Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

VCs aren’t your friends

openvc.app

Post reply on HN
Print view View original

141–150 of 383 posts

Re: VCs aren’t your friends

#141

Post by leashless »

jordanb wrote: post #138
leashless wrote: post #115

Earlier quoted context omitted.

"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.

As a class VC is a lousy investment. Warren Buffett has described PE as a horrible investment class populated entirely by grifters who lock up your money for 10 years and fuck around with it, producing awful returns. The way he describes it, VC sounds very similar from a LP's perspective. So why does anyone invest? Buffett's theory is that LPs are mutual fund and pension fund managers who like the fact that there's a…

I think the answer is marginal utility of money. If I have $20 million, and I take $1m to the casino and bet it all on Red 21, maybe I come back with another $20m after taxes. Or I lose $1m then and there.

But in the process there's no control and no sense of skill or judgement or expertise. I'm just a gambler.

If on-the-other-hand I gave that money to a GP in a fund to invest on my behalf, they could come back with a game-changing amount of money in some circumstances, and there's a plausible claim of skill and expertise in my selection of the GP, and the GP's selection of investments.

Same potential for asymmetric returns as gambling, but in a format that reinforces the illusions of skill and control and just maybe really is a question of skill at some level.

I want to say that losing money by being bad at things is always possible, but making money by being good at things is far more a matter of intangibles than anybody want to admit, and proving that any success was deterministic rather than little turtles racing down the beach to the sea and on-average half make it is nearly impossible.

We all love the illusion of control. But the statistics just don't bear it out as a fact in business.

Re: VCs aren’t your friends

#142

Post by b112 »

leashless wrote: post #139
chollida1 wrote: post #123

Earlier quoted context omitted.

> 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 l…

VC as an asset class loses money. Within that loss, some companies do better than others. Whether that is skill , luck or finding some way to tilt the board in your favour (political influence for example) depends on who you ask. I have read that the statistics the distribution of success in the VC field was compatible with a random distribution with a very small skill bias. I do not know if that analysis was accurat…

Do you know if those stats took into account massive economic events? Such as market crashes?

Which tend to happen at least once a decade?

People often have a point to make, and will often ignore such data to make it. To add to this, outside of honest intent prejudiced with personal bias, there are parties lookong to undermine any aspect of success the West has, by invalidating those successful models.

Re: VCs aren’t your friends

#143

Post by pwillia7 »

chollida1 wrote: post #123
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 l…

> If startup employees truly believe in their company they would also take no salary at all and just live on ramen noodles.

Not if you have no capital -- You still have to eat and be housed and that costs a lot if you don't have family wealth or other income streams, even with a good salary.

People also naturally have different levels of risk aversion. Not everyone can/should be putting it all on red every day.

> 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.

You're looking at it at the 'fund' level not the individual businesses that make up the fund. To use the roulette example, if I bet specific numbers or splits, I will expect any one of those to certainly lose, but I just need one to hit to cover the rest. Since the individual bets here are human beings and companies and not chips on a table, there's definitely an element of what the top commenter said IMO.

Re: VCs aren’t your friends

#144

Post by davedx »

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…

Elegantly written presumption.

Re: VCs aren’t your friends

#145

Post by jordanb »

yard2010 wrote: post #60
raverbashing wrote: post #33

Earlier quoted context omitted.

Yeah pretty much So much that playing videogames during a VC meeting can swing them the "right way" if you fit the structure enough

You can say a lot of shit about this person. But this is so inspiring. Like, this is a good example for young people out there. You don't have to change your ways for boomers even though they have a lot of money you need. The lesson I got here is just be you. Let others change for you. And do not fuck with the IRS in any circumstances.

SBF was able to fit the image of the boy genius that the partners at the VCs (who mostly were probably not boomers) were looking for, while still coming off as "one of them."

They thought that the crazy hair and the video game stuff was an act meant to project an image to the world, and the real SBF was Stanford and Jane Street.

Re: VCs aren’t your friends

#146

Post by MichaelZuo »

kabouseng wrote: post #96
MichaelZuo wrote: post #45

Earlier quoted context omitted.

Not if they are a bonafide super genius, then it's entirely possible. That's the minimum bar without traction however. A regular genius isn't that impressive.

VC's don't have the ability to distinguish between genius and super genius...

The competent ones can.

Re: VCs aren’t your friends

#147

Post by leashless »

saberience wrote: post #127
csomar wrote: post #113

Earlier quoted context omitted.

> 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…

Nobody said work for free.

Raise money for the fund's operations with a separate investment product, and take no 2% management fee. Instead take 40% of the upside: this is _efficient_ if you think the upside will be huge.

In fact if you were certain of the huge upside, people would borrow the operating costs for the VC rather than selling equity in the fund. Most VCs in practice live off the 2% quite nicely, and pray for a big hit, but _the big hit is a bonus not the point of the fund_

The point of the fund is the 2%. The once-in-a-blue moon hit is just that.

And let me point out. The YC "big hit rate" is about 1 per 200 investments. Ballpark; you'd need to ask them the current stat.

So a fund that makes 100 investments, on those numbers, has a 50/50 chance of a big hit. 50 investments, a 25% chance.

To reliably get a big hit you either need to massively alter the odds of success for your portfolio companies, or kiss an awful lot of frogs hoping to hit the occasional prince.

VC is _extremely hard_ because it bakes in tech risk and projections about future society into a financial product called startup equity. The big hits are staggering - the best investments ever made by human beings at any point in history I would guess - but reliable prediction of those big hits is impossible.

Nearly every unicorn has a stack of 70 rejection emails. The special factor is intangible and invisible.

If it even exists.

I think Paul Graham explained all of this quite clearly in Black Swan Farming. It's slightly "between the lines" but he knows exactly what business he is in: spread betting and tipping the table as far as possible in his favour!

A good VC approach.

Re: VCs aren’t your friends

#148

Post by jordanb »

caseyy wrote: post #20

Most business founders don’t need VC money and are worse off for taking VC money. I find the mindset “my pitch deck was 2 months old so I didn’t get funding” very out of touch of business realities. It is far more likely that that type of business doesn’t need VC funding. Your SaaS can probably be built with your daytime developer salary. No VC ever says “wow, what a great investment opportunity, one of the best, but…

I'm hopeful for this silicon valley downturn because while I think you're right that most software business plans are capital-light and could be bootstrapped, the problem with the boom times is that if you try to bootstrap and validate any market you will have a VC-funded competitor come along and blitzscale right over the top of you.

Re: VCs aren’t your friends

#149

Post by davedx »

fsloth wrote: post #61
keiferski wrote: post #21

The way VCs filter out potential investments seems fairly similar to the way Ivy League schools filter out potential students. (Probably because they are comprised of the same people.) It is not really about technical brilliance, or innovation, or anything that is written on their website as a core value. It's more about whether you're smart enough and can follow instructions and fit into the overarching institutiona…

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…

> b) the recipient was not their first choice (ouch, you can hear the ego taking a glancing hit)

We can be as cynical about this part as we want, but I think what is meant here is that startups should try to raise investment from VC's or investors who are a good match. If I'm down to the 20th VC on my list - that list is sorted a way for a reason by the startup founders.

It's easy to assign this to ego but I think being a rational actor, it is also a signal like the pitch deck date.

Re: VCs aren’t your friends

#150

Post by davedx »

YetAnotherNick wrote: post #32
keiferski wrote: post #21

The way VCs filter out potential investments seems fairly similar to the way Ivy League schools filter out potential students. (Probably because they are comprised of the same people.) It is not really about technical brilliance, or innovation, or anything that is written on their website as a core value. It's more about whether you're smart enough and can follow instructions and fit into the overarching institutiona…

Nikola Tesla received funds, in fact quite a bit of it. JP Morgan invested $150,000(~$5M in today terms) for just one project[1]. He died penniless because of his too much confidence in his ideas and he overused the money he got. Even with hindsight, funding Tesla was a bad decision for investors return wise. [1]: https://en.wikipedia.org/wiki/Wardenclyffe_Tower

> Even with hindsight, funding Tesla was a bad decision for investors return wise.

He invented the brushless motor and types of transformers that were instrumental to building Westinghouse's empire. When Westinghouse was running low on money Tesla tore up the patents he'd sold to him to save the company.

Tesla was definitely not a "bad decision for investors", the ROI for his inventions is some significant fraction of the economic value of the global electrical system.

But yeah, a couple of his projects failed at some point. Surely a terrible investment!

Post reply on HN