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How VCs Make Money

vcstarterkit.substack.com

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Re: How VCs Make Money

#81

Post by zackmorris »

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…

You bring up a really good point about backing.

Banks generally don't give out loans to any kind of small business that doesn't have > $100,000 in assets and/or some indication of past profitability. Note that this represents pretty much all internet businesses. So it's not surprising that little funding is available for startups.

What if angels simply got into the co-signing business? Like, why give a VC $1 million when you could co-sign $100,000 loans for 10 startups? Then write it up as 10% ownership in the company or something like on Shark Tank. Sorry I'm probably conflating terms, but we have kickstarter.com so I don't understand why we don't have something like a readily available angle fund website yet.

I'm also curious about government-sponsored programs (does anyone know any?). I imaging they work somewhat like the FHA down payment grants for first-time homebuyers:

https://www.bankrate.com/mortgages/first-time-homebuyer-loan...

https://www.fha.com/program_genesis

If someone really wanted to stimulate the economy, I think internet startup down payment grants would go a long way towards that goal.

Re: How VCs Make Money

#82

Post by H8crilA »

camjw wrote: post #80
H8crilA wrote: post #77

Earlier quoted context omitted.

It's all fine :). I thought that "stock return" is the [exit price]/[entry price], for an asset that does not pay dividends, no? exit/entry still requires a log() to be normally distributed, for example exit/entry is non-negative, wile gaussian is of course sometimes negative, no matter what the mean is.

I think your formula is slightly off. Stock return = (exit_price - entry_price + dividends) / entry_price. It’s clear that then the mean return is the dividends paid and can be negative if the exit price is sufficiently low. I think by a bit of squinting (using the central limit theorem) you can say that this should be normally distributed as long as entry_price and exit_price have the same distribution

I still think it should be log()ed explicitly.

Coming back to options world, entry_price is a constant when opening the contract, let's ignore dividends, the formula is (exit_price - entry_price) / entry_price = exit_price/entry_price - 1 = exit_price/constant - 1.

This is normally distributed if, and only if exit_price is normally distributed. You'd want to to add back the 1, log() it, add back the log(constant) to cancel it out and just work on the log(exit_price) normally distributed random variable.

Stock return really is not normally distributed. Log(stock return) is normally distributed (under B-S, it's an assumption after all). Stock return is log-normally distributed. Multiply by 1/entry_price and subtract 1 to get your version of stock returns.

Re: How VCs Make Money

#83

Post by bpt3 »

ignoramous wrote: post #66
bpt3 wrote: post #45

Earlier quoted context omitted.

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.

Fair enough.

To your point in the other related thread about the usage of the term glass ceiling, there's nothing discriminatory about this specific practice in the VC community. No matter the gender, race, sexual orientation, or whatever other metric you'd use to describe an associate that could in theory be used to discriminate, a VC firm does not have an incentive to promote from within, and actually has incentives not to do so as described by another poster.

Re: How VCs Make Money

#84

Post by ignoramous »

bpt3 wrote: post #83
ignoramous wrote: post #66

Earlier quoted context omitted.

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.

Fair enough. To your point in the other related thread about the usage of the term glass ceiling, there's nothing discriminatory about this specific practice in the VC community. No matter the gender, race, sexual orientation, or whatever other metric you'd use to describe an associate that could in theory be used to discriminate, a VC firm does not have an incentive to promote from within, and actually has incentive…

Thanks. I concur. I must point out that glass ceiling is also used to mean, a point after which you cannot go any further, usually in improving your position at work...

Re: How VCs Make Money

#85

Post by woah »

zackmorris wrote: post #81
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…

You bring up a really good point about backing. Banks generally don't give out loans to any kind of small business that doesn't have > $100,000 in assets and/or some indication of past profitability. Note that this represents pretty much all internet businesses. So it's not surprising that little funding is available for startups. What if angels simply got into the co-signing business? Like, why give a VC $1 million…

Not sure what the benefit is for the VC of co-signing a loan vs just loaning the cash themselves, but let's ignore that for now.

The terms here are that the company accepts a very low valuation ($1mm) on some equity, and then they still need to pay the money back???

Re: How VCs Make Money

#86

Post by lazzlazzlazz »

vcstarterkit wrote: post #43
Major_Grooves wrote: post #39

Earlier quoted context omitted.

I remember going to A16Z a few years ago, and everybody was called Partner. Looking at Connie's LinkedIn profile it looks like she too was "Partner" and then promoted to "General Partner". Does that mean the "Partner" title is kinda BS and they only really mean Partner when you are a GP?

Yes, a16z famously lets everyone call themselves “partner” as a form of title arbitrage https://vcstarterkit.substack.com/p/how-vcs-choose-twitter-b...

However, I've heard partners at a16z get carried interest in the funds to which they are connected. So the title isn't actually far off.

Re: How VCs Make Money

#88

Post by zackmorris »

woah wrote: post #85
zackmorris wrote: post #81

Earlier quoted context omitted.

You bring up a really good point about backing. Banks generally don't give out loans to any kind of small business that doesn't have > $100,000 in assets and/or some indication of past profitability. Note that this represents pretty much all internet businesses. So it's not surprising that little funding is available for startups. What if angels simply got into the co-signing business? Like, why give a VC $1 million…

Not sure what the benefit is for the VC of co-signing a loan vs just loaning the cash themselves, but let's ignore that for now. The terms here are that the company accepts a very low valuation ($1mm) on some equity, and then they still need to pay the money back???

Ya you're probably right. I got the idea watching an episode of Shark Tank where Kevin O'Leary offered to give someone some money with similar terms but at 15% interest because he felt that the contestant needed the money to survive (so it was riskier than usual like a credit card). Luckily they turned down the offer, and the others congratulated them that they made the right choice.

But to me it seems like there are A) a lot of startups that want loans and can't get them (almost all of them) and B) a lot of wealthy people that can't find easy investments that return over 10% interest.

So I wish there was a standard way that angels could co-sign loans (possibly even with some leverage, so maybe they could put down as little as 20% like a down payment) and then those startups could actually build something rather than spending all of their time bootstrapping and consulting to make rent.

I guess I just thought that there might be a hack here that would let banks get into the startup business through existing channels and also let angels get some leverage by potentially putting down less than the total amount they would have given before. Angels would still have the liability of potentially having to pay the whole loan back, but could take on some interest to free up the money for other things in the meantime.

So ya, it's a potentially bad deal for the company, but it's better than the current situation of not being able to get a loan anywhere.

Re: How VCs Make Money

#89

Post by simonebrunozzi »

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.

The person you mentioned above, nickname patio11, happens to work for Stripe now. I am a huge fan of both him and the company.
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