The Hacker’s Guide to Investors

Monday, May 7th, 2007

Paul Graham presents The Hacker’s Guide to Investors:

  1. The investors are what make a startup hub
  2. Angel investors are the most critical.
  3. Angels don’t like publicity.
  4. Most investors, especially VCs, are not like founders.
  5. Most investors are momentum investors.
  6. Most investors are looking for big hits.
  7. VCs want to invest large amounts.
  8. Valuations are fiction.
  9. Investors look for founders like the current stars.
  10. The contribution of investors tends to be underestimated.
  11. VCs are afraid of looking bad.
  12. Being turned down by investors doesn’t mean much.
  13. Investors are emotional.
  14. The negotiation never stops till the closing.
  15. Investors like to co-invest.
  16. Investors collude.
  17. Large-scale investors care about their portfolio, not any individual company.
  18. Investors have different risk profiles from founders.
  19. Investors vary greatly.
  20. Investors don’t realize how much it costs to raise money from them.
  21. Investors don’t like to say no.
  22. You need investors.
  23. Investors like it when you don’t need them.

He explains his fifth point:

Because most investors are dealmakers rather than technology people, they generally don’t understand what you’re doing. I knew as a founder that most VCs didn’t get technology. I also knew some made a lot of money. And yet it never occurred to me till recently to put those two ideas together and ask “How can VCs make money by investing in stuff they don’t understand?”

The answer is that they’re like momentum investors. You can (or could once) make a lot of money by noticing sudden changes in stock prices. When a stock jumps upward, you buy, and when it suddenly drops, you sell. In effect you’re insider trading, without knowing what you know. You just know someone knows something, and that’s making the stock move.

This is how most venture investors operate. They don’t try to look at something and predict whether it will take off. They win by noticing that something is taking off a little sooner than everyone else. That generates almost as good returns as actually being able to pick winners. They may have to pay a little more than they would if they got in at the very beginning, but only a little.

This is similar to the point Robert Shiller makes about the Internet bubble of a few years ago:

Some sociologists talk about collective consciousness. We humans evolved to be very closely linked, and our minds focus on the same ideas. Those [ideas] get reinforced because we hear them all the time.

Back in the late 1990s, you kept hearing that you had to stake your claim on the Internet or you’d miss out on the future. No one cared about the present. Then something happened around March 2000. There was an acceleration of public talk about doubts. You could no longer declare at a cocktail party that Internet stocks were going up. Such statements had become embarrassing — and just like that, word of mouth changed.

Embarrassment is a powerful emotion.

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