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VCs aren’t your friends

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Re: VCs aren’t your friends

#121

Post by saberience »

leashless wrote: post #115
saberience wrote: post #104

Earlier quoted context omitted.

They already do that... they raise funds from LPs which include a fee which covers the costs. And it works fine, LPs repeatedly invest in the same firms which they wouldn't do if they thought it was a bad deal. There are firms which have been investing for 20-30 years with the same LPs. If the business model wasn't working it would have failed and the VC firm would have closed a long time ago.

"If the business model wasn't working it would have failed and the VC firm would have closed a long time ago." Tons of VCs do fail.

Yes, and that's healthy. Any ecosystem of companies, people, animals has failures. As far as I can see, it works fine. Just like tech companies, some VCs do amazingly, some fail. We get new VCs starting each year just like tech companies, some succeed, some fail, there's no issue here.

Re: VCs aren’t your friends

#123

Post by chollida1 »

leashless wrote: post #78

Remember: if VCs believed in what they were doing they would not take a 2% annual management fee and 20% of the upside. They’d take 40% of the upside and live on ramen noodles. VCs make money by raising money from LPs. They spend this money on investments which don’t look too bad if they fail, because nearly all of them fail. Looking good while losing all of your investors money on companies which go broke is the key…

> Remember: if VCs believed in what they were doing they would not take a 2% annual management fee and 20% of the upside.

This makes no sense. Companies have fees, junior associates have student loans, buldings require rent to be paid.

This is a foolish sentiment, unless you would apply it to all employees everywhere. If startup employees truly believe in their company they would also take no salary at all and just live on ramen noodles.

But if you think this through you realize that employees also have costs in their lives that they need money for.

> Once you get this it’s all a lot easier: the job of a VC is not to invest in winners, that’s a bonus.

> The job of a VC is to look respectable while losing other people’s money at the roulette wheel, and taking a margin for doing so.

This really makes me question which VC firm you work at as you don't seem to understand how they work. If VC firms had no alpha then they wouldn't be able to raise a second fund at all. And you'd never see VC funds stick around.

They fact that Y combinator exists for all these years and A16Z, sequoia, etc are all around for so long indicates that they are good at their job and their job is to make returns for the LPs.

I work at a firm, i'd be happy to help you understand how these firms work as you seem to have a very outsiders view on it, i can help clear up alot of your blind spots if you want to talk!!

Re: VCs aren’t your friends

#124

Post by dsr_ »

tomp wrote: post #88
leashless wrote: post #78

Remember: if VCs believed in what they were doing they would not take a 2% annual management fee and 20% of the upside. They’d take 40% of the upside and live on ramen noodles. VCs make money by raising money from LPs. They spend this money on investments which don’t look too bad if they fail, because nearly all of them fail. Looking good while losing all of your investors money on companies which go broke is the key…

This doesn't make sense. I worked in hedge funds, even there the management fee (2%) covers the fixed costs (legal, trading operations, treasury, IT operations, etc.) whereas the performance fee (20%) incentivises the alpha. In VC it's even worse, because at least hedge funds are liquid . VC investments don't realize their value for 5-10 years! Are they supposed to work for free for 10 years? Even the support staff?

"incentivises the alpha"

If they knew where the alpha was, they would go get it.

If they could make alpha happen, they would do that.

Re: VCs aren’t your friends

#125

Post by raincole »

leashless wrote: post #78

Remember: if VCs believed in what they were doing they would not take a 2% annual management fee and 20% of the upside. They’d take 40% of the upside and live on ramen noodles. VCs make money by raising money from LPs. They spend this money on investments which don’t look too bad if they fail, because nearly all of them fail. Looking good while losing all of your investors money on companies which go broke is the key…

> if VCs believed in what they were doing they would not take a 2% annual management fee and 20% of the upside. They’d take 40% of the upside and live on ramen noodles

So if you believed in something, you need to get rid of the concept of hedging and financial responsibility?

This kind of "believing" is what a religious zealot does. No wonder people say SV is a cult.

Re: VCs aren’t your friends

#126

Post by devoutsalsa »

tomnipotent wrote: post #82
caseyy wrote: post #47

Earlier quoted context omitted.

Profitable companies attract much more VC interest and even competition.

Doesn't a VC make money from valuation, not profitability. A profitable business has either reached market potential, or isn't spending enough on growth. Anecdotally I can think of many more examples of unprofitable businesses getting VC money.

Not counting their 2% annual maintenance fee, a VC makes money from buying shares low, selling them high, and keeping 20% of the high price minus the low price. So yes, they make money if the valuation is higher than the when they bought it.

Example:

- buy 1 million shares at $1.

- sell 1 million shares for $101.

- (101 - 1) * 1_000_000 = 100_000_000

- 100_000_000 * 0.2 = VC gain of 20_000_000

Re: VCs aren’t your friends

#127

Post by saberience »

csomar wrote: post #113
saberience wrote: post #92

Earlier quoted context omitted.

This is nonsense... VCs have a whole staff of people needed to do business and a ton of costs. There's a legal team, marketing/events, human resources, finance, some executive assistants. Screening, meeting founders, traveling to meet founders, takes up a TON of time and obviously most of the time, no investments are made! Also don't forget, VCs have an office, usually not in a cheap place, so lease costs, cleaning c…

> If VCs had to work for free, where would you be meeting them? It's interesting you are pointing exactly at the OP point without realizing it. If you are assuming that the VCs will be doing this for "free", it means they simply don't believe they'll have any ROI, let alone one that beats the market.

What? That makes no sense.

VC is a job like any other, it takes time and work/effort etc to produce output, it's also a job where you can improve with skill and experience. Just like writing code takes effort and skill, why would you spend 10 years writing code full-time for "free"?

Just like no one would edit books full-time for free, or write code full-time for free, or teach kids full-time for free, VC's wouldn't screen companies, interview founders, carry out significant due diligence processes for free either. Because they need to eat, need health-care, need money for rent/mortgages etc, just like every other professional.

It's just another job, and most people in VC are not rich, they are just earning a salary and get no carry/% of profits of the fund.

Re: VCs aren’t your friends

#128

Post by leashless »

SkyMarshal wrote: post #116
leashless wrote: post #90

Earlier quoted context omitted.

Take 40% and raise capital for the VC operations as a separate transaction than from the LPs, of course. Efficient markets.

How would you raise capital for operations separately from LPs? What's the upside of that for any investor? Do they get part of fund returns? Nobody is giving any kind of fund any money unless they get part of the fund returns for it.

They would take equity in the fund, of course.

Re: VCs aren’t your friends

#129

Post by csomar »

michaelt wrote: post #69
fsloth wrote: post #61

Earlier quoted context omitted.

In the tweet the wrong date was not a red flag due to lack of detail as such, but because it signaled: a) they had been raising for a while now b) the recipient was not their first choice (ouch, you can hear the ego taking a glancing hit) So ”the market” did not consider the startup investable, and they did not think about their sales pitch strategically enough … this VC would have liked to be sold to, not just a sou…

> the recipient was not their first choice (ouch, you can hear the ego taking a glancing hit) It baffles me that a person successful enough to get put in charge of an investment fund can have such incredibly thin skin. How would you even function in the real world if you were so easily offended?

> It baffles me that a person successful enough to get put in charge of an investment fund

Not necessarily ROI successful, though certainly successful in making connections to get the job. It seems, however, from their website that some of their capital made it into big companies. It's not clear whether they disclose the previous funds performances.

Re: VCs aren’t your friends

#130

Post by wasteduniverse »

input_sh wrote: post #36
jrflowers wrote: post #22

I love this blog post about why Jason Lemkin’s post about passing on a pitch because the pitch deck said March instead of May is a good and normal post. Without this informative content we would not know that Jason Lemkin‘s post was not at all off putting or ridiculous, and we are rightfully brought up to speed on how cool it was, in fact.

Also, "caused an outrage" apparently means "barely got any traction". I guess "VC was wrong and nobody really gave a shit" doesn't have the same ring to it.

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