5 ms·

The cynical side of me wonders if all this is "helpful advice" from VCs is just designed to bring valuations down to earth.

by tarr11 11y ago

mathattack 11y ago
I am a cynic about VCs "Talking their books" but this is a little different: - The stock market is off 20%. - Very few IPOs. - Many hot IPOs are under the offering price. - Most of the public market investors that have entered late in the game (Fidelity, etc) are marking down their positions, and holding off on new investments. Every solid company should have a "What would we need to do to get cashflow positive?" scenario. It may damage longterm valuation (cutting growth does that) but at least it gives the existing investors an option: "We can enter survival mode and do X, or you can fund us with Y, and we can do Z"
- ojbyrne 11y ago
  Which stock market is off 20%? When I look at the Dow or S & P , I see a roughly 10-12% decline from its peak value. And after 2 days of up 2%, suddenly there's a headline saying "the bulls are back."
  - mathattack 11y ago
    NASDAQ's high to low was approximately 20%. After today's rally it's perhaps 16%? NASDAQ is the better index since that's the more likely liquidity source.
- dismal2 11y ago
  so far, no IPOs this year!
tdaltonc 11y ago
Is there no objective way to tell if things are really cooling? Or for what types of startups things cooling?
- rcarrigan87 11y ago
  I can see B-2-C apps, anything social, chat, or apps where the monetization strategy is primarily advertising revenue running into trouble raising money. Good B-2-B biz most likely still get funded.
- nostrademons 11y ago
  There is no "objective way" when it comes markets, there is only what the market will give you. If the market will give you $450M for 5% of a product that doesn't work (a la Theranos), then objectively you're worth $9B, at least until you go bankrupt and then you're worth nothing. If the market is dead but you somehow manage to IPO anyway, save the company, and sell for $1.5B, you're worth $1.5B (a la LoudCloud/Opsware). If you want to find out what you're worth, try to raise money, and whatever you can get is your answer. This throws a lot of people for a loop who want one source of objective truth for everything. But markets don't work that way: they're just deals between individual people, which may or may not become public. If somebody else makes a deal that you think is absolutely crazy, it is objective truth for them but absolutely irrelevant to you. Personal finance works the same way. I know a few folks who were momentarily multi-millionaires during the dot-com boom; then valuations came crashing down and they were completely broke. We also tend to think of the value of a dollar (in cash) to be stable, but as anyone who lives in Zimbabwe can tell you, that's not a given.
  - rokhayakebe 11y ago
    So technically you can raise $1M for 0.1% of your startup and give the VC some crazy 20x liquidation preference. Now the market has you at $1B in valuation.
    - nostrademons 11y ago
      Exactly, and several unicorns are doing things exactly like that: http://blog.samaltman.com/the-tech-bust-of-2015 http://blog.samaltman.com/the-tech-bust-of-2015 I could drop the market cap of Google down to $3.4M right now. All I have to do is sell one of my shares for $0.01. The thing is, it would pop right back up again to $483B within a few milliseconds, and I'd just be out $690, so there's kinda no point to it. (Pedantic note, since I know there's gonna be someone in the financial industry that corrects me: no, I couldn't, technically. When I put in a sell order, it goes into the order book, and buyers are required by law to take the best offer, which is probably more than mine. I'd have to place my order at a time when there are no outstanding limit offers. This has actually happened during flash crashes and technical glitches, but is not a normal occurrence.) Privately traded companies are similar, but because there's less liquidity, the price doesn't necessarily correct on any reasonably time scale.
gyardley 11y ago
Oh, it's decent advice for right now. Of course, you probably need that decent advice because you listened to your VCs' previous decent advice in better economic conditions - "don't worry about profit, just grow grow grow as fast as you can." The cynical side of me thinks that it's this flip-flopping between two extremes that ends up disproportionately benefitting investors, and that entrepreneurs would be better served by always assuming economic conditions will change and preparing accordingly.
- nostrademons 11y ago
  Nah, I figure that venture investors operate under conditions of extreme uncertainty, which means that they make decisions almost purely on emotion. That's what our emotional circuits are made for, after all: subconsciously aggregating a lot of signals so we can make decisions when there's not enough information to process it rationally. And yes, entrepreneurs are almost always better off ignoring everything an investor says and using their own data (which ought to be better than that of an investor's, otherwise why the hell are you founding a company?) to come to a conclusion. The "Mr. Market" allegory was published in 1949, but it's never been more apropos. Pretty much all venture capital operates on this principle; use it to your advantage: https://en.wikipedia.org/wiki/Mr._Market https://en.wikipedia.org/wiki/Mr._Market
  - aorloff 11y ago
    Kahneman and Tversky, Prospect Theory. Applies to investors, VCs, and ordinary people at the grocery store.
- aorloff 11y ago
  Holy shit I was about to write a comment to say - YES!!! absolutely. And then its you. Well, you are still right, and its still what I was thinking.
mindcrime 11y ago
The cynical side of me wonders if all this is "helpful advice" from VCs is just designed to bring valuations down to earth. I'm not really into conspiracy theories as a rule, but I will admit to having a similar thought. At the last, I find myself wondering if advice from VC's - especially regarding something like valuation - doesn't inherently tend to be self-serving on their part. Remember, the objectives of a VC and the objectives of an entrepreneur aren't always aligned. That said, you can't really argue with this part: You know what kind of companies generally survive? Companies that make more money than they spend. I know, duh, right? If you make more than you spend, you get to stay alive for a long time.
- tragic 11y ago
  > I'm not really into conspiracy theories as a rule, but I will admit to having a similar thought. Though I agree with the substance of your comment, I don't think it's a 'conspiracy theory' to expect a VC to have her percentage in mind. That's just capitalism.
- lmm 11y ago
  That kind of company has no business taking VC money in the first place. A VC shouldn't want to invest in a company that doesn't need VC money, and I'm kind of surprised that they would want to encourage their portfolio to transition into that kind of company - such a company isn't going to be the "home run" that VCs make their money off.
  - mindcrime 11y ago
    such a company isn't going to be the "home run" that VCs make their money off. Two thoughts: 1. It might. But it might not do so in the time-frame that VC's typically expect. Since funds tend to be time-boxed, VC's generally need to see not just a specific return, but they need to see it by a certain point in time. The older a given fund is, the more pressure to "do it now". 2. That said, nothing says growth has to be a smooth curve (whether it's linear, exponential, or whatever). You could be on an exponential growth path, slow down to flat, or even shrink, due to external macro-economic factors, or strategy, or whatever, then ramp back up again later and "go exponential" when things change. and I'm kind of surprised that they would want to encourage their portfolio to transition into that kind of company 3. Well if the alternative is going out of business and resulting in a valuation of 0 for everybody involved, almost any alternative is better. I see it not as a call to give up on being a "home run" but as a call to batten down the hatches, hunker down, weather the storm, and then adapt as circumstances change.
davidjgraph 11y ago
When the market takes off again, I'm sure you'll see the flip-side posts from VCs, explaining how startups need to push for higher valuation and better terms, proving you wrong 8-).
- mathattack 11y ago
  It depends on which side of the transaction they are. :-) New investors will keep pushing for lower prices, existing investors will talk up the values!
draw_down 11y ago
... or there could be a bubble bursting. Contrarian takes aren't necessarily correct by the virtue of their contrarianism.
musesum 11y ago
If memory serves: Heidi Roizen had one of the best ROI track records during the Dot Bomb era, having exited most of her portfolio just before. Meanwhile, a friend mentioned that Benchmark had lost a whole fund. I don't have numbers in front of me and the Benchmark comment was hearsay -- so, please correct if I'm wrong. Point is: that some VCs were better at timing than others during a down cycle; I would pay very close attention to what Roizen has to say.
davemel37 11y ago
Their argument would be that this hurts their portfolio companies as well so they are not incentivized to drive prices down.

The cynical side of me wonders if all this is "helpful advice" from VCs is just designed to bring valuations down to earth.

by tarr11 11y ago

The cynical side of me wonders if all this is "helpful advice" from VCs is just designed to bring valuations down to earth.

mathattack 11y ago

I am a cynic about VCs "Talking their books" but this is a little different: - The stock market is off 20%. - Very few IPOs. - Many hot IPOs are under the offering price. - Most of the public market investors that have entered late in the game (Fidelity, etc) are marking down their positions, and holding off on new investments. Every solid company should have a "What would we need to do to get cashflow positive?" scenario. It may damage longterm valuation (cutting growth does that) but at least it gives the existing investors an option: "We can enter survival mode and do X, or you can fund us with Y, and we can do Z"

ojbyrne 11y ago
Which stock market is off 20%? When I look at the Dow or S & P , I see a roughly 10-12% decline from its peak value. And after 2 days of up 2%, suddenly there's a headline saying "the bulls are back."
- mathattack 11y ago
  NASDAQ's high to low was approximately 20%. After today's rally it's perhaps 16%? NASDAQ is the better index since that's the more likely liquidity source.
dismal2 11y ago
so far, no IPOs this year!

tdaltonc 11y ago

Is there no objective way to tell if things are really cooling? Or for what types of startups things cooling?

rcarrigan87 11y ago
I can see B-2-C apps, anything social, chat, or apps where the monetization strategy is primarily advertising revenue running into trouble raising money. Good B-2-B biz most likely still get funded.
nostrademons 11y ago
There is no "objective way" when it comes markets, there is only what the market will give you. If the market will give you $450M for 5% of a product that doesn't work (a la Theranos), then objectively you're worth $9B, at least until you go bankrupt and then you're worth nothing. If the market is dead but you somehow manage to IPO anyway, save the company, and sell for $1.5B, you're worth $1.5B (a la LoudCloud/Opsware). If you want to find out what you're worth, try to raise money, and whatever you can get is your answer. This throws a lot of people for a loop who want one source of objective truth for everything. But markets don't work that way: they're just deals between individual people, which may or may not become public. If somebody else makes a deal that you think is absolutely crazy, it is objective truth for them but absolutely irrelevant to you. Personal finance works the same way. I know a few folks who were momentarily multi-millionaires during the dot-com boom; then valuations came crashing down and they were completely broke. We also tend to think of the value of a dollar (in cash) to be stable, but as anyone who lives in Zimbabwe can tell you, that's not a given.
- rokhayakebe 11y ago
  So technically you can raise $1M for 0.1% of your startup and give the VC some crazy 20x liquidation preference. Now the market has you at $1B in valuation.
  - nostrademons 11y ago
    Exactly, and several unicorns are doing things exactly like that: http://blog.samaltman.com/the-tech-bust-of-2015 http://blog.samaltman.com/the-tech-bust-of-2015 I could drop the market cap of Google down to $3.4M right now. All I have to do is sell one of my shares for $0.01. The thing is, it would pop right back up again to $483B within a few milliseconds, and I'd just be out $690, so there's kinda no point to it. (Pedantic note, since I know there's gonna be someone in the financial industry that corrects me: no, I couldn't, technically. When I put in a sell order, it goes into the order book, and buyers are required by law to take the best offer, which is probably more than mine. I'd have to place my order at a time when there are no outstanding limit offers. This has actually happened during flash crashes and technical glitches, but is not a normal occurrence.) Privately traded companies are similar, but because there's less liquidity, the price doesn't necessarily correct on any reasonably time scale.

gyardley 11y ago

Oh, it's decent advice for right now. Of course, you probably need that decent advice because you listened to your VCs' previous decent advice in better economic conditions - "don't worry about profit, just grow grow grow as fast as you can." The cynical side of me thinks that it's this flip-flopping between two extremes that ends up disproportionately benefitting investors, and that entrepreneurs would be better served by always assuming economic conditions will change and preparing accordingly.

nostrademons 11y ago
Nah, I figure that venture investors operate under conditions of extreme uncertainty, which means that they make decisions almost purely on emotion. That's what our emotional circuits are made for, after all: subconsciously aggregating a lot of signals so we can make decisions when there's not enough information to process it rationally. And yes, entrepreneurs are almost always better off ignoring everything an investor says and using their own data (which ought to be better than that of an investor's, otherwise why the hell are you founding a company?) to come to a conclusion. The "Mr. Market" allegory was published in 1949, but it's never been more apropos. Pretty much all venture capital operates on this principle; use it to your advantage: https://en.wikipedia.org/wiki/Mr._Market https://en.wikipedia.org/wiki/Mr._Market
- aorloff 11y ago
  Kahneman and Tversky, Prospect Theory. Applies to investors, VCs, and ordinary people at the grocery store.
aorloff 11y ago
Holy shit I was about to write a comment to say - YES!!! absolutely. And then its you. Well, you are still right, and its still what I was thinking.

mindcrime 11y ago

The cynical side of me wonders if all this is "helpful advice" from VCs is just designed to bring valuations down to earth. I'm not really into conspiracy theories as a rule, but I will admit to having a similar thought. At the last, I find myself wondering if advice from VC's - especially regarding something like valuation - doesn't inherently tend to be self-serving on their part. Remember, the objectives of a VC and the objectives of an entrepreneur aren't always aligned. That said, you can't really argue with this part: You know what kind of companies generally survive? Companies that make more money than they spend. I know, duh, right? If you make more than you spend, you get to stay alive for a long time.

tragic 11y ago
> I'm not really into conspiracy theories as a rule, but I will admit to having a similar thought. Though I agree with the substance of your comment, I don't think it's a 'conspiracy theory' to expect a VC to have her percentage in mind. That's just capitalism.
lmm 11y ago
That kind of company has no business taking VC money in the first place. A VC shouldn't want to invest in a company that doesn't need VC money, and I'm kind of surprised that they would want to encourage their portfolio to transition into that kind of company - such a company isn't going to be the "home run" that VCs make their money off.
- mindcrime 11y ago
  such a company isn't going to be the "home run" that VCs make their money off. Two thoughts: 1. It might. But it might not do so in the time-frame that VC's typically expect. Since funds tend to be time-boxed, VC's generally need to see not just a specific return, but they need to see it by a certain point in time. The older a given fund is, the more pressure to "do it now". 2. That said, nothing says growth has to be a smooth curve (whether it's linear, exponential, or whatever). You could be on an exponential growth path, slow down to flat, or even shrink, due to external macro-economic factors, or strategy, or whatever, then ramp back up again later and "go exponential" when things change. and I'm kind of surprised that they would want to encourage their portfolio to transition into that kind of company 3. Well if the alternative is going out of business and resulting in a valuation of 0 for everybody involved, almost any alternative is better. I see it not as a call to give up on being a "home run" but as a call to batten down the hatches, hunker down, weather the storm, and then adapt as circumstances change.

davidjgraph 11y ago

When the market takes off again, I'm sure you'll see the flip-side posts from VCs, explaining how startups need to push for higher valuation and better terms, proving you wrong 8-).

mathattack 11y ago
It depends on which side of the transaction they are. :-) New investors will keep pushing for lower prices, existing investors will talk up the values!

draw_down 11y ago

... or there could be a bubble bursting. Contrarian takes aren't necessarily correct by the virtue of their contrarianism.

musesum 11y ago

If memory serves: Heidi Roizen had one of the best ROI track records during the Dot Bomb era, having exited most of her portfolio just before. Meanwhile, a friend mentioned that Benchmark had lost a whole fund. I don't have numbers in front of me and the Benchmark comment was hearsay -- so, please correct if I'm wrong. Point is: that some VCs were better at timing than others during a down cycle; I would pay very close attention to what Roizen has to say.

davemel37 11y ago

Their argument would be that this hurts their portfolio companies as well so they are not incentivized to drive prices down.