Top Silicon Valley angel: 'It might not be a bubble, but sure as hell the rent is too high'
His verdict?
"It might not be a bubble, but sure as hell the rent is too high."
He's complaining that founders at very young startups, like the ones his company 500 Startups invests in, expect ridiculous valuations.
Then they balk at terms that are meant to protect small investors in case of an early exit.
This means higher risk for small investors like him.
Here's the Twitter stream, complete with McClure's typically colorful language.
2/ YOU might be worth a million (someday), but your pre-revenue company is not... and it def ain't worth $8-12M+ cap.
- Dave McClure (@davemcclure) March 11, 2015
4/ what is also fucked is with small exits $1-10M, founders may get $1M paydays but angel investors at $5-10M caps will lose money.
- Dave McClure (@davemcclure) March 11, 2015
6/ this is complete BULLSHIT: if founders don't feel like they are worth at least 2X their current cap, then WHY THE FUCK SHOULD I INVEST?
- Dave McClure (@davemcclure) March 11, 2015
8/ while we understand when founders FAIL (happens all the time), when u WIN, we damn sure want to WIN WITH YOU (even if you win *small*).
- Dave McClure (@davemcclure) March 11, 2015
10/ now you may not KNOWINGLY decide to FUCK your small investors over, but believe me acquirers will certainly TELL you to fuck us over.
- Dave McClure (@davemcclure) March 11, 2015
12/ usually we swallow our pride, wish founders well, & hope they make some money (even if we don't) & come back 2 us 4 their next venture.
- Dave McClure (@davemcclure) March 11, 2015
14/ but the truth of the matter is angels & small investors get FUCKED all the time by high cap debt, & founders don't seem 2 give a shit.
- Dave McClure (@davemcclure) March 11, 2015
16/ now i'll shut the fuck up abt getting screwed over on high cap deals, & politely tell u why we ask 4 that min 2X clause on early exits.
- Dave McClure (@davemcclure) March 11, 2015
18/ peace out, #TheRentIsTooDamnHigh.
- Dave McClure (@davemcclure) March 11, 2015
In a phone call with Business Insider, McClure explained further that some founders are expecting companies with no revenue to be valued at $5 to $10 million, and they're not agreeing to clauses that guarantee a 2X return on debt-based investments in case of an early exit.
Those clauses protect investors like McClure in case of an early "acqui-hire" type acquisition where a company buys a startup mainly for its founding team. In those cases, the acquiring company often tries to steer more money to the founders to keep them around for a while, and early investors can end up with no return.
"We've seen it multiple times," says McClure. "The founders have a half-million payday in compensation or in stock. It's a sweet deal for founders, but it's not a meaningful return at all for investors."
(Note that this is different from a "super liquidation preference," which some bigger investors insist on. In those cases, equity investors insist on a guaranteed 2x return in case of an exit - so, for instance, if they invested $10 million, they would get $20 million upon a sale, even if the company only sold for $20 million. Founders are generally advised to avoid such deals if possible, as it can leave them with nothing from a big exit.)
The long and short of it is that McClure sees increased risk for small investors.
"Across the board, people are coming in with higher cap valuations, raising at the top end of the range. A lot of people are raising above 5 million caps with no metrics.... I don't think that's a healthy environment. You're gonna lose money."
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