Key Moments
Startup Investor School Day 4 Live Stream
Y CombinatorKey Moments
Startup investing costs have drastically decreased, and while ICOs offer instant liquidity, they also introduce new risks distinct from traditional equity. "Good" investors build reputations for helpfulness, not just financial returns, to secure better deal flow.
Key Insights
The cost to start and invest in companies has continuously decreased throughout the history of venture capital since the 1940s.
Founders are now raising significantly more capital through ICOs (tens to hundreds of millions) compared to traditional seed rounds (millions).
A 'good' investor's reputation is crucial in the startup world, driving deal flow and influencing access to the best opportunities, whereas in public markets, financial returns are the primary driver.
In ICOs, investors own part of a network, not a company, which affects governance, valuation, and the investment process, often with immediate liquidity.
While historical venture capital favored longer liquidity cycles for potentially larger returns, the trend is now towards faster liquidity, with tokens often offering near-instantaneous options.
The Y Combinator SAFE (Simple Agreement for Future Equity) was designed to simplify fundraising but has led to confusion; a spreadsheet tool will be provided to help model its conversion.
Historical trends in venture capital: decreasing costs and increasing capital
The early days of venture capital, starting in the 1940s and 50s, were characterized by high costs to start companies and limited capital available for investment. Key early firms like J.H. Whitney & Co. and ARDC emerged, with ARDC seeing a significant early success with Digital Equipment Corporation, returning 500x. The landscape began to formalize with the introduction of Small Business Investment Companies (SBICs) in 1958, encouraging more venture fund creation. Early firms like Venrock, Greylock, and Sequoia were founded. A major structural innovation of this era was the '2 and 20' fee structure (2% management fee, 20% carry), still common today. Crucially, early investments required substantial personal capital or funds from friends and family, creating a high barrier to entry. This trend of decreasing costs to start companies and lower barriers to entry for investors, alongside an arc towards greater liquidity, has been a consistent theme throughout venture capital history.
The rise of institutional capital and competitive deal flow in the 1970s and 80s
The 1970s saw the emergence of technology-focused angel investors and the pivotal introduction of institutional capital (endowments, corporations) into venture as an 'alternative asset.' This influx of capital enabled successful angels to found new funds, leading to a significant increase in the number of venture funds by the 1980s – growing from a few dozen to over 650. This intensified competition among funds to secure deals led to them needing to invest earlier, sometimes within weeks or days, a stark contrast to the leisurely pace of earlier decades. The 1980s also exhibited market volatility, including the rise of leveraged buyouts and investments in slower consumer brands, alongside fast-growth startups. The decade concluded with a stock market crash, impacting deal activity. The latter half of the 80s saw a secular trend towards earlier investment, driven by the competitive landscape.
The 90s boom, the dot-com bust, and the emergence of new models
The 1990s witnessed an explosive increase in capital available to startups, with venture industry Assets Under Management (AUM) dramatically growing. The focus shifted towards software and services, with companies like Netflix and Amazon starting. The pursuit of quick liquidity through IPOs fueled this boom, with venture funds commanding higher carry percentages (30-40%). The late 90s and early 2000s saw a significant bust, but the industry recovered, with innovations emerging. Y Combinator (2005) and Techstars (2006) began, further reducing the cost to start companies. Angel investing saw a resurgence, aided by the standardization of convertible notes, heavily influenced by YC. The rise of 'super angels' and micro-VCs in the mid-to-late 2000s provided more early-stage capital. Seed rounds began to surpass $1 million, enabling companies to raise substantial funds even before demonstrating significant traction.
Regulatory shifts and democratization of investment post-2008
The JOBS Act of 2012 and subsequent legislation significantly reshaped the early-stage funding ecosystem. Key changes included exemptions from being registered investment advisors for venture funds, allowing general solicitation (506(c) offerings) to publicly advertise fundraising, and the formalization of crowdfunding (Reg CF). These changes made it significantly easier for both startups to raise capital and for individuals to become angel investors. Platforms like AngelList facilitated this democratization. The trend towards faster liquidity continued, with increased secondary trading in startups. Y Combinator further innovated by creating the SAFE (Simple Agreement for Future Equity) in 2014, moving back towards convertible structures and away from interest-bearing convertible notes, simplifying and cheapening early-stage fundraising.
ICOs and the token economy: a new frontier
The emergence of Initial Coin Offerings (ICOs) in 2017 marked a profound shift, enabling companies to raise capital globally without traditional investor meetings. This lowered the barrier to participation even further, with many ICOs raising tens to hundreds of millions of dollars. A key distinction in ICOs is that investors acquire tokens representing a stake in a network, not necessarily ownership in a company. This has significant implications for governance, valuation (which is vastly different from traditional equity), investment process (often online-only), and liquidity (frequently immediate). Tokens can be categorized as protocol tokens (e.g., Ethereum), application tokens (built on platforms), or security/asset-backed tokens. While ICOs offer potential for rapid wealth creation, they are also highly speculative and nascent, with prices often irrational. The regulatory landscape for ICOs is still evolving, with potential for future legislation similar to the JOBS Act.
The importance of being 'good': reputation and founder relationships
Beyond financial returns, an investor's reputation is paramount in the startup world. 'Good' investors are those who are helpful, honest, and supportive, fostering strong relationships with founders. This reputation directly influences deal flow; helpful investors receive more opportunities, creating a virtuous cycle. Conversely, negative experiences can quickly damage an investor's standing. Being 'good' manifests at several stages: in sourcing deals respectfully, negotiating fairly and with integrity, closing deals quickly and honoring commitments, and providing ongoing support without overstepping boundaries. While founders may ask for help, investors should only advise in areas where they have genuine expertise and always respect the founder's ultimate decision-making authority. Honesty, even when delivering difficult truths, is crucial, as is understanding the difference between confidential and proprietary information.
Navigating investor rights and future outlook
Key investor rights, such as pro-rata rights, allow early investors to maintain their ownership percentage in subsequent funding rounds. While later-stage investors or company pressures might seek to reduce these rights, maintaining them is often critical for early investors. Founders are increasingly being counseled to plan for pro-rata implications during fundraising. The future of early-stage investing will likely see continued trends of decreasing costs to start and raise companies, further standardization through platforms and legal automation, and the persistence of both traditional angel investing and token-based fundraising. The concept of 'good' investing, characterized by integrity and founder support, remains a timeless strategy for long-term success in this dynamic ecosystem.
Mentioned in This Episode
●Products
●Software & Apps
●Companies
●Organizations
●Books
●Concepts
●People Referenced
Common Questions
Section 1202, also known as Qualified Small Business Stock (QSBS), is a tax provision that can significantly reduce an angel investor's tax liability on gains from qualified small business stock. Investors are encouraged to look it up for its potential benefits. (0:07:16)
Topics
Mentioned in this video
A platform that emerged to connect investors to startups, democratizing the investment process and taking advantage of general solicitation.
A YC company mentioned for legal automation and standardization, contributing to making company formation cheaper.
A YC company that created Filecoin; CoinList was birthed out of the Filecoin sale and the combination of Protocol Labs and AngelList.
Cited as an example of a huge company built by software founders/engineers.
A major seed fund mentioned as part of the rise of micro VCs. Ron Conway is associated with it.
Mentioned humorously in the context of opening a wealth management account after signing investment documents.
Mentioned as one of the first venture capital firms, achieving the first venture 'win' with Digital Equipment Corporation.
A venture capital firm founded in the 1970s, noted for its smaller fund size (7 million dollars) compared to today.
A venture capital firm funded around the 1950s/60s.
Cited as an example of a huge company built by software founders/engineers. Jon Doerr is mentioned as funding Netflix.
Mentioned as one of the first venture capital firms, emerging in the 1940s.
One of the first Silicon Valley companies, started around the 1950s/60s.
A venture capital firm founded in the 1970s, noted for its smaller fund size (5 million dollars) compared to today.
A supercomputer company founded in the 1970s, cited as a massive success story.
An example of an application token, built on top of platforms like Ethereum, providing a specific use case (distributed network of data scientists).
Used as an analogy for abundant unused resources (like hard drives for file storage), showing how a marketplace can connect supply and demand.
Ron Conway's first job, from which he later left with colleagues to found Altos Computer.
An anti-spam company invested in by SV Angel, demonstrating early ventures.
Cited as an example of a huge company built by software founders/engineers, highlighting a trend in successful tech companies.
A major company founded in the 1970s, cited as a massive success story.
Referred to by the slang 'Smith Barney' briefly, in the context of calling a financial advisor.
A venture capital firm founded in the 1970s.
Mentioned as going public 11 years after its founding, yielding large returns with slower liquidity. Also brought up in the context of founder agreements.
One of SV Angel's first companies invested in, demonstrating early success.
A micro VC/seed fund mentioned, notable in the rise of more early capital availability.
A venture capital firm funded around the 1950s/60s.
Cited as an example of a huge company built by software founders/engineers. Ron Conway later recounts meeting Larry and Sergey at Google.
A platform for digital asset companies to run token sales and for investors to find high-quality deals in the space. It was birthed out of the Filecoin sale.
The first venture 'win' for ARDC, returning 500x in 11 years, marking a significant early success in venture capital.
A startup accelerator mentioned as the institution hosting the event, and as a key player in standardizing convertible notes (SAFE) and influencing funding trends.
Cited as an example of a huge company built by software founders/engineers. Also mentioned in relation to Amazon S3 as a file storage solution.
A major company founded in the 1970s to early 1980s, cited as a massive success story.
Cited as an example of a huge company built by software founders/engineers and later as a type of network. Mark Zuckerberg, its founder, is later praised for his drive.
A major company founded in the 1970s, cited as a massive success story.
A microcomputer company disrupting the mini-computer industry in the late 1970s, where Ron Conway was a founder.
The company to which Altos Computer was sold.
A major company founded in the 1970s, cited as a massive success story.
A major computer company founded in the 1970s, cited as a massive success story. Ben Rosen, chairman of Compaq, teamed up with Ron Conway.
A seed fund that came into its own in the mid to late 2000s, contributing to increased early capital.
Partner at YC, who refers to a particular kind of investor as a 'human DNS attack'—someone who overloads founders with distracting requests after investing.
A famous angel investor, co-founder of SV Angel, discussed lessons on founder character, the importance of portfolio approach, and civic engagement.
Co-founder of Google, mentioned as being met by Ron Conway during an early visit to Google.
The founder of Facebook, admired for his drive, focus on metrics and user experience from a young age, leading to a successful company.
An early Google employee and operations guy who figured out the entire AdWords model, showcasing the importance of meeting all team members.
A YC partner for five years, he discussed what it means to be a 'good investor' in the context of reputation and returns. Also mentioned as running the Series A program.
Chairman of Compaq, who teamed up with Ron Conway to identify the next big growth industry, leading to their focus on internet software.
Funded Netflix and Amazon, symbolizing the movement towards venture capital funding recognizable software companies.
The founder of Sequoia Capital and a lead board member and investor in Altos Computer, who mentored Ron Conway into angel investing.
Introduced Ron Conway to Y Combinator, highlighting the network effect in the venture community.
CEO and co-founder of CoinList, who discusses the past, present, and future of early-stage investing, especially regarding ICOs.
Co-founder of Google, mentioned as being met by Ron Conway during an early visit to Google.
Underrated legislation in the history of fundraising that led to massive changes, including exemptions for venture funds and general solicitation (506 C offerings).
A tax provision mentioned as potentially having a significant impact on tax liability for angel investors, suggesting looking it up for more information.
Equity crowdfunding that resulted from the JOBS Act, allowing anyone to invest small amounts in startups and lowering the bar for angel investors.
US government legislation introduced in 1958 that provided leverage (loans) to venture funds, significantly pushing the industry forward.
A venture capital firm focused on early-stage investments, mentioned as an example of a seed fund/micro VC.
A fund mentioned for its 'Spearhead' program, which educates founders on angel investing and provides capital.
A venture capital firm funded around the 1950s/60s.
An industry advocacy group based in Washington D.C. that educates legislators on crypto, but is not a lobbying firm.
A venture capital firm founded in the 1970s.
A venture capital firm founded in the 1970s, which later became very large. Ron Conway was mentored by Don Valentine, founder of Sequoia Capital.
Issued a no-action letter for AngelList, making it easier to run syndicates and do general solicitation.
An accelerator that started in 2006, contributing to the trend of decreasing costs to start companies.
A token created by Protocol Labs (a YC company) and the first token sale on CoinList, designed to solve decentralized file storage using a clever token and incentive model (staking, proof of space-time).
An example of a protocol token, a platform on which other tokens are built, deriving its value from usage by other networks.
The 'obvious solution' for storing files, used as a contrast to Filecoin's decentralized approach, highlighting centralized downsides like censorship and downtime.
A perks-based crowdfunding platform that allowed companies to raise early money without selling equity.
A perks-based crowdfunding platform that allowed companies to raise early money without selling equity.
An equity crowdfunding platform that emerged, allowing anyone (accredited or unaccredited) to invest in security sales online.
The original cryptocurrency, cited as one of the most successful angel investments in the past decade, demonstrating incredible returns for early investors despite its pseudonymous founder.
One of SV Angel's first companies invested in, which went public within two years and was a significant early win for Ron Conway.
Created by YC in 2014, it standardized convertible structures, providing an easier, faster, and lower-cost solution for early-stage money without interest.
An important and underrated element in venture capital history, its rise was largely due to YC standardizing terms and encouraging founders to use them for faster, less legalistic fundraising.
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