Author Topic: Anyone do VC? How could one have gone about investing in Twitter?  (Read 3859 times)

Baylor3217

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Anyone do VC? How could one have gone about investing in Twitter?
« on: September 13, 2013, 05:10:45 PM »
I've been a pretty avid user the last 4 years or so.  Had I wanted to invest $100,000 - $200,000 3-4 years ago, could I have done that as a nobody and what could it have entitled me to in the upcoming IPO?

yolfer

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Re: Anyone do VC? How could one have gone about investing in Twitter?
« Reply #1 on: September 14, 2013, 11:04:42 PM »
At the $100k level, you'd be considered an "angel investor" in the tech world, meaning you are investing a relatively small amount of cash into a very-early-stage company. You'd be given equity and expected to advise the company, make connections to potential clients and VCs, etc. To put this in perspective, by the end of 2009, Twitter had already raised over $100MM in venture capital, so your $100k would have been laughed at, to be honest.

VC rounds usually start at around $1MM. Like with angel investment, VC is not just a money/equity swap. Venture Capitalists sit on the boards of the companies they invest in, so they are expected/required to have decades of relevant business/entrepreneurship experience. Even more importantly, VC is about connections, as startup founders don't only look at deal terms when comparing VC deals. Since money is the fuel that will propel their company out of "startup mode", they want the highest octane fuel they can get, meaning a sharp VC who will give good advice, connect them to potential clients, and eventually help them through a liquidity event (acquisition, IPO). It's called "smart money."

The answer to "what could it have entitled me" would have been totally up to the terms of the investment deal you made with Twitter. These are some VERY complex arrangements, involving esoteric clauses like "liquidation preference" and "capped participation". Google those terms and if you're not falling asleep reading their definitions, you might make a good angel investor.

Lastly, it's easy to look at Twitter's IPO and say, "I should have invested 4 years ago." What you should really ask yourself is "Do I know what will be making headlines in the business papers 4 years from now, and do I have access to these people?"

If all the above doesn't deter you from angel investing, you still have that $100-200k, and you wouldn't mind never seeing it again, here's a great article on becoming an angel investor:

http://www.paulgraham.com/angelinvesting.html

LMK if you have any questions about this world. It's cutthroat and very oligarchic.

[Source: worked at various early-stage startups]
« Last Edit: September 14, 2013, 11:07:31 PM by yolfer »

footenote

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Re: Anyone do VC? How could one have gone about investing in Twitter?
« Reply #2 on: September 15, 2013, 06:57:26 AM »
+1 to yolfer's well-written information.

With 100-200k, you may want to find someone locally who has a brilliant idea and funding it. I've done two startups (and am now consulting to a third), and they are brutally difficult. (My first one failed, but the second is has been profitable for two years and is slowly returning my investment.)

fiveoclockshadow

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Re: Anyone do VC? How could one have gone about investing in Twitter?
« Reply #3 on: September 15, 2013, 07:25:23 AM »
As an addendum to the excellent info given already...

IPOs and VC are "lottery like" asset classes. Meaning usually you lose 100% and very occasionally you make a mint. There is extensive research showing such asset classes are usually overpriced as far as risk adjusted rewards go. People have a psychological preference for lottery like returns and thus they over pay for them (i.e. it is a behavioral error). Junk bonds and small growth being other examples.

Even unfavorable asset class as far as risk adjusted returns can be a useful part of a very widely diversified portfolio if their correlations to other asset classes are low. In other words just because an asset class appears at first to be poor it may still have a positive role.

VC, however, does not appear to fall into that category and would probably be near the very bottom of the list of asset classes for an individual investor. And by the time you got that far down the list it would be a very slim slice of your portfolio which would then be hard to diversify.

In summary seeing the twitter IPO and thinking "how do I get a piece of that" is more of a warning sign of impending behavioral errors rather than good investment sense.

Nords

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Re: Anyone do VC? How could one have gone about investing in Twitter?
« Reply #4 on: September 16, 2013, 12:17:07 AM »
I've been a pretty avid user the last 4 years or so.  Had I wanted to invest $100,000 - $200,000 3-4 years ago, could I have done that as a nobody and what could it have entitled me to in the upcoming IPO?
In addition to the very good advice you're getting, you should see if there's a local angel investing group for you to join and learn more about the process.  The JOBS act is going to open up a lot of opportunities for smaller investors, and ideally a good local angel group would welcome new members (and new membership fees).

If the Twitter guys had pitched to your angel investor group back when they were small enough to be raising $500K or less, then I'm pretty sure that you would have run away screaming in terror.  Or collapsed with laughter.

I don't know Twitter's history, but I bet their current product is completely different from the product they were promising to build when they were first funded.  In the startup world, that's known as a "pivot" rather than "deceptive" or a "mistake".

By the way, being an avid customer is much better than being an investor.  I love flying in airplanes and driving automobiles, but both industries have been net money-losers for their investors.  Twitter may be a great deal now for us ad viewers users, but it's still losing money for its investors.
« Last Edit: September 16, 2013, 12:19:20 AM by Nords »

yolfer

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Re: Anyone do VC? How could one have gone about investing in Twitter?
« Reply #5 on: September 16, 2013, 05:55:07 PM »
I don't know Twitter's history, but I bet their current product is completely different from the product they were promising to build when they were first funded.  In the startup world, that's known as a "pivot" rather than "deceptive" or a "mistake".

You are absolutely right that Twitter was a pivot. IIRC, the product we now know as Twitter was a side-project of the company's main goal (podcasting). They built it to quickly communicate with each other while building the podcasting product. It got traction, they pivoted, and the rest is history.

BTW, for tech/business folks interested on how startup pivots work, check out Steve Blank's amazing book "Four Steps to the Epiphany."

Nords

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Re: Anyone do VC? How could one have gone about investing in Twitter?
« Reply #6 on: September 16, 2013, 10:21:29 PM »
BTW, for tech/business folks interested on how startup pivots work, check out Steve Blank's amazing book "Four Steps to the Epiphany."
Another YCombinator product is Jessica Livingston's "Founders At Work".  It's a great story of what comes out of a completely different idea, and it's repeated through the stories of three dozen different founders.

Here's another perspective on Twitter:  would you have invested $100K with the startup shown below, only to learn that it'd take them over seven more years to get around to their IPO?