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Minsky Moments in Venture Capital

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Re: Minsky Moments in Venture Capital

#21

Post by cs702 »

hncommenter13 wrote: post #8

Interesting piece. But speaking as someone who was formerly a very junior VC through the dot-com era, there most certainly can be a negative spiral. The public and private markets aren't as distinct as they might appear to be. A VC buying shares in a private company at valuation X must believe that a sale is possible at a big multiple of X, and soon. Some VC will be the last investor before the company goes public or…

One other thing that happened in the dot-com era, which is also happening today, is that many new companies would spend fresh funds raised from VCs and even from IPOs to buy products and services from each other, spending money aggressively to deliver such products and services, and generating revenue growth that would look impressive in the short run... but ultimately would prove unsustainable. Such growth can last only as long as there is an ongoing supply of fresh capital!

At the extreme, some companies in the dot-com era engaged in dubious "round-trip revenues" behavior, e.g., agreeing to buy a certain dollar amount of another company's products/services only if the other company agreed to do the same, with neither company actually needing to do so for ordinary business purposes. I don't know if this is happening today too, nor to what extent.

Re: Minsky Moments in Venture Capital

#22

Post by MichaelZuo »

arbuge wrote: post #11
MichaelZuo wrote: post #5

Earlier quoted context omitted.

Didn’t Uber have a down round? They didn’t implode of course but it seems like it did significantly affect their trajectory. I can’t think of any big YC company with a down round + death spiral, but I think maybe one of the Techstars companies?

Homejoy perhaps?

Wasn’t a unicorn I believe but seems close enough.

Re: Minsky Moments in Venture Capital

#23

Post by lumost »

Looking at a company like $SNOW with a price to revenue multiplier of >100x, the core thesis rings true. Companies are being priced as if they have already succeeded beyond the expectations of all past companies in the space.

To make SNOW's valuation make sense you would need to assume that they can get to a profit of 2.6 Billion/year. This would put them squarely in the realm of hot, high growth stocks with a P/E of 30x. Put differently, SnowFlake's TAM must be able to support ~6 Billion in profit to keep a flat valuation and a P/E ratio of 13. Assuming they were able to offer the service while returning their full gross margin as profit would imply a revenue of 10 billion or a little over 16x revenue growth priced into the stock.

While SnowFlake is a great company with a great product. Is any enterprise software company really worth pricing an optimistic 16x revenue growth into?

Re: Minsky Moments in Venture Capital

#24

Post by thedudeabides5 »

lumost wrote: post #23

Looking at a company like $SNOW with a price to revenue multiplier of >100x, the core thesis rings true. Companies are being priced as if they have already succeeded beyond the expectations of all past companies in the space. To make SNOW's valuation make sense you would need to assume that they can get to a profit of 2.6 Billion/year. This would put them squarely in the realm of hot, high growth stocks with a P/E of…

As a competitor to SnowFlake I talk about this 100x price to sales in every meeting

Re: Minsky Moments in Venture Capital

#25

Post by lumost »

JumpCrisscross wrote: post #13
hncommenter13 wrote: post #8

Interesting piece. But speaking as someone who was formerly a very junior VC through the dot-com era, there most certainly can be a negative spiral. The public and private markets aren't as distinct as they might appear to be. A VC buying shares in a private company at valuation X must believe that a sale is possible at a big multiple of X, and soon. Some VC will be the last investor before the company goes public or…

> while speed is good for startups, "time diversification" used to be considered a good thing for VC investors, who really are playing a portfolio game To expand on this, as the article notes, the old game might have been (stylised) ten Series A investments, three of those raise a B and one raises a C. Today, all ten raise a B and then three months later a C. Valuations (perception of risk) go up (down). But has actu…

Objectively, software bets are less risky than 20 years ago. There are more well understood business models, more ways to reach customers, fewer technical risks (putting a consumer website meant dropping 7 figures on hardware and hoping you had the right team to make things work), and a better understanding of what a defensible business looks like.

On the flip side a reduction in risk is no guarantee of success, there are new risks related to having ~100 copy cat companies - or having your business replicated by a mega-cap. Lower risk means lower barrier to entry.

Re: Minsky Moments in Venture Capital

#26

Post by onlyrealcuzzo »

lumost wrote: post #23

Looking at a company like $SNOW with a price to revenue multiplier of >100x, the core thesis rings true. Companies are being priced as if they have already succeeded beyond the expectations of all past companies in the space. To make SNOW's valuation make sense you would need to assume that they can get to a profit of 2.6 Billion/year. This would put them squarely in the realm of hot, high growth stocks with a P/E of…

16x over how many years? A lot of companies are growing 40%+

I don't think it's absurd to think AWS and GCP can keep rates like this up for another 4-5 years.

If SNOW could do it for 8.5 years - that's ~16x growth.

Still that seems way too optimistic for me - unless I'm purely speculating on greater fools willing to pay more.

Re: Minsky Moments in Venture Capital

#27

Post by civilized »

Very interesting.

It seems to me that the basic punchline of Minsky theory is "the financial system is designed to encourage momentum investing". Or maybe even "everyone is a momentum investor, some just do it with extra steps".

Even if you're not consciously a momentum investor, you will use or be presented with so-called "risk" metrics which are really just looking at past performance, in a way that mostly amounts to

Stonk go up = "low risk"

Stonk go down = "high risk"

If you use such metrics, you're just a momentum investor with extra steps.

And if everyone is just a momentum investor with extra steps, our markets will of course boom and bust, as a market full of momentum investors must do.

Re: Minsky Moments in Venture Capital

#28

Post by lumost »

thedudeabides5 wrote: post #24
lumost wrote: post #23

Looking at a company like $SNOW with a price to revenue multiplier of >100x, the core thesis rings true. Companies are being priced as if they have already succeeded beyond the expectations of all past companies in the space. To make SNOW's valuation make sense you would need to assume that they can get to a profit of 2.6 Billion/year. This would put them squarely in the realm of hot, high growth stocks with a P/E of…

As a competitor to SnowFlake I talk about this 100x price to sales in every meeting

When I see SaaS multiples like this, I worry that it incentivizes consultancy behavior. SaaS is attractive as the R&D work gets amortized over many customers and many years. Customer acquisition costs are often looked at separately for this reason as the initial sales engineering/solutions consulting/sales work is done once and then the business makes profit on the back-end.

At a 100:1 valuation to revenue multiplier, doing ad-hoc work to close deals becomes awfully appealing - likewise performing ad-hoc work to keep the revenue coming becomes very appealing. Pretty soon, you may find that the business has become a consulting organization masquerading as a SaaS as the platform isn't very compelling without the broader consulting business.

A Consulting business typically maintains a 1.2x multiple on EBITDA earnings as it tends not to scale very well due to both execution quality challenges, and relatively low/squeezable margins.

Re: Minsky Moments in Venture Capital

#29

Post by lumost »

onlyrealcuzzo wrote: post #26
lumost wrote: post #23

Looking at a company like $SNOW with a price to revenue multiplier of >100x, the core thesis rings true. Companies are being priced as if they have already succeeded beyond the expectations of all past companies in the space. To make SNOW's valuation make sense you would need to assume that they can get to a profit of 2.6 Billion/year. This would put them squarely in the realm of hot, high growth stocks with a P/E of…

16x over how many years? A lot of companies are growing 40%+ I don't think it's absurd to think AWS and GCP can keep rates like this up for another 4-5 years. If SNOW could do it for 8.5 years - that's ~16x growth. Still that seems way too optimistic for me - unless I'm purely speculating on greater fools willing to pay more.

aye - effectively this says that SnowFlake will execute perfectly for 4 years, or slow to 40% growth for 8.5 years and will maintain/reach a healthy margin. For this, the market is willing to price this performance in today. Meanwhile a dollar placed in the S&P 500 would likely 2x over the same time frame.

To see a return on a dollar placed into snowflake we'd need to start adding in assumptions like "SnowFlake doubles in revenue for the next 7 years reaching a revenue of 76 billion dollars per year in 2029, surpassing GCP, rivaling major cloud vendors".

Re: Minsky Moments in Venture Capital

#30

Post by swrj »

MichaelZuo wrote: post #5
lordnacho wrote: post #4

One thing I always wondered as a hedge fund guy was where all the reports of VC/PE doing badly went. You always hear about some hedge fund blowing up or having a terrible month, but I seem to never hear any bad news from the private markets world. In fact it's all "we returned 10x capital" which is pretty good even if it takes a few years, especially if there's no losses. Even Softbank seems to be doing okay consider…

Didn’t Uber have a down round? They didn’t implode of course but it seems like it did significantly affect their trajectory. I can’t think of any big YC company with a down round + death spiral, but I think maybe one of the Techstars companies?

There is a good list of startups that went bankrupt here: https://www.cbinsights.com/research/startup-failure-post-mor... Katerra seems like the latest big one - $1.5B in funding that filed for chapter 11 last year.
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