Ron Conway And Paul Graham Talk About Investing

Today at our Social Currency CrunchUp in Palo Alto, CA, Michael Arrington sat down with investors Ron Conway and Paul Graham. Obviously, these are two of the biggest names in early-stage investing (with SV Angel and Y Combinator, respectively).

Both Conway and Graham had some interesting data to share. Conway, in particular, was able to give some great numbers because he’s recently done an audit on the over 500 companies he’s invested in over the past 12 years.

You can also follow the full Social Currency CrunchUp live here.

Below find my live note (paraphrased):

MA: Ron Conway is the founder of SV Angel which is a $10 million angel fund.

RC: Over 500 companies I’ve invested in.

MA: Ron has some new data to share today that he hasn’t shared before. It will be great to hear that data. Paul Graham is the co-founder of Y Combinator. You guys have funded 212 companies?

PG: 208 companies. 72 companies a year now. First investment was in 2005.

MA: Yesterday was the Angel Conference. 8-10 super angels were speaking, then me. I presented an argument that perhaps Y Combinator and angel investors were destroying Silicon Valley. Ron wants to rebutt that argument. The “Dipshit” argument.

RC: Well referring to these entrepreneurs as dipshits is bullshit. It’s bullshit in my opinion. It takes a lot of guts and passion to start a company. There’s too many M&A in the $25 to $50 million dollar range. Some of them could have been building the next huge company — but they sell too soon. But that’s the entreprenuers decision to make. But the real fallacy is that it’s hurting Silicon Valley. Because the exits are going up it’s helping.

PG: Around 10% or a little more get series A round from VC funds. Anyone who gets that knows they can’t sell for $25 million.

MA: What about the other 90%?

PG: Well most go to angels, the 10% is just from actual VCs. So everything you said if false.

MA: Let’s talk about Mint. Ron you had a stake. Sold for $175 million to Intuit. There’s an argument they could have not sold and become the next Intuit. Some VCs wanted them to take money off the table instead. Same with Aarvark. Investors were begging them to keep going. Isn’t that a bad thing?

RC: Well they’re good examples, but they didn’t stop hiring after being bought. Their parent companies now have a lot more money. And it’s about scaling the idea — much easier now.

MA: There’s been a trend in deals. Facebook has 5 or 10 in the pipeline right now. A small amount of cash, and no stock — but the employees get stock. Some investors complain this is ridiculous — to fund a hiring process for Facebook.
RC: Well I invest in two of them Parakey and Hot Potato — well, if that happens (laughs). I think FriendFeed can been in this category too. Once again you have to respect the entrepreneurs that did all the work. The investors in these companies should consider this a cost of sales. Some will get sucked up — it’s a great thing for the entrepreneur. Getting your money back is not a bad deal. Money back is a win.
PG: But Ron invested in Facebook too — so it’s kind of a wash, right?

MA: There’s been a trend in deals. Facebook has 5 or 10 in the pipeline right now. A small amount of cash, and no stock — but the employees get stock. Some investors complain this is ridiculous — to fund a hiring process for Facebook.

PG: The way to make money isn’t on these small deals anyway.

MA: But if they get a tenth of percent in options — that’s a big deal.

PG: That sounds wrong.

MA: I”m never wrong.

RC: I have another ulterior motive. Founders of Hot Potato, FriendFeed, and Parakey won’t be at Facebook their whole lives. An entrepreneur is an entrepreneur.

MA: Let’s talk data. Paul you have enough companies now to predict if a startup will be successful. Ron, we talked about your recent audit with investments over 12 years. And you were suprrised. You thought it would be different.

RC: I’ve invested in 500 companies over 12 years — there’s a ton of data. People ask all the time what’s the success rate. 1/3 fail, 1/3 you get money back, 1/3 you get 2x to Googlex — I THOUGHT. That’s not accurate. If you go back to the bubble: 1997-2001 — the failure rate (out of business investors get nothing) was 77%. It was catastrophic. But we got Google, PayPal, etc. We were lucky. Others weren’t. That failure rate has plummeted to closer to 40% now. That’s post-Bubble from 2002 to today.

PG: But the failure rate is going to be much higher overall. This is just your portfolio.

RC: That’s right. Just our portfolio that we picked closely from. Repeat entrepreneurs have a 66% of being successful on startup #2.

MA: Does it matter if they were successful the first time?

RC: Well 70% of those companies had a successful first exit. Funny how that works.

RC: A high percentage had huge flame outs too. A third.

MA: What’s the average age of investment?

RC: I don’t know. It’s 25 and under.

PG: Ours is 26 — yours have to be older.

MA: What’s the ROI been?

RC: I haven’t shared that — probably never will. There’s more money coming in. Two more data points: entrepreneurs who start a company, regardless of the climate — since 2002 to today — we’ve had ups and down. Entrepreneurs have the same chance of success — Anytime is a good time to start a company.

MA: Who is the coolest entrepreneur you’ve ever met?

RC: I’m gonna dodge that bullet and say Shawn Fanning. He’s started 3 companies.

MA: Zuckerberg vs. Fanning in the startup pit. He takes him out at the knees right?

RC: Zuck has grown in maturity at an algorithmic scale. He’s a leader. You are a different person than you were 6 months ago. One other point that I think is interesting. People are saying ‘every 10 years we get a Google.” That’s not true. I invested in AskJeeves, then came Google. 4 years later was Facebook. 2 years later was Twitter. 2 years later was Foursquare, Zynga, etc. Great companies are being created at a much greater rate. Awesome news for entrepreneurs. Giant companies every 2 years.

MA: Paul your data has helped you pick entrepreneurs.

PG: We haven’t had enough exits. We noticed that 4 person teams have done badly. We’re not for sure why, but I have a theory. 2 and 3 is good but 1 isn’t great. We’ll fund them, but 2 and 3 is optimal

MA: What about 2 if they’re dating.

PG: It depends. If they stay together. Or if they’re married.

MA: What if you’re gay?

PG: So far it’s all good.

MA: Women?

PG: Only 14 women out of 450 so far. But that’s just because of the applicant pool.