A few comments on Paul Graham re superangels

Overall, the best written and most accurate description of recent
changes to early stage financing environment I’ve seen. A must read
for founders and investors.


A few comments:

– “But it was mysterious to me that the super-angels would quibble
about valuations. Did they not understand that the big returns come
from a few big successes, and that it therefore mattered far more
which startups you picked than how much you paid for them?”

Totally agree: as a seed investor I generally follow the Ron Conway
school of thought that outcomes are binary and so angels generally
should not be price sensitive. That said, in some cases (especially
non-hot markets with no VCs co-investing) a key risk for seed funded
companies is financing risk, specifically getting VCs to follow on to
the next round (at a higher price hopefully – down rounds are
psychologically devastating). I’ve seen VCs summarily pass on deals
when angel round valuation was too high. Keeping the seed valuation
reasonable lowers financing risk.

– “Because super-angels make more investments per partner, they have
less partner per investment. They can’t pay as much attention to you
as a VC on your board could.”

True, but I also would argue that practicing entrepreneurs can help
early-stage startups in more scalable ways since they are current on
lots of startup issues/people/vendors/partners etc that VCs aren’t.

– “Who will win, the super-angels or the VCs? I think the answer to
that is, some of each. They’ll each become more like one another. The
super-angels will start to invest larger amounts, and the VCs will
gradually figure out ways to make more, smaller investments faster.”

I hope not. It will require discipline on the part of successful
super angels to keep their funds from growing. If Founder Collective
is successful, I expect we will disciplined and continue focusing on
seed investments (and not raise bigger and bigger funds as seems to be
the historical pattern).

– “The seriousness of signalling risk depends on how far along you
are. If by the next time you need to raise money, you have graphs
showing rising revenue or traffic month after month, you don’t have to
worry about any signals your existing investors are sending. Your
results will speak for themselves. Whereas if the next time you need
to raise money you won’t yet have concrete results, you may need to
think more about the message your investors might send if they don’t
invest more. I’m not sure yet how much you have to worry, because this
whole phenomenon of VCs doing angel investments is so new. But my
instincts tell me you don’t have to worry much. Signalling risk smells
like one of those things founders worry about that’s not a real

1) In my experience a significant majority of companies are in that
grey area without super strong concrete results.
2) I have seen negative VC signaling play out a number of times. I
guess I just disagree here but as Paul says this is all so new that
time will tell. Particularly interesting will be to see how rounds
with multiple VCs in seed deals play out. Could be good or bad for
founders – I’m really not sure.

– “The best thing for founders, if they can get it, is a convertible
note with no valuation cap at all. In that case the money invested in
the angel round just converts into stock at the valuation of the next
round, no matter how large. Angels and super-angels tend not to like
uncapped notes. They have no idea how much of the company they’re

As I see it, the main problem with uncapped notes is that seed
investors have perverse incentives – they want to see the company
succeed but are economically rewarded for a lower valuation, hence
economically (I stress “economically” to distinguish it from moral
imperatives) have no incentive to help the founders raise a high
valuation VC round.


7 thoughts on “A few comments on Paul Graham re superangels

  1. rsobers says:

    Nice addition to Paul’s great essay, Chris.I can’t help but feel that the influx of angels, superangels, and VCs willing to participate in angel rounds, combined with the ever-plummeting cost of entry is causing a massive over supply of tech startups.The supply of tech startups is high and the supply of funding is high, but the demand for the technology and availability of great engineers, in my opinion, won’t be sufficient.Even us alpha geeks can only juggle so many web apps at once, and while the truly great startups will surely benefit, there are going to be a ton of bad bets, too.

  2. Boaz Fletcher says:

    Funny enough I wrote about how founders need to have a sane approach to valuation in angel rounds around the time of “Angelgate”:”The entrepreneur who pats himself on the back at doing an early raise at a high valuation is probably doing a disservice to his company and investors when it comes time for A or B rounds as institutional investors most likely won’t be able to, or want to, invest at the valuations which would then be required.”Rest of the article here: http://digitaltiger.posterous.com/devilled-angels

  3. JeffMiller says:

    Outcomes may be binary, but valuation still matters. Many seed stage investors don’t have enough capital to fulfill their opportunity set. In that case it makes sense to allocate the capital among lower valuation companies first, all other things being equal (like quality of the startup). If you get into a company at a $2m pre instead of a $4m pre you’ll make 2x as much money; why not favor the $2m pre over the $4m?

  4. Azeem Azhar says:

    As Paul said, ‘The expected value of a startup is the percentage chance it’s Google’. Strikes me that is true for the traditional model of VC investing — and it makes all the downside protections meaningless for everyone but the lawyer who drafts them.But are super-angels looking for something different? That is velocity of investing, fast turn around, quick multiples, high IRRs — and that means that the price you get in does matter, and you’re looking for deals that create $50m in value. Buy in a $2m and you only need to go half as far as buying in at $4m. You are a super-angel–is that your take?Disagree on uncapped notes.An uncapped note reflects a bond-like return for an equity-like risk, it’s clearly unfair. Equity-like risks require equity-like returns, but pricing a seed round is difficult, so the capped note seems like a reasonable way of handing an equity-like return within certain limits. Everything comes out in the wash, ultimately. And assuming your super-angel is prepared to help you further down the track aligning incentives early is critical. It’ll be interesting to see how Founder Collective moves forward. If you are successful, you will attract much more money and with it many more types of opportunities. When hedge funds have faced too much demand, they have capped participation and raised their fees. Is this what you would do?My money is that if you are successful, you will necessarily build a bigger organisation and not for long find yourselves with huge AUM, and having to do bigger, different deals.

  5. Paramendra Bhagat says:

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  6. stevenkane says:

    Nicely said, ChrisMy big issue, or anxiety, with Graham’s arguments, as well as similar sentiments I see expressed all over the place these days, is, they all seem to be in favor of abandoning discipline in investing . Angel investors should be insensitive to valuation, terms, structure, etc? Not for me, at least. This is not an abstract matter to me. I have been an angel investor for over ten years, in tech startups and others as well. Plus I invest in more traditional places too — public markets, private partnerships, VC and PE funds, real estate. The one and only rule I think that matters is, be disciplined. Know what you are investing in, and why you think it makes sense to do so, and what you expect to get from the investment (information, behavior, returns etc) over time.All the discussion lately about how these things do not matter in tech angel investing strike me as an excellent reason to, well, stop angel investing in tech startups. IMO, undisciplined investing has a long and storied tradition, and a convenient name: gambling. And I prefer to do that where I can get delicious free cocktails and tickets to a rock and roll circus.;)

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