In his essay published last month, Startup Investing Trends, Paul Graham (that’s this Paul Graham, Y Combinator co-founder) says “one of the biggest unexploited opportunities in startup investing right now is angel-sized investments made quickly.” Here’s the full quote:
I think one of the biggest unexploited opportunities in startup investing right now is angel-sized investments made quickly. Few investors understand the cost that raising money from them imposes on startups. When the company consists only of the founders, everything grinds to a halt during fundraising, which can easily take 6 weeks. The current high cost of fundraising means there is room for low-cost investors to undercut the rest. And in this context, low-cost means deciding quickly. If there were a reputable investor who invested $100k on good terms and promised to decide yes or no within 24 hours, they’d get access to almost all the best deals, because every good startup would approach them first.
That’s an interesting thought, but I wonder: Can anybody do any kind of due diligence in 24 hours? And wouldn’t the access to “almost all the best deals” be drowned in the noise of all the worst, bad, and not-so-bad deals too?
Graham does address this. He adds:
It would be up to them to pick, because every bad startup would approach them first too, but at least they’d see everything.
At the very least, it’s an interesting thought.
Graham goes on to predict a change in the patterns of success in startups, which will result in more opportunities for early stage investment, and more opportunity for new investors.
Mostly because of the increasing number of early failures, the startup business of the future won’t simply be the same shape, scaled up. What used to be an obelisk will become a pyramid. It will be a little wider at the top, but a lot wider at the bottom.
What does that mean for investors? One thing it means is that there will be more opportunities for investors at the earliest stage, because that’s where the volume of our imaginary solid is growing fastest. Imagine the obelisk of investors that corresponds to the obelisk of startups. As it widens out into a pyramid to match the startup pyramid, all the contents are adhering to the top, leaving a vacuum at the bottom.
That opportunity for investors mostly means an opportunity for new investors, because the degree of risk an existing investor or firm is comfortable taking is one of the hardest things for them to change. Different types of investors are adapted to different degrees of risk, but each has its specific degree of risk deeply imprinted on it, not just in the procedures they follow but in the personalities of the people who work there.
Paul Graham does essays, not blog posts. Whether you’re a startup founder, angel investor, or just interested in the topic, this most recent essay makes very interesting reading. To prove that point, I end with this quote:
The empirical evidence on that is already clear: investors make more money as founders’ bitches than their bosses. Though somewhat humiliating, this is actually good news for investors, because it takes less time to serve founders than to micromanage them.