Fausto Boni @ 360°

Bubble Test

2011-05-20T18:27:16+02:00

The few who read my February post in which I expressed some doubts about Facebook’s 50 billion valuation might remember that I considered nevertheless somewhat justifiable in the medium term on fundamental's basis.

In the meantime FB’s valuation on grey market doubled to reach an amazing 100 Bio and yesterday Linkedin, the first social internet IPO went public for an amazing USD 4,5 billion quickly more than doubled to USD 10 Billion (24 times Revenues 160 times ebitda and 1100 times profits).

Another less conventional metric to assess Linkedin valuation is a fairly old one known as replacement cost of assets. Linkedin’s main assets being a CV database comprising 100 Mio professionals currently on its record. At current market cap each CV is valued at approximately 100 USD each

An interesting arbitrage opportunity would be to offer each Linkedin’s member 50 USD to copy/paste their Linkedin page into a new website and IPO the second one at a bargain 6 Bio USD… (1,0 bio in my pocket). Assuming that a copy/paste takes around 30 seconds that adds up to 100 USD a minute or an annualized USD 6,3 Mio (on 8 hours working day and 220 working days a year). Quite a productive use of time even for Linkedin’s well paid members :-)

What Investors’ really want.

2011-02-04T10:10:20+01:00

When I recently met with a long time colleague VC as well as a shareholder in our latest fund I expressed some surprise and frustration for the seemingly irrelevant correlation between a fund’s IRR and its perceived performance.

My colleague looked at me in disbelief and politely told me I wasn’t at all getting it: “Fausto !” he said “you’ve been in this for so long and you still don’t realize investors don’t really care about performance as much as they care about glamour ?!”

In fact looking at our past individual investments, rarely the best ones in IRR terms are those we are indentified with or praised for. Many colleague of ours have since long understood it and some are ready to pay whatever price is needed to get into so called “high profile deals”: chances are (that’s the underlying reasoning) that this one is going to be a superstar company and we’ll be identified as their backers by their investors and target companies. When did they enter and at what price and what return we’ve made on its quickly going to became a minor detail.

While such a cynic behaviour can be understood (even if not entirely justified) from professional Venture Capital firms which have to find ways to market themselves every 3-4 year at each fundraising cycle, much more puzzling is the behaviour of private investors who supposedly invest their own money. In a rationale world they shouldn care about whether they invest in a boring business or in a fashionable one. However this isn't a rationale world as anybody can see by looking at the current private placement of Facebook’s shares currently managed by Goldman Sachs to the benefit of their “best ?!” private clients.

The Placement:

To provide its wealthy clients the “privilege” of getting a piece of the hottest technology/media company of the decade, Goldman Sachs charges them a 4% entry commission (probably on top of the 1% per year they already pay on any asset managed by the bank). On top of the 4% entry charge clients will be charged an extra 5% on any profit made on such a fantastic investment... which by the way values the company “only” USD 56 Billions (2 times Google’s valuation at IPO).

In addition it is rumoured the privileged ones are requested to lockup their investments for 2 years and to have a substantially high level of assets in the bank’s accounts.

Chances are that thanks to this investment (even if not formally guaranteed) Goldman will also win the mandate as lead manager/book runner or Facebook’s IP and make another 2 - 3% fee on a 20 Billion + placement.

In summary likely payoff of the deal for all parties is:

Goldman’s client: In order to make a 10% return per annum on the deal (a real minimum for an investment in a private company at this stage) Facebook’s valuation two years from now must reach USD 71 Billions. Is it feasible ? probably yes (shares in grey market seem to increase by 10% a week..). Is this easily achievable ? not too convinced

Goldman: in exchange for holding the shares on their books for a couple of months (invested capital USD 1,5 Billion) in the same scenario outlined for their client above Goldman receives the following fees: Placing : 60 Mio, Profit Share 15 Mio, IPO fees 400 mio (assuming 2% fee on a 20 Bio placement 12 month after) IRR 157%, if we take out the IPO fees a more than respectable 30%

The Company

I'm Personally a great fan of Facebook and its business, even at a valuation 1/5^th of the current this would make it one of the greatest ever successes in technology and venture capital. Great credit and praise to his founder and early stage investors!

On January 10^th the FT published the numbers circulated by Goldman to their beloved clients for the first 9 months of 2010 : Revenues USD 1,2 bio Net Profit of USD 355 mio. To increase the appetite a comparison with 2004 Google’s numbers have been made (Revenues 2.0 Bio and Net profits of USD 195 mio). Google’s current market cap being at USD 200 Bio (vs 23 Bio at IPO) makes Facebook’s a real bargain (for their clients in Goldman’s view).

FB has currently 500 Mio registered accounts to which he serves advertising. About 120 Mio of those registered accounts are active every month and in last month on average they spent on FB 7 hours of their time. Those are by any mean very impressive numbers and past growth has been extraordinary and will continue for some time.

Looking at valuation metrics lets now assume that FB’s net profits (post or pre tax not given to say, probably the numbers coincide as previous loss carryover offset those charges.... given the company isn’t public this isn’t a known data) for the year are at USD 550 Mio, current valuation of the company shows a P/E of above 100: To reach a normalized historical P/E of 17 or Google’s more aggressive P/E of 25 company should multiply its profits by 4 or 6 times for their latest investors to breakeven.

Feasible certainly but not a given. At constant revenues per minute spent by user that would require for example users to double in number and to double the hours they spent of FB too.

In my view FB has indeed the potential to get there and beyond in the long term, but I’m not convinced entering now at those terms is an highly attractive risk reward profile (except for bankers handling the placement of course). Why then private investors fight to get a piece of it ? Well probably in those calculations I haven't factored in the value of being able to claim in the next 20 years during dinners and cocktail parties to have been a Facebook's backer before the masses...

Greed and VC Math

2010-11-26T17:32:54+01:00

An entrepreneur which I have been dealing with recently, drew my attention on a 2009 blog post of Fred Wilson, a fellow NYC based US Venture Capitalist http://www.avc.com/a_vc/2009/10/the-we-need-to-own-baloney.html .

Fred is not only an excellent Venture Capitalist but also a terrific blogger with whom I find myself in agreement most of the time…. But, guess what, not this time. His point is that too often, he believes, Venture Capitalists claiming to “need to own” a certain % of a perspective portfolio companies are wrong and greedy.To support such thesis he mentions notable landmark investments in companies such as “Google” as an example of a deal in which a much smaller stake has been sufficient to generate an excellent return for VCs.

On another post referring to Fred’s http://redeye.firstround.com/2009/10/company-math-vs-vc-math.html another colleague Josh Kopelman take a look at VC math issues from a much different perspective and I this case I very much agree with his conclusions. Taking this even further the implications are even bolder in my view.

Facts first:

1) Average performance of Venture Capital as an asset class (in Europe AND US) has lately been disappointing. On some vintages recently coming to maturity the average fund have delivered negative returns.

2) US funds have hugely grown in size (75% of US VC funds have more than 100 Mio under management whereas only 25% were larger than that 10 Years ago)

3) Managers’ % remuneration in the private equity industry (and therefore in VC too) remains disconnected from the amount of assets under management. Consequently a manager with 1,0 Billion fund receives 10 times the fees of a 100 Mio fund.

4) Remuneration % being tied to capital commitment rather than on a reasonable budget of the management company, forces the manager to “allocate” prorata such costs to investments in portfolio. As small investment often require the same (and sometimes more) amount of time and energy from the manager than large investments, obviously such allocation tend to penalize the smallest investments.

5) VC funds returns are determined by essentially two main factor:

a) the ability to invest in “fund returners” (deals which alone allows to payback on exit all or a substantial part of the fund) and

b) the ability to timely put stop losses on poorly performing deals particularly if highly capital intensive.

Given that aggregate stats in the industry are generally not too reliable I drew some data from our last realized fund (raised in 2000, with 130 Mio Euro committed capital) and more precisely the math is:

a) Out of 20 Investments made 2 of them represented > than 50% of the total amount returned and allowed returning alone all paid in capital.

b) Losses have been incurred on 6 investments absorbing in total 15% of all paid in capital, other 12 investments were sold at a multiple between 1,2 and 4 X allowing cumulatively to return another 90% of paid in capital

c) Percentage owned in the 2 star investments at exit was 40 and 25% respectively and their entity value at exit was between Euro 220 and 300 mio.

Other previous funds (from the bubble years) had in aggregate a similar concentration of value realization on 2 or 3 holdings. In that case however we were able to deliver even higher multiple on shorter times and with smaller percentage holdings …. But as said we were in the bubble days when you could flip unprofitable holdings 6- 12 months after investing and make 20X multiple. I’d not bet on those conditions to return again soon.

Of course (heard that already) all entrepreneurs reading this will immediately think that they are the “Stars” and that its not their fault if we are dumb investors in many “dogs” and that we and not them shall be paying for those mistake. But this clearly doesn’t apply in this business: a VC so cautious to avoid bad investments is most certainly also too cautious to take the risk to find the “stars” (every entrepreneur, particularly the most successful, should try to remember what their company was like when they first pitched investors).

All of the above lead in my opinion to the following conclusions:

1) In order to payback a 100 Mio fund with an average holding companies at exit of less than 10% one should only target star companies with potential Mkt caps of over 1,0 Billion Euro. If the VC’s goal is to deliver a 20% return in 6 years one needs to triple the fund and if accounting for fees and carried one needs to realize 350 Million from proceeds. That means “finding” in your portfolio 2 stars valued more than 1,5 Billion each at exit. How many venture backed companies reaches that threshold annually ? Obviously very few (none last year across all Europe for example)

2) The larger the fund the more the above is true… with a 400 Mio fund and 10% ownerships a VC has to create 15 Billion of Market value… (Google, probably the deal of the century, went public with a market cap of Euro 17 billion at today’s exchange rate)… Can any VC with a sound state of mind design his investment strategy on finding the next Google ?

Hence that a VC needs to own a sizable chunk (20 to 40) percent of a company depending on stage of investment in order to hope to generate strong returns, is indeed a sound rule of thumb and more of a necessity to survive than a sign of greediness.

Particularly in light of the latest aggregate asset class performance averages, if anybody can claim some VCs are too greedy those shall be the LPs of too large VC funds rather than entrepreneurs. But there again were those LPs forced to invest in funds trebling in size to milk more fees ? No they weren’t… they were just sheepishly following.

What future for VC in Cleantech ?

2010-06-11T12:48:29+02:00

The 2008 financial crisis and the subsequent economic downturn definitely had a strong impact on the VC Cleantech sector. Data recently published show that in 2009 total VC investments in Cleantech were $5,6 billion vs. $8,5 billion in 2008, a 33% decrease. That said, there are several indicators that let me strongly believe that VCs will continue to play a crucial role in the Cleantech sector and a bright future is ahead of us:

Given last year’s general economic climate, the above mentioned 33% contraction in capital invested actually shows that the Clantech sector was much more resilient than all other sectors (including software, biotech and pharma). In fact, while VC investments in Cleantech declined to 2007 levels, overall venture capital retracted back to 2003 levels. In 2009 VCs were therefore focused on Cleantech more than ever and this trend has continued into 2010.
In 2009 the market for clean technologies continued to strengthen. Investors, governments and corporations showed record level of activity regardless of any non-binding global climate change agreement that came out from Copenhagen. Governments in particular looked at Cleantech as one of the main drivers to stimulate economic growth and fight unemployment.
Even if the outcome of Copenhagen was disappointing, it is absolutely clear that global warming will be on the agenda of all political leaders and decision makers for the next few decades. In addition it is also clear that there is no concrete hope of making any substantial impact on global warming without major scientific breakthroughs that will require a considerable amount of risk capital and, therefore, VC investments.
Moreover, given that we do not see any major breakthrough at the horizon and one single silver bullet will not be able to solve global warming, I think there is still plenty of time for new ideas and business initiatives to start, grow and be successful within the typical 5-7 years timeframe of a VC investment.

If you agree with me that the VC Cleantech sector is here to stay and flourish, your next question should be: What are the one or two most promising subsectors within the broad realm of Cleantech? In my view the answer to this question is straightforward and comes from the two following remarks:

· Of all possible mitigation measures targeted to reduce global warming, energy conservation measures are, broadly speaking, the ones that come at a negative cost for the society (i.e. the cost of implementing those is less than the economic benefit that comes from them) and therefore their implementation should be a no-brainer.

· Given that mitigation policy initiatives stall due to a lack of regulatory agreement on collective action against climate change (e.g. Copenhagen), the interest and importance on adaptation measures (primarily related to water management, agriculture and related infrastructures) will have to grow. Initial estimates from UN and several non-profit foundations suggest that this market would be very significant: up to $170 billion p.a. in revenues by 2030 with up to two thirds generating economic benefits that outweigh their costs.

I therefore believe that energy efficiency and bluetech (water and agriculture related products/processes) are the two Cleantech subsectors that have the strongest fundamentals and should have the brightest 5-10 years outlook. In selecting specific business ideas within energy efficiency and bluetech VCs should focus on the ones that, in addition to all the traditional must haves of an investment (e.g. driven founders, innovative technology content, right time-to-market, etc.) have a sound business model with the following three characteristics:

It alleviates the agency dilemma which characterizes almost all conservation measures (i.e. there is no incentive for the landlord in investing in conservation measures that reduce the consumption of the tenant).
It allows for aggregation of demand, which is by its nature very disperse, into bigger and more easily targetable clusters (e.g. changing light traditional light bulbs to more efficient ones requires millions of individual decisions, while going from a traditional meter to a smart meter requires the decision of few hundreds utilities).
It can provide a product or service at a price that people living in developing countries can afford (given that most of the emerging economies, like China, are vastly energy inefficient and most of the mitigation measures will have to be implemented in poor regions like Africa and South East Asia).

Go West ? Not always a good idea

2010-06-11T09:42:39+02:00

I recently come across quite a few young entrepreneurs, some of which talented, who expressed their desire to cross the ocean to set up their venture. While I understand that Europe and Italy in particular have some limitations in their ecosystem which is a legitimate source of concern for entrepreneurs, this decision is in my view only rarely justified and more a result of an non critical “fascination” with the “valley mythology” which could prove very costly and decrease rather than increase the chances to succeed.

Particularly disappointing in my view is that such recommendations often come from people and managers who transfer their own frustration to the entrepreneurs they are supposed to help.

Entrepreneur should realise that probably 80-90% of the Valley’s mythology is what Americans can qualify as “bull...t”. Companies founded in “garages”, meetings with VCs which translates into checks in a matter of hours, immediate access to the elite of tech guru’s, zillions of VCs ready to fund at hundreds of millions USD pre-money valuations ideas of young kids with no business models. Those kind of stories (which might be emphasized transpositions of what happened once or twice in a decade) are indeed powerful catalysts for anybody (myself included 13 years ago when I started in this business). Reality is however very different and for one succeeding there are hundreds who tried.

That said, don’t misunderstand me: I recommend startups in certain sectors to go to the valley once or twice per year. Brainstorming with other tons of CEOs who are in your same shoes and networking with VCs all at 2 hours driving, tech events of every kind, etc. is certainly helpful to source new ideas, improve your business development strategies and keep up with the times.. going there with clear ideas on what to do and whom to meet is certainly recommended and is a way to take advantage of the pluses of the valley avoiding risks and traps of a full move there.

There are quite few negatives too which are often downplayed:

- Tech talent is the most expensive and best developers are constantly sought after by other companies and their loyalty minimal.

- Talent in general very hard to attract unless you have the very best VCs and the most promising outlook

- Smart ideas with no IP protection are easily copied as they become “visible”

- Local market is small and not very representative of the “world outside”

- Generally speaking, starting a company where you don’t have network is much more challenging…source your first customer, attract developers, get first and easy money from friends&family, find you mentors, etc. can be 10x harder and time consuming than if you where in your home country

In conclusion while it remains true that to conquer the world in SOME and ONLY some sectors (e.g. enterprise software) being there at some point is a must do, it can be a very serious mistake for many others, particularly in a very early phase when success doesn’t depend on sitting 10 yards away from Google’s founders in Starbucks.

Recession’s Impact on VCs (cont…)

2009-03-09T19:00:53+01:00

In my post last fall I made a point on the relatively lower impact of the current macroeconomic situation on VCs vs other categories of investors. While some (entrepreneurs in particular) broadly agreed with my position I believe most others (GPs of private equity firms and LPs) smiled sarcastically (and still do) whenever I reply “not too bad” at the usual “how is business doing ?” questioning.

A few months of recession and bear market allowed me to rethink about the whole issue, backed by some stronger evidences provided by performance metrics of some of my new and old investments.

The short conclusion is that many top performing companies with strong value proposition ARE NOT suffering but are benefitting from it. Examples (from my portfolio companies):

- Yoox (www.yoox.com - worldwide leader in off/on season online fashion apparel and accessories): an heated debate between investors and CEO took place in October as VCs (with different degree of cautiousness), invited to plan for a bearish scenario of minimal to negative YoY growth while CEO stated he did expect the company to maintain the forecasted 40% YoY growth. 5 month later company’s performance proved CEO’s prediction was completely accurate. Not only Xmas season was stronger than ever but also Q1 09 started on the same pace. Conclusion: ecommerce growth driven by stronger fundamentals and not connected to few points of GDP growth. Good value for money researched more than ever by customers in recession times makes company’s outlook very bright.

- Mutuionline (www.mutuionline.it - Italian leader in online mortgage and lending brokerage): with banks in deep crisis and real estate market stalling even the most optimistic investor would have expected a strong contraction in volumes of the brokerage division. Instead volumes of new applications keeps raising since October very strongly on a YoY basis. Reasons ?: familiarity with web based instrument of the relevant age groups, word of mouth, banks not able anymore to match competitors’ offers.

Companies having more difficult times are those serving the B2B market where in many case Capex decisions are often delayed thus extending already long sales cycles. Nevertheless I keep believing that their ultimate success will depend more on them being able to make a very solid investment case for themselves. If they do, then, sooner or later, they’ll fund a budget pocket. If they don’t it would be very unlikely that a return to positive growth will translate in a market opening for them.

The above of course doesn’t imply that we and our LPs will be better off if we remain for long in a deep recession. In an uncertain scenario M&A activity is reduced, as general willingness of corporate buyer to pay high multiples on targets. Besides appetite for IPO is low to nil and those few stories remaining appealing to investors are such at lower price than 1 or 2 years ago.

However I maintain the view that, for those who have the possibility and the patience to wait for better exit markets, possibilities to achieve superior returns remain intact.

Financial Crisis: Impact on Venture Capital and their companies

2008-10-13T13:52:07+02:00

Financial Crisis has been on everybody's mind and mouth in the last few days and weeks and also Venture Capitalists felt the need to analyze the impact of the financial crisis on their world and to spread the word with portfolio companies and co-investors via emails, newsletters, forums, slideshows and blogs which have then been chain forwarded and contributed to spread some kind of sense of urgency but also in my view some further unnecessary panic.

While it is clearly wise to carefully ponder issues and implications of such crisis on our environment and initiate actions, I found many of the views expressed (also from highly reputable investors/firms) far too extreme. Parallels have been set with the previous financial crisis and in particular with the 2000 "dot com bubble" implosion and some concluded that given that this crisis is likely to be longer and more pervasive than the last one the action to be taken should be even bolder this time.

While we agree on the vaster scope of this crisis versus the last one I encourage to consider that while 8 years ago our ecosystem was the cause and not the victim, here the epicenter of the seism is probably as far away from us as it could possibly be. In fact:

Neither our funds nor our portfolio companies are leveraged (they never have been). Hence credit restriction have no direct impact on valuation and riskiness of our assets
Our shareholders are (typically) long term investors who have set aside capital with a 10 or 12 year horizon. Ourselves and (hopefully) most of our peers hold reserves to support our portfolio companies in difficult times.
Our companies are very early on in their life cycle and plan to grow at 30- 50% year on year. Hence a very minimal part of their growth assumptions can depend on sheer GDP growth.

All the above applies to private companies in early stage of development. Portfolio holdings in more mature companies already public or closer to exit will of course suffer as much as others.

Of course chain effect exists and they are always difficult to predict and if the word falls apart it would be naive to believe we're all in a safe heaven. Our reccomendation therefore is to:

Increase reserve allocation to portfolio (to decrease for example reliance on co-investors whose liquidity might dry up)
Raise more money rather than less if possible
Request prompt scenario planning to portfolio companies
Variabilize cost as much as possible
Defer increase in spending until scenario is clearer

At the same time, at least for the moment, we also recommend no panic, no massive layoff (except for situations in which "fat" was already there pre-crisis) and no complete generalized and across the board spending/investing freeze. We must be aware that if we dismantle fragile early stage organizations to prepare for the worse we might find nothing good is left once the crisis is overcome.

Performance Benchmarks

2008-07-22T14:13:00+02:00

I recently reviewed an EVCA research paper co-authored with Thomson Reuters called “Pan-European Survey of performance 2008"

The main conclusion of such paper (not to surprisingly indeed) was that ranked by stage and location on a 5 years horizon European Buyouts is the best performing asset class with a +16,2% return while European Venture is the laggard with a meagre +0,6% . The same conclusion could be reached by looking at results for so called “top half” and “top quartile”.

Research also apparently seems to dig in the issue deeper and pushes itself into analysing the J curve effect on vintages, publishing results by vintage group and stage it states that “the normal life cycle for Private Equity funds requires at least 6 years to deliver substantial returns” (implicitly assuming that the length of the J effect shall be considered the same for buyout as for venture !).

I’m pretty sure that if we had access to the raw date we’ll find out quite a few flaws. For example I’d be ready to bet that there is no correction factor on the masses under management vs vintage age and therefore, given the very short history of the European Venture sector, the long term return comparison is very much penalized by the “weight” of historically “bad” vintages such as 99-2000.

One of the most obvious flaws in the analysis becomes extremely apparent by looking at the last section of the report “Scope and methodology” where list of funds contributing to the survey are listed and where of course most of the top performing European funds aren’t mentioned at all. As everybody knows that in Venture Capital more than any other Private Equity Segment performance varies very substantially from top to bottom quartile. Quartile analysis have been included in the survey, they just forgot to explain that top quartile surveyed is by no mean the real top quartile in EU.

Of course such figures were extremely pleasing to the EVCA Madrid Symposium audience (to whom such study was first presented last month) and quickly allowed notoriously smart and forward thinkers LP to go on stage with proclaims “The European Venture Industry has absolutely no reason to exist” and other similar absurdities.

I honestly believe the LP market in Europe in particular still has to go through the cleanup process experienced by the venture capital industry in the last five years but I’m now fairly confident that by letting them go full speed into the large buyout fund segment for a few more year will help such cleanup to (finally) occur there too.

Valuation discussions

2008-06-10T10:59:52+02:00

Valuation is generally one of the most complicated topics to agree upon between VCs and founders, in particular in the less mature Venture markets.

Valuation discussions tend to be quite harsh and often contribute to create a bad relationship from the very start between parties (VCs and founding team) that are supposed to work together for several years. It is not uncommon that negative personal dynamics in the course of such discussions leads the parts to pull out of a transaction already approved.

In my opinion it is important to start looking at this issue with different eyes and interiorize the fact that the Venture Game isn’t a zero sum one. When an entrepreneurs sells a company and gets out to do something else or retires, it’s understandable that getting the best possible price ranks very high on his priority list. If the buyer ends up loosing his shirts its unfortunate but not a terrible thing for the selling shareholders and entrepreneur. On the opposite a Venture Capital deal isn’t an exit transaction but the beginning of a 5-7 year journey. Maximising one own payout at the expenses of other fellow shareholders isn’t sound and leads to conflicts and problems and ultimately ends up harming the company as a whole.

A deal should be considered a good one when:

a) if all goes well everybody gets rich enough not to have to complain about the other’s payouts.
b) who joins the party at later stage where risk is (supposedly) substantially lower that in earlier stages, trades in a lower upside (higher valuation) for more security (liquidation preferences in case things do not go that well)
c) contributors to company’s success in the different phases are rewarded in a reasonably balanced way perceived generally “fair” by all constituencies (e.g. nobody would invest in a company where “angels” or friends and family hold majority stakes as they leveraged their negotiating power in early phases).
d) there is (generally) a diffused “perception” of the fairness of the respective payouts and nobody is frustrated (explicitly or implicitly). It is important that founder in particular remain focused on creating value for the company rather than improving his own payout at the expense of others.

Of course tensions are sometimes unavoidable but its important that they remain confined and that people keep treating each other in a civilized way. If this does not happen the company will suffer and eventually everybody loose.

Winning teams

2008-05-20T14:10:54+02:00

Some investors believe that what makes or break a successful project is almost entirely its leader.

While a true leader is always extremely important I do believe that his ability to attract into the project very early on a group of talented individual is probably the most visible sign of his capacity to be the leader he pretend to be.

While it’s relatively simple to recruit when a venture has traction, 10 million of cash in bank, 3 large VC on board and in the position to offer six figures packages, attracting talented people who might have to leave their jobs for some shares when there is no cash and just a project on paper, is indeed a challenging task. Somebody succeeding in it already deserves respect.

Going forward those 3 or 4 early recruits (even though some might drop or have to be dropped on that road) will certainly help out the founder to keep going in spite of difficult times that sooner or later occur in every start-up. Their loyalty is typically greater as greater will be the sense of responsibility of the founder toward them (more than toward investors indeed). While second waver recruits will come and go, most of them will stay until the end.

This is why when looking at an early stage investment opportunity I like to assess not just “the” leader but the entire founding team.