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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

#241

Post by myth2018 »

drdrek wrote: post #206
simonbarker87 wrote: post #200

Earlier quoted context omitted.

I’ve often heard the modern VC route described as a Ponzi scheme with the public market being the greatest of the fools, I don’t totally buy into the idea but your 3rd point really does highlight how close it all is to a Ponzi scheme. So much value is absorbed in the VC pipe than by the time a company IPOs the chance of retail investors seeing returns is minimal to none.

Think about it in this way: You want to open a wholesale food distribution business for restaurants in a Manhattan You want to make sure that enough restaurants will buy from you They want to make sure that enough costumers will buy from them The customers are going out less because of a downturn in the economy So you do not open our business because the stock market is down Is any business a ponzi scheme? P.S Saying…

> Is any business a ponzi scheme?

The analogy you are stating doesn't sound right.

If the early stage investors' criteria were based on startups' revenue forecasts, then yes, the metaphor would apply.

However, that's not the case. They pour the money expecting for more money to be poured in later, by others. Granted, I'm oversimplifying here, but the simple existence of such criterium is "symptomatic".

Re: VCs are scared when they should be greedy

#242

Post by x-complexity »

unicornmama wrote: post #221
jacob_rezi wrote: post #190

Earlier quoted context omitted.

what happened?

Instead of our engineer talent pool working on things that matter, such as managing climate change, thanks to (in part) a16z they now work on overheating the planet with lame monkey jpegs. We are in proto-idiocracy.

> Instead of our engineer talent pool working on things that matter, such as managing climate change, thanks to (in part) a16z they now work on overheating the planet with lame monkey jpegs. We are in proto-idiocracy.

This statement assumes the following axioms:

- The engineers that go to work for such startups are capable of devising/deploying solutions towards climate change: Some engineers & researchers may be able to do this, but most are focused in CompSci/SoftEng, with no experience in the field that you want them to be in.

- No roadblocks exist throughout the deployment of said solutions (NIMBYs, politicians, perfectionist "environmental activists"/virtue signalers, bureaucracy, supply chain issues)

Despite the "Sounds good"ness of your statement (which I partially agree with), the practical reality is that the chances of succeeding in something like crypto is still way higher than in building infrastructure, as there are near-0 NIMBYs in crypto that will protest in the next town hall meeting, nor will there be weather issues during the deployment/upgrade of a network/smart contract.

"Software will eat the world" still rings true today, only because the deployment of software is still orders of magnitude easier than deploying something into the real world. In order to make something like infrastructure deployment that much more enticing, the (chance_of_success*windfall - chance_of_failure*investment) must be greater than investing in software, which has significantly lower development costs, does not get bottlenecked by supply chain issues, & can be deployed globally within minutes.

Re: VCs are scared when they should be greedy

#243

Post by karterk »

frognumber wrote: post #212
lpolovets wrote: post #22

(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…

(Context: I'm a successful serial entrepreneur, but never on the fundraising side) My experience is that the best investment opportunities are counter-cyclical. During a down economy, talent is cheap. Competition is low. It's easy to build a growth business which explodes when the economy enters a growth stage. It's also cheaper, more focused, and more efficient to have 5 people work for 5 years than 100 people for 1…

Have you looked at TinySeed? But they don't operate at a Series A scale in terms of cash deployed per investment. I suspect that the power law of returns in VC model requires really large outsized returns that cannot be achieved Without an all or nothing model.

Re: VCs are scared when they should be greedy

#244

Post by icedchai »

peyton wrote: post #188
icedchai wrote: post #174

Earlier quoted context omitted.

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. )

Isn’t that what venture debt is for?

If you can't show you're going to have the cashflow to pay it back any time soon (or later), you may have trouble with that.

Re: VCs are scared when they should be greedy

#245

Post by HWR_14 »

throwawaytemp27 wrote: post #192
HWR_14 wrote: post #161

Earlier quoted context omitted.

> We all hate for our homes to be worth 10% less in 2023 compared to 2022 Speak for yourself. If all property drops, I'm ecstatic. I'm not moving or withdrawing money with a HELOC. So lower property values just mean less taxes for me. I mean, sure, it also means I may be underwater, but who cares? And if I decide to move, that just means the delta between my current place and a new place is smaller in absolute terms.…

Not sure where you live, but where I’m from, an increase/decrease in home value affects your proportion of the overall property taxes but not the absolute amount. If everyone’s home goes down by 20% then everyone gets same tax bill.

That sounds like a European or maybe Canadian thing. Everywhere in the US I've been, it's been a predetermined rate of your home's value.

Re: VCs are scared when they should be greedy

#246

Post by cnelsenmilt »

drdrek wrote: post #206
simonbarker87 wrote: post #200

Earlier quoted context omitted.

I’ve often heard the modern VC route described as a Ponzi scheme with the public market being the greatest of the fools, I don’t totally buy into the idea but your 3rd point really does highlight how close it all is to a Ponzi scheme. So much value is absorbed in the VC pipe than by the time a company IPOs the chance of retail investors seeing returns is minimal to none.

Think about it in this way: You want to open a wholesale food distribution business for restaurants in a Manhattan You want to make sure that enough restaurants will buy from you They want to make sure that enough costumers will buy from them The customers are going out less because of a downturn in the economy So you do not open our business because the stock market is down Is any business a ponzi scheme? P.S Saying…

Future investors are not analogous to customers.

Re: VCs are scared when they should be greedy

#247

Post by Sohcahtoa82 »

HWR_14 wrote: post #161
givemeethekeys wrote: post #71

Earlier quoted context omitted.

As much as VCs and founders hate down rounds - if the public market has dropped in value by 50% for mostly macroeconomic reasons - isn't it fair to then suggest that properties on the private market should be similarly worth less? We all hate for our homes to be worth 10% less in 2023 compared to 2022, but it is what it is, no?

> We all hate for our homes to be worth 10% less in 2023 compared to 2022 Speak for yourself. If all property drops, I'm ecstatic. I'm not moving or withdrawing money with a HELOC. So lower property values just mean less taxes for me. I mean, sure, it also means I may be underwater, but who cares? And if I decide to move, that just means the delta between my current place and a new place is smaller in absolute terms.…

> So lower property values just mean less taxes for me.

In my state, your property's assessed value for taxation purposes cannot rise more than 3% per year, creating a pretty long lag time from the value going up to the taxes going up.

My home is worth about $650K, but it's being taxed as if it was only $250K.

Re: VCs are scared when they should be greedy

#248

Post by unicornmama »

x-complexity wrote: post #242
unicornmama wrote: post #221

Earlier quoted context omitted.

Instead of our engineer talent pool working on things that matter, such as managing climate change, thanks to (in part) a16z they now work on overheating the planet with lame monkey jpegs. We are in proto-idiocracy.

> Instead of our engineer talent pool working on things that matter, such as managing climate change, thanks to (in part) a16z they now work on overheating the planet with lame monkey jpegs. We are in proto-idiocracy. This statement assumes the following axioms: - The engineers that go to work for such startups are capable of devising/deploying solutions towards climate change: Some engineers & researchers may be abl…

> This statement assumes the following axioms:...

Cross-industry support roles contribute to endeavors: DevOps, infra, ML/data science. The a16z fueled ponzi has stripped and redirected talent from these important areas.

Re: VCs are scared when they should be greedy

#249

Post by chenxi9649 »

intelVISA wrote: post #228
simonbarker87 wrote: post #200

Earlier quoted context omitted.

I’ve often heard the modern VC route described as a Ponzi scheme with the public market being the greatest of the fools, I don’t totally buy into the idea but your 3rd point really does highlight how close it all is to a Ponzi scheme. So much value is absorbed in the VC pipe than by the time a company IPOs the chance of retail investors seeing returns is minimal to none.

I'm fairly certain they're mostly laundering schemes at this point -- half of the tech founders I've seen seem to be pitching MVPs that could be readily found in any CS undergrad's Git repo lol.

I think a lot of the tech founders are CS undergrads haha, so you'd probably literally see their mvp in their git repo.

Jokes aside, oftentimes, the most disruptive technologies are not actually technologically difficult. If we take a look at the early days of mega corps today, most of them found an edge in an emergent market with off-the-shelf tech stacks.

Re: VCs are scared when they should be greedy

#250

Post by lpolovets »

simonbarker87 wrote: post #200
lpolovets wrote: post #22

(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…

I’ve often heard the modern VC route described as a Ponzi scheme with the public market being the greatest of the fools, I don’t totally buy into the idea but your 3rd point really does highlight how close it all is to a Ponzi scheme. So much value is absorbed in the VC pipe than by the time a company IPOs the chance of retail investors seeing returns is minimal to none.

I don't think VC is at all like a Ponzi scheme, even thought most VCs depend on there being a "next investor in line." That dependency is not because we're looking for a sucker to shift a bad investment onto, but because most companies' capital needs grow dramatically. So you end up having lots of investors of all sizes, and that works more like checks and balances than a Ponzi scheme.

investors.gov defines a Ponzi scheme as "an investment fraud that pays existing investors with funds collected from new investors. Ponzi scheme organizers often promise to invest your money and generate high returns with little or no risk. But in many Ponzi schemes, the fraudsters do not invest the money."

A few thoughts here:

- the money is actually invested.

- the founders are the ones that decide how to use the money, not the investors. (And generally no one suggests that founders as a group are complicit in a Ponzi scheme.)

- the next investment round is not required -- some companies get to profitability or have a good exit without further funding.

- the next investment round is far from guaranteed. Most stats I've seen suggest that ~30% of seed stage companies raise a Series A. So if it's a Ponzi scheme, then it's a poorly executed one ;)

- the outcomes generated by founders who get VC funding are high impact. See: https://twitter.com/emollick/status/1546109494228402176 (quote: This paper argues that 20% of the largest three hundred US public firms & 75% of the largest VC-backed ones “would not have existed or achieved their current scale without an active VC industry.")

- the next stage investor is generally unaffiliated with the earlier investor AND evaluates a company on its merits. I.e. if our seed company can't get to a stage where they can convince at least one Series A investor to invest -- and as mentioned above, many cannot -- then it goes out of business and we lose our investment. And fwiw, if the later stage fund does a poor job picking companies, it will itself go out of business.

- 99% of the time, our investors are not paid back when another investor invests, they are paid when a company exits. That means either the public market or an individual company thought the startup was a good enough business to invest their money into.

- returns are not promised to our investors -- if anything, it's well known that VC is especially risky and that most VC funds don't have good returns.

> So much value is absorbed in the VC pipe than by the time a company IPOs the chance of retail investors seeing returns is minimal to none.

My understanding is that this is largely regulation related. Companies used to go public much earlier, but because there's an increasingly high burden and cost to being public, lots of companies choose to wait for as long as possible. And there is now enough funding out there that companies are able to stay private for a long time.

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