The Hacker's Guide to Investors

April 2007

(This essay is derived from a keynote talk at the 2007 ASES Summit
at Stanford.)

The world of investors is a foreign one to most hackers—partly
because investors are so unlike hackers, and partly because they
tend to operate in secret. I've been dealing with this world for
many years, both as a founder and an investor, and I still don't
fully understand it.

In this essay I'm going to list some of the more surprising things
I've learned about investors. Some I only learned in the past year.

Teaching hackers how to deal with investors is probably the second
most important thing we do at Y Combinator. The most important
thing for a startup is to make something good. But everyone knows
that's important. The dangerous thing about investors is that
hackers don't know how little they know about this strange world.

1. The investors are what make a startup hub.

About a year ago I tried to figure out what you'd need to reproduce
Silicon Valley. I decided the
critical ingredients were rich people
and nerds—investors and founders. People are all you need to
make technology, and all the other people will move.

If I had to narrow that down, I'd say investors are the limiting
factor. Not because they contribute more to the startup, but simply
because they're least willing to move. They're rich. They're not
going to move to Albuquerque just because there are some smart
hackers there they could invest in. Whereas hackers will move to
the Bay Area to find investors.

2. Angel investors are the most critical.

There are several types of investors. The two main categories are
angels and VCs: VCs invest other people's money, and angels invest
their own.

Though they're less well known, the angel investors are probably
the more critical ingredient in creating a silicon valley. Most
companies that VCs invest in would never have made it that far if angels
hadn't invested first. VCs say between half and three quarters of
companies that raise series A rounds have taken some outside
investment already.
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