Editor’s note: Guest author Chris Yeh is an independent angel investor and VP of Marketing for PBworks, one of his investments. He has been involved with Internet startups since 1995. His Twitter handle is @chrisyeh.
Update: This post originally referred to DST as the investor in Start Fund when it actually is Yuri Milner personally investing, along with Ron Conway’s fund SV Angel.
Update II: This has been corrected below.
The big news this morning is Yuri Milner’s announcement that he and Ron Conway will be investing $150,000 in *every* Y Combinator startup on a no-discount, no-cap convertible loan.
Many people have already weighed in with instant reactions—”It’s a bubble!” “It’s the greatest thing to happen to the US economy!” As usual, these off-the-cuff reactions focus on a single part of the story, rather than looking at the big picture.
Let’s walk through the news, step-by-step, and see what it really means. Ultimately, my take is that it’s good for Y Combinator and Milner, but bad for the rest of Silicon Valley.
1) “Yuri is a fool who believes he can sell to a greater fool.”
Many people mocked DST when it began investing in companies like Facebook at “outlandish” valuations. DST invested in Facebook at a $10 billion valuation; with the valuation now above $50 billion, I’d say Yuri is having the last laugh (for now).
If Milner is investing in YC companies on these terms, it’s because Milner believes it can make money on these terms (more on this later).
2) “I can’t believe all the money going into YC’s dipshit companies.”
Once upon a time, Y Combinator’s companies were features masquerading as companies. But anyone who still thinks that isn’t paying attention. The quality of YC companies has risen considerably; the companies graduating from YC these days are much more polished and accomplished. And with monster successes like Dropbox and AirBnB (along with Heroku’s exit), YC’s company quality is looking better and better.
3) “Finally, someone who’s willing to take risks, unlike today’s pantywaist angels and VCs!”
Now we’re getting to something more substantive. There seems to be a feeling among entrepreneurs that investors are no longer willing to take risks, and that no one is willing to invest in ideas any more. My response to that is simple—if startups are really so low-risk, why is it that only a tiny fraction of the companies that do get funded (which are presumably “no-brainer” investments for all the cautious VCs) actually return any money to investors?
Of course I try to invest in companies that I expect to be “sure things,” but I also know that history predicts that at least 60% of my investments are going to be complete financial failures. The reason Milner is willing to take on such risk is simple—in addition to the actual investment, it’s also buying option value.
Option value is what makes the VC system work—by investing in stages, investors are able to abandon companies that don’t look likely to succeed. This is why startups are so much more effective than big companies at innovation—a big company’s internal politics make it difficult to try lots of things that will probably fail. Milner has additional option value available to them that traditional angels do not because of its ability to invest at later stages. By investing in the seed round, Yuri – and DST – gets the inside track on any future financings.
Let’s say that I was lucky enough to invest in Facebook’s seed round (I wasn’t). As the company raised further rounds of funding at $100 million and $10 billion valuations, I would have to come up with increasingly large checks to maintain my ownership position. Buying 0.1% of the company is pretty easy at a $5 million valuation (that’s just $5,000). It gets harder at $100 million ($100,000) and $10 billion ($10,000,000).
For Milner, however, investing a few million in YC companies is well worth it if it gives him the inside track to do a $100 million expansion round in the future. Moreover, is Milner really making it easier for entrepreneurs to raise money? I was not under the impression that YC grads were having difficulties raising money. It’s not like Milner is giving $150K to anyone who asks—the investment is reserved for companies which pass YC’s rigorous screening process.
4) Okay, Mr. Smarty-Pants, why is this bad for Silicon Valley then?
In the TechCrunch comments, Ted Rheingold of Dogster fame says simply, “This is not going to be healthy for the ecosystem.” I think he’s right, but the reasons he’s right are subtle. Allow me to explain.
a) Independent angel investors need to be able to invest at reasonable valuations.
As I explained in (3) above, folks like me need to be able to invest at reasonable valuations. That means either priced rounds or convertibles with valuation caps, and seed round valuations of $1-3 million. We don’t have the money to stay in the game with the VCs and DSTs of the world, so if seed funding shifted to a model of no-cap convertibles, we would be priced out of the ecosystem.
In today’s environment, many companies skip straight from a seed round to $20 million+ valuations, and angels simply won’t get rewarded for the extra risk they assume without priced rounds or caps.
b) The Milner/YC partnership could end up upsetting this delicate balance
As I’ve argued in the past, angel investing is a fragmented game. No one has enough power to collude on valuations. However, someone who is influential enough can influence what is and isn’t considered “standard.”
Once upon a time, there was no such thing as a convertible note with a cap. There were convertible notes, and there were priced rounds, and nothing in between. Then a few years ago, a number of prominent players in the ecosystem (YC included) began pushing the concept of a capped convertible. Today, even though there are plenty of angels who despise any kind of convertible note, capped or not, the capped convertible is pretty much the standard seed financing instrument.
Now imagine the impact of YC, the most influential incubator, standardizing on uncapped, no-discount convertibles. It’s not difficult to envision a scenario in which the entire industry moves in this direction. The problem is that this shift eliminates the incentive for independent angels to participate in the ecosystem.
Angels play an important part in the ecosystem because we are willing to take on more risk than the VCs. Some of that is non-economic behavior, but some of that is also due to the fact that we get compensated for that risk-taking with much lower valuations. Eliminating that compensation will surely reduce the number of independent angel investments.
The irony is that the Milner/YC deal didn’t have to cause problems for independent angel investors. If Milner committed to providing $150K to every YC company, at whatever terms were determined by the lead investor in the syndicate, he wouldn’t be pricing the angels out of the ecosystem.
c) Removing independent angel investors from the ecosystem is a bad idea
Naturally, angels like me will be upset about getting shut out of the ecosystem, but why is that bad for Silicon Valley? After all, between YC, TechStars, the Founders Institute, and all the other incubators and quasi-incubators, who needs us? Let the incubators pick the winners, and let the DSTs fund them.
The problem is that the chaotic, fragmented, Darwinian nature of Silicon Valley is an integral part of what makes it great. We need those random mutations to generate innovation, especially breakthrough innovation.
If we concentrate the decision-making on who does and doesn’t get funding in the hands of a small number of institutions, we hurt Silicon Valley as a whole, no matter how smart those institutions are.
I tell many people that Paul Graham is a genius. He saw the opportunity to start YC, and he’s done the Valley a huge favor by broadening the pool of company founders. But I don’t want Paul to be one of a small group of people who decides which companies get funding—not because he isn’t smart (he is) or a great guy (he is). When it comes to innovation, central decision-making is bad, no matter how good the decision-makers are.
For all our flaws, independent angels serve the important role of enabling the “genetic diversity” of the startup population. That diversity is at the heart of Silicon Valley’s success, and that’s something we don’t want to lose.
You're probably reading this on junk. And I'm not talking about newsprint - industry woes aside, that's high-quality stuff. But if you're on a computer or an iPad, and you're not plugged into an Internet jack in the wall? Junk, then.
But it's not your MacBook or your tablet that's so crummy. It's the spectrum it's using.
Spectrum, in the words of FCC Chairman Julius Genachowski, is the economy's "invisible infrastructure." It's the interstate system for information that travels wirelessly. It's how you get radio in your car, service on your cellphone and satellite to your television. It's also how you get WiFi.
But not all spectrum is created equal. "Beachfront spectrum" is like a well-paved road. Lots of information can travel long distances on it without losing much data. But not all spectrum is so valuable.
In 1985, there was a slice of spectrum that was too crummy for anyone to want. It was so weak that the radiation that microwaves emit could mess with it. So the government released it to the public. As long as whatever you were doing didn't interfere with what anyone else was doing, you could build on that spectrum. That's how we got garage-door openers and cordless phones. Because the information didn't have to travel far, the junk spectrum was good enough. Later on, that same section of junk spectrum became the home for WiFi - a crucial, multibillion-dollar industry. A platform for massive technological innovation. A huge increase in quality of life.
There's a lesson in that: Spectrum is really, really important. And not always in ways that we can predict in advance. Making sure that spectrum is used well is no less important than making sure our highways are used well: If the Beltway were reserved for horses, Washington would not be a very good place to do business.
But our spectrum is not being used well. It's the classic innovator's quandary: We made good decisions many years ago, but those good decisions created powerful incumbents, and in order to make good decisions now, we must somehow unseat the incumbents.
Today, much of the best spectrum is allocated to broadcast television. Decades ago, when 90 percent of Americans received their programming this way, that made sense. Today, when fewer than 10 percent of Americans do, it doesn't.
Meanwhile, mobile broadband is quite clearly the platform of the future - or at least the near future. But we don't have nearly enough spectrum allocated for its use. Unless that changes, the technology will be unable to progress, as more advanced uses will require more bandwidth, or it will have to be rationed, perhaps through extremely high prices that make sure most people can't use it.
The FCC could just yank the spectrum from the channels and hand it to the mobile industry. But it won't. It fears lawsuits and angry calls from lawmakers. And temperamentally, Genachowski himself is a consensus-builder rather than a steamroller.
Instead, the hope is that current owners of spectrum will give it up voluntarily. In exchange, they'd get big sacks of money. If a slice of spectrum is worth billions of dollars to Verizon but only a couple of million to a few aging TV stations - TV stations that have other ways to reach most of those customers - then there should be enough money in this transaction to leave everyone happy.
At least, that's some people's hope. Some advocates want that spectrum - or at least a substantial portion of it - left unlicensed. Rather than using telecom corporations such as Verizon to buy off the current owners of the spectrum, they'd like to see the federal government take some of that spectrum back and preserve it as a public resource for the sort of innovation we can't yet imagine and that the big corporations aren't likely to pioneer - the same as happened with WiFi. But as of yet, that's not the FCC's vision for this. Officials are more worried about the mobile broadband market. They argue (accurately) that they've already made more beachfront spectrum available for unlicensed uses. And although they don't say this clearly, auctioning spectrum to large corporations gives them the money to pay off the current owners. But even so, they can't do that.
"Imagine someone was given property on Fifth Avenue 50 years ago, but they don't use it and can't sell it," says Tim Wu, a law professor at Harvard and author of "The Master Switch." That's the situation that's arisen in the spectrum universe. It's not legal for the FCC to run auctions and hand over some of the proceeds to the old owners. That means the people sitting on the spectrum have little incentive to give it up. For that to change, the FCC needs Congress to pass a law empowering it to compensate current holders of spectrum with proceeds from the sale.
One way - the slightly demagogic way - to underscore the urgency here is to invoke China: Do you think it's letting its information infrastructure stagnate because it's a bureaucratic hassle to get the permits shifted? I rather doubt it.
Of course, we don't want the Chinese system. Democracy is worth some red tape. But if we're going to keep a good political system from becoming an economic handicap, there are going to be a lot of decisions like this one that need to be made. Decisions where we know what we need to do to move the economy forward, but where it's easier to do nothing because there are powerful interests attached to old habits. The problem with having a really good 20th century, as America did, is that you've built up a lot of infrastructure and made a lot of decisions that benefit the industries and innovators of the 20th century. But now we're in the 21st century, and junk won't cut it anymore.
benchcraft company scamHere's all the fashion news that's fit to print! Enjoy!
Arab News contacted on Saturday the embassy official concerned with the case but he did not answer the call. “We specifically requested that aside from providing her medical care, the embassy should also arrange her immediate ...
Horse Tracks -- Your Daily Cup of Orange and Blue Coffee.
benchcraft company portland or Editor’s note: Guest author Chris Yeh is an independent angel investor and VP of Marketing for PBworks, one of his investments. He has been involved with Internet startups since 1995. His Twitter handle is @chrisyeh.
Update: This post originally referred to DST as the investor in Start Fund when it actually is Yuri Milner personally investing, along with Ron Conway’s fund SV Angel.
Update II: This has been corrected below.
The big news this morning is Yuri Milner’s announcement that he and Ron Conway will be investing $150,000 in *every* Y Combinator startup on a no-discount, no-cap convertible loan.
Many people have already weighed in with instant reactions—”It’s a bubble!” “It’s the greatest thing to happen to the US economy!” As usual, these off-the-cuff reactions focus on a single part of the story, rather than looking at the big picture.
Let’s walk through the news, step-by-step, and see what it really means. Ultimately, my take is that it’s good for Y Combinator and Milner, but bad for the rest of Silicon Valley.
1) “Yuri is a fool who believes he can sell to a greater fool.”
Many people mocked DST when it began investing in companies like Facebook at “outlandish” valuations. DST invested in Facebook at a $10 billion valuation; with the valuation now above $50 billion, I’d say Yuri is having the last laugh (for now).
If Milner is investing in YC companies on these terms, it’s because Milner believes it can make money on these terms (more on this later).
2) “I can’t believe all the money going into YC’s dipshit companies.”
Once upon a time, Y Combinator’s companies were features masquerading as companies. But anyone who still thinks that isn’t paying attention. The quality of YC companies has risen considerably; the companies graduating from YC these days are much more polished and accomplished. And with monster successes like Dropbox and AirBnB (along with Heroku’s exit), YC’s company quality is looking better and better.
3) “Finally, someone who’s willing to take risks, unlike today’s pantywaist angels and VCs!”
Now we’re getting to something more substantive. There seems to be a feeling among entrepreneurs that investors are no longer willing to take risks, and that no one is willing to invest in ideas any more. My response to that is simple—if startups are really so low-risk, why is it that only a tiny fraction of the companies that do get funded (which are presumably “no-brainer” investments for all the cautious VCs) actually return any money to investors?
Of course I try to invest in companies that I expect to be “sure things,” but I also know that history predicts that at least 60% of my investments are going to be complete financial failures. The reason Milner is willing to take on such risk is simple—in addition to the actual investment, it’s also buying option value.
Option value is what makes the VC system work—by investing in stages, investors are able to abandon companies that don’t look likely to succeed. This is why startups are so much more effective than big companies at innovation—a big company’s internal politics make it difficult to try lots of things that will probably fail. Milner has additional option value available to them that traditional angels do not because of its ability to invest at later stages. By investing in the seed round, Yuri – and DST – gets the inside track on any future financings.
Let’s say that I was lucky enough to invest in Facebook’s seed round (I wasn’t). As the company raised further rounds of funding at $100 million and $10 billion valuations, I would have to come up with increasingly large checks to maintain my ownership position. Buying 0.1% of the company is pretty easy at a $5 million valuation (that’s just $5,000). It gets harder at $100 million ($100,000) and $10 billion ($10,000,000).
For Milner, however, investing a few million in YC companies is well worth it if it gives him the inside track to do a $100 million expansion round in the future. Moreover, is Milner really making it easier for entrepreneurs to raise money? I was not under the impression that YC grads were having difficulties raising money. It’s not like Milner is giving $150K to anyone who asks—the investment is reserved for companies which pass YC’s rigorous screening process.
4) Okay, Mr. Smarty-Pants, why is this bad for Silicon Valley then?
In the TechCrunch comments, Ted Rheingold of Dogster fame says simply, “This is not going to be healthy for the ecosystem.” I think he’s right, but the reasons he’s right are subtle. Allow me to explain.
a) Independent angel investors need to be able to invest at reasonable valuations.
As I explained in (3) above, folks like me need to be able to invest at reasonable valuations. That means either priced rounds or convertibles with valuation caps, and seed round valuations of $1-3 million. We don’t have the money to stay in the game with the VCs and DSTs of the world, so if seed funding shifted to a model of no-cap convertibles, we would be priced out of the ecosystem.
In today’s environment, many companies skip straight from a seed round to $20 million+ valuations, and angels simply won’t get rewarded for the extra risk they assume without priced rounds or caps.
b) The Milner/YC partnership could end up upsetting this delicate balance
As I’ve argued in the past, angel investing is a fragmented game. No one has enough power to collude on valuations. However, someone who is influential enough can influence what is and isn’t considered “standard.”
Once upon a time, there was no such thing as a convertible note with a cap. There were convertible notes, and there were priced rounds, and nothing in between. Then a few years ago, a number of prominent players in the ecosystem (YC included) began pushing the concept of a capped convertible. Today, even though there are plenty of angels who despise any kind of convertible note, capped or not, the capped convertible is pretty much the standard seed financing instrument.
Now imagine the impact of YC, the most influential incubator, standardizing on uncapped, no-discount convertibles. It’s not difficult to envision a scenario in which the entire industry moves in this direction. The problem is that this shift eliminates the incentive for independent angels to participate in the ecosystem.
Angels play an important part in the ecosystem because we are willing to take on more risk than the VCs. Some of that is non-economic behavior, but some of that is also due to the fact that we get compensated for that risk-taking with much lower valuations. Eliminating that compensation will surely reduce the number of independent angel investments.
The irony is that the Milner/YC deal didn’t have to cause problems for independent angel investors. If Milner committed to providing $150K to every YC company, at whatever terms were determined by the lead investor in the syndicate, he wouldn’t be pricing the angels out of the ecosystem.
c) Removing independent angel investors from the ecosystem is a bad idea
Naturally, angels like me will be upset about getting shut out of the ecosystem, but why is that bad for Silicon Valley? After all, between YC, TechStars, the Founders Institute, and all the other incubators and quasi-incubators, who needs us? Let the incubators pick the winners, and let the DSTs fund them.
The problem is that the chaotic, fragmented, Darwinian nature of Silicon Valley is an integral part of what makes it great. We need those random mutations to generate innovation, especially breakthrough innovation.
If we concentrate the decision-making on who does and doesn’t get funding in the hands of a small number of institutions, we hurt Silicon Valley as a whole, no matter how smart those institutions are.
I tell many people that Paul Graham is a genius. He saw the opportunity to start YC, and he’s done the Valley a huge favor by broadening the pool of company founders. But I don’t want Paul to be one of a small group of people who decides which companies get funding—not because he isn’t smart (he is) or a great guy (he is). When it comes to innovation, central decision-making is bad, no matter how good the decision-makers are.
For all our flaws, independent angels serve the important role of enabling the “genetic diversity” of the startup population. That diversity is at the heart of Silicon Valley’s success, and that’s something we don’t want to lose.
You're probably reading this on junk. And I'm not talking about newsprint - industry woes aside, that's high-quality stuff. But if you're on a computer or an iPad, and you're not plugged into an Internet jack in the wall? Junk, then.
But it's not your MacBook or your tablet that's so crummy. It's the spectrum it's using.
Spectrum, in the words of FCC Chairman Julius Genachowski, is the economy's "invisible infrastructure." It's the interstate system for information that travels wirelessly. It's how you get radio in your car, service on your cellphone and satellite to your television. It's also how you get WiFi.
But not all spectrum is created equal. "Beachfront spectrum" is like a well-paved road. Lots of information can travel long distances on it without losing much data. But not all spectrum is so valuable.
In 1985, there was a slice of spectrum that was too crummy for anyone to want. It was so weak that the radiation that microwaves emit could mess with it. So the government released it to the public. As long as whatever you were doing didn't interfere with what anyone else was doing, you could build on that spectrum. That's how we got garage-door openers and cordless phones. Because the information didn't have to travel far, the junk spectrum was good enough. Later on, that same section of junk spectrum became the home for WiFi - a crucial, multibillion-dollar industry. A platform for massive technological innovation. A huge increase in quality of life.
There's a lesson in that: Spectrum is really, really important. And not always in ways that we can predict in advance. Making sure that spectrum is used well is no less important than making sure our highways are used well: If the Beltway were reserved for horses, Washington would not be a very good place to do business.
But our spectrum is not being used well. It's the classic innovator's quandary: We made good decisions many years ago, but those good decisions created powerful incumbents, and in order to make good decisions now, we must somehow unseat the incumbents.
Today, much of the best spectrum is allocated to broadcast television. Decades ago, when 90 percent of Americans received their programming this way, that made sense. Today, when fewer than 10 percent of Americans do, it doesn't.
Meanwhile, mobile broadband is quite clearly the platform of the future - or at least the near future. But we don't have nearly enough spectrum allocated for its use. Unless that changes, the technology will be unable to progress, as more advanced uses will require more bandwidth, or it will have to be rationed, perhaps through extremely high prices that make sure most people can't use it.
The FCC could just yank the spectrum from the channels and hand it to the mobile industry. But it won't. It fears lawsuits and angry calls from lawmakers. And temperamentally, Genachowski himself is a consensus-builder rather than a steamroller.
Instead, the hope is that current owners of spectrum will give it up voluntarily. In exchange, they'd get big sacks of money. If a slice of spectrum is worth billions of dollars to Verizon but only a couple of million to a few aging TV stations - TV stations that have other ways to reach most of those customers - then there should be enough money in this transaction to leave everyone happy.
At least, that's some people's hope. Some advocates want that spectrum - or at least a substantial portion of it - left unlicensed. Rather than using telecom corporations such as Verizon to buy off the current owners of the spectrum, they'd like to see the federal government take some of that spectrum back and preserve it as a public resource for the sort of innovation we can't yet imagine and that the big corporations aren't likely to pioneer - the same as happened with WiFi. But as of yet, that's not the FCC's vision for this. Officials are more worried about the mobile broadband market. They argue (accurately) that they've already made more beachfront spectrum available for unlicensed uses. And although they don't say this clearly, auctioning spectrum to large corporations gives them the money to pay off the current owners. But even so, they can't do that.
"Imagine someone was given property on Fifth Avenue 50 years ago, but they don't use it and can't sell it," says Tim Wu, a law professor at Harvard and author of "The Master Switch." That's the situation that's arisen in the spectrum universe. It's not legal for the FCC to run auctions and hand over some of the proceeds to the old owners. That means the people sitting on the spectrum have little incentive to give it up. For that to change, the FCC needs Congress to pass a law empowering it to compensate current holders of spectrum with proceeds from the sale.
One way - the slightly demagogic way - to underscore the urgency here is to invoke China: Do you think it's letting its information infrastructure stagnate because it's a bureaucratic hassle to get the permits shifted? I rather doubt it.
Of course, we don't want the Chinese system. Democracy is worth some red tape. But if we're going to keep a good political system from becoming an economic handicap, there are going to be a lot of decisions like this one that need to be made. Decisions where we know what we need to do to move the economy forward, but where it's easier to do nothing because there are powerful interests attached to old habits. The problem with having a really good 20th century, as America did, is that you've built up a lot of infrastructure and made a lot of decisions that benefit the industries and innovators of the 20th century. But now we're in the 21st century, and junk won't cut it anymore.
benchcraft company scamHere's all the fashion news that's fit to print! Enjoy!
Arab News contacted on Saturday the embassy official concerned with the case but he did not answer the call. “We specifically requested that aside from providing her medical care, the embassy should also arrange her immediate ...
Horse Tracks -- Your Daily Cup of Orange and Blue Coffee.
benchcraft company scam[reefeed]
benchcraft company scam
benchcraft company scamHere's all the fashion news that's fit to print! Enjoy!
Arab News contacted on Saturday the embassy official concerned with the case but he did not answer the call. “We specifically requested that aside from providing her medical care, the embassy should also arrange her immediate ...
Horse Tracks -- Your Daily Cup of Orange and Blue Coffee.
bench craft company reviews Editor’s note: Guest author Chris Yeh is an independent angel investor and VP of Marketing for PBworks, one of his investments. He has been involved with Internet startups since 1995. His Twitter handle is @chrisyeh.
Update: This post originally referred to DST as the investor in Start Fund when it actually is Yuri Milner personally investing, along with Ron Conway’s fund SV Angel.
Update II: This has been corrected below.
The big news this morning is Yuri Milner’s announcement that he and Ron Conway will be investing $150,000 in *every* Y Combinator startup on a no-discount, no-cap convertible loan.
Many people have already weighed in with instant reactions—”It’s a bubble!” “It’s the greatest thing to happen to the US economy!” As usual, these off-the-cuff reactions focus on a single part of the story, rather than looking at the big picture.
Let’s walk through the news, step-by-step, and see what it really means. Ultimately, my take is that it’s good for Y Combinator and Milner, but bad for the rest of Silicon Valley.
1) “Yuri is a fool who believes he can sell to a greater fool.”
Many people mocked DST when it began investing in companies like Facebook at “outlandish” valuations. DST invested in Facebook at a $10 billion valuation; with the valuation now above $50 billion, I’d say Yuri is having the last laugh (for now).
If Milner is investing in YC companies on these terms, it’s because Milner believes it can make money on these terms (more on this later).
2) “I can’t believe all the money going into YC’s dipshit companies.”
Once upon a time, Y Combinator’s companies were features masquerading as companies. But anyone who still thinks that isn’t paying attention. The quality of YC companies has risen considerably; the companies graduating from YC these days are much more polished and accomplished. And with monster successes like Dropbox and AirBnB (along with Heroku’s exit), YC’s company quality is looking better and better.
3) “Finally, someone who’s willing to take risks, unlike today’s pantywaist angels and VCs!”
Now we’re getting to something more substantive. There seems to be a feeling among entrepreneurs that investors are no longer willing to take risks, and that no one is willing to invest in ideas any more. My response to that is simple—if startups are really so low-risk, why is it that only a tiny fraction of the companies that do get funded (which are presumably “no-brainer” investments for all the cautious VCs) actually return any money to investors?
Of course I try to invest in companies that I expect to be “sure things,” but I also know that history predicts that at least 60% of my investments are going to be complete financial failures. The reason Milner is willing to take on such risk is simple—in addition to the actual investment, it’s also buying option value.
Option value is what makes the VC system work—by investing in stages, investors are able to abandon companies that don’t look likely to succeed. This is why startups are so much more effective than big companies at innovation—a big company’s internal politics make it difficult to try lots of things that will probably fail. Milner has additional option value available to them that traditional angels do not because of its ability to invest at later stages. By investing in the seed round, Yuri – and DST – gets the inside track on any future financings.
Let’s say that I was lucky enough to invest in Facebook’s seed round (I wasn’t). As the company raised further rounds of funding at $100 million and $10 billion valuations, I would have to come up with increasingly large checks to maintain my ownership position. Buying 0.1% of the company is pretty easy at a $5 million valuation (that’s just $5,000). It gets harder at $100 million ($100,000) and $10 billion ($10,000,000).
For Milner, however, investing a few million in YC companies is well worth it if it gives him the inside track to do a $100 million expansion round in the future. Moreover, is Milner really making it easier for entrepreneurs to raise money? I was not under the impression that YC grads were having difficulties raising money. It’s not like Milner is giving $150K to anyone who asks—the investment is reserved for companies which pass YC’s rigorous screening process.
4) Okay, Mr. Smarty-Pants, why is this bad for Silicon Valley then?
In the TechCrunch comments, Ted Rheingold of Dogster fame says simply, “This is not going to be healthy for the ecosystem.” I think he’s right, but the reasons he’s right are subtle. Allow me to explain.
a) Independent angel investors need to be able to invest at reasonable valuations.
As I explained in (3) above, folks like me need to be able to invest at reasonable valuations. That means either priced rounds or convertibles with valuation caps, and seed round valuations of $1-3 million. We don’t have the money to stay in the game with the VCs and DSTs of the world, so if seed funding shifted to a model of no-cap convertibles, we would be priced out of the ecosystem.
In today’s environment, many companies skip straight from a seed round to $20 million+ valuations, and angels simply won’t get rewarded for the extra risk they assume without priced rounds or caps.
b) The Milner/YC partnership could end up upsetting this delicate balance
As I’ve argued in the past, angel investing is a fragmented game. No one has enough power to collude on valuations. However, someone who is influential enough can influence what is and isn’t considered “standard.”
Once upon a time, there was no such thing as a convertible note with a cap. There were convertible notes, and there were priced rounds, and nothing in between. Then a few years ago, a number of prominent players in the ecosystem (YC included) began pushing the concept of a capped convertible. Today, even though there are plenty of angels who despise any kind of convertible note, capped or not, the capped convertible is pretty much the standard seed financing instrument.
Now imagine the impact of YC, the most influential incubator, standardizing on uncapped, no-discount convertibles. It’s not difficult to envision a scenario in which the entire industry moves in this direction. The problem is that this shift eliminates the incentive for independent angels to participate in the ecosystem.
Angels play an important part in the ecosystem because we are willing to take on more risk than the VCs. Some of that is non-economic behavior, but some of that is also due to the fact that we get compensated for that risk-taking with much lower valuations. Eliminating that compensation will surely reduce the number of independent angel investments.
The irony is that the Milner/YC deal didn’t have to cause problems for independent angel investors. If Milner committed to providing $150K to every YC company, at whatever terms were determined by the lead investor in the syndicate, he wouldn’t be pricing the angels out of the ecosystem.
c) Removing independent angel investors from the ecosystem is a bad idea
Naturally, angels like me will be upset about getting shut out of the ecosystem, but why is that bad for Silicon Valley? After all, between YC, TechStars, the Founders Institute, and all the other incubators and quasi-incubators, who needs us? Let the incubators pick the winners, and let the DSTs fund them.
The problem is that the chaotic, fragmented, Darwinian nature of Silicon Valley is an integral part of what makes it great. We need those random mutations to generate innovation, especially breakthrough innovation.
If we concentrate the decision-making on who does and doesn’t get funding in the hands of a small number of institutions, we hurt Silicon Valley as a whole, no matter how smart those institutions are.
I tell many people that Paul Graham is a genius. He saw the opportunity to start YC, and he’s done the Valley a huge favor by broadening the pool of company founders. But I don’t want Paul to be one of a small group of people who decides which companies get funding—not because he isn’t smart (he is) or a great guy (he is). When it comes to innovation, central decision-making is bad, no matter how good the decision-makers are.
For all our flaws, independent angels serve the important role of enabling the “genetic diversity” of the startup population. That diversity is at the heart of Silicon Valley’s success, and that’s something we don’t want to lose.
You're probably reading this on junk. And I'm not talking about newsprint - industry woes aside, that's high-quality stuff. But if you're on a computer or an iPad, and you're not plugged into an Internet jack in the wall? Junk, then.
But it's not your MacBook or your tablet that's so crummy. It's the spectrum it's using.
Spectrum, in the words of FCC Chairman Julius Genachowski, is the economy's "invisible infrastructure." It's the interstate system for information that travels wirelessly. It's how you get radio in your car, service on your cellphone and satellite to your television. It's also how you get WiFi.
But not all spectrum is created equal. "Beachfront spectrum" is like a well-paved road. Lots of information can travel long distances on it without losing much data. But not all spectrum is so valuable.
In 1985, there was a slice of spectrum that was too crummy for anyone to want. It was so weak that the radiation that microwaves emit could mess with it. So the government released it to the public. As long as whatever you were doing didn't interfere with what anyone else was doing, you could build on that spectrum. That's how we got garage-door openers and cordless phones. Because the information didn't have to travel far, the junk spectrum was good enough. Later on, that same section of junk spectrum became the home for WiFi - a crucial, multibillion-dollar industry. A platform for massive technological innovation. A huge increase in quality of life.
There's a lesson in that: Spectrum is really, really important. And not always in ways that we can predict in advance. Making sure that spectrum is used well is no less important than making sure our highways are used well: If the Beltway were reserved for horses, Washington would not be a very good place to do business.
But our spectrum is not being used well. It's the classic innovator's quandary: We made good decisions many years ago, but those good decisions created powerful incumbents, and in order to make good decisions now, we must somehow unseat the incumbents.
Today, much of the best spectrum is allocated to broadcast television. Decades ago, when 90 percent of Americans received their programming this way, that made sense. Today, when fewer than 10 percent of Americans do, it doesn't.
Meanwhile, mobile broadband is quite clearly the platform of the future - or at least the near future. But we don't have nearly enough spectrum allocated for its use. Unless that changes, the technology will be unable to progress, as more advanced uses will require more bandwidth, or it will have to be rationed, perhaps through extremely high prices that make sure most people can't use it.
The FCC could just yank the spectrum from the channels and hand it to the mobile industry. But it won't. It fears lawsuits and angry calls from lawmakers. And temperamentally, Genachowski himself is a consensus-builder rather than a steamroller.
Instead, the hope is that current owners of spectrum will give it up voluntarily. In exchange, they'd get big sacks of money. If a slice of spectrum is worth billions of dollars to Verizon but only a couple of million to a few aging TV stations - TV stations that have other ways to reach most of those customers - then there should be enough money in this transaction to leave everyone happy.
At least, that's some people's hope. Some advocates want that spectrum - or at least a substantial portion of it - left unlicensed. Rather than using telecom corporations such as Verizon to buy off the current owners of the spectrum, they'd like to see the federal government take some of that spectrum back and preserve it as a public resource for the sort of innovation we can't yet imagine and that the big corporations aren't likely to pioneer - the same as happened with WiFi. But as of yet, that's not the FCC's vision for this. Officials are more worried about the mobile broadband market. They argue (accurately) that they've already made more beachfront spectrum available for unlicensed uses. And although they don't say this clearly, auctioning spectrum to large corporations gives them the money to pay off the current owners. But even so, they can't do that.
"Imagine someone was given property on Fifth Avenue 50 years ago, but they don't use it and can't sell it," says Tim Wu, a law professor at Harvard and author of "The Master Switch." That's the situation that's arisen in the spectrum universe. It's not legal for the FCC to run auctions and hand over some of the proceeds to the old owners. That means the people sitting on the spectrum have little incentive to give it up. For that to change, the FCC needs Congress to pass a law empowering it to compensate current holders of spectrum with proceeds from the sale.
One way - the slightly demagogic way - to underscore the urgency here is to invoke China: Do you think it's letting its information infrastructure stagnate because it's a bureaucratic hassle to get the permits shifted? I rather doubt it.
Of course, we don't want the Chinese system. Democracy is worth some red tape. But if we're going to keep a good political system from becoming an economic handicap, there are going to be a lot of decisions like this one that need to be made. Decisions where we know what we need to do to move the economy forward, but where it's easier to do nothing because there are powerful interests attached to old habits. The problem with having a really good 20th century, as America did, is that you've built up a lot of infrastructure and made a lot of decisions that benefit the industries and innovators of the 20th century. But now we're in the 21st century, and junk won't cut it anymore.
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benchcraft company portland or Last summer, before I took full advantage of the benefits provided by e-mail filtering and multiple accounts, I was getting a ton of daily SPAM (I still get a ton of SPAM, only now it goes where it should: into its own dedicated e-mail account). Much of this unsolicited e-mail had to do with achieving wealth over the internet, usually effortlessly - a concept I had always summarily dismissed. But one day, all booted up with no place to go, I decided to take a trip into internet money-making land just to see where it would lead. Though I can identify, and know the pitfalls of a sexy come-on when I read one, I've never been averse to making money. So I set out on a crash course of making money online, starting with Google. I entered that exact phrase, "making money online", and got some 15 million results. Wow, I thought. Either I wasn’t the only one with time on my hands, or something about this concept was sucking people in. Eventually, I would click my way to an online world that I had no clue even existed. And I spend a lot of time online.
In the days and months that followed, I became intrigued with one online money making venture that had gained phenomenonal popularity: HYIPs, or “High Yield Investment Plans”. In retrospect, HYIPs had probably reached their peak right about the time I learned of them. Chances are you're familiar with the phrase, "High Yield Investment Plan." Perhaps you've seen it while skimming a prospectus or some other form of investment literature. For the record, legitimate high yield, short term investments do exist, and they are a totally different animal from what I'm talking about.
HYIPs - the acronym is pronounced, ironically, just the way you think - are tailor-made for our Right Here, Right Now generation. That's right. One of the many things the World Wide Web has brought us is the expectation of instant access. We want our information, our relationships, and our wealth at the click of a mouse. HYIPs provide this immediacy by giving you the ability to watch your money grow exponentially, incredibly, and even better, daily - online.
That is, assuming everything goes according to plan. Frequently it does not, however, and that's when many a starry eyed wealth builder runs into trouble. Fortunately, I happen to be more parts cynic than idealist, so it didn’t take a great deal of sleuthing to find that these are essentially thinly disguised ponzi schemes - which, according to the Federal Trade Commission and the Securities and Exchange Commission, are illegal.
Simply by virtue of the way they are structured, even the best run ponzis are destined to fail because in order for someone to win, someone else has to lose. It is also important to note that the fact that there may or may not be deception involved about the nature of a ponzi (false claims of investing in goods or services) makes it no less illegal.
Step right up...
The infamous scheme named after Carlo Ponzi was first launched in 1920 to great success. Brilliant in its simplicity, it worked on a simple premise: get people to invest in a nonexistent product or service, promise an outrageous return after a specified number of days or weeks, and use the money from new investors to pay off old investors who cash out. Ponzi’s plan did have one fatal flaw, though. When new money stopped coming in at a rate sufficient to pay out people who wanted to withdraw, the cycle collapsed. This was inevitable, for the simple reason that no investment vehicle can have a steady inflow of new investors forever; if for no other reason than the fact that the Earth's population is not infinite. But here's a funny thing about human nature: Where money is involved, it is not highly unusual to see ethics and common sense take a flying leap. What this means is that people may be aware that they are building their dreams on a house of cards, but will tend to ignore that fact and take their chances until they’ve been burned themselves.
This is the reason countless variations of Ponzi's scheme have been able to proliferate for nearly a century after his death. From day one, there has never been any shortage of dreamers and schemers in the world. And conveniently, the World Wide Web has given them all one huge playground in which to romp.
The blueprint...
The way a HYIP works is as follows: Using an online payment processor, you make a “spend”, or a deposit, into the plan of your choice. Generally, there will be a variety of plans, all displayed on the home page of the program (In November 2005, a typical HYIP offered plans ranging from 35% profit after four days, to 450% or more after 10 days). After your plan has matured, you have the choice of either withdrawing the money or rolling it over into another plan. By the way, if you are thinking four or 10 days is a very short time for an investment, I want to reiterate that there are no similarities between the way a HYIP operates and the way a stock, mutual fund, or certificate of deposit does, so throw out that whole paradigm. The only common element is that with all of them, you hope to eventually take more money out than you put in.
The potential returns are mind boggling. Enough to make many take the plunge, ponzi or not.
HYIPs are run by an administrator, or “Admin“. This would be anyone who woke up one morning, bought a template, or script off the web, and decided to start one up. The lifespan of a HYIP can range anywhere from a few hours to several months, depending upon how quickly it runs into problems. The main reason for the demise of a HYIP is always money. Because they act on Ponzi’s Principle, once the withdrawals start exceeding deposits, you can kiss the program goodbye, along with your money.
Also, since these are businesses run almost exclusively over the Internet, other problems can come into play that don’t even involve a faulty business model. Databases can be hacked, money stolen. More than one HYIP has been permanently disabled when the admin’s payment processor account - the one that holds all the money - was emptied because a security vulnerability in the script was exploited. Or so many an admin has claimed. The hacker alibi has been used so often as the reason for a HYIP’s demise that members have reasonably speculated as to whether or not an Admin simply ran off with all the cash before it had a chance to die of its own accord. And members have also had the unpleasant experience of discovering their own payment processor accounts were hacked. You can never be certain as to why a HYIP collapses, just that it will.
Trust me...
Admins frequently make posts on message and discussion boards devoted to the subject of online investing, and, early in a program, will work to gain the trust of online speculators by cultivating an image of accessibility, honesty, and program transparency. They encourage people to make spends into programs they have just started. An admin may have other people assisting her in this regard, people who will regularly make posts about how excellent the program is and attesting to the admin’s good character. Recently, many HYIPs have attempted an image makeover: they now define themselves as “games” or "programs" rather than investments. You are a “member” making a “spend” into said “game” or "program". There are a couple of reasons for this: 1) The Securities and Exchange Commission requires that one have a license to sell securities and generally speaking, HYIP administrators do not. A typical admin may never have even bought a share of stock in his life, let alone possessed a Series 7 license. An admin could be your barber, your babysitter, or a barber or babysitter in another country. 2) By stating that it is a game, this supposedly eliminates the obligation on an admin’s part to disclose how your money is being “invested” (Some still, however, will claim that at least a portion of member spends are being invested in the forex market, though I have not found a single instance where that could be verified). Again, such simplistic nods to disclosure do not provide a safe haven for these schemes under the law. "Robbing Peter to pay Paul" is not a legally viable foundation upon which to build a business.
If you wander to the discussion board of any HYIP - and there are hundreds of them, though decidedly fewer than just six months ago - chances are you will find several lively threads debating the merits of “xyz HYIP” and whether or not the Admin is a scamster. This discussion becomes most lively when payments start to slow, as that is a clear indication that the clock is running out on that program. But sometimes there is no forewarning at all; the program just vanishes. You find out by reading an apologetic note posted on the website by the admin: “Sorry. Hackers kept getting in my back office. I tried to keep this going as long as I could…” or something equally succinct.
Occasionally, there will also be a promise to refund those who had active spends or were due money when the program ended. Then again, sometimes there won't, and you will never "see" that admin on the internet again, at least under the same handle. In the end it doesn’t matter, though, because even if promises were made, they will likely not be kept. Assuming the admin didn’t outright rip everyone off and, indeed, could be trusted, the program ran out of money because that's what happens. As a result, there are better-than-average odds that you will never see a refund of any money you lost. Seriously. If you think I’m being redundant, I could point you right now to discussion boards of HYIPs that folded months ago, and you will find people posting who still believe they will be paid. They are believers, and anyone who disagrees is, to them, a naysayer. Can I get an Amen dot com?
Stuff happens?
If you got burned by a HYIP, then chances are your feelings are, Darn tootin’ it was a Ponzi, and the admin is a bleeping thief (I‘ve cleaned up your feelings for you). You might even be kicking yourself for being so greedy or naïve and have taken a blood oath to stick to Certificates of Deposit from now on. 3% a year may not be much, but you don’t have to worry about the bank president stealing it out of your account and running away to Cancun.
On the other hand, if you think you lost money because you had bad timing, or bad luck, or Mercury was in retrograde; if you believed in the admin, or if you happened to actually be in the money at the time the HYIP went under; if you are convinced that, despite the outcome, the admin ran an excellent program, and he was a stand-up guy... well, I can guarantee you that there is an admin out there right now hoping that you’ll visit her website. And you might want to do that soon, because, as I write this, internet schemes are being investigated with unprecedented vigor by the SEC, and in several cases, the FBI. The outcome of it all will undoubtedly influence how the "game" is played in the future, or if indeed, it will be played at all. Stay tuned.
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Arab News contacted on Saturday the embassy official concerned with the case but he did not answer the call. “We specifically requested that aside from providing her medical care, the embassy should also arrange her immediate ...
Horse Tracks -- Your Daily Cup of Orange and Blue Coffee.
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