From the VC perspective though, if the business can't scale, it isn't worth their attention. Sure there is a lot of status going on, but it's also a practical decision on the VCs part. They want to throw a lot of ideas against the wall to see what sticks. This is a cheap way for them to do it. Of course those ideas have to have some chance of blowing up in a big way to pay for all the misses.

Yeah, I mean I think the randomness of start-ups, from a VC point of view, is sort of being underrepresented in this thread.

I think recall reading once that if you had .75% equity in a start-up (a typical early to mid employee percentage) that exits for $50 million (which is a relative rarity in relation to the number of start-ups) you'd end up with around $20,000 in stock owing to furthur dilution from potential but likely later funding rounds.

So, there really is a lot of risk for VC's in funding companies, and they will likely push all their investments to gear towards the big score. While not entirely similar to ideas of tournament poker, there is a similarity of risk asymmetry.

I'm interested in knowing who it is (if it is a company and not a hoax) as I've read pretty thoroughly on the history of venture capital industry (going back to George Doriot) and was wondering whether these recommendations being blasted by this guy are correct. Or they could possibly be seen in an entirely different light. For companies Airbnb, Dropbox, and Disqus this approach (joining an accelerator) seems to have worked out pretty well.

This is absolutely absurd. Even IF (and this is a pretty big IF) the VCs are getting a significant advantage in pure money EV terms it ignores the effect of variance and diminishing marginal utility of money.

People give up money EV to reduce variance all the time. And it makes sense, especially when you're talking about people's main source of income, to trade the high variance of incomes in a bootstrapped company with a steady income in a funded company.

If you can guarantee yourself, and your employees, a reasonable salary for a reasonable period of time (a year or two) at the cost of giving up some high risk EV down the road that's often a totally reasonable thing to do. The value of a regular salary (of say $75K) is extremely high because it gives you food and shelter. The value of going from 5 million to 10 million on a successful exit isn't quite the same in terms of impact to your life.

And of course the other side of this is that in most start ups that a VC invests in the founders will walk away much better off than the VC. The company is likely going to fail and the founders will have taken a portion of the VC money as salary/benefits while the VC gets absolutely nothing in return. It only makes sense that in successful cases the VC gets a better return.


And like I said above when they don't hit, the founders ended up with an absurdly favourable deal. Somebody just gave them a bunch of money to work on what they wanted to work on anyway.

If you actually think its the parties that cause people to get investment you're kind of clueless.

But yes, there are lots of times when bootstrapping your business or just taking a small angel investment round makes sense. But its totally dependent on the nature of the business and the strategy you want to take.

That's not quite right. Say you get diluted by 30% 5 times (which would be pretty significant dilution) you're looking at $63,000. A more realistic dilution would probably leave you at around $100,000.

Fred Wilson (VC with Union Square Ventures) has had a series of blog posts over the years called MBA Mondays which are pretty interesting reading. Since I've been involved with a startup the last year and a half I ended up reading through them. There's quite a few on employee equity but I think the whole series is good.

Nice link. I'd read a few posts but forgotten about his site.

You're quite likely right. I was trying to find the analysis I'd read and couldn't quite remember where I'd read it. It was probably, now that I think about it, that that amount of equity (.75%) is worth around around 10K-20K per year. I'd read in the context of what sort of deal you should look for with salary relative to equity.

Still an accelerator with 7% and funding 50 companies when only a few of those will likely exit with a profit, is breaking even or losing money without the big hits. It is also possibly waiting 7 years for the largest returns.

I'd say the history of funding movies is probably the closest analogy--and about that screenwriter William Goldman's quote that "noboby knows anything" probably applies.

Very good link on Fred Wilson. Wilson infamously passed on investing in Airbnb, which is probably the most valuable ycombinator company. There's a really good series of emails with Paul Graham trying to pitch him on the idea of investing. He seemed really forthright about it (openly letting Graham publish the exchanges) even after it would solicit the "OMG I can't believe you passed on them".