense to make optimize tiny bets on as much startups regardless of the industry? At the end of the day, it's not much different than investing in penny stocks or early stage mining companies, I'd find it hard to justify investing so few.

I'd subscribe to Taleb's black swan model, except the complete opposite of what he did which was making small bets that market would crash.

Capture unexpected, phenomenal returns without introducing any personal beliefs or bias and making equally sized small bets across as many startups as possible. If you can get like 60,000% ROI then the model becomes sustainable, unlimited upward potential with a limited and tiny risk.

[blahblah3]

if you make too many bets you'll dilute your edge. if you make too few bets then you are exposed to too much idiosyncratic risk. so people have to find the right balance

[curiousjorge]

In a market where you just need one winner, being overdiversified argument is invalid be cause you are not optimizing for total portfolio return, you want to maximize opportunity and upwards exposure while keeping each downside risk limited. If you make too few bets the numbers are against you. Now this is nothing like spray and pray, you are still dealing with people, at the minimum you need to deal with founders who can be trusted.

[blahblah3]

okay but the less you allocate to your "one winner" the less your portfolio return will benefit from that winner.

[curiousjorge]

It couldn't be worse than allocating a quarter into one company that goes under at such an early stage. the tremendous return comes when others begin buying into it, at worst case, the founder doesn't generate more money than you put in which in this case is very tiny but the equity is still sizable that the next guy paying 10x what you paid and even ipo would have exponential yield. You don't even need to focus on the startup doing well if enough series of investors are willing to buy your shares out. I reminds me of pump and dump which is why I think the latter is unethical but it's unregulated and private market, not exactly the type of people that would go homeless if the start up did go under like when Enron wiped a lot of working ordinary people's pensions.

[ScottBurson]

> Rather, wouldn't it make more sense to make optimize tiny bets on as much startups regardless of the industry?

I think I've heard of a VC firm that does that. Trying to remember the name... wait... Y-Calculator, something like that, maybe?

[marcosdumay]

Just a question: How do you expect to create new markets or any kind of real innovation if you only invest in companies whose products are similar to something you already worked with?

Maybe it's a goof thing angels are doing bigger rounds taking your place.

[lpolovets]

I'm an early stage VC, so I often invest at the same time as angel investors. I think there are shortcuts to getting an investment even if you are approaching a new market. Sometimes that means showing enough promise with an MVP (which often doesn't require much capital). Sometimes it's having an amazing team -- for example, a lot of early PayPal folks could probably raise money with just about any reasonable-sounding idea.

Also, investors typically invest in areas that they're familiar with, but that can be a pretty inclusive criterion. For example, I've personally worked on payment fraud detection before (as an engineer), so that makes me feel comfortable investing in fraud detection, but also credit assessment (similar algorithms), a large number of startups that involve lending or payments, and so on. For another example, my fund invested in Flexport (a recent YC company that handles shipping logistics for companies). My partners and I didn't have any personal logistics experience, BUT one of my partners worked at a company that struggled with imports and shipping, so he appreciated the pain point. Also, Flexport's CEO, Ryan, is a force of nature and had been working in the import/export space for 15 years, so he was very credible. That was enough for us to invest despite not having logistics experiences ourselves.

In the Airbnb example -- and I wasn't an investor 6 years ago so I don't know what their pitch was like -- I'm guessing if the founders had a bunch of lodging-related experience, or if they had previously built great companies, or if they had a few more data points that showed the viability of their model, that could've helped.

Finally, here's the challenge from an investor's point of view: you see 1500 pitches per year. The majority of the pitches mention something like "we're going to be a billion dollar company" or "we're going to create an entire new market." One or two of those 1500 companies will do just that, ten or twenty companies will get kind of close, and the other 99% won't be close at all. In hindsight, it's easy to look at Airbnb or Uber and think that investors were short-sighted. Maybe they were. But a lot of early stage companies look simultaneously promising and risky in their early days, and most of them fail, so investors understandable err on the side of pessimism.

[Fede_V]

Thanks for your point of view - that actually makes a lot of sense.

I really dislike the escalation of pitches. As you said, almost everyone says that 'we will become a billion dollar company' or similar claptrap - but that just means that people have to make more and more extraordinary claims to pierce the cynicism (fully justified!) of investors.

[marcosdumay]

My post turned up to be too confrontational, sorry for that.

I'm not opposed to VCs on abstract, and I'm happy to see people trying to do good work on the area. Your area is hard, and if you can improve it, everybody wins.

I also got widely off-topic, because I was complaining that todays VC wouldn't have created the Silicon Valley, not that they couldn't see Air B&B. That said, I'm still not convinced you are liberal enough to do this. (Not that you should.)