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.
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
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.
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.
(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 year. 5-20 people is sort of optimal.
That requires (more) patient capital, and longer times to IPOs, but has higher ROI.
I think I could build any of several successful businesses with a smaller investment -- on the order of $5-10M -- sustained over a longer period (optimally, around $1-2M/year over 5 years). I don't think I'd want or need series B or C funding. That can accelerate things, which is helpful if I'm competing aggressively against five companies, and it's first to grab the market, but it makes companies a lot less lean, focused, and aligned as well. It also dilutes equity a lot, for everyone. Stock options have a reputation for being worthless, and when you run the numbers, that's generally true for anyone beyond the founders.
Do you know if there are investors who can handle this type of structure? Or what constraints there are to having these kinds of investments? I understand the current time windows that a VC fund is open, but it's odd to me that there aren't more diverse types of funding available. Do you know why people haven't set up VC funds with other structures? It seems like a major inefficiency and friction....
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.
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.
They discussed this phenomenon at length on a recent Odd Lots podcast, and I can’t understand it as anything but a market inefficiency that some smart VC firm will eventually exploit. Values (and thus prices) go up and down. Putting your head in the sand about it can’t be a winning investment strategy.
you might be underestimate the importance of narrative in a startup. a startup takes a tremendous amount of belief to will into existence, and a lot of belief depends on an unbroken narrative. to most outward folks, a startup generally wants to appears to be continuously crushing it - people understand that there are ups and downs, but generally have no patience for a "well we had a slow 3 years where we made a lot of mistakes" nuance.
if you doubt this, consider how you eval a startup when joining as an employee, much less as an investor.
I agree, I think this is an inefficiency. But it's a tough one to correct because startups are a repeated game, and everyone's worried about upsetting people they'll have to keep playing with.
I think the logic is "I like this company, but if I offer a down round then will I piss off their existing investors? Will those investors stop sharing good investment opportunities with me? ... Ah screw it, I'll just skip this down round and focus on other prospective investments."
I think multi-stage investors are probably best-positioned to address this, since they are both new and existing investors in the companies they back, so they should be able to offer market price down rounds for companies that are still promising but unable to attract external capital.
What amazes me is the seed round at 10s of millions. I was amazed to find the YC puts in 150k to each start up. I think it was 6k per founder back in the day.
Apart from companies wanting to build battery storage, what do people do with 20M of seed funding?
I mean surely it is time to pivot to finding dozens of companies wanting to just be profitable and return a dividend. Fund enough (but like YC) and one or two will become unicorns just because?
"$10m-$15m post" actually refers to the valuation of the company rather than the investment amount. The investment amount is typically 10-20%. So a valuation of $10-15m would mean an investment of $1-1.5m
I say this as someone who isn’t very familiar with this world, but have also noticed this. I think it’s a perception hack: there are some expectations about how a series A startup operates (demonstrated product/market fit, starts entering the growth stage, etc), and investors/founders still want to invest in companies that show great potential according to them, but just aren’t there yet, and it’s undesirable to oversell the company / raise expectations too high.
Hence the massive seed rounds,
with equally massive bridge rounds, etc etc.
Your second point is the dynamic that makes the least sense to me. In public markets, if a stock is cheaper relative to future earnings, that makes it a better buy. In our corner of the world, the opposite often holds true.
There should be a tipping point where greed beats ego, but have not yet figured out how to find it.
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.
There is literally no benefit to most homeowners for the real estate market being higher.
When you raise funding at a startup, you're usually creating new shares which dilute old shares. If a seed round VC is able to get out with a 20% loss then they might be happy, but what will actually happen is that the seed round VC's 10% share turns into a 8% share AND they look like they've taken a loss because the 8% share is worth less.
In growing markets, the 10% turning into 8% doesn't matter because it was 10% of a $1M company vs 8% of a $10M company. You're still richer (at least on paper) than you used to be.
I've been trying to understand the medium-term implications of your first point for the market.
My understanding is that if a VC raised a $1B fund, and the fund lasts for 10 years, the investments really need to be made in the first 5 years.
If VCs are sitting on the sidelines now, AND making smaller investments, what happens in year 2 or 3 when they have to deploy those funds?
Do you think deal sizes will get outrageously large because of too much money in the system? Will there be another rush to sign deals to deploy the capital?
Does this get talked about by VCs? Am I completely misunderstanding how this will play out?
It's perfectly possible for funds to return the capital to investors and just say "Hey, we couldn't find anything to invest in at a good price, so we didn't", and that'll look better for them because their ROI will still be good.
This is also likely to happen because big investors generally have their investments split between lots of asset classes by some ratio, so let's say for the sake of argument that Harvard's endowment is 30% equities, 30% private equity, 10% fixed income, and a mix of other stuff. If the value of their equities in the stock market fall through the floor that means their ratio is suddenly off, so they're going to need to rotate out of private equity and into equities.
Part of the difficulty in parsing public versus private company valuations is due to the time constant: It takes a while for private companies to get desperate, whereas public companies have a real-time bead on investor sentiment.
Angellists data is flawed here—- you ideally want to look at seeds that are completely new or coming from sub $2 million pre-seeds. They include seed extensions, seed extension extensions, high priced note extension to seed rounds, etc. and when the market slows down you see a lot of extension rounds which pushes that number up but those are not really new seed rounds.
There are a host of other way their data is flawed as well :) but that’s a much longer topic.
Am I correct to understand that VCs get the same share of the pie, now, that the valuations are lower?
So the valuation changes, the amount the VC puts in changed but not the % VCs get from the deal?
This seems that the founders get the short end of the stick, no?
From the linked article: "Critically, the venture market at the time was tiny relative to today’s ecosystem"
This isn't quite true. At least for US VC investment in dollars. It peaked at $66 billion in 2000, and didn't surpass that amount until 2018, according to these charts:
And if you adjust for inflation, that year 2000 $66B is $103.86B in 2021 dollars, and the 2nd chart shows 2021 getting to $128B.
Now the two different data sources do have somewhat different numbers for each comparable year. I couldn't find a comparison that covered enough years to show the difference. But I think it's pretty clear that the dot com era was a spectacularly fast increase in VC funding. And the more recent years were slower growth, but did end up getting to slightly higher numbers, if you adjust for inflation.
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.
i've been betting against btc from the beginning, however i truely believe there's something interesting in this field, that may end up getting some real applications sometimes.
Now what's still unknown is whether the funds that invested heavily on crypto in 2020s will have enough leftovers once this crisis is over to be a player when the crypto 2.0 era is coming.
> i've been betting against btc from the beginning
Not literally, I assume? Or you’ve got a tiny position and have been (relative to the size if your position) haemorrhaging money for ~13 years? Or successfully rode some down waves? (I’m super jelly if you did the latter)
"In contrast with the scenario in 2000, most of today’s tech companies are real businesses."
I disagree that many startups have viable ideas that will generate black numbers and organic growth.
Bold founders have sold startup ideas which are not sustainable.
Ie investment capital have prefered bold founders that could give vision of high future returns wework for example.
A small number of startups will become awesome but the majority wont.
Zero interest rates was a money rocket that fueled startups going to the sky. But what goes up usually comes down eventually with gravity/interest rates.
A small fraction of startups will become super sucessfull but the majority wont. The number of sucessfull probably follows some kind of statistical distribution of which startups is great vs bad.
Higher interest rates will adjust future return calculations that is brilliant from the article!
>Higher interest rates will adjust future return calculations that is brilliant from the article!
I think discounted future cashflow is unfit for purpose as a valuation metric in an inflationary environment. It is based on the assumption that interest rates and future cash flows are independent variables. They are not.
There's no dispute that the present value of a given amount of future cashflow is lower when interest rates are higher. This part is correct. It's simple arithmetic.
However, when interest rates rise because inflation rises, it means that future cash flows rise as well, because future cash flows are linked to future revenues, and future revenues, by definition, grow with inflation.
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
If you hire a smart kid with an MBA from stanford and he gives you a bad name with a series of mistakes, well, bad apples happen. If you hire a smart kid from a no name university and the same happens people will be quicker to blame you.
Credentialism is a thing for the same reason brand recognition is a thing. When a product with good reputation fails it's bad luck. When a product with bad reputation fails it's to be expected. Power perpetuates.
In the USSR, there was democratic control by the public at each given level of the economy. Which is why people who were born to poor rural farmers were able to get education, and then get to the top of the USSR's economy and politics.
In the US, that never has been the case. Even in its golden years.
Even in 1960s, 30,000 people (families, children included) dominated all US economic and political institutions. This group was an exclusive group with class consciousness, thwarting any reduction of their control and keeping outsiders out. This phenomenon continues today. Some freak successes in tech space did not change the pattern.
This post reminded me a little of my real estate agent's newsletter:
2007: There's never been a better time to buy!
2008: There's never been a better time to buy!
2012: There's never been a better time to buy!
2020: There's never been a better time to buy!
2022: There's never been a better time to buy!
Assuming you are referring to the US, buy side real estate agents get paid by the sell side real estate agent (technically the real estate seller pays commission to the sell side real estate broker, which then pays the sell side real estate agent and the buy side real estate broker which then pay the buy side real estate agent).
while I agree with the general premise (majority of VCs are not good investors) it's important to remember the money they raised isn't sitting in a bank account.
It's likely still in the LPs stock portfolio, doing a capital call when everyone is down a lot can be tricky. You need to sell the investment more even though they agreed to give you the money when you asked
Fwiw - my general premise isn't that the "majority of VCs are not good investors." My point is that there's a serious disconnect in the markets right now, and that it is rooted more in fear than a lack of opportunity.
On the second point - you're right that the cash isn't literally sitting around, but VCs (generally) do not have to ask LPs for approval on a deal by deal basis. Capital calls can happen either as tranches or in response to a deal, and it is unusual for an LP to successfully refuse a capital call because of a specific deal.
If you just view VCs as any other business, it involves revenue (exits) and costs (investments). The market turmoil is affecting the volume and size of exits in at least the short term, which means they are cutting costs. It's not clear the number of opportunities have grown/shrank but i guess fewer people trying to invest means the number of available opportunities to you as a player has grown.
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.
If the LPs don’t meet the capital calls, they’re in breach of their investor agreement, and the penalties are generally quite harsh, including potentially forfeiting a lot of the value they currently have in the fund.
No, that's not how it is. If the LP doesn't pay their capital call they go into default and the returns on all the money they've invested so far can be taken away. The only LPs who default on the capital call are individual investors who are flat out broke. They will of course default on their capital call before their mortgage.
The narative here seem disengenious, framing everything as one extreme to another:
Then came the coronavirus-related market shock of 2020...everyone assumed the absolute worst...then everything ... went nuts... around the beginning of this year, when it all ground down to a halt.
I don't doubt you can find (many) examples to support this, and yes, the themes are along these lines, but this is not the absolute reality in many industries, geographies and companies. If companies that have been hit hard are still able to raise, though maybe it's more painful.
My take-aways are:
* This is not the end of the world
* Poor fundamentals will be recognized and punished (finally) but only for a while
Readit News
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.
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.
Is any business a ponzi scheme?
P.S Saying that, there is research that buying at IPO is rarely a good idea: https://www.youtube.com/watch?v=2a7qhIpxv60
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.
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 year. 5-20 people is sort of optimal.
That requires (more) patient capital, and longer times to IPOs, but has higher ROI.
I think I could build any of several successful businesses with a smaller investment -- on the order of $5-10M -- sustained over a longer period (optimally, around $1-2M/year over 5 years). I don't think I'd want or need series B or C funding. That can accelerate things, which is helpful if I'm competing aggressively against five companies, and it's first to grab the market, but it makes companies a lot less lean, focused, and aligned as well. It also dilutes equity a lot, for everyone. Stock options have a reputation for being worthless, and when you run the numbers, that's generally true for anyone beyond the founders.
Do you know if there are investors who can handle this type of structure? Or what constraints there are to having these kinds of investments? I understand the current time windows that a VC fund is open, but it's odd to me that there aren't more diverse types of funding available. Do you know why people haven't set up VC funds with other structures? It seems like a major inefficiency and friction....
They discussed this phenomenon at length on a recent Odd Lots podcast, and I can’t understand it as anything but a market inefficiency that some smart VC firm will eventually exploit. Values (and thus prices) go up and down. Putting your head in the sand about it can’t be a winning investment strategy.
you might be underestimate the importance of narrative in a startup. a startup takes a tremendous amount of belief to will into existence, and a lot of belief depends on an unbroken narrative. to most outward folks, a startup generally wants to appears to be continuously crushing it - people understand that there are ups and downs, but generally have no patience for a "well we had a slow 3 years where we made a lot of mistakes" nuance.
if you doubt this, consider how you eval a startup when joining as an employee, much less as an investor.
I think the logic is "I like this company, but if I offer a down round then will I piss off their existing investors? Will those investors stop sharing good investment opportunities with me? ... Ah screw it, I'll just skip this down round and focus on other prospective investments."
I think multi-stage investors are probably best-positioned to address this, since they are both new and existing investors in the companies they back, so they should be able to offer market price down rounds for companies that are still promising but unable to attract external capital.
Apart from companies wanting to build battery storage, what do people do with 20M of seed funding?
I mean surely it is time to pivot to finding dozens of companies wanting to just be profitable and return a dividend. Fund enough (but like YC) and one or two will become unicorns just because?
or am I dreaming
Hence the massive seed rounds, with equally massive bridge rounds, etc etc.
There should be a tipping point where greed beats ego, but have not yet figured out how to find it.
We all hate for our homes to be worth 10% less in 2023 compared to 2022, but it is what it is, no?
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.
There is literally no benefit to most homeowners for the real estate market being higher.
In growing markets, the 10% turning into 8% doesn't matter because it was 10% of a $1M company vs 8% of a $10M company. You're still richer (at least on paper) than you used to be.
My understanding is that if a VC raised a $1B fund, and the fund lasts for 10 years, the investments really need to be made in the first 5 years.
If VCs are sitting on the sidelines now, AND making smaller investments, what happens in year 2 or 3 when they have to deploy those funds?
Do you think deal sizes will get outrageously large because of too much money in the system? Will there be another rush to sign deals to deploy the capital?
Does this get talked about by VCs? Am I completely misunderstanding how this will play out?
This is also likely to happen because big investors generally have their investments split between lots of asset classes by some ratio, so let's say for the sake of argument that Harvard's endowment is 30% equities, 30% private equity, 10% fixed income, and a mix of other stuff. If the value of their equities in the stock market fall through the floor that means their ratio is suddenly off, so they're going to need to rotate out of private equity and into equities.
Part of the difficulty in parsing public versus private company valuations is due to the time constant: It takes a while for private companies to get desperate, whereas public companies have a real-time bead on investor sentiment.
There are a host of other way their data is flawed as well :) but that’s a much longer topic.
This seems that the founders get the short end of the stick, no?
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This isn't quite true. At least for US VC investment in dollars. It peaked at $66 billion in 2000, and didn't surpass that amount until 2018, according to these charts:
https://pitchbook.infogram.com/6-vm-charts-1h8n6m3klxngj4x
https://www.statista.com/chart/11443/venture-capital-activit...
And if you adjust for inflation, that year 2000 $66B is $103.86B in 2021 dollars, and the 2nd chart shows 2021 getting to $128B.
Now the two different data sources do have somewhat different numbers for each comparable year. I couldn't find a comparison that covered enough years to show the difference. But I think it's pretty clear that the dot com era was a spectacularly fast increase in VC funding. And the more recent years were slower growth, but did end up getting to slightly higher numbers, if you adjust for inflation.
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Now what's still unknown is whether the funds that invested heavily on crypto in 2020s will have enough leftovers once this crisis is over to be a player when the crypto 2.0 era is coming.
Not literally, I assume? Or you’ve got a tiny position and have been (relative to the size if your position) haemorrhaging money for ~13 years? Or successfully rode some down waves? (I’m super jelly if you did the latter)
I disagree that many startups have viable ideas that will generate black numbers and organic growth.
Bold founders have sold startup ideas which are not sustainable.
Ie investment capital have prefered bold founders that could give vision of high future returns wework for example.
A small number of startups will become awesome but the majority wont.
Zero interest rates was a money rocket that fueled startups going to the sky. But what goes up usually comes down eventually with gravity/interest rates.
A small fraction of startups will become super sucessfull but the majority wont. The number of sucessfull probably follows some kind of statistical distribution of which startups is great vs bad.
Higher interest rates will adjust future return calculations that is brilliant from the article!
I think discounted future cashflow is unfit for purpose as a valuation metric in an inflationary environment. It is based on the assumption that interest rates and future cash flows are independent variables. They are not.
There's no dispute that the present value of a given amount of future cashflow is lower when interest rates are higher. This part is correct. It's simple arithmetic.
However, when interest rates rise because inflation rises, it means that future cash flows rise as well, because future cash flows are linked to future revenues, and future revenues, by definition, grow with inflation.
My guess is probably more statements 2 and 3 for the usual suspects eg Stanford
If you hire a smart kid with an MBA from stanford and he gives you a bad name with a series of mistakes, well, bad apples happen. If you hire a smart kid from a no name university and the same happens people will be quicker to blame you.
Credentialism is a thing for the same reason brand recognition is a thing. When a product with good reputation fails it's bad luck. When a product with bad reputation fails it's to be expected. Power perpetuates.
In the US, that never has been the case. Even in its golden years.
https://whorulesamerica.ucsc.edu/power/class_domination.html
Even in 1960s, 30,000 people (families, children included) dominated all US economic and political institutions. This group was an exclusive group with class consciousness, thwarting any reduction of their control and keeping outsiders out. This phenomenon continues today. Some freak successes in tech space did not change the pattern.
2007: There's never been a better time to buy! 2008: There's never been a better time to buy! 2012: There's never been a better time to buy! 2020: There's never been a better time to buy! 2022: There's never been a better time to buy!
Recessions are good times to take risks since people are afraid and while capital isn’t cheap this time around, assets are.
All years: There’s never been a better time to sell!
In other countries the agents only make commissions from the seller not the buyer, hence getting the listing is the big thing.
It's likely still in the LPs stock portfolio, doing a capital call when everyone is down a lot can be tricky. You need to sell the investment more even though they agreed to give you the money when you asked
On the second point - you're right that the cash isn't literally sitting around, but VCs (generally) do not have to ask LPs for approval on a deal by deal basis. Capital calls can happen either as tranches or in response to a deal, and it is unusual for an LP to successfully refuse a capital call because of a specific deal.
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.
Then came the coronavirus-related market shock of 2020...everyone assumed the absolute worst...then everything ... went nuts... around the beginning of this year, when it all ground down to a halt.
I don't doubt you can find (many) examples to support this, and yes, the themes are along these lines, but this is not the absolute reality in many industries, geographies and companies. If companies that have been hit hard are still able to raise, though maybe it's more painful.
My take-aways are:
* This is not the end of the world
* Poor fundamentals will be recognized and punished (finally) but only for a while
* There are some really good deals out there