As of right now, I’m trying to decide whether to start a new startup, versus raise for an incubator or venture fund. What are considerations for whether I’d do better as a founder or investor?
(By “investor”, I’m also lumping together different portfolio-based careers, including starting an incubator, advising companies, or community-building. This is oriented at early/seed-stage investing; I have even less of an idea what later stage looks like.)
Contrasts
Founding relies on yourself; investing relies on your network
Starting a startup is an act of self-confidence, a bet that your own skillset will carry you to greater heights. Eventually, you’ll be finding cofounders and employees, but even then you’re in the driver’s seat.
Investing is a bet on your existing network and your ability to grow it, a bet on your interpersonal skills, that you can convince great founders to accept your money, advice, intros.
(For engineers, this is similar to the distinction between being an individual contributor and an engineering manager.)
Founders need taste in product & users; investors need taste for founders & markets
The thing that founders do is build a product; the things that founders sell to are users.
The thing that investors do is invest in founders; the things that determine the valuation (what investors “sell to”) is the market.
Founders operate on shorter feedback loops
Founders hear from their IDE on the order of seconds, and from their customers in minutes to days; investors get updates from portfolio companies in months, and exits take years.
Perhaps it takes more experience and wisdom, to do well in fields with longer feedback loops, and more neuroplasticity to tackle rapidly changing fields grounded in the “real world”.
Investing demands more context-switching
From the outset, investing involves reviewing many different things at a pretty shallow level, compared to building a product. At later stages, a good founder-CEO also often becomes a manager, with the context-switching that demands (see: maker’s schedule vs manager’s schedule) — but I imagine switching contexts on different areas of a single company still feels less burdensome than switching between different companies and fields.
Investors need money; money requires a legible track record
In our society, money is a ledger which reflects your past performance; that is, money in your bank account is the result of work you’ve done to add value to the world via positive-sum trades, through past labor (selling your own time) or past investment.
To start investing, you need access to a sizable amount of money; either your own, or the ability to convince others with money, which also requires a strong track record. Meanwhile, starting a startup just requires your own time.
If only successful people can become investors, but anyone can become a startup founder, that might imply that there’s less competition in being an investor. (Sam Altman: “Be hard to compete with”; Peter Thiel: “Competition is for losers”)
Similarities
Starting an investment fund or incubator has some things in common with starting a startup:
- Both are acts of creation, which require going from 0 to 1, bringing an idea into reality by force of will.
- Starting an investment fund is a bit like setting up a multi-sided marketplace; you have to both raise from LPs, and convince startups to take your capital, and both want to know that the other is in place.
Other musings
- While founders and investors are sometimes aligned through equity, from a macro level, “founders” and “investors” are complements. And it’s good business strategy to commoditize your complement.
- A cynic might say that this why well-known investors (eg Paul Graham, Nat Friedman, Sam Altman for a time) encourage people to start startups. They provide advice, run programs, write essays to this end. And to no small degree of success — it’s seen as much cooler, high status to be a founder than an investor, I think.
- I don’t actually think these investors are Machiavellian, scheming to flood the industry with young folks they can invest in; in fact, the founders that work with them say glowing things about these investors.
- But maybe there’s something to avoiding being bycatch. I can think of a few founder friends who went through YC and are now doggedly persisting on their startup, despite not much success.
- How come founders are never glorifying the lifestyle of investors, and encouraging more investors to get into the game? It seems like founders also celebrate other founders, rather than their complements.
- The business of venture (where returns are dominated by a single outlier success) means that the most successful venture funds still earn less than their successful founders. h/t Matt Clifford.
- The world’s richest individuals are founders; as of right now, the richest 10 people in the world consists of 9 founders and 1 inevestor (Warren Buffet, down at #9)
- Though arguably, once your company or conglomerate is large enough, your main decisions are similar to investment decisions: choosing to allocate resources, headcount, projects among your executive team
- Many of the best investors were previously founders.
- But also many of the best founders were previously… founders.
- What determines whether a founder is a good fit to become an investor, or start another company? What makes a Paul Graham vs an Elon Musk?
- Why do people choose to stop founding startups?
- Time, energy: older people have more obligations (kids, events, network upkeep) and less stamina
- Log returns to money: one successful startup means that your appetite
- Diversification: successful individuals may rationally care more about preventing downside risk, and betting on a portfolio is safer
- Novelty: founders like doing new things, and investing is a new thing. (I may be guilty of this particularly)
- In SF, it’s cooler to be a founder than an investor. In AI safety/EA, it’s cooler to be a grantmaker than a grantee. Why is this?
- Perhaps: the “core activity” of tech is to build stuff; the “core activity” of EA is to fund stuff. So the best talent tries to do the core activity first (”those who can’t do, teach”).
- Perhaps: this is somehow downstream of concentration of funding — AI safety has been fairly monopolistic vis a vis OpenPhil, while tech venture has many funders