Dan Shapiro

Chris Zacharias, founder of imgix.com (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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