Thread by @dunkhippo33

Unpopular opinion: There’s still not enough investors for all the great endeavors and startups out there.

A thread >>

1) I was thinking about this a lot lately after hearing @helena speak at the Affies last wk.

https://twitter.com/hustlefundvc/status/1481447171488501760

2) Helena is *badass*, her company Haus has an awesome product (they make great gifts), and their traction is fantastic.

But she has never been able to raise much from traditional VCs and has relied on hundreds of angels. Why?

3) A lot of VCs have vice clauses - they can’t invest in alcohol. Even though alcohol is legal, there’s just a lot of restrictions on institutional money.

A lot of other VCs are just not interested in investing in physical products or things they don’t get.

4) But that didn’t stop her from knocking her raises out of the park. She raised multimillions primarily from angel investors who don’t have tough restrictions and have a different viewpoint.

Full disclosure- I’m a small personal investor in Haus.

5) It’s just one of many examples of where if you don’t fit a certain “box”, then getting a VC investment is tough.

Even if you’re a great founder and have a great business.

This is something most ppl don’t understand until they start pitching VCs.

6) The good news is the world is filled with investors. I honestly think that about 1B ppl could be angels investors.

You don’t need to be super rich or famous to be a success angel investor which I’ve written about here:

https://twitter.com/dunkhippo33/status/1397953351514349570

7) And great companies don’t need to be beholden to the limited number of vc firms.

They should have choice including non-institutional checks from individuals - the ultimate free market.

8) Most VCs also don’t like categories like hardware or ecommerce or food or media or cybersecurity, etc - there are so many great companies that are in categories most VCs just don’t really fund.

9) There are so many great companies in many of these categories with 100x+ potential upside and so little investor competition - in many ways the upside can be even greater.

So why don’t VCs pivot into these areas?

10) Some reasons:
-belief that exits may be low because of past exits
-other investors are not in those areas to mark up the investment (or mark it up quickly)
-lack of knowledge about an area

11) Lack of knowledge is a very real problem.

For example, although the VC industry started w HW, few VCs now know anything about hardware. There were ~30 EEs in my graduating class and 10x as many CS grads.

(This is why it takes so many VCs to change a lightbulb 😆)

12) You can imagine when it comes to investing in Haus, does any VC know anything about wine? How to make it? How to sell it? No of course not.

I am absolutely dumb money into Haus but I can do that because it’s my own and not my firm’s.

13) This is also why it’s important we need more investors - we don’t need everyone to have a CS degree from Stanford.

We need winemakers, doctors, artists, musicians, athletes, and many more. People who understand a broad world of problems and perspectives and how things work.

14) I am so glad and honored that we have a variety of angels in our Angel Squad run by @b_nicks11 and @haleymbryant who come from all kinds of backgrounds to help us all make a dent in this problem and look at opportunities with different perspectives.

15) The other reasons why investors don’t go into some of these areas are small exits and getting marked up.

This has to do w incentives in the VC industry which is very different from Angels’ incentives.

16) Both types of investor want strong exits.

But institutional investors need strong IRR performance - which is an interim measurement of exit potential. IRR is calculated based on dollars invested within a time span and how those dollars are marked up.

17) For example, if I invest $100 on Jan 1 and another VC invests more into the company at 2x the valuation on Dec 31, my IRR will be 100%.

However this is not liquid cash. Ultimately what matters to all of us is cash out.

18) But for VCs, strong IRR numbers help you raise your next fund. And fund of fund managers get bonuses based on the IRR of their portfolio.

Angels on the other hand don’t get anything from anyone if a company gets marked up. So angels don’t care about such things.

19) We recently had a portfolio company go public. They were largely bootstrapped so from an IRR perspective, it did not look interesting for much of its history.

But the exit was great! So this is an example of how ppl are rewarded may deviate from the true goal that matters.

20) And I think low exits have happened previously because traditionally founders have been beholden to a limited number of investors. And if you couldn’t get access to cash from these folks, you might take a lesser exit.

21) But we now have vibrant secondary mkts, debt mkts, and an influx of startup investors. Exits are bigger than ever - not just for software.

And not just because markets are bigger but because there is more capital and also more patient capital.

22) Which goes back to the original pt of why we need more funders. More funders who are incentivized in different ways, have different perspectives in spotting opportunities, and don’t have the same restrictions as institutional capital.

We need more investors.