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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

#21

Post by vcfundedmylife »

skippyboxedhero wrote: post #9
MegaButts wrote: post #3

> In contrast with the scenario in 2000, most of today’s tech companies are real businesses. How many of today's startups are just servicing each other with VC money? This isn't meant to be flippant - I'm genuinely curious (and while I bet it's a lot, I am skeptical it is overwhelming). I mean if we really look at some of the business models for these companies, they're clearly unsustainable. Uber is a prime example…

> I think tech investors are unable to see their bias for just how awful most tech companies today are I agree. Ecomm broke first in other markets, and I am seeing profitable ecomm companies still having to raise capital. Uber is one of the worst ones (they took a business that is very profitable, and lost absolutely staggering amounts of money, they probably need to cut 50% of the workforce to start with, and then k…

I agree, crypto and fintech will be the first dominos to fall - they’re in free fall already.

There’s a lot of copycat B2B startups that extremely dependent on crypto and fintech for their revenue. They will be the next domino to fall.

After that, it would be infrastructure, security, and analytics vendors that will face a revenue crunch and will be unable to raise another round of funding. And then, all the startups for startups vendors like Rippling and Brex.

And the final domino would be currently well funded private companies such as Airtable, Notion, Loom, and possibly even Figma. We’ll learn that none of these products had any significant traction outside of VC-land.

This would be even worse for the Bay Area than 2000. Remote work is still the norm here (I’m typing this on my lunch break in my nearly empty SF office). An economic downturn coupled with destigmatized remote work is an environment ripe for outsourcing.

Re: VCs are scared when they should be greedy

#22

Post by lpolovets »

(Context: I'm a VC)

Some great points in the post, but I also see a few additional dynamics at play:

1) The last 10 years have been great for VCs and startups, but now VCs are thinking about how to make their funds last longer. Two reasons for this: first, time diversification matters. If you think markets might go down even more, you don't want to deploy the rest of your fund quickly, you want to spread it out over a few years and get a good average cost basis. Second, there's a healthy fear among VCs that LP capital will be much harder to secure in the next 1-2 years. And you don't want to deploy the rest of your current fund in the next 6 months if you won't have a new fund ready to go for 18 months.

2) Most VCs (and founders) hate down rounds. So a lot of existing companies are stuck because they previously raised at $X valuation, and now the market price is $0.75X, and either the VC doesn't want to push for a down round or a founder won't accept it, or both.

3) Aaron mentions this in the blog post, but everyone is worried about downstream investors. Our fund is big enough to lead a seed round, but it can't put a dent in a Series A, so we depend on Series A investors eventually backing our seed companies. And Series A investors often depend on Series B investors to invest a lot in the next round. And so on. If the entire growth stage market grinds to a halt -- and it seems like it basically has -- then early stage investors start worrying about making new investments because there's way less downstream funding available. So even if a seed VC believes this is an amazing time to build a company and there are lots of great seed opportunities out there, they might still slow down investing a lot if they know their companies will need more funding and that funding doesn't seem to be there right now.

4) I've been a VC for about a decade, and the gap between VC and founder valuation expectations is greater than it's ever been during that time. 3 months ago, a median seed round was at $20m post, and a lot were at $25m-$30m post. Now I still see a lot of seed founders looking for $20m-$30m post, but a lot of VCs believe we should be back to 2020 valuations of $10m-$15m post. The gap between an expectation of, say, $13m post on one side and $25m post on the other side is huge, and lots of conversations never even begin because of that mismatch.

Re: VCs are scared when they should be greedy

#23

Post by xthrowawayxx »

fdgsdfogijq wrote: post #15

Rather than complain about how VCs arent good investors, people should rail on the system that selects VCs. Which is mostly admittance to prestigious MBA programs/colleges. So please write a post about how those schools arent selecting for good investors, because these diatribes about a "flawed" industry are very surface level compared to the underpinning power structures in america

How do we distinguish between: "VCs are are selected because they go to school X", "school X is good at creating VCs", and "school X receives more potential VCs"?

My guess is probably more statements 2 and 3 for the usual suspects eg Stanford

Re: VCs are scared when they should be greedy

#24

Post by lmeyerov »

MegaButts wrote: post #3

> In contrast with the scenario in 2000, most of today’s tech companies are real businesses. How many of today's startups are just servicing each other with VC money? This isn't meant to be flippant - I'm genuinely curious (and while I bet it's a lot, I am skeptical it is overwhelming). I mean if we really look at some of the business models for these companies, they're clearly unsustainable. Uber is a prime example…

My bigger uneasy feeling here is the advertising/marketing world where ROI basics like attribution are highly questionable and bohemeths like Apple & Google are using their $T war chests & monopoly positions to cripple the sales/marketing ecosystems of their competitors. So risks a repeat of the dotcom bubble collapse when cpm/cpc collapsed. So much of saas is directly serving these questionable areas, and in turn, more neutral b2b (data, ...) is in turn powering those and thus also fragile.

Variable sales+marketing spend is easy to scale back on during a recession. We've seen preeemptive layoffs due to valuation drops, but not this stuff yet. It's hard to handle. Our team largely focused on helping enterprise/gov/etc customers (think visibility/ai for core fraud, cyber, supply chain operations) and prioritized more self-serve etc for the crypto markets: they came to us with similar questions, but had way more risk, and so luckily we're seeing only a bit of churn right now. But if/when the sales/marketing/etc. collapses hit, that'll be much harder to avoid for many people.

Re: VCs are scared when they should be greedy

#25

Post by georgeecollins »

dahdum wrote: post #11
MegaButts wrote: post #3

> In contrast with the scenario in 2000, most of today’s tech companies are real businesses. How many of today's startups are just servicing each other with VC money? This isn't meant to be flippant - I'm genuinely curious (and while I bet it's a lot, I am skeptical it is overwhelming). I mean if we really look at some of the business models for these companies, they're clearly unsustainable. Uber is a prime example…

> I mean if we really look at some of the business models for these companies, they're clearly unsustainable. Uber is a prime example of a company that seems destined to fail. Lyft and Uber are both very near profitability and things are looking pretty good for them over the next couple years. Why do you believe they are destined to fail? Established markets have been profitable for a while.

>> 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 they are way past the point where their profitable markets could fund growth. But they don't seem to.

I am sure there is a profitable and enduring business in Uber in some markets and at some prices. I just think they know that the economic realities of that business would not support their public stock valuation. So they work on self driving and buy postmates rather than focus on those profitable established markets.

Re: VCs are scared when they should be greedy

#26

Post by vkou »

PeterisP wrote: post #16
christkv wrote: post #13

Earlier quoted context omitted.

In a recession they provide a luxury good that might be down prioritized by customers to save money.

In a recession some people suddenly are eager for any job, no matter how bad, driving down Uber's "cost of goods sold" i.e. driver fees.. But in general economic downturns are tricky, as they affect different groups differently - are the people who would suffer in a recession the same people who are currently using Uber?

Driver fees are already so low that between depreciation, gas, and your time, you're barely making ends meet driving. They can't squeeze the drivers any further, unless they only want people to be driving 15-year-old beaters.

Re: VCs are scared when they should be greedy

#27

Post by throwk8s »

MegaButts wrote: post #3

> In contrast with the scenario in 2000, most of today’s tech companies are real businesses. How many of today's startups are just servicing each other with VC money? This isn't meant to be flippant - I'm genuinely curious (and while I bet it's a lot, I am skeptical it is overwhelming). I mean if we really look at some of the business models for these companies, they're clearly unsustainable. Uber is a prime example…

> If your unit economics don't work then you're fucked...

From the company's perspective that's certainly true.

As a regular person I'm more worried about the companies whose unit economics work too well. Companies like Amazon have so much momentum that it seems like they could go on indefinitely, instead of eventually failing and making room for new entrants.

Companies whose unit economics don't work transfer wealth from investors to customers, then get out of the way. Companies that work too well can become an inescapable force.

Re: VCs are scared when they should be greedy

#28

Post by marcosdumay »

MegaButts wrote: post #3

> In contrast with the scenario in 2000, most of today’s tech companies are real businesses. How many of today's startups are just servicing each other with VC money? This isn't meant to be flippant - I'm genuinely curious (and while I bet it's a lot, I am skeptical it is overwhelming). I mean if we really look at some of the business models for these companies, they're clearly unsustainable. Uber is a prime example…

> If your unit economics don't work then you're fucked, and even if you raise literally tens of billions of dollars you will eventually run out of money.

Hum... VCs exist exactly because this is not a general truth.

It's true for Uber, but there are many sectors where unit economics change with scale.

Re: VCs are scared when they should be greedy

#29

Post by killjoywashere »

EGreg wrote: post #17
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.

What if the LP says no deals for 50 years? These “fund raised X” means nothing if they can’t enforce capital calls

That should be actionable as a breach of contract, with a notable exception of sovereign wealth funds, which may or may have immunity: https://www.reedsmith.com/en/perspectives/2013/11/capital-ca...
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