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How VCs Make Money

vcstarterkit.substack.com

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Re: How VCs Make Money

#51

Post by ignoramous »

pc86 wrote: post #31
ignoramous wrote: post #4

Earlier quoted context omitted.

> (at another firm obviously) I have no insider knowledge but I guess it might be due to glass ceiling s: https://en.wikipedia.org/wiki/Glass_ceiling

> I have no insider knowledge Probably best to stop there then, as this has nothing to do with it.

To cherrypick quotes from topmost the comment:

"It’s hard to escape from the shadow of your mentor and find your own footing."

"It’s a harder sell when you are promoting from within..."

"A16Z used to have a rule where no one internally would be promoted to be a GP..."

From where I come from, the term glass ceiling is not just limited to women but all forms of discrimination at workplace denying someone/anyone a rise up the ranks. In the US, the term seems to be exclusively used in the domain of gender dynamics.

Re: How VCs Make Money

#52

Post by paulddraper »

woah wrote: post #46
H8crilA wrote: post #26

One thing that you have to keep in mind is that the 20% part is effectively a European call option on the fund's portfolio, with strike equal to the fund's initial value (so ATM - At The Money - when the fund starts) and notional amount of 20% of the fund's value. The manager gets that option for free, in fact he's paid 2% a year to hold that long option (and do his/hers job). Call options are more valuable if the un…

It’s strange how often people need to be reminded on here that VCs invest in businesses that grow fast or fail. There’s a vocal contingent on here that feel it’s some kind of moral failing and are mad that nobody is getting excited about their bingo card creating website.

VCs sell rocket fuel.

If you're building a rocket, buy some rocket fuel. Otherwise, go to the gas station/bank.

Re: How VCs Make Money

#53

Post by pc86 »

ignoramous wrote: post #51
pc86 wrote: post #31

Earlier quoted context omitted.

> I have no insider knowledge Probably best to stop there then, as this has nothing to do with it.

To cherrypick quotes from topmost the comment: "It’s hard to escape from the shadow of your mentor and find your own footing." "It’s a harder sell when you are promoting from within..." "A16Z used to have a rule where no one internally would be promoted to be a GP..." From where I come from, the term glass ceiling is not just limited to women but all forms of discrimination at workplace denying someone/anyone a rise…

That may be how you use the term, but that's not what the term means.

> The metaphor was first coined by feminists in reference to barriers in the careers of high-achieving women.[0]

> "A glass ceiling" represents a barrier that prohibits women from advancing toward the top of a hierarchical corporation.[0]

[0] https://en.wikipedia.org/wiki/Glass_ceiling

Re: How VCs Make Money

#54

Post by paulddraper »

motohagiography wrote: post #29

Wow, what a great post. The most interesting question for me is, if you are a company with VC money and they are on your board, does the age of the vintage of the fund the money came from impact the strategy of the company down to a product level? It looks like you could literally calculate/estimate the time left in the fund and see how much pressure it will put on the CEO to get positioned for an exit, then predict…

VCs worry about that sort of stuff when they decide which fund to spend out of but companies generally don't.

LPs are patient with the returns, and in extreme cases VCs could even "buy out" the equity from themselves with another fund.

The only thing really visible to portfolio companies is "we have X dollars for these stages".

Re: How VCs Make Money

#55

Post by nickpinkston »

woah wrote: post #46
H8crilA wrote: post #26

One thing that you have to keep in mind is that the 20% part is effectively a European call option on the fund's portfolio, with strike equal to the fund's initial value (so ATM - At The Money - when the fund starts) and notional amount of 20% of the fund's value. The manager gets that option for free, in fact he's paid 2% a year to hold that long option (and do his/hers job). Call options are more valuable if the un…

It’s strange how often people need to be reminded on here that VCs invest in businesses that grow fast or fail. There’s a vocal contingent on here that feel it’s some kind of moral failing and are mad that nobody is getting excited about their bingo card creating website.

Yea, I mean I get why a lot of people would be angry that their very real, but not VC fundable, business is hard to finance. There's a lot of things that should exist that have small markets, long time horizons, lots of upfront risk, are in markets that VC's don't understand, etc.

The shame is that for many of these there are likely possible funding sources that could exist, but new asset classes are hard to get started, especially when LPs are pretty risk averse and experience strong herd mentality effects.

Re: How VCs Make Money

#56

Post by paulddraper »

Roritharr wrote: post #5

I've sometimes wondered if transitioning from CTO to VC makes sense/is possible, has anyone tried that?

There are plenty of examples.

The other day I talked to one of the PagerDuty founders, who is a VC now.

IMO it's a hard transition to make. VCs need networking and salesmanship more than they need technology insights.

It's possible in the same way that engineer -> product manager happens. You'll benefit from your understanding, but the biggest job requirements are ones you didn't have before.

Re: How VCs Make Money

#57

Post by nicoburns »

woah wrote: post #46
H8crilA wrote: post #26

One thing that you have to keep in mind is that the 20% part is effectively a European call option on the fund's portfolio, with strike equal to the fund's initial value (so ATM - At The Money - when the fund starts) and notional amount of 20% of the fund's value. The manager gets that option for free, in fact he's paid 2% a year to hold that long option (and do his/hers job). Call options are more valuable if the un…

It’s strange how often people need to be reminded on here that VCs invest in businesses that grow fast or fail. There’s a vocal contingent on here that feel it’s some kind of moral failing and are mad that nobody is getting excited about their bingo card creating website.

I think it's a failing of our economic system that wealth is concentrated enough for VC's to exist in the first place. It would be better if such investment power was distributed.

Re: How VCs Make Money

#58

Post by paulddraper »

xorfish wrote: post #14

So if 2/3 of the funds income is from the management fee, wouldn't that mean that the average VC fund clearly underperforms the market?

Just like most start-ups underperform the market.

But then you get some rocket ships.

And everyone (LP, VC) thinks they can pick the future rocket ships (VC, startup).

Maybe some of them can.

Re: How VCs Make Money

#59

Post by paulddraper »

refrigerator wrote: post #2

Brilliant post — very informative + clearly written. > What goes unsaid, is that only the actual partners in the fund get any carry, associates just get a comfortable salary and the prospects of becoming a partner (at another firm obviously) "(at another firm obviously)" — I've heard this in other discussions about VC careers too. Why is it the case?

Funds have a long lifetimes, especially if you count follow-on investments from the same LPs.

Timing is very important, and it's likely that another VC firm has more opportune timing than the one you are currently at.

Re: How VCs Make Money

#60

Post by hef19898 »

csa wrote: post #49
woah wrote: post #46

Earlier quoted context omitted.

It’s strange how often people need to be reminded on here that VCs invest in businesses that grow fast or fail. There’s a vocal contingent on here that feel it’s some kind of moral failing and are mad that nobody is getting excited about their bingo card creating website.

> There’s a vocal contingent on here that feel it’s some kind of moral failing and are mad that nobody is getting excited about their bingo card creating website. LOL. I hope this is HN /s. If so, it has several layers of humor. The guy who actually created a bingo card creation site has been fairly vocal with his stance that VC money should only be taken for rocket-ship trajectory businesses — with bingo card creati…

Funding a company is hard. I'm bootstrapping and funding will become a key issue in the next couple of months. My preferred solution is a classical bank loan, maybe backed up by some of the available government-sponsored programs. Why? Because while I maybe could frame my business in some VC-friendly way and go out pitching it I don't want to give up more control than absolutely necessary. Also, I am perfectly fine to have a well running mid-sized business one day (if luck will have it). VCs are not, and being forced to go for 20x+ exit can only mean one huge acquisition or an IPO. Not my cup of tea.

Also, every minute I pitch a VC is minute I cannot pitch actually paying customers. I get that some businesses need a lot of money to come up with a product and thus need VCs. I'm lucky to not need that amount of money and to finance the whole product development myself for the next couple of months.

But I can't stop wondering if it would be possible for VCs to buolzd a portfolio of profitable, cash positive mid-sized businesses to find the more adventurous investments.

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