Tuesday, August 13, 2013

Y combo's Paul Graham walks his talk his way

Aug 13, 2013, 11:26am PDT

Y Combo's Paul Graham: Luring fund herd without being stampeded


Senior Technology Reporter- Silicon Valley Business Journal
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Y Combinator co-founder Paul Graham warned startups in a blog on Tuesday that flirting with herds of investors can get you run over.
"Lots of startups that cause stampedes end up flaming out," Graham warned, adding that many very successful startups were only moderately appealing to investors when they first hit the scene.
Graham's warning comes a week before Y Combinator's latest startup class faces a herd of potential investors at Demo Day on Tuesday, August 20.
Investors tend to form herds, Graham wrote, because many of them are just bad at judging startups.
"Judging startups is hard even for the best investors," he said. " The mediocre ones might as well be flipping coins. So when mediocre investors see that lots of other people want to invest in you, they assume there must be a reason. This leads to the phenomenon known in the Valley as the 'hot deal,' where you have more interest from investors than you can handle."
The best investors would rather avoid the herd but sometimes find they have to jump in when it starts heading towards a good startup.
"If you start to get far along the track toward an offer with one firm, it will sometimes provoke other firms, even good ones, to make up their minds, lest they lose the deal," Graham wrote.
For all of that, investor stampedes are rare and most startups will be faced with the opposite problem, he concludes.
"While few startups will experience a stampede of interest, almost all will at least initially experience the other side of this phenomenon, where the herd remains clumped together at a distance," he wrote.
Click here to read the full blog by Paul Graham on herd dynamics in startup funding.
Click here to subscribe to TechFlash Silicon Valley, the free daily email newsletter about founders and funders in the region.
Cromwell Schubarth is the Senior Technology Reporter at the Business Journal. His phone number is 408.299.1823.


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