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Startups Once Showered with Cash Now Have to Work for It

nytimes.com

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Re: Startups Once Showered with Cash Now Have to Work for It

#41

Post by SilasX »

nostrademons wrote: post #38
SilasX wrote: post #34

Earlier quoted context omitted.

I get the theory there but it's never seemed realistic to me. What VC would actually change their mind about pulling the trigger on an equity by because of a fractional point change in the risk free rate? It just doesn't make sense.

It's not the individual VC that changes their mind. The LP that funds the VC has to work harder for returns when money is cheap. They're incentivized to put more money into potentially higher-yielding investments (or even just keep the same asset allocation, but a bigger pool = more money going into VC at the same allocation). That in turn means they're incentivized to fund more marginal VC firms, and then it's the m…

That's my point: a change from 3 to 3.25% in the prime rate doesn't suddenly make CoolApprfy into a good vs a bad investment. The need to earn higher returns on cash doesn't make CoolApprfy more likely to go big and pay a return; reality doesn't work like that. If you're investing in CoolApprfy to "win back" some income streams, you're doing it for the (very) wrong reasons.

Re: Startups Once Showered with Cash Now Have to Work for It

#43

Post by nostrademons »

SilasX wrote: post #41
nostrademons wrote: post #38

Earlier quoted context omitted.

It's not the individual VC that changes their mind. The LP that funds the VC has to work harder for returns when money is cheap. They're incentivized to put more money into potentially higher-yielding investments (or even just keep the same asset allocation, but a bigger pool = more money going into VC at the same allocation). That in turn means they're incentivized to fund more marginal VC firms, and then it's the m…

That's my point: a change from 3 to 3.25% in the prime rate doesn't suddenly make CoolApprfy into a good vs a bad investment. The need to earn higher returns on cash doesn't make CoolApprfy more likely to go big and pay a return; reality doesn't work like that. If you're investing in CoolApprfy to "win back" some income streams, you're doing it for the (very) wrong reasons.

My point is that there's a wide variety of beliefs as to whether CoolApprfy is a good company. To get funded, CoolApprfy only needs to identify one person who believes it is.

When money is cheap, it is much more likely that they will be able to find someone controlling money who believes it is. When money is expensive, the intersection of [people who have money] x [people who believe CoolApprfy is a good company] is much smaller. For companies that are actually good companies, this intersection will likely (although not always; good companies fail to get funded in challenging fundraising climates all the time) still be non-zero. For companies that are bad companies, it's much more likely they will be unable to find anyone who believes they are good companies.

Markets are made up as individuals, but they don't behave like individuals. An effect does not have to be observable on the individual level for it to be observable in the behavior of the market as a whole.

Re: Startups Once Showered with Cash Now Have to Work for It

#45

Post by lazaroclapp »

paulpauper wrote: post #26
paulpauper wrote: post #20

Earlier quoted context omitted.

AMZN and GOOG would have been great investments and still are

I know but it was founded in 1998 and survived.

Sure, but what he means is most normal people wouldn't have been able to invest in GOOG then.

Re: Startups Once Showered with Cash Now Have to Work for It

#47

Post by Ankaios »

blazespin wrote: post #42

tldr, The fed raised the funds rate.

That, plus it seems like in the last couple of years many people got more careful about estimating the values of privately-held companies. A $100 million investment for 10% of a company in its latest round doesn't indicate that it's worth $1 billion if there are liquidation preferences or other similar favorable terms.

I might be misreading things, but I think that has made people more conservative about what scales of exits are eventually attainable.

Re: Startups Once Showered with Cash Now Have to Work for It

#48

Post by carsongross »

morgante wrote: post #31
carsongross wrote: post #9

This is bad news for bootstrapped startups. If cash stops being a cocaine-tier obsession for these guys, we might have to compete with them. Sad.

Could you explain your point? Conventional reasoning is that decreased VC investments is actually good news for bootstrappers, as it winnows down the competition of people offering unsustainable unit prices with outsized markets. If everyone is forced to seek fast profitability, bootstrappers are the most experienced at it.

I was joking that the lack of free cash might focus the VC-backed startups on areas where bootstrapped (and presumably profitable) startups already are.

I don't actually think that will happen much: typically the structural costs associated with VC-backed companies is too high (e.g. SF rents) to even get close to what bootstrappers can do.

Re: Startups Once Showered with Cash Now Have to Work for It

#49

Post by GCA10 »

kordless wrote: post #27

> “Investors have materially more time to do diligence than before,” said Ben Ling, a partner at venture capital firm Khosla Ventures. In other words, "We're getting less deals to look at, so we're looking at the ones we have more closely."

Actually, it's the VCs' fear map that changes most radically. (Hire enough associates, and you can call 20 customers/prospects/former associates in an afternoon.)

In boom times, VCs cut short their due diligence because if they dawdle or seem too skeptical, they won't get to be in the next Theranos round.

In jittery times, VCs check everything because otherwise they will be in the next Theranos round.

I saw an echo of this with mortgage appraisals. In the housing bubble, we got refinanced one time with an appraisal that didn't involve stepping inside the house. The appraiser just took two photos from the street and didn't even ask me if the home was habitable.

After the housing finance crack-up, the next appraiser not only walked through every room, he clicked dozens of photos of everything from our smoke detectors to the straps holding on the hot-water heater. It was almost like having a crime-scene photographer pay us a visit.

Re: Startups Once Showered with Cash Now Have to Work for It

#50

Post by SilasX »

nostrademons wrote: post #43
SilasX wrote: post #41

Earlier quoted context omitted.

That's my point: a change from 3 to 3.25% in the prime rate doesn't suddenly make CoolApprfy into a good vs a bad investment. The need to earn higher returns on cash doesn't make CoolApprfy more likely to go big and pay a return; reality doesn't work like that. If you're investing in CoolApprfy to "win back" some income streams, you're doing it for the (very) wrong reasons.

My point is that there's a wide variety of beliefs as to whether CoolApprfy is a good company. To get funded, CoolApprfy only needs to identify one person who believes it is. When money is cheap, it is much more likely that they will be able to find someone controlling money who believes it is. When money is expensive, the intersection of [people who have money] x [people who believe CoolApprfy is a good company] is…

That would still suggest that the set of "VC investments that depend on Fed policy" is the same as the set of "VC investments that will sputter out anyway" (module the fortuitous luck factor).
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