Startup accelerators like Y Combinator (YC), TechStars and Wayra are increasingly releasing young, vibrant companies into the mainstream. Some say there are too many startups and not enough investors to support them.
But, in a recent essay aimed at startup investors, Y Combinator founder and successful startup investor, Paul Graham says there are plenty of reasons to be more optimistic about investing in startups.
His access to so many different startups looking for investment allows him to spot trends early, particularly in investing. He starts with a basic question: Will the future be better or worse than the past? Ie, will investors, in the aggregate, make more money or less?
He believes they’ll make more. This assumption is based on two big forces currently driving a change in startup investing: it’s cheaper to start a company and it’s increasingly normal to do so (He states that even 20 years ago, young adults had the choice to go to grad school or get a job. Now starting your own business is a very viable third option).
Here’s what Graham believes these observations mean for investors:
- Because it’s increasingly less expensive to setup a company, founders increasingly have the upper hand over investors. That means founders will get to keep a larger share of their business (and therefore, control) and investors will have less control.
- Less control doesn’t necessarily mean investors will make less money. Right now, the limiting factor on the number of successful startups is the number of good founders out there. This number should go up: the greater the number of startups that launch, the greater the number of successes there will be.
- The amount of desirable startup shares available to investors will probably increase, because the number of these startups will probably grow at a faster pace than the percentage they sell to investors lessens.
Graham suspects that top investment firms will actually make more money than they have in the past. High returns don’t come just from investing at low valuations. They come from investing in the companies that do really well. So if there are more of those each year, the best “pickers” should have more hits.
He also believes that there will be more opportunities for new investors to access early-stage deal flow alongside larger, more experienced investors (enter Seedrs).
And, angel-sized investments made quickly are a large unexploited opportunity. The current high cost of fundraising (mostly the time of founders, but also the legal and administrative costs) means there is room for low-cost, fast-acting, more transparent investors to undercut the rest (enter Seedrs, again).
Read the full essay, along with other startup and investment observations by Paul Graham over on his blog.
