I was lucky enough to be invited to the very first Pre-money conference organised  by 500 start-ups last Thursday. PreMoney is a 1-day conference about the most disruptive models, platforms, and strategies for modernizing venture capital. Featuring the world’s leading investors & thought leaders such as Marc Andreessen (Andreessen Horowitz), Fred Wilson (Union Square Ventures), Kate Mitchell (Scale Venture Partners), Dave McClure (500 Startups), Josh Kopelman (First Round Capital), Naval Ravikant (AngelList) and more.

Today I just want to focus on Paul’s speech and share some valuable insights from him. To start, I guess everyone is more or less familiar with Y combinator, one of the most successful incubators in U.S. and even the world, a list of data as followed:

  • Invested in 564 start-ups in total, including 53 in the current batch
  • Total post money valuation is 11.6B USD (Covering 285 start-ups out of 564)
  • The total investment that YC backed start-ups got so far: 1.7B USD
  • Top 10 YC companies have a total valuation of 8.6B (74.1%)
Below I summarised # points from this speech and listed the reasons behind.

In general, the average investment return will increase.
There are two reasons, the first reason is that starting a company is getting easier than anytime before, thus the number of startups will increase dramatically. The second is mainly due to the decrease in cost when you start a company. It would feel absurd if there’s a company calling themselves the “500 start-up”. The whole industrial re-structuring process would ultimately create more start-ups to replace some of the slow moving big companies.

There is a rule: every year, there are constantly 15 successful start-ups appearing. 
To many people’s surprise, The number of 15 is not limited by the advancement of technology, but the number of good founders. Once we could educate more qualified start-up founders, the limiting number 15 could possibly become 50.

Angels’ gonna have a better opportunities to compete with VCs
Previously, Angels has such a disadvantage of finding good projects or companies; Also, they suffered at the negotiation table when start-ups move to series A round due to their weak bargaining power. Now they stand a much better opportunities when platforms like Angie’s list came out. All companies, – no matter good or not, are basically there and all investors could access it.

Moving more quickly with early-stage investments
If there existed reputable investor who would invest $100,000 on market terms within 24 hours, they would be able to access the best startups. Though the VC would be approached by bad startups as well, at least they’d see everything in the market. In contrast, Firms who tend to be slower in making their investment decision would be approached last.

Right now, VCs knowingly invest too much in the Series A stage.
Another way that venture firms could differentiate themselves is to break from the typical 20 percent in equity that they ask for during Series A investments. VCs are investing too much and startups are raising too much more than what they actually need during that fund raising period, but that could change if someone were willing to break ranks and actually invest less, but for less equity.

“Some VCs lie and say that the company needs that much,” he said. “Others are more candid and admit that their business models require them to own a certain percentage of the company, but we all know that the amounts being invested are not determined by the amount that the companies need.”

“If there exists a reputable VC who is willing to only invest the amount of money that the founder is willing to accept, it stands the opportunity the reap huge benefits, since the best startups are always where the money is, ” Graham said.

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    July 2013