Saturday, May 12, 2007

Paul Graham's Wisdom on Investors

Snippets from Paul Graham's Hacker's Guide to Investors:

... the angel investors are probably the more critical ingredient in creating a Silicon Valley. Where do angel investors come from? From other startups.

... VCs like publicity. They need to market themselves to the investors who are their "customers"— [those] whose money they invest. What they're good at is reading people, and making deals work to their advantage. Think twice before you try to beat them at that.

Investors always say what they really care about is the team. Actually what they care most about is your traffic, then what other investors think, then the team. If you don't yet have any traffic, they fall back on number 2, what other investors think.

In principle investors are all competing for the same deals, but the spirit of cooperation is stronger than the spirit of competition. So you will not, as of this writing, be able to get investors into an auction for your series A round. Note: See Prosper for a different take on this for small investments.

Instead of acting tough [with investors], what most startups should do is simply always have a backup plan. Always have some alternative plan for getting started if any given investor says no.

My advice is to err on the side of safety: when someone offers you a decent deal, just take it and get on with building the company. Startups win or lose based on the quality of their product, not the quality of their funding deals.

See also Graham's 2005 piece on How to Fund a Startup.

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