Day traders, angels and venture capital: The internet changes everything, including money

33 thoughts on “Day traders, angels and venture capital: The internet changes everything, including money”

  1. rather long piece, Om… guess you didn’t have time to write a short letter? 😉

    thanks for the [literal] hat tip.

    agreed Wilson & Gurley are class acts, and have admittedly vast reach via their blog & community. however, i don’t think you have to choose between great VCs and “platform” benefits. hopefully the good ones come with both.

    (coffee soon?)

    DMC

    1. Gurley is a class act? Really? Are we forgetting about the Epinions lawsuit where Gurley (along with his sidekick Nirav Tolia) and August Capital allegedly tried to screw the rest of the Epinions founders and employees out of their fair share during a liquidity event? The rest of the Epinions employees included none other than Naval Ravikant, who was so disgusted by the VC experience that he went on to start Venture Hacks and AngelList. Such a short memory in the Valley these days! In a way, you could argue that Gurley and Tolia were the inspiration for AngelList.

  2. Nice post Om. But I would suggest that for Dave & 500S this is much less about “the changing of the guard in our corner of the world” and much more about creating new guards in every corner of the world.

    When I was a young entrepreneur growing up in London a few years ago, the most glamorous investment vehicle I’d look to was 500 Startups; I hadn’t heard of DFJ and co – despite the former being about 1 year old at the time and DFJ close to 30. McClure’s branding genius is to appeal to foreign start-ups and make himself accessible to them. So when a breakout success does come up, it’s Dave and 500S that they’re aspiring to pitch and respect (e.g. 9Gag from Hong Kong etc).

    Through creating micro-funds in neglected economies such as Latin America, India etc. I think that 500 Startups biggest impact is much to be felt much more in these developing regions than it is back home. It’s like a popstar who only performs in one city, vs one that’s doing world tours every day of the year.

    As to AngelList, I don’t think that we’ve even scratched the surface of the potential that’s going on there. I think that Naval is building a beast that’s going to blow stuff up. VC firms like to talk about how they can help you with recruiting and marketing etc. and hire armies of people who can often have just marginal impact (you can’t throw people at a lot of these problems), Naval by contrast is instead building a platform that automates all of these functions. And to say that it’s automating the functions perhaps isn’t doing it justice – they’re blowing up the ideas of how they should take place. Recruiting is in the top 3 challenges that a startup will face and the AngelList recruiting platform is perhaps the most effective that I’ve ever used.

    AngelList is building a hub where all your startup activity takes place, the dashboard you check first thing every morning. Oh and this is without even getting started on the potential that it has as a fundraising platform (now and in the future).

    1. Jack

      That is an epic comment. I couldn’t add more, except that I totally agree with you on your assessment of Dave – going to places where no one was willing to go has been a great edge for him and that ultimately is going to be his brand.

      Thank you for your thoughts.

    2. thx jack 🙂

      DFJ was one of *my* inspirations, and some of what 500 is doing follows in their footsteps, as well as other thoughtful folks.

      and agreed, i’ve been a fan of Naval and AngelList pretty much since day one… amazing what he’s built in just a few short years.

  3. Bill is the best in the business. i only wish he would write more. so much to learn from him.

    your ending is the best part of this Om. the only thing that matters in the end is the ability of an investor to empathize and understand a founding team and the company they are building. everything else is bullshit, as commodity as the money itself.

  4. Great post Om.

    Its too early to make sense of whether platforms or individuals will make more sense.

    A lot of early stage investing is really individual based in my opinion..and smart individuals will use the best tools to achieve what they need to achieve without having any pre-conceived notions.

  5. Yes OM, the playing field is leveling off as you point out. Those clueless VC’c who were shooting darts, getting lucky and looking like Genius may feel the competition. However, we won’t know (as Buffett says) who was swimming naked until the tide goes out. Thanks for a sensible and well researched article.

  6. The most important sentence here is…

    “People race to try it, hoping to earn higher returns, and that works; for a while, anyway.”

    Most investors will invest in like 2-5 startups and will get burned as that is no way to invest in early stage companies. However, a few will get super lucky and hit it big which will get more people into the rush…. until the bust cycle hits.

    However, this whole change WILL be good for startups. Having all the money/power in just a few VCs hands is bad for business. VCs can demand crappy terms and control over the entrepreneur which makes so many entrepreneurs decide not to take money. If this goes away there will be much more growth.

  7. Om, you are absolutely right that the only thing that matters is the ability of the investor to understand and empathize with the entrepreneur. Yet, if we measure the VC industry on that metric, we’re further from the ideal than ever before.

    The Arthur Rocks that empathized with the likes of Apple and Intel are nowhere to be seen. Instead, we have an industry of wealthy plantation owners practicing Darwinian selection on sharecroppers. They’ll take increasingly extreme risks in hopes of finding the next Google rather than just building a solid growing company. At the seed end, there are endless investments in technologies that would once have been considered only features and not products.

    Angels are not the answer. They simply fuel a bigger group of sharecroppers for the Series A Crunch investors to choose from. Who will live or die? Entrepreneurs are expected to take all the risk–build the product, get the customers, and show the momentum on their own nickel. No longer can a great team and an idea command much investment.

    Entrepreneurs watch liquidity receed further and futher into the distance–now you’d better be able to tell a Billion dollar story and soon a 10 Billion story. Acquisitions are acqui-hires so we can double down on some other low likelihood bet.

    As a consequence, we’re not building any more Oracles, Intels, or Apples. VC returns are lower than ever. They much prefer investing in kids who don’t know the game yet and haven’t been burned. I did 6 VC startups. 2 good acquisitions, 1 IPO, all many happy returns. Not a single one could be funded in today’s world.

    As long as these excesses continue, the real future is bootstrapping. You have to do everything a bootstrapper does anyway to get real VC, so why give up shares of your company rather than just keep going?

    Look to the 37Signals and the Smugmugs. They are the future until this industry really gets in line with entrepreneurs and adds value.

    1. I agree with this point of view as well, Om.

      Over 99% of the entrepreneurs who seek financing get rejected.

      What do the rest do?

      Bootstrap.

      And if you bootstrap to a certain level of maturity, you raise money on your terms.

      Savvy entrepreneurs have figured this out.

  8. Well written article – I shared with our global team. Appreciate the way you provided historical context to the 90’s, recent trends (without overhyping) and close with the entrepreneur’s POV.

  9. Great post Om. Just wanted to point out the importance of decimalization to the changes on Wall St. and demise of day traders. I was a NASDAQ market maker before I moved to SF. The analogy to VC is that micro-funds and angels are more capital efficient and can operate on “base-hits” of 2-3x returns, versus institutional VCs (paying marketing partner salaries) requirements to make 10x for their fees and LPs.

    Looking forward to the next decade!

    1. Hong

      I guess having transitioned from covering public markets to private markets does give a slightly better understanding of the trading mentality. I hope SF has been good to you. I would love to hear what is your prediction for the future looks like.

  10. Vcs are managing to disrupt themselves with or without new funding platforms. Over a ten year period they’ve been unable to match the performance of an S&P 500 index fund. This “smart money” isn’t as smart as middle class librarian from the mid-west investing in a safe index fund.

    The world is awash in money and there are few and fewer opportunities for it to act as investment capital especially since “too big too fail” means little capital is destroyed – a primary requirement for healthy profit margins and new investment opportunities.

    More funding platforms for rich investors might help speed up the destruction of capital but it requires the vehicle of startups, young teams told to dream big, yet most destined for failure, or sold into corporate cubicles for four years before they earn out while their investors cash out as early as possible. Terrible waste of youth, imho.

  11. Great post, Om – also interesting to note that both USV and Benchmark have been very good and strategic in building their partnerships while keeping the culture of a “boutique firm”

  12. Great writeup giving traditionalist old guards a glimpse of their demise unless they adopt to technology. Indeed, the world will get flatter and more transparent as technology advances our intelligence. At the end of the day, it is how we leverage this intelligence (big data) that will differentiate us players in the money re-branding game. It will be a contest between the right brain innovators and the left brain (taken over by machines/ algorithms) analysts. We have barely scratched the surface. For now, Naval and his AngelList team are the heroes of the day. Watch what happens to their products. What a beautiful world we live in.

  13. Beautiful ending: “In a world where money is a commodity and startup funding is just a matter of being part of a platform, there is one thing that will always be unique: people and what they bring to the table”

  14. Interesting piece. I was intimately involved in the trading world. Initially, it was democratized from the Club. But, the Club has used it’s money and influence to change the rules via regulation to re-create a different club that only a select few can be a member of.

    In the commodity trading world, to compete with the big boys carries a price tag of $50M.

    Venture will change, and I suspect if one can take Bayes Theorem and combine it with economic incentives, they will have a winner.

  15. And the punchline is perfect: “there is one thing that will always be unique: people and what they bring to the table.”

    The magic is what they bring to the table, not what PR, spin, conjecture, and second order reputation derived from noise suggests they bring to the table. Or what they assert they bring to the table.

    Anyone who things we are in a static state shall enjoy their deeply delusional frame of reference until it is no more.

  16. Thanks Om for a great article. All of the changes happening in venture are incredibly positive for investors, entrepreneurs and I think ultimately returns. As others have commented – people and what they bring to the table captures it well. Authenticity, real value, empathy and partnership are a big part of what drives success.

  17. Hi Om, great post! There’s one thing, though, that doesn’t change as the VC industry is disrupted and democratized. That is the critical role of the hands-on investor who works with founders. That hasn’t changed for decades and it never will change. It’s hard to commoditize the things the best angel/VCs bring to the table: the empathy, business savvy, patience and the desire to work closely with founders. These are like the precious metals in a world of angel/VC paper-money inflation. We’ve got all these venture boot camps and online funding, but we should not forget the role of a really effective, involved board member who supports their companies through the often long and messy early years.

    Disrupting Sand Hill Rd is fine, as long as we have more investor/mentors who understand that squiggly line to success and are able to work with founders.

  18. Interesting narrative. The disruption of VC model is just the beginning.

    You are right, the internet is changing the meaning of money itself (e.g, bitcoin, crowdfunds)

    After all money is just a faith proxy – if people stop believing in its value…

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