It is hardly surprising that GMAC is circling back to the government for a third helping of taxpayer money. GMAC is struggling under the double whammy of bad car loans and the fallout from its misguided foray into mortgage finance at the height of the housing bubble. After the government applied stress tests to the banks last May, it was the only big bank that could not raise the capital it was deemed to need.
“And now there are five — five Wall Street behemoths, bigger than they were before the Great Meltdown, paying fatter salaries and bonuses to retain their so-called ‘talent,’ and raking in huge profits. The biggest difference between now and last October is these biggies didn’t know then that they were too big to fail and the government would bail them out if they got into trouble. Now they do. And like a giant, gawking adolescent who’s just discovered he can crash the Lexus convertible his rich dad gave him and the next morning have a new one waiting in his driveway courtesy of a dad who can’t say no, the biggies will drive even faster now, taking even bigger risks.”
“The theory that bailout benefits sans meaningful reform will trickle down and benefit the average Joe (as much than or more than bankers) is the kind of perverse logic only an economist could love. It’s is faith-based economics — and it’s Barack Obama’s biggest mistake. (Consider for a moment that 20+ per cent of hedge funds misrepresent info.) For years, George Bush hunted for phantom WMDs, while terrorist networks flourished under his nose. Now Barack Obama is hunting for a phantom prosperity, while the greatest robbery in the world is happening right under his nose.”—Reinventing Wall Street From the Bottom Up - Umair Haque
“If they’re too big to fail, they’re too big,” Greenspan said today. “In 1911 we broke up Standard Oil — so what happened? The individual parts became more valuable than the whole. Maybe that’s what we need to do.”—Alan Greenspan
“When you take any money at all from a big VC in a seed round, you are effectively giving them an option on the next round, even though that option isn’t contractual. And, somewhat counterintuitively, the more well respected the VC is, the stronger the negative signal will be when they don’t follow on.”—
Yes. This always bothered me. I’d rather raise from a group of great angels (and therefore herd a lot of cats) than run the risk of having a seed VC not lead the next round. And if they do end up leading there are lots of distorted incentives that can cause serious problems for the entrepreneur. Negotiate too hard and you lose your lead and end up sending a really negative message to other prospective investors. Not good.
Thanks for the advice, would love to hear more about it. About to go through this now for the first time. Definitely leaning towards doing a syndicated angel deal than a VC seed round that also requires a board seat and other strings. Pros / Cons?
Your angels should get a board seat. More specifically, the lead should represent them as a class on the board. I guess this doesn’t always happen. It’s the way it worked for us, and it worked reasonably well. At some point they should expect to give up their seat as they get crammed down by professional venture investors in later rounds.
I think there are many reasons to go with an angel syndicate over a VC in an early seed round. The follow-on issue is only one of them. You also get more diverse advice. You also get friends. No investor is really your friend, but angels are probably as close as any investors get. Most angels invest because they love it, not so much for the returns. VCs are professionals that are fiduciaries for LPs (pension funds, university endowments, etc). They’re more likely to be dicks because sometimes they have to be dicks. You want investors who you can grow with.
There are exceptions to every rule. I think it would be tough to turn down a seed round from USV, for example. But imagine how much it must suck to have Fred put in $500,000 and then refuse to participate in your next round. Everyone out there thinks Fred has one of the best noses around. How do you explain to potential funders that Fred won’t be participating? This is always a problem, but it’s much more pronounced early in a company’s history when concrete metrics are hard to come by and you’re still to a large degree selling vision.
“One interesting thing that I’ve always found about the film business from an economic point of view is that unlike in any other business I can think of, the cost of manufacturing the product has no affect on the purchase cost to the consumer. For example Honda can make a cheaper car with less features and cheaper finishes than BMW without losing all of their customers to the superior car because they sell their product for less. You spend less to make something, you charge less for it. Makes complete and obvious sense. Not so in the film business.”—Marginal Revolution: the unusual economics of the film industry