Paul Graham may be right, but Chris Zacharias is righter

Posted: December 23rd, 2012 | Author: | Filed under: Startups | 31 Comments »

Chris Zacharias, founder of (and Y Combinator grad), recently wrote an interesting blog post that postulated a different funding strategy.  Instead of pricing his round at market, he priced it significantly below.  He claims this gave him access to a group of high-quality “value-conscious” angel investors who would not invest in Y Combinator companies at the higher valuations that were normal for the market.

Paul Graham, founder of YC, challenged Chris on two points.  First, he claimed that it wasn’t rational for angel investors to be price-sensitive.  Second, he said that Chris’s evidence was just an anecdote – he may have found good investors at a lower price point, but that didn’t mean that less price-sensitive investors weren’t equally valuable.

I think Paul may be correct, but he misses Chris’s genius.  I believe what Chris is doing is an example of one of my favorite startup strategies, the contrarian segmentation.

Imagine a set of investors who have decided to only invest in companies that will accept the investment in Dutch guilders. This strange circumstance is found randomly throughout a significant minority of the investing populace, and isn’t well correlated with any other investor traits.

Most companies say, “This is silly! There are meaningful downsides to taking investment in guilders. I will only consider investors who take American dollars.”

But one canny startup decides to take the contrarian approach: they actively look for guilder-investing angels. They pay some additional cost for doing so (in guilder-conversion fees and so on). However, there is no competition in this investment pool. They complete their investment round far more quickly than their dollar-seeking bretheren, and get the very best of the guilder-investing angels in their round.

Paul may be right that “there is no value-investing in startups” – that is, Chris’s investors are making a mistake.  He may be right that non-price-conscious investors are equally or more valuable than price conscious ones.  But even so, Chris is doing something very smart: he’s fishing in a smaller pool.  There may be fewer fish, but he’s got them all to himself.

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  • Slight correction, the company is called imgix. I’m one of their customers, and Chris was in my YC batch :)

  • I’m in a fish tank. That’s the problem.

  • foo

    In addition, I would also spellcheck the article.

  • You realize guilders dont exist anymore right? ;-)

  • I’d say that’s also great if you need investment faster.

  • The market for people who want to pay less than full price is called ‘everyone’.

  • LE

    I find myself agreeing with Chris and disagreeing with Paul for the following reason.

    Chris is following a path rooted in psychology and human behavior/nature which over many years I have found to be correct a majority of the time (even though n=1 in this anecdote) while Paul, a math person, is giving a financial or numbers argument to refute what he is saying.


    If you give the right investors the right deal, they will instantly
    become part of your team. Our investors have secured deals for us that
    have allowed us to run much of our infrastructure for free or far
    cheaper than what is available on the open market. They have gotten us
    in the door places that other companies would only dream of. Because of
    an investor’s work on our behalf, we stole the business from a
    competitor right before they were about to sign a major deal. Our
    investors have introduced us to the best lawyers, accountants, sales
    people, etc. I can go on and on.

    So the above I absolutely agree with. My experience in dealing with people over the years has found that to be correct. Every deal I ever closed was done as a result of applying the right strategy and psychology. Even if it involved manipulating someone’s mindset regarding numbers that couldn’t be altered.


    And it is very stupid to let
    valuation decide which startups you invest in, because the variation in
    outcomes between startups is orders of magnitude greater than the
    variation in valuations. I.e. there is no value investing in startups

    Paul’s approach makes sense of course if you are shotgunning your money to try and get the big win and not have to contribute any serious time to the success of any company by what you can offer. Many times investors like this don’t even have the time to read and properly answer an email question unless the shiny ball attracts them on that particular day. Or they might answer an email from a smartphone and give a one sentence reply. The person who is young and starting a company knows nothing and needs all the connections and help they can get. This seems to fall squarely in the zone of giving up a larger part of the pie to gain the expertise that you don’t have.

  • the concept of “full price” is difficult to define when you’re dealing with a company without users, revenues, or financials. i bet Chris’s “lower” number above would still seem hallucinatory to most brick and mortar businesspeople.

  • RobertinSeattle

    The only point that should really matter for Chris’ startup is: Did he get his funding and is he up and running now?

    After decades of starting and running companies, one gets a little tired of the worn-out “My way or no way” mentality. The whole point to most startups is taking a think-outside-the-box idea and running with it.

    So what’s next? “Oh – you didn’t got to Harvard Business School so you don’t count.”

  • Russell Fairfax

    Paul Graham is ultimately a VC – one who gets very favorable terms in exchange for an unquantifiable ‘brand’ – and as such he will tend to argue against anyone who suggests – directly or indirectly – that the value of his investments should be lower than they are. His arguments are clever spin in that they are apparently rational yet mask his true agenda: his net worth.

  • Yes, but it’s the most amusingly-named currency I could think of off the top of my head. Most likely because we’re thinking of a vacation to Aruba, which uses the Florin. (Connection left as an exercise to the reader)

  • Fixed! Thanks. That’s what happens when I dash off a post before bed.

  • From my few conversations with him, I have no doubt that you’re wrong. Paul genuinely believes what he espouses. His thinking may be colored by his own interests – whose isn’t – but the sort of duplicitous posturing you accuse him of isn’t a part of his character.

  • The title caught my attention. “Fishing in a smaller pool” maybe THE strategy for early stage startups on both marketing and seeking funding.

  • Russell Fairfax

    PG’s response to the recent reduction of start fund contributions from $150k to $80k is a good example of the spin I’m talking about. “So we decided to take control of the situation and replace it with something of our own design.” ( This is spin. The VCs made the decision – not Paul Graham, not Y-Combinator – to reduce their investment in YC graduates. But it’s obviously too embarrassing to say this. Better to spin it as a benefit. “We decided to take control” was really “we were left with no choice but to…”

    By the way, I wouldn’t go so far as to say this is duplicitous, unless you characterize the entire PR industry as duplicitous. Because this is essentially what Graham is doing – practising public relations.

  • LE


    “From my few conversations with him”

    “but the sort of duplicitous posturing you accuse him of isn’t a part of his character.”

    Dan – You could be right of course (I’ve haven’t had any conversations with him) but I will say this. It’s easy to keep a certain posture over the short course of time “few conversations with him”. Much harder over the long term (where few equals short exposure). No doubt though that your feelings have been confirmed by others I’m guessing.

    I’m sure my wife thinks that I don’t ever look at other women. That’s certainly the front that I present and I take extra care in front of her not to do that. (And I’m not saying that I do that, understand my point?) I could also be a politician and constantly take a position that, over time, seems to indicate one behavior while there is another hidden behavior. (Elliott Spitzer as only one example.)

    That said (as I started this comment) I don’t know what his true feelings are. But I will say that the parent posters thoughts are entirely possible. And Paul does have an agenda and has an agenda etc. People always have that “coloring” as you put it it’s only a matter of degree and only Paul knows where exactly he falls on that line.

    I also agree with @russellfairfax as far as the spin that was put on the funding reduction. It was my exact take when I read that news. Doesn’t mean the take is right but I would say it’s very possible. To me, “fighting over the scraps” doesn’t pass the smell test.

  • Some Dude

    You were spot on in doing this. Kudos.

    I’ve talked with 60 to 80 investors in Silicon Valley the last few months. 90% of them express anger, dismay or “meh” about Y Combinator.

    They disagree with PG’s hardball tactics such as threatening to black ball them from future Demo Days if they don’t invest at the current ( sky high ) valuations.

    In regards to PG’s statement hat valuation doesn’t matter, why does YC give the worst valuation in Silicon Valley to all of it’s startups as a class? $250k to $350k?

  • The only way investors make money in your startup if you get acquired or have an IPO. So, your funding strategy should be correlated with your vision for the size of your company and its eventual exit. That is if you are trying to build a billion dollar company, asking for a $20M cap at an early stage is not such a bad thing, but if you predict to only have $15-$30M exit, then you should be going for $3-$5M cap. That’s it.

  • VC? Viet Cong? In this day and age? Really? Here, in the U.S.?

  • I’m going to go out on a limb and guess he meant Venture Capitalist, which I’d in fact Paul’s job.

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  • Cory Cater

    You, sir, are a legend! Let me put it this way. Have you ever heard of Plato? Aristotle? Socrates? MORONS!