Startup Investor School Day 4 Live Stream

Course Overview and Logistics

• The event marks the final day of Startup Investor School, concluding with a focus on Q&A regarding ICOs and angel investing.
• Logistics included a promise to start on time, the availability of wine, beer, and pizza, and designated Slack channels and a hashtag (#YCSIS) for online engagement.
• Taxes were briefly mentioned as a complex issue involving "installment sales" and "Section 1202" (Qualified Small Business Stock) but deferred for individual research.
• A summary of previous sessions highlighted key takeaways from past speakers:
  • Elad: Finding billion-dollar companies and the value of a helpful personal brand to attract deal flow.
  • Jeff: Portfolio construction, asset allocation, and the need for amateurs to adopt professional rigor.
  • Andrea: The critical importance of personal branding and adopting a "think like a boss" mindset.
  • Ali: The trend of software engineers founding major companies (Microsoft, Facebook, Google, etc.).
  • General Aphorism: Seek "Brilliant founders in big markets with ideas that seem bad."

Andy Bromberg: History and Future of Early-Stage Investing

• Trends Over Time:
  • Costs to start companies have continuously decreased since the 1940s.
  • The barrier to entry for investors has lowered significantly over decades.
  • The market historically bends toward faster liquidity, though recent years saw speed bumps before potentially reverting.
  • Capital availability has massively increased, driving more startups and investment opportunities.
• Historical Timeline:
  • 1940s–1950s: Emergence of early firms like J.H. Whitney & Co. and ARDC; ARDC returned 500x on a Digital Equipment Corporation investment in 11 years.
  • 1958: U.S. government Small Business Investment Companies (SBIC) legislation provided leverage to venture funds, accelerating industry growth.
  • 1970s: Founding of major firms (Kleiner Perkins, Sequoia, CRV); emergence of "angels" (originally theater investors) in tech; institutional capital (endowments, corporations) entered the market as "alternative assets."
  • 1980s: Venture capital became a boom asset class; fund count grew from a few dozen to over 650 by decade's end.
  • 1980s IPOs: 1983 saw over 150 tech IPOs, but numbers dropped sharply in 1984 and later; the decade saw a shift to earlier-stage investment due to competition.
  • 1990s: Massive capital influx (AUM rose from $12B in 1996 to $120B invested in 2000); founders sought rapid exits via IPOs; carried interest rates rose to 30–40%.
  • 2000s: The dot-com bust cooled the market; Y Combinator (2005) and Techstars (2006) introduced accelerators, lowering the cost to start.
  • 2005–2009: YC standardized the use of convertible notes, enabling rolling closes and faster fundraising compared to traditional equity deals.
  • 2010s: Rise of "super angels" and micro-VCs; Seed rounds crested at $1M; the Jobs Act (2012) created exemptions for venture funds and enabled general solicitation (Regulation 506c).
  • 2014: YC launched the SAFE (Simple Agreement for Future Equity), removing interest rates and debt structure to further lower costs and complexity.
  • 2017: Emergence of ICOs (Initial Coin Offerings) and the "Everyone is an Angel" trend, democratizing investing via platforms like CoinList, Republic, and Reg CF.
• ICO vs. Traditional Equity:
  • Nature of Asset: Token investors own a stake in a network, not equity in a company; they do not have voting rights or governance control unless specific token mechanisms exist.
  • Valuation: Token valuations differ wildly from seed equity; companies may raise $10M–$200M in token sales compared to $1M–$2.5M in traditional seed.
  • Investment Process: Token investing often requires no founder meetings; decisions are made based on online information, unlike the relationship-driven equity process.
  • Liquidity: Tokens offer near-instant liquidity or secondary trading, contrasting with the 5–10 year lockup typical of equity.
  • Token Categories:
    • Protocol Tokens: Platforms where other tokens are built (e.g., Ethereum).
    • Application Tokens: Specific use cases built on protocols (e.g., Numerai).
    • Securities/Asset-Backed Tokens: Tokens representing real-world assets or equity.
• Future Trends:
  • Continued push for liquidity via tokenization and secondary trading markets.
  • Further reduction in costs to start companies via legal automation (e.g., Clerky) and standardization.
  • Potential regulatory safe harbors for ICOs similar to the Jobs Act.
  • Evolution of the SAFE structure to potentially account for future tokenization, though no consensus exists yet.
• Q&A Highlights:
  • Investors can hold both equity and tokens; the industry is currently weighted toward founders, but hybrid models (equity + tokens) are emerging.
  • Evaluating ICOs without meetings requires analyzing technology, team backgrounds, shipping history, and the diligence of follow-on investors (e.g., top crypto funds).
  • The ICO market is global, with significant capital raised in Europe, Russia, China, and Southeast Asia.
  • Venture capital and crypto lobbying are active; the Jobs Act's success was partly due to effective lobbying.
  • Liquidity speed correlates inversely with potential returns; forced long-term lockups in equity can actually benefit companies by aligning investor interests with company survival.

Aaron Harris: Defining a "Good" Investor

• Reputation as Currency: Unlike public markets, early-stage investing relies on a closed network where a good reputation is the primary driver of deal flow and access to oversubscribed deals.
• The Four Stages of Being "Good":
  • Sourcing: Avoid harassment (e.g., stalking founders); respect rejection; seek genuine connections rather than persistence.
  • Meeting & Negotiation:
    • Pay for meals/coffee; do not treat the founder's time as free.
    • Respect the founder's expertise; do not ask the same question repeatedly.
    • Do not add non-standard terms (e.g., board seats, drag-along rights) to a standard SAFE after agreeing.
    • Avoid "groupthink" due diligence; invest based on independent assessment of the founder.
    • Treat all agreements as binding; "word is bond" is critical for trust.
  • Closing:
    • Move quickly to wire funds immediately after agreement.
    • Bring a syndicate (coalition of other investors) after committing personal capital to help the founder close.
    • Do not act as a "human DNS attack" by overwhelming founders with unsolicited advice during fundraising.
  • Ongoing Relationship:
    • Provide help only when asked or when you possess specific expertise; do not advise on areas outside your knowledge.
    • Be honest and direct, even with hard truths, to foster mutual trust.
    • Respect the limits of your influence; do not interfere with CEO decisions or call the board behind the founder's back.
    • Handle "pro rata" rights negotiations with firmness but reasonableness; understand that forcing dilution protections can harm long-term relationships.
• Investor Archetypes:
  • "Dumb money" can be good if they are helpful, honest, and quick.
  • "Smart money" is good if they leverage expertise to add value without dominating.
  • Being "good" is not synonymous with famous, rich, or providing the largest check size.
• Common Pitfalls:
  • Investors with bad reputations sometimes survive due to power asymmetry, but the ecosystem is becoming transparent enough that bad behavior eventually leaks.
  • Founders may unintentionally strip pro rata rights due to pressure from later-stage VCs; early investors should advocate for their rights but prioritize the company's success.

Ron Conway: Legacy and Philosophy

• Origin Story: Entered angel investing after observing board meetings with Don Valentine (Sequoia Capital) while a founder at Altos Computer; switched to full-time investing in 1994 to focus on mentorship.
• Investment Thesis:
  • Focused exclusively on internet software starting in 1994 (two years before Netscape), betting on the most disruptive, high-growth industry.
  • Philosophy: "Invest in the founder first, the idea second."
  • Key Founder Traits: Determination, integrity, and the ability to recruit talent and drive metrics.
• Deal Flow & Selection:
  • Early on, deal flow was limited (one internet company per month); investors screened all of them.
  • Success was driven by identifying determined founders (e.g., Mark Zuckerberg, Peter Thiel) rather than just the idea.
• Risk Management:
  • 40–60% failure rate is standard; success requires a portfolio approach where one winner pays for many losers.
  • Most failures are due to co-founder conflict rather than fraud; investors must evaluate team dynamics closely.
• Post-Investment Value Add:
  • Primary value is introductions for hiring, partnerships, and distribution (e.g., connecting startups to Apple, Google).
  • Critical advice involves pushing founders to stop procrastinating and make decisive actions, even if mistakes occur.
• Advice to New Investors:
  • Adopt a portfolio approach: Invest small amounts ($25k) in 5–10 companies within a sector of expertise.
  • Avoid "playing the long game" with too few investments; diversification is necessary to survive the high failure rate.
  • Once a "hit" occurs, the investor can focus on adding value and "playing with house money."
• Social Engagement: Emphasized civic engagement, citing the Parkland student movement as an example of how founders and investors should influence society.
• Demo Day Advice: Take extensive notes, be decisive, and focus on sectors where you can add domain expertise (e.g., blockchain/Web 3.0).

Closing Remarks

• Educational Tools: The organizers intend to release a spreadsheet and utilize AngelCalc to help investors model SAFE conversions and understand the math behind them.
• System Integrity: A plea for the ecosystem to maintain consistency, honesty, integrity, and transparency; acting badly yields no long-term wins for investors, founders, or the community.
• Future of Equity vs. Tokens: Equity investing will persist in the near future, though tokens will become a necessary factor in decision-making.
• Next Steps: Winners of the program will receive invites to Demo Days 2018; networking, food, and drink will follow the session.