Paul Graham’s Dilemma

I have to make sure I don’t take 4 months off from blogging again.  Having re-read this for editing, I had a lot to say, but more importantly, I enjoyed the mental exercise it put me through.

I am not sure that I am going to tread much new ground in simply covering the weekend news of Yuri Milner and Ron Conway basically blanket offering $6M to the Y!Combinator crop.  There’s been plenty of analysis and moaning about this being the beginning of the end for the tech market.

As a former founder, and venture capitalist (late stage, but investor in private companies nonetheless), I wanted to touch on a few points I hadn’t seen elsewhere.

Yuri is a genius.  Why?  Think about what you need to do when you are an angel investor.  You have a little bit of money (relative to the overall venture pie) that you want to get into deals.  There are quite a few more angels then there are venture funds.  Competition is fierce and getting into deals is really all about who you know.  As a venture investor, your primary concern is “proprietary deal flow.”  In English, that means having sources of deals that other guys don’t have.  That problem is somewhat exacerbated when there is fierce competition for deals.

Further compounding the problem of the angel investor is the high beta nature of the deals.  In short, you have WAY more company failures than wins.  You just hope to make the winners payout more than the losers.  You expect to be compensated for that risk.  So even if you have proprietary deal flow, you need to get into good deals to reduce your risk.  Investing is supposed to be about risk management after all.

Paul Graham acts as a (so far) pretty good filter function for deals.  By just writing a check to all the companies in the portfolio, Yuri solved two problems in one swipe – Paul did the work to get the a good portfolio of angel deals, and Yuri now has access to all of them.  Further, he has put money to work evenly in a portfolio of deals which are more or less not competitive.  He didn’t have to spend 2 years putting money to work in 40 deals.  He did it one shot, effectively enabling himself to have a nice angel mutual fund.  Genius.

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