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VCs are scared when they should be greedy

blog.aaronkharris.com

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Re: VCs are scared when they should be greedy

#171

Post by aetherson »

ceeplusplus wrote: post #99
georgeecollins wrote: post #25

Earlier quoted context omitted.

>> Lyft and Uber are both very near profitability As they have been for over a decade. Just not actually GAAP profitable, except maybe a one off sale to DiDi. >> Established markets have been profitable for a while. So what market is Uber not established in? Are they pouring their oceans of profit from New York, Los Angeles and London into building a business in La Paz? I am sure they are trying to grow in places but…

Uber's net GAAP loss, excluding losses from investments in DiDi and other companies, is around 300m last quarter [1] which is a ~1% loss on their gross bookings. Most of that is stock based comp. Their FCF loss was only 47m last quarter. I know HN likes to hate on Uber and other gig apps but a 1% margin is something they can easily make up given their stated take rate on mobility and delivery is around 20%. > So what…

I think we should split the difference.

Yes, Uber is close to break-even and they aren't going to just disappear. But there's still a big gap for them to close between "breaking even" and "profitable enough to justify a $50B valuation."

There's plenty of room for a moderate view in which Uber survives as a business but their investors are extremely unhappy.

Re: VCs are scared when they should be greedy

#172

Post by chii »

ethanbond wrote: post #158
kypro wrote: post #150

Earlier quoted context omitted.

> Uber is a prime example of a company that seems destined to fail. I'm not a fan of Uber, both as a company and as an investment thesis, but I think this is far too strong. Uber isn't prioritising profitability at the moment, so obviously the unit economics isn't going to work. I think the important question to ask here is if people continue to want to pay & hail taxis from their phone? If the answer to that is yes…

> I think the important question to ask here is if people continue to want to pay & hail taxis from their phone? If the answer to that is yes then Uber will be fine so long as they're one of the apps that people continue to use to hail taxis [and they figure out how to get their unit economics to work] If they don’t get their unit economics figured out, not only will they not be Google/FB/etc., they will be nothing a…

uber's unit economics will easily work out if they stop expanding (which is where the expenses are).

Their backend services have a "fixed cost", if you assume they've designed it to be scalable, such that the marginal cost of a new user doesn't add more cost to hosting and compute. Then fire most engineers, and keep some skeleton crew maintaining the services.

The other cost is obviously the payment to drivers. I believe the unit economics will work here, since uber is not making capital investments into equipment, and is paid per-ride. Competition would drive the margins down, but thin margin is still a positive unit economics. Right now, the cost is subsidized by uber, but only as a marketing tactic to obtain marketshare and drive out competitors (unsuccessfully i might add). Uber can choose to stop the subsidizing, which can then make the unit economics positive.

Re: VCs are scared when they should be greedy

#173

Post by bombcar »

icedchai wrote: post #126
singron wrote: post #118

Earlier quoted context omitted.

Down rounds are bad for employee morale too since it puts previously issued options below water. It's probably worth it to re-issue equity, but that's messy and a lot of companies don't do it.

At a previous company all of the employees (there weren't many left) demanded options be repriced. They were. Unfortunately, they still were worthless when the company was "acquired" in a fire sale.

Which is why nobody likes down rounds, as it's indicative of where everything is going (and so the music stops).

Re: VCs are scared when they should be greedy

#174

Post by icedchai »

bombcar wrote: post #173
icedchai wrote: post #126

Earlier quoted context omitted.

At a previous company all of the employees (there weren't many left) demanded options be repriced. They were. Unfortunately, they still were worthless when the company was "acquired" in a fire sale.

Which is why nobody likes down rounds, as it's indicative of where everything is going (and so the music stops).

Yep. But when your startup is burning through cash and you're not going to make next month's payroll, you're pretty much force to accept whatever terms you're offered. (Assuming you're offered any.)

Re: VCs are scared when they should be greedy

#175

Post by jacquesm »

Bubble_Pop_22 wrote: post #113
jacquesm wrote: post #110

Earlier quoted context omitted.

Show me a contract where an LP gets to renege penalty free on their obligations to a VC and I'll be happy to believe you. I have been part of 222 VC/PE deals to date (that's not a typo, just a coincidence) and not once has an LP reneged on their obligation to honor a capital call without penalty. That's not saying it doesn't happen, it may well happen, or it may have happened and it was kept so quiet that nobody pick…

I understand all the above, but the general rules kinda supercede it all.The general rules are that when you are the best/biggest thing around the block, rules just don't apply to you. Also in general when government is involved rules don't apply to it. 80% or more of the amount of money that LPs as a whole administer are either Govt. Pension Funds or SWFs. So in the case of big LPs it's one of the rare cases where b…

LPs in a fund usually - possibly not always - have the same conditions except for the 'anchor' LPs, who are declared up front to the other LPs and who put in a substantially larger chunk of cash and commit before the fund is even officially opened. They are committed to do so and are listed in the rest of the documentation by name. Even the anchor LP agreements that I've seen do not allow those to default on their commitment, though there may be priority assignment in case of returns.

Again, show me. Just. One. Contract. I'll be happy to read the whole thing even if it is 200 pages.

Oh and just to be clear about this: if smaller LPs were on the hook for the full amount but larger LPs could walk at will how big do you think the chances are that those smaller LPs would still want to be part of such a fund?

Because clearly if a large contributor has a reason to back out they may have an even better reason to do the same.

Personally I would not invest in a fund where a larger LP can back out at will.

Re: VCs are scared when they should be greedy

#176

Post by rileymat2 »

ceeplusplus wrote: post #142
rileymat2 wrote: post #111

Earlier quoted context omitted.

You need to do the math on a deduction v credit. If you are spending .30 and deducting .58, you need to multiply the .58 by your tax rate. You can’t simply say .58 - .30 is .28 and that is a profit of .28. Deductions don’t work that way.

Okay, that's my bad. But if you assume an effective tax rate of 15% (combined federal + state + SS + Medicare), which sounds about right for an Uber driver making 40k/year, 0.58 * 15% * 75k mi/year is an $6525 tax reduction. A quick look at an income tax calculator says someone in California making 40k pays about 6k in tax, so your credit per mile is 6k / 75k = 8 cents/mile. Depending on your costs that could put you…

I made some comments below, the devil is in the details. It is not theoretical, I tried to Uber to challenge my notions about this.

Circa 2021:

The main point I would like to make is that in my market at the time, the mileage was getting paid was .76 a mile, as I look back in the app. At the time additionally was getting .11 per a minute fare. The main issue is that the mileage rate is for time that passengers are in the car.

But about half the time it was driving to a pickup location. So you are looking at an average of .38 per mile + .11 per minute. These were city miles, not quick highway miles.

So to pull one random example from my actual history.

I did a 6 minute and 57 second trip that paid 2.86. The distance was about 2.5 miles. So by your calculations we subtract .75. This leaves 2.11 profit. The issue is it pulled me 2.5 miles from my next fare, so you need to subtract another .75 to get back. So we are at 1.36. We also have another ~7 minutes of driving.

So in 14 minutes I made 1.36... So we are talking $5.80 an hour. This is pretty poor pay for the service provided. I might quibble about your numbers in my case because it was a 2020 traverse, that was about 35k and worse gas mileage. So I was probably doing worse...

HOWEVER, that's only part of the story. Uber has bonuses, so there will be a deal where for a particular weekend, if you do 40 trips (no matter the length of each trip, which was strange to me), they might pay an additional $80 bonus. So that adds an extra $2.00 for that particular trip, if you meet the quota. And is nearly as much as the base rate. So that will push the earnings to ~$10 an hour. Significantly better!

And that is where the VC money criticism comes in claiming the subsidization is what makes it work.

TLDR; If you are very economical about the bonuses and surge rates (which the example was not) you can make better than minimum wage income, it is not a loss. But you have to be very savvy and strategic. But the bottom line is the base rates, at the time were a bit over break even, and very low if you had any down time. But the bonuses and incentives made it reasonable.

Re: VCs are scared when they should be greedy

#177

Post by seibelj »

jacquesm wrote: post #43
seibelj wrote: post #4

Earlier quoted context omitted.

Yeah I was super confused by this. VCs generally don’t have all the money ready to invest. They may have raised a $300 mil fund but they don’t get that money until they call it in. If the LP says “no deals for 6 months” that’s how it is.

As an LP in a large fund: that's definitely not how it is. As an LP you pre-commit to a certain level, and when the capital call comes you perform or you will be found to be in default when a whole pile of clauses kicks in that you really do not want to have to deal with. You will have to have an extremely good reason (such as being already bankrupt) to be able to avoid a capital call that you have committed to.

You are viewing the problem wrong. If you don't want to pay and you are a big fish, you just tell them not to ask. VC world is based on reputation and politeness. Causing a big stink is not a good look for anyone. If you are a big LP and you say, look buddy, we are taking this quarter off, what do you think is going to happen?

Re: VCs are scared when they should be greedy

#178

Post by grandmczeb »

bombcar wrote: post #166
grandmczeb wrote: post #136

Earlier quoted context omitted.

> These parasites wiped out the network of local dry cleaners, in particular in SF. Huh? I’ve never had an issue finding a dry cleaning shop in SF and there’s tons that pop on Google maps - hardly seems like a dry cleaning “desert”.

They mean "actual" dry cleaners that clean in the shop - almost all those you find are fronts for some massive cleaning warehouse somewhere else (check to see if they have any machines on-site).

Even if that's the case, how does that make it a dry cleaning "desert"? I only care if I can get my clothes cleaned quickly and I've never had any problem with that.

Re: VCs are scared when they should be greedy

#179

Post by seibelj »

jacquesm wrote: post #175
Bubble_Pop_22 wrote: post #113

Earlier quoted context omitted.

I understand all the above, but the general rules kinda supercede it all.The general rules are that when you are the best/biggest thing around the block, rules just don't apply to you. Also in general when government is involved rules don't apply to it. 80% or more of the amount of money that LPs as a whole administer are either Govt. Pension Funds or SWFs. So in the case of big LPs it's one of the rare cases where b…

LPs in a fund usually - possibly not always - have the same conditions except for the 'anchor' LPs, who are declared up front to the other LPs and who put in a substantially larger chunk of cash and commit before the fund is even officially opened. They are committed to do so and are listed in the rest of the documentation by name. Even the anchor LP agreements that I've seen do not allow those to default on their co…

You are confused because you think the contracts mean anything in such a world. The contracts are worth less than the paper they are printed on when push comes to shove and you are facing a whale.

Re: VCs are scared when they should be greedy

#180

Post by foobiekr »

ilrwbwrkhv wrote: post #20

A lot of people became "VC"s during the bull run. They brought nothing to the table like YC did. Instead some previously reputable VCs like a16z became crypto grifters. So it's good the market clears a bunch of them so that the YCs and next generation of VCs who actually bring something new to the table come to the forefront.

What happened with a16z is truly amazing.
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