BUT...
since we started developing i2X in 2010, we have talked to hundreds of angels, VCs, entrepreneurs and accelerator members. As with everything new, there are tons of objections to the model. Here we want to share the most frequent ones to save you and us some time.
FREQUENT OBJECTIONS FROM SILICON VALLEY ANGELS AND VCs
Entrepreneurs want smart capital that helps them succeed, not a passive quantitative fund
We don't know why, but for some reason many believe that being smart in engineering risk and return means we must be dumb in managing our portfolio. The opposite is true. We understand startups better than most other investors, because we are entrepreneurs ourselves. We understand the needs of startups, and we designed i2X to address them more seamlessly and frictionless than most other. We do not think an individual angel can compete against a fund run by entrepreneurs whose only mission is to make its portfolio companies succeed; that is widely connected in Silicon Valley; that has the attention of many innovation thought leaders; and that maintains one of the largest accelerator networks in the world. Being quantitative doesn't mean we are passive.
You probably need 100s of deals to achieve your low risk profile.
No, we need 45 unevenly spread across 6 specific accelerators to make it work. If we have more, it works, too. i2X can be run with as little as $2m AUM as well as with over $1b in a multi-tiered fund structure.
All you are doing is spray and pray. Same thing as SV Angel, 500 startups and others. Nothing new here.
The novelty value is that i2X actually understands its own risk and return profile at high resolution. One effect of this understanding is that we can predict the performance of our portfolio with high accuracy. Others can't do that (as far as we know). It also means we know in which ecosystems we can invest; how many deals at what time we should source from where; and a lot of other aspects that make us very different from a random spray and pray approach.
Startup investing will always be risky. Saying otherwise is dangerous and potentially fraudulent.
That's actually not true. In terms of risk of loss, we can make investing into startups historically safer than any mutual or index fund. We are not afraid to go to jail for this statement, because it's empirically true and we have the facts. With over 2000 startups across the leading accelerators over the last 8 years and the most advanced risk analytics engine in Venture Capital, we know exactly what our risk is, and why it is far lower than that of public markets - not to speak of conventional Venture Capital products.
This having said, even US treasuries are not a "safe" investment, and no investment product can have a zero risk of loss. The i2X strategy had a near-zero risk of portfolio loss over the last 8 years, which makes it very likely it will have a very low risk of loss in the future.
Providing entrepreneurs with easy capital will erode startup quality. That's why Yuri Milner stopped the YC deal.
First, we are not so sure why Yuri stopped the deal. We can show that he actually lost money on this portfolio, since he offered uncapped notes (always a bad idea). As a smart investor, it's logical that he stopped this strategy.
The more important question is: do we really need to starve entrepreneurs of capital in order to build great products? We think: no. The success function of money for seed stage startups is likely to look like the happiness function of income: if you don't have any money, more money is very, very important and productive. Once you hit a critical mass, additional money doesn't do anything. In some cases, it might even hurt your success.
The thing is that the vast, vast majority of seed stage startups are dramatically underfunded. If you have $5k in the bank and try to build a product, you are getting very distracted and more likely to fail. Every additional $25k have a strong acceleration effect until you hit a capital inflection point. In our experience, this capital inflection point is roughly $125k for an early seed stage startup; about $250k for a startup with some hints of traction; and $1.5m for a startup with traction but before real product-market fit. If you compare these numbers with the reality of seed stage startups - even those in the best accelerators - you will see that over 90% of founders are below these levels. Therefore, more money will indeed lead to more success.
The brash assumption that entrepreneurs need to consistently be at the brink of personal bankruptcy and worry about their next rent payment in order to perform is empirically wrong, but also cynical towards founders who already risk everything they have to build something great. Pain might lead to gain, but too much pain results in failure. Too many entrepreneurs are in too much pain today, and it hurts progress for all.
Most accelerators suck. You will lose money.
The first part is totally true: most accelerators and incubators fail at generating value. i2X is a performance-driven, empirical analytics framework that analyzes the past and current performance of accelerator ecosystems. Only if an accelerator significantly outperforms our benchmarks and offers an attractive risk-profile in the larger context can its startups become i2X portfolio companies. That's why i2X is more unlikely to lose money than every other venture fund.
You won't be able to get into the right deals, because they are too hot.
That might be right in theory, but the theory is wrong. Go into any accelerator today a few months before Demoday, be nice and intelligent, and then asks who wants $50,000 at standard terms and valuations. Over 90% of founders will say yes. Believe us, we tried it. And the 5-10% who might say no are not the unicorns. In fact, there are not even correlated to long-term top quartile performance. We tested that, too. Investing at seed stage - even at early stage Series A - is not a game in that the market "knows" who will succeed. That has been proven extensively, again and again.
Quantitative VC will create a bubble.
i2X is less likely to create bubbles than conventional angel or VC mechanisms. Different from conventional approaches, every batch and investment decision is tightly tracked and controlled by a return model that checks valuations against historic performance and identifies deviations. While we are always fair and lenient towards entrepreneurs and their terms, we will never overpay, since we know before we do so what it would mean for our returns.
This whole thing is a violation of VC culture.
Yes. But not in a mean way. We just think applying some engineering skills and introducing math and statistics to VC investing is a good thing, because it makes capital more available to the right entrepreneurs, improves investment quality, stability, and innovation.
FREQUENT OBJECTIONS FROM ENTREPRENEURS AND ACCELERATORS
Are you nice people? We really don't like mean investors, or investors who waste our startups' time.
We are entrepreneurs ourselves. We love startups and want to do nothing more than helping them succeed. We offer frictionless capital that doesn't require any time investment from your founders. We don't want special terms, and our model doesn't rely on screwing over weak performing startups. We are more specialized in your arena than any other investor on the planet, and can even help you to optimize your portfolios. We totally understand that we have to prove ourselves as helpful, competent investors, and we will do so.
Why are you not up and running? We need you.
Stay put, we are working on it.
since we started developing i2X in 2010, we have talked to hundreds of angels, VCs, entrepreneurs and accelerator members. As with everything new, there are tons of objections to the model. Here we want to share the most frequent ones to save you and us some time.
FREQUENT OBJECTIONS FROM SILICON VALLEY ANGELS AND VCs
Entrepreneurs want smart capital that helps them succeed, not a passive quantitative fund
We don't know why, but for some reason many believe that being smart in engineering risk and return means we must be dumb in managing our portfolio. The opposite is true. We understand startups better than most other investors, because we are entrepreneurs ourselves. We understand the needs of startups, and we designed i2X to address them more seamlessly and frictionless than most other. We do not think an individual angel can compete against a fund run by entrepreneurs whose only mission is to make its portfolio companies succeed; that is widely connected in Silicon Valley; that has the attention of many innovation thought leaders; and that maintains one of the largest accelerator networks in the world. Being quantitative doesn't mean we are passive.
You probably need 100s of deals to achieve your low risk profile.
No, we need 45 unevenly spread across 6 specific accelerators to make it work. If we have more, it works, too. i2X can be run with as little as $2m AUM as well as with over $1b in a multi-tiered fund structure.
All you are doing is spray and pray. Same thing as SV Angel, 500 startups and others. Nothing new here.
The novelty value is that i2X actually understands its own risk and return profile at high resolution. One effect of this understanding is that we can predict the performance of our portfolio with high accuracy. Others can't do that (as far as we know). It also means we know in which ecosystems we can invest; how many deals at what time we should source from where; and a lot of other aspects that make us very different from a random spray and pray approach.
Startup investing will always be risky. Saying otherwise is dangerous and potentially fraudulent.
That's actually not true. In terms of risk of loss, we can make investing into startups historically safer than any mutual or index fund. We are not afraid to go to jail for this statement, because it's empirically true and we have the facts. With over 2000 startups across the leading accelerators over the last 8 years and the most advanced risk analytics engine in Venture Capital, we know exactly what our risk is, and why it is far lower than that of public markets - not to speak of conventional Venture Capital products.
This having said, even US treasuries are not a "safe" investment, and no investment product can have a zero risk of loss. The i2X strategy had a near-zero risk of portfolio loss over the last 8 years, which makes it very likely it will have a very low risk of loss in the future.
Providing entrepreneurs with easy capital will erode startup quality. That's why Yuri Milner stopped the YC deal.
First, we are not so sure why Yuri stopped the deal. We can show that he actually lost money on this portfolio, since he offered uncapped notes (always a bad idea). As a smart investor, it's logical that he stopped this strategy.
The more important question is: do we really need to starve entrepreneurs of capital in order to build great products? We think: no. The success function of money for seed stage startups is likely to look like the happiness function of income: if you don't have any money, more money is very, very important and productive. Once you hit a critical mass, additional money doesn't do anything. In some cases, it might even hurt your success.
The thing is that the vast, vast majority of seed stage startups are dramatically underfunded. If you have $5k in the bank and try to build a product, you are getting very distracted and more likely to fail. Every additional $25k have a strong acceleration effect until you hit a capital inflection point. In our experience, this capital inflection point is roughly $125k for an early seed stage startup; about $250k for a startup with some hints of traction; and $1.5m for a startup with traction but before real product-market fit. If you compare these numbers with the reality of seed stage startups - even those in the best accelerators - you will see that over 90% of founders are below these levels. Therefore, more money will indeed lead to more success.
The brash assumption that entrepreneurs need to consistently be at the brink of personal bankruptcy and worry about their next rent payment in order to perform is empirically wrong, but also cynical towards founders who already risk everything they have to build something great. Pain might lead to gain, but too much pain results in failure. Too many entrepreneurs are in too much pain today, and it hurts progress for all.
Most accelerators suck. You will lose money.
The first part is totally true: most accelerators and incubators fail at generating value. i2X is a performance-driven, empirical analytics framework that analyzes the past and current performance of accelerator ecosystems. Only if an accelerator significantly outperforms our benchmarks and offers an attractive risk-profile in the larger context can its startups become i2X portfolio companies. That's why i2X is more unlikely to lose money than every other venture fund.
You won't be able to get into the right deals, because they are too hot.
That might be right in theory, but the theory is wrong. Go into any accelerator today a few months before Demoday, be nice and intelligent, and then asks who wants $50,000 at standard terms and valuations. Over 90% of founders will say yes. Believe us, we tried it. And the 5-10% who might say no are not the unicorns. In fact, there are not even correlated to long-term top quartile performance. We tested that, too. Investing at seed stage - even at early stage Series A - is not a game in that the market "knows" who will succeed. That has been proven extensively, again and again.
Quantitative VC will create a bubble.
i2X is less likely to create bubbles than conventional angel or VC mechanisms. Different from conventional approaches, every batch and investment decision is tightly tracked and controlled by a return model that checks valuations against historic performance and identifies deviations. While we are always fair and lenient towards entrepreneurs and their terms, we will never overpay, since we know before we do so what it would mean for our returns.
This whole thing is a violation of VC culture.
Yes. But not in a mean way. We just think applying some engineering skills and introducing math and statistics to VC investing is a good thing, because it makes capital more available to the right entrepreneurs, improves investment quality, stability, and innovation.
FREQUENT OBJECTIONS FROM ENTREPRENEURS AND ACCELERATORS
Are you nice people? We really don't like mean investors, or investors who waste our startups' time.
We are entrepreneurs ourselves. We love startups and want to do nothing more than helping them succeed. We offer frictionless capital that doesn't require any time investment from your founders. We don't want special terms, and our model doesn't rely on screwing over weak performing startups. We are more specialized in your arena than any other investor on the planet, and can even help you to optimize your portfolios. We totally understand that we have to prove ourselves as helpful, competent investors, and we will do so.
Why are you not up and running? We need you.
Stay put, we are working on it.
