I read Ben Horowitz' post about their investment in Instagram that made them a 312x return, turning a $250k investment into $78m. Most people would regard that as a shrewd business decision on Andreessen Horowitz' part, but I think it actually comes down to money making money.

Andreessen Horowitz has raised a venture fund worth almost $3bn in the last 3 years. So for them to make a $250k investment represents 0,0083% of their total investment fund. Considering that Instagram ended up being a pivot from the business that they actually invested in, I'd argue that the $250k investment was a "calculated" gamble. Sure, you might argue they backed the entrepreneurs behind the original idea, but that too is a calculated risk / gamble at best. (I'd stick to this opinion regardless of whether or for what amount Instagram was eventually acquired.)

Compare that to Y Combinator that invests an average of $18 000 into approximately 120 startups every year. Or Yuri Milner & Ron Conway that puts $150 000 into any Y Combinator startup that wants it (via Start Fund). As of last year, Yuri Milner alone had a net worth in excess of $1bn (Wikipedia), so putting $150 000 into a startup represents small change.

Their respective returns on these investments are however a far cry from small change, making their investment status a goal for most other investors. Myself included.

Yet, these guys have a head start: they have bucketloads of money. Marc Andreessen co-founded Netscape back in the day. Yuri Milner created DST which has become a premier investor in so many awesome tech companies. And Paul Graham has become the leader of the whole startup community with his work with Y Combinator. So they deserve their success & all these new opportunities now.

The one thing all of them have in common now is that they had one big success as an entrepreneur; one big success that propelled their reputation into the higher echelons of our community & gave them the capital (or access to it) to make all of these investments. It only took one big success.

Ultimately I'd probably be able to make quite a bit of money if I had a $5m venture fund and I could invest $250k into 20 hot startups right now. You could too. Provided we're not totally shit at making our picks.

Money makes money. And it only takes one, big success to get there.

There's been a lot said lately about us replicating the Dot Com bubble all over again and even though a much-respected figure like Paul Graham has stated his believe that we're not in a bubble, the doubts remain.

I'm yet unconvinced by either to be honest; I understand all the reasons why people wouldn't think we're in a bubble, yet I'm very cautious about some of the valuations being thrown around in what may just be a very ambitious funding environment at present.

When all else fails though, fall back on what we know: years and years of data. The above-linked article highlights that (listed) tech companies at present trades on similar ratio's to other non-tech companies, which at least seems to indicate that people outside of the supposed bubble isn't throwing their money at it (which is what I understand happened in Dot Com).

What do you think about the bubble?

In this post Fred Wilson goes on to explain that a company should first scale & gather traction on seed funding before it goes after venture round funding. Whilst WooThemes has never taken any outside funding (we’ve bootstrapped from the beginning), Fred’s post did make me think twice about when it’s a good idea to re-invest earnings into a company.

So with WooThemes, we’ve been steadily gained traction and grown our revenues & user base since we started out, without having to really re-invest those revenues (in one significant decision) back into the business. Instead we have been very lucky in that we have a very cash flow positive business and we are thus able to cover all immediate expenditures (capital included) from those revenues.

But similarly to Squarespace (who just announced their first outside funding of $38.5m in 7 years), I can see merit in re-investing funds in a rapid growth campaign / strategy.

I think when things are going well and a business is growing steadily, it is easy to start applying revenues to optimize a business just enough to fuel that steady growth rate. But if you’re keen to ramp things up quickly & significantly, then a significant re-investment in that strategy is probably required.

Even whilst writing this post though, I’m personally at odds about how I see this strategy, as I’ve never been the kind of entrepreneur that simply wanted to throw money at something; much less a growth strategy. Instead I believe in organic growth, innovation, great ideas & clever marketing solutions.

What do you think?

A few thoughts on why first-time attempts at raising funding are failing.

So as I’ve mentioned before, I’m really keen to do some angel / seed investing (via iincubate, which will also fall under the radiiate umbrella) in the future and as a result I’ve been following quite a few influential peeps in that space as a way to build up my own knowledgebase.

Up until now, I have zero experience with angel / seed investments and the bit of theory that I do know, I picked up during my graduate studies in Business Management. That being said, I don’t think that angel investing is overly hard to grasp, as it is not much different to any other form of investing (imho as a newbie).

I’d think that it would be possible to make a solid investment decision based on the following two factors:

• Does the idea make sense? Irrespective of how speculative the idea is, if it makes sense and it’s possible to turn it into a sustainable & potentially profitable idea, then your investment should be fine.
• Does the business / revenue model make sense? How dependent are those on external factors & assumptions? What percentage uptake / number of customers do you need to cover overheads?

As far as I understand (and this is my mentality with regards to angel investments), the idea is to take a small percentage of a startup at a conservative price level (so you need to get in early). Based on that, it is thus possible to limit one’s risk exposure with great potential in terms of earning a proper ROI if the idea & business model does gather traction.

I’d love to hear your thoughts on this, as these are just the thoughts that I have been playing with in my head… I still have a lot to learn obviously and most things I’ll only end up learning with future experiences. In the meantime though, my plan is (as it has always been) to simply wing it and learn on the job…