The “Startup Whisperer” Tells VCs Not to Expect Such Big Stakes

Y Combinator founder Paul Graham says venture capitalists should listen to entrepreneurs’ complaints.

Rachel Metzarchive page

June 27, 2013

Paul Graham, founder of the influential startup accelerator Y Combinator, gave some advice to venture investors at an event in San Francisco this morning: if you want to find the best opportunities for investing, start listening to what founders are complaining about.

According to Graham, who spoke at the PreMoney conference organized by another accelerator, 500 Startups, the two things that make founders most irritated are investors who take too long to make up their mind and series-A investment rounds where investors insist on too large a stake for a larger amount of money than the founders actually want (series-A rounds are a company’s earliest investment, or its first after getting some seed funding).

More generally, Graham said, “do something founders want.”

The advice reflects the way the startup ecosystem has shifted of the last several years. Thanks to cloud computing and powerful software it’s possible to start a tech company with relatively money–making venture capital less essential for many founders to get their ideas off the ground. Because of this, VCs aren’t able to command as large a stake as they used to in return for their investment (nowadays they’re fighting to get a 20 percent stake where they might have gotten 40 percent eight years ago, Graham said).

Graham said the first venture capitalists who “break ranks” and start investing in series-A without expecting to get huge amounts of equity “stand to reap huge benefits.”

“What will happen to the VC business when that happens? Hell if I know. But it will certainly be good for that firm,” he said, as they’d quickly get the best startups interested in taking their investments. “And the best startups are where the money is,” he said.

On the issue of speed, at least, Mark Suster, a partner at Upfront Ventures (formerly GRP Partners), disagrees. Speaking after Graham, he noted that one problem with quick decision-making is that neither the investor nor the startup knows much about the other.