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How VCs Make Money

vcstarterkit.substack.com

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Re: How VCs Make Money

#61

Post by soapboxrocket »

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.

The problem as I see it is that Bingo just isn't a dynamic game, you have a static card with single numbers called out. My bingo card app is unique in that fact that your card changes in direct relation to the number of possible win paths you have at any given moment.

Re: How VCs Make Money

#63

Post by ignoramous »

pc86 wrote: post #53
ignoramous wrote: post #51

Earlier quoted context omitted.

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

Thanks.

> That may be how you use the term

That's the thing: It's not just me, but the entire country where I work, doesn't limit its usage to gender or minority.

> but that's not what the term means.

"a situation in which progress, esp promotion, appears to be possible but restrictions or discrimination create a barrier that prevents it."

https://www.thefreedictionary.com/glass+ceiling

"Invisible but real barrier through which the next stage or level of advancement can be seen, but cannot be reached by a section of qualified and deserving employees. Such barriers exist due to implicit prejudice on the basis of age, ethnicity, political or religious affiliation, and/or sex."

http://www.businessdictionary.com/definition/glass-ceiling.h...

"Since becoming commonplace in contemporary language it [glass ceiling] has become generally applied to obstacles encountered in any field and by any group"

https://www.phrases.org.uk/meanings/glass-ceiling.html

"a point after which you cannot go any further, usually in improving your position at work"

https://dictionary.cambridge.org/dictionary/english/glass-ce...

Re: How VCs Make Money

#64

Post by camjw »

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…

  Call options are more valuable if the underlying security is more volatile 
  (because there's higher chance of ending in the money)
Whatever the volatility is you still (in Black-Scholes) have a 50/50 of the option ending ITM (stock returns are normally distributed, higher volatility just means higher std. deviation). One reason why ATM options are more valuable with higher volatility is because there's a greater chance of the option ending far away from the strike price (either in the positive OR negative direction), so there's a lot of time value on those.

This doesn't discount the rest of your post though, clear that VCs go for high risk options.

Re: How VCs Make Money

#65

Post by jiveturkey »

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?

Just like becoming principal engineer. You will never do it at a company you joined as merely senior, unless you are approx employee #5 or earlier.

it should be obvious why. there's no more room (nor need) at the top. if you wait for it, you are not waiting for your skills to be recognized, you are waiting for someone to die.

Re: How VCs Make Money

#66

Post by ignoramous »

bpt3 wrote: post #45
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

Your username is accurate in this case.

May be. I try to be a little less ignorant everyday, though. That's why we are here, on news.yc, I guess; to exchange ideas, to engage in discussions, to learn from whoever would teach.

Re: How VCs Make Money

#67

Post by robbiemitchell »

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.

Yes! VC is an asset class targeting high-growth, high-risk opportunities. As an LP (e.g., pension fund, college endowment, individual baller), you put some % of your money in VC funds as part of a broad portfolio of investment types.

If you want to grow a stable business and share portions of your revenue, there are other sources of investment such as Private Equity and plain-old debt (loans).

Re: How VCs Make Money

#68

Post by smabie »

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…

Good insight, but the incentives don’t exactly match up to how you describe. Their investments actually looks like an American option instead of a Euro option because they can flip their investments when in the black. Since it’s not possible to cash out Euro options in this way, their incentives and compensation look much more like American options than Euro ones.

Re: How VCs Make Money

#69

Post by csa »

hef19898 wrote: post #60
csa wrote: post #49

Earlier quoted context omitted.

> 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 t…

Assuming that this is a business that has some sort of online component (esp. payments), consider Stripe — they offer loans based on cash flow history with their service.

I’m not sure what level of cash you need, but this might do the trick without giving up equity or control.

Not affiliated with stripe — just a fan.

Re: How VCs Make Money

#70

Post by hef19898 »

csa wrote: post #69
hef19898 wrote: post #60

Earlier quoted context omitted.

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 t…

Assuming that this is a business that has some sort of online component (esp. payments), consider Stripe — they offer loans based on cash flow history with their service. I’m not sure what level of cash you need, but this might do the trick without giving up equity or control. Not affiliated with stripe — just a fan.

Thanks for the tip, certainly will take a look, could be very helpful in case I sell stuff myself. Which also needs a lot more capital.

Does stripe also have a B2B / invoicing functionality?

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