I don't really care about funding that much but I wish them well. I want our capital markets to look more like our mortgage markets: you get your history read by a computer, numbers get crunched, and you get a take-it-or-leave-it offer presented to you by a junior employee of the firm (whose main purpose is to wear a suit to give you the impression that the piece of paper in your hands really is worth $200,000) which you can review and consummate inside of an afternoon.
If this happened, scaling would make "100 to 200 investments per year" look like the financial equivalent of "Our website serves 100 users per day! Bwahaha we're in the big leagues now!" Many, many local bank branches write more mortgages than that every year, and if you haven't noticed bank branches outnumber VC firms by, well, an awful lot.
But mortgages have an underlying asset that's usually of some value, as do cars, for instance. Getting loans for both is relatively easy, if you have decent credit.
On the other hand, I'm skeptical about this for a few reasons:
- If it was as easy and plugging your qualifications into a computer, why aren't banks doing it already? There is obviously a high level of risk in a startup, and most investors have many defenses in place to try to assess higher quality startups, many of which are exceptionally frustrating to the entrepreneur (although perhaps justifiably so).
- As a follow-up point, how are they going to defend against a large number of people who become good at "faking" a startup? If you're investing $20k, what's to stop someone hungry for cash from outsourcing a prototype and applying? Since they never meet in person, I'd think it would become exceptionally difficult to distinguish between the legit companies and those legitimately good at faking it.
- As has been repeated many times, the most valuable part of YC isn't the money, it's the mentoring. Without mentoring, it's "just money". If you're just looking for money, family & friends of family are a pretty decent place to start. It's easy to think that if you just had money, you'd be able to bring the company to the next level, but oftentimes the reality is that you need help to get there. This model would seem to encourage people to take the money, lock themselves up, and plug away, which really isn't the right approach.
What does mentoring mean? education that hasn't been formalized yet
People gaming the system by outsourcing prototypes? sounds like a good an entrepreneur
Collateral requirements? most bank lending apart from mortgages is uncollaterilized, even mortgages are not fully collaterized, you can default and the bank wouldn't recoup their full loan amount by selling the house.
Banks routinely deal with huge amounts of risk - trading stocks and bonds. Startups would just be a new asset class to exploit for them.
This fund, and Graham's Y-Combinator, both follow the advice that Nassim Taleb gives for investing in an "extremistan" world of fat tails - many small investments, instead of a few larger ones. He argues that the profit from the few very successful investments will swamp the losses from the unsuccessful ones.
Capital is one of the things that should have been democratized by computers and the internet but was not. Online stock brokers democratized the other side of it - investing, but nothing happened on the fund-raising part yet. This seems to be about to change.
If this happened, scaling would make "100 to 200 investments per year" look like the financial equivalent of "Our website serves 100 users per day! Bwahaha we're in the big leagues now!" Many, many local bank branches write more mortgages than that every year, and if you haven't noticed bank branches outnumber VC firms by, well, an awful lot.