7 ms·

Just of out curiosity to the HN crowd - why is understanding the finance behind venture capital so interesting to people? I regularly see posts like this (inclu

by mbesto 9y ago

Just of out curiosity to the HN crowd - why is understanding the finance behind venture capital so interesting to people? I regularly see posts like this (including stuff I've written) and people are absolutely enamored by it. VC's likely represent a small fraction of the people on here, and are definitely a small fraction of the overall finance community, so why so much interest from non VC folks?

palakchokshi 9y ago
I suppose it is good knowledge to have incase you find yourself in the seed investor's shoes. It is likely that many on HN have an interest in understanding this from a seed or angel investor viewpoint. That's why I read these. But then again what do I know.
AznHisoka 9y ago
I'm not interested in this. I wished there was an article on "How Hard is it to generate a 10X return" for normal, Average-Joe investments (ie stocks, bonds, real estate), and how a 10X return is actually at most 6X return, because you need to take into account taxes, costs, and inflation.
- autokad 9y ago
  if you are - a passive investor and dont want to spend much time thinking about it - want your money to earn a good return over inflation (5%+) - dont need the money for ~ 3 to 5 years (its ok not being liquid) then an sp500 index fund is probably best. not the 10x return you are looking for, otherwise you have to be a lot more speculative
  - AznHisoka 9y ago
    For a middle-aged person, what % of my money should be in that index fund?
    - dahdum 9y ago
      A good rule of thumb is 100 minus your age is your % of stocks to hold. Those stocks should be diversified index funds, so if you're 40 years old 60% in S&P500 ETF is pretty decent. The exact index funds to hold is a constant matter of debate (including whether to hold international). Doesn't matter as much as having that equity exposure and keeping the fund fees low. Lots of resources out there to do it yourself (https://www.bogleheads.org/wiki/Three-fund_portfolio https://www.bogleheads.org/wiki/Three-fund_portfolio) or you could use Betterment/Wealthfront/Personal Capital for extra fees.
      - jmulho 9y ago
        I agree about equity exposure, low fees, and simple approaches like a three fund portfolio. Here is a slightly more sophisticated way to think about the percentage that should be in equities. One year from now, equities could be up 25% or down 50%. Twenty years from now, equities are likely to be up, likely to have outpaced inflation, and likely to have outperformed "safer" alternatives (money market funds, bond funds, etc.). If you have a $10,000 bill coming due in one year, and $10,000 in the bank, it would be risky to invest any of it in equities. If you have money to invest that you won't be forced to liquidate for 20 years (e.g. your 401k at age 40), then it is probably fine to start with 100% of in equities. The percentage should be based on when you might be forced to liquidate each available investment dollar. In many cases this will agree with the rule of thumb. By equities I mean low cost equity ETFs (or index funds) that invest in broad indexes. I do not mean a portfolio of 10 to 30 stocks hand-picked by you or any fund manager. The hand-picked portfolio could be down 100% in 20 years, or in 1 year.
        dahdum 9y ago
        We're on the same page mostly, but I think if forced liquidation is a real risk you should lower your equity % at the start to compensate. 100% at age 40 is overly aggressive, pretty sure you'd have better risk adjusted returns by including bonds in there from the start.
        9y ago
  - badpun 9y ago
    I wonder if it will be true in this century. 20th century was exceptional for US economy, allowing for huge growth and hence great returns on stocks. The playing field looks very different now, though. Personally, given the circumstances, I’d be happy with 2% return over inflation.
- goialoq 9y ago
  10X returns are easy -- just put the money in a savings account. What's your _timescale_ for generating 10X returns? That's where it gets tricky.
  - AznHisoka 9y ago
    In my lifetime :)
- codingdave 9y ago
  For "normal" investments, a 10X return is easy.... given enough time. Invest in your 20s, it is definitely going to be 10x by retirement. Now, 10X in a short timeframe, that is a different story. Being rich when you are young is mostly about the right idea, at the right time, in the right place. Being rich when you are old is simply about organizational skills.
awad 9y ago
Understanding VC dynamics is good for founders and would-be founders
nicolashahn 9y ago
Lots of people would like to be in that position, so it's interesting to them. Why do people follow the lifestyles of the rich and famous in general?
syllogism 9y ago
It's a huge part of the tech landscape. If you're working for start-ups, you're an investor in start-ups, so you need to understand how the financing works. You also need to understand what it means when your CEO says they're "almost definitely closing a round now, surely". Even if you're running a normal, non-VC tech company, understanding the motivations of VCs is very useful. The behaviour of other companies makes much more sense in light of this.
QML 9y ago
I don’t know about others, but I’m interested in the large cogs that move the world. Maybe it’s because I’m looking for problems, or wondering how the status quo came to be. For example, why does it cost $30 for a wire transfer? And why is it only processed on business days. That led to me wonder how banking and ACHs work.
- syedkarim 9y ago
  The bank charges you $30 to process a wire. It costs them less than $1 to move your money.
  - QML 9y ago
    Is there now a cheaper alternative towards wiring money?
fgonzag 9y ago
A lot people would like to have their startup funded. I believe that knowing what the investment side is looking for, the things that would make your company attractive to them, is important in a sales pitch. It allows you to focus your pitch and business plan around their business model, which makes it easier to get funded. It's a small part of it, but understanding what VCs are looking for and their business model is important if you ever want to get funded. It will allow you to foresee certain decisions, and give you more options in response to them.
gumby 9y ago
You should know your customer. If you start a business to make widgets you need to understand the needs and motivations of widget users. But unless you can bootstrap it, you need to know the motivations of your lenders and/or investors. Their interests are different from (and rarely aligned well with) yours, much less those of your customers.
the_cat_kittles 9y ago
because there is a pervasive interest in making alot of money quickly here. i think (and im probably projecting a bit) that this community exaggerates how interested it is in tech and engineering based on merits, and down plays how much its interested in them as means to an end (wealth). it bothers me because its dishonest, and its also a bit sad to not know the difference between liking something because its cool, and liking something because its going to help you get rich. small criticisms, dont apply to everyone, yadda yadda
- hinkley 9y ago
  I wonder how true that is. One thing engineers and scientists suffer from in spades is the Illusion of Control. Venture Capitalists are strange creatures that can make you rich or lay you off seemingly on a whim. Trying to manage them makes us feel like we have some say in the outcome. Thing is, VCs are making money off of information asymmetry, just like most of us. As soon as you think you've figured out one thing they just move the goal posts and you're in the dark again. Letting some of us win the lottery once in a while is how they keep the rest of us docile. I'm pretty done with it. I already leaned this way anyway, but if I work for a startup again it'll only be because I believe in what they're doing, not because there will be a payday. The execs will see almost all of the upside of you moving heaven and earth. What trickles down to you isn't that much.
lordnacho 9y ago
I find it interesting coming from the stocks/bond/etc side of finance. Just interesting to see how other people think of investment. I also trade on orders-of-magnitude shorter timescales, and it's important to see what I'm not seeing on the longer timeframe.
CalChris 9y ago
> I generally think it’s helpful for founders who take VC money to understand the business of their investors because it impacts their incentives and how they see the world. If you're anywhere in the startup ecosystem, it's helpful to know venture mechanics. If you're a VC it's essential since yours and your LPs paycheck are on the line. However if you a founder, a would-be founder, maybe even a senior engineer, ..., it's necessary to understand where your VC is coming from and what the term sheet means. This is necessary before you get a term sheet. There's a lot of information out there now that didn't used to be out there. You can find out that Shaquille O'Neal, Tiger Woods, Arnold Schwarzenegger and Henry Kissinger were in on the A round for Google. I don't know if that's useful information. But it's out there. https://www.crunchbase.com/search/principal.investors/field/funding_round.has_funding_round.forward/num_investors/google-series-a--6c4715f9 https://www.crunchbase.com/search/principal.investors/field/... There are a lot more startups and a lot more investors, VCs and angels. Maybe 30 years ago, this was backroom stuff between founders, investors and their lawyers. It isn't anymore.
teddyh 9y ago
Every SF techbro is a temporarily embarrassed VC.
rb808 9y ago
This website is run by a VC which isn't a coincidence.
jacquesm 9y ago
I suspect that a very important part of it is that in the life of an entrepreneur capital is a very important tool in the toolbox and to know how some of the providers of capital think and are organized can help maximize the use of that tool. Knowing what the other party is looking for is a very important bit of knowledge during any kind of negotiation.
- mbesto 9y ago
  Right - but the mechanics of VCs are well documented at this point. I feel like the content is just all a re-hash of the same thing with individuals all jockeying for the latest position. PS - Jacques, we should sync up sometime, I'll be doing some tech diligence in the EU/UK market in the future and I understand you're based there. If I recall correctly, we've gone back and forth about the topic of diligence on here before.
  - csa 9y ago
    It needs to be both well-documented as well as easy to find in "native" internet circles. Currently I would humbly suggest that the content is not easy to find for most people. As a simple example in a different field, 'patio11 has taken standard practices in the online marketing world and exposed them to the engineer set with a fairly decent level of success and exposure. Very little of what he has said is original or novel... to those who hang out in marketing circles. That said, he has been able to open the eyes of many engineers to the realities of marketing via using appropriate communication style and sharing it in appropriate forums (in the broad sense of the term).
    - 1337biz 9y ago
      The translation aspect is an important point. But also all the personal perspectives, anecdotes, ramblings are highly interesting to those who look for the outliers. The perspectives that don't fit into the current frame of explanation are so essential for any new hypothesis to arise.
    - shostack 9y ago
fnl 9y ago
I completely agree. The mathematics behind the argument are so boring and obvious, yet explained in an extremely convoluted language. Fascinating how you can describe 10+1=11% to otherwise intelligent people here and get to the frontpage of HN, just because it's about VC.
IAmGraydon 9y ago
Because people want to know how people who have money got it. What kind of question is that?
- yesenadam 9y ago
  Well, I thought, a perfectly reasonable one. I don't want to know how people who have money got it. (I find 'money' the most boring subject in the world, by some distance.) Perhaps, it seems, you assume everyone wants to know that. Well, maybe everyone you know does. But I found your comment extremely strange at first. ..well, I'm not in the USA - such a mindset seems rather estadounidense.
  - IAmGraydon 9y ago
    I'm not sure why it seems strange to you. The desire for wealth is certainly not uniquely American. Money is the means by which most people in the world get what they want. What do you think motivates millions of people around the world to go to work every day? We all want money, and we all like to learn about more efficient ways to obtain it. You can pretend you're above that if you want, but if you've worked for any amount of wealth in your life then you're just lying to yourself. Maybe you haven't. Most of us have.
ci5er 9y ago
For me, it's understanding which types of parties across the table can and can not do what. Saves a lot of time!
deleted 9y ago
[deleted]
csa 9y ago
People are fascinated by it, but many people (even those seeking funding) don't really seem to have a solid understanding of what they are getting themselves into when they are seeking funding. Specifically, I think that there are many people who make companies that are better off being bootstrapped, but they go the VC route because that's the sexy thing that gets reported on and talked about. They don't understand why they get no interest from good VCs when they have good product-market fit and are making money. It's usually a market that's too small or a trajectory that's too flat, but these ideas do not really resonate with most people who don't spend a lot of time around financial people/ideas. Hearing VC explained in different ways and in different voices is a healthy thing. If anything, it will help people either correctly self-select out of the VC funding process or create a company that has the potential to work at VC scale. I would spend more time writing about this topic using the questions and wording that you hear from people who are curious about the VC world but clearly don't know the answers. This will probably mean talking in a way that is more engineer/maker-oriented than financier-oriented.
deepnotderp 9y ago
Because as an entrepreneur I've spent way too much of my life chasing funding. I just want to build tech and make money from it so I can make more tech ( and so forth), the fastest way to do that is to understand investor incentives.
mancerayder 9y ago
Because many of us techies fortunately or unfortunately live off of VC capital, indirectly, via jobs. More information is better than less information.
yesenadam 9y ago
Ohh thank you, I was wondering what "VC" was.

by mbesto 9y ago

palakchokshi 9y ago

I suppose it is good knowledge to have incase you find yourself in the seed investor's shoes. It is likely that many on HN have an interest in understanding this from a seed or angel investor viewpoint. That's why I read these. But then again what do I know.

AznHisoka 9y ago

I'm not interested in this. I wished there was an article on "How Hard is it to generate a 10X return" for normal, Average-Joe investments (ie stocks, bonds, real estate), and how a 10X return is actually at most 6X return, because you need to take into account taxes, costs, and inflation.

autokad 9y ago
if you are - a passive investor and dont want to spend much time thinking about it - want your money to earn a good return over inflation (5%+) - dont need the money for ~ 3 to 5 years (its ok not being liquid) then an sp500 index fund is probably best. not the 10x return you are looking for, otherwise you have to be a lot more speculative
- AznHisoka 9y ago
  For a middle-aged person, what % of my money should be in that index fund?
  - dahdum 9y ago
    A good rule of thumb is 100 minus your age is your % of stocks to hold. Those stocks should be diversified index funds, so if you're 40 years old 60% in S&P500 ETF is pretty decent. The exact index funds to hold is a constant matter of debate (including whether to hold international). Doesn't matter as much as having that equity exposure and keeping the fund fees low. Lots of resources out there to do it yourself (https://www.bogleheads.org/wiki/Three-fund_portfolio https://www.bogleheads.org/wiki/Three-fund_portfolio) or you could use Betterment/Wealthfront/Personal Capital for extra fees.
    - jmulho 9y ago
      I agree about equity exposure, low fees, and simple approaches like a three fund portfolio. Here is a slightly more sophisticated way to think about the percentage that should be in equities. One year from now, equities could be up 25% or down 50%. Twenty years from now, equities are likely to be up, likely to have outpaced inflation, and likely to have outperformed "safer" alternatives (money market funds, bond funds, etc.). If you have a $10,000 bill coming due in one year, and $10,000 in the bank, it would be risky to invest any of it in equities. If you have money to invest that you won't be forced to liquidate for 20 years (e.g. your 401k at age 40), then it is probably fine to start with 100% of in equities. The percentage should be based on when you might be forced to liquidate each available investment dollar. In many cases this will agree with the rule of thumb. By equities I mean low cost equity ETFs (or index funds) that invest in broad indexes. I do not mean a portfolio of 10 to 30 stocks hand-picked by you or any fund manager. The hand-picked portfolio could be down 100% in 20 years, or in 1 year.
      - dahdum 9y ago
        We're on the same page mostly, but I think if forced liquidation is a real risk you should lower your equity % at the start to compensate. 100% at age 40 is overly aggressive, pretty sure you'd have better risk adjusted returns by including bonds in there from the start.
        9y ago
- badpun 9y ago
  I wonder if it will be true in this century. 20th century was exceptional for US economy, allowing for huge growth and hence great returns on stocks. The playing field looks very different now, though. Personally, given the circumstances, I’d be happy with 2% return over inflation.
goialoq 9y ago
10X returns are easy -- just put the money in a savings account. What's your _timescale_ for generating 10X returns? That's where it gets tricky.
- AznHisoka 9y ago
  In my lifetime :)
codingdave 9y ago
For "normal" investments, a 10X return is easy.... given enough time. Invest in your 20s, it is definitely going to be 10x by retirement. Now, 10X in a short timeframe, that is a different story. Being rich when you are young is mostly about the right idea, at the right time, in the right place. Being rich when you are old is simply about organizational skills.

awad 9y ago

Understanding VC dynamics is good for founders and would-be founders

nicolashahn 9y ago

Lots of people would like to be in that position, so it's interesting to them. Why do people follow the lifestyles of the rich and famous in general?

syllogism 9y ago

It's a huge part of the tech landscape. If you're working for start-ups, you're an investor in start-ups, so you need to understand how the financing works. You also need to understand what it means when your CEO says they're "almost definitely closing a round now, surely". Even if you're running a normal, non-VC tech company, understanding the motivations of VCs is very useful. The behaviour of other companies makes much more sense in light of this.

QML 9y ago

I don’t know about others, but I’m interested in the large cogs that move the world. Maybe it’s because I’m looking for problems, or wondering how the status quo came to be. For example, why does it cost $30 for a wire transfer? And why is it only processed on business days. That led to me wonder how banking and ACHs work.

syedkarim 9y ago
The bank charges you $30 to process a wire. It costs them less than $1 to move your money.
- QML 9y ago
  Is there now a cheaper alternative towards wiring money?

fgonzag 9y ago

A lot people would like to have their startup funded. I believe that knowing what the investment side is looking for, the things that would make your company attractive to them, is important in a sales pitch. It allows you to focus your pitch and business plan around their business model, which makes it easier to get funded. It's a small part of it, but understanding what VCs are looking for and their business model is important if you ever want to get funded. It will allow you to foresee certain decisions, and give you more options in response to them.

gumby 9y ago

You should know your customer. If you start a business to make widgets you need to understand the needs and motivations of widget users. But unless you can bootstrap it, you need to know the motivations of your lenders and/or investors. Their interests are different from (and rarely aligned well with) yours, much less those of your customers.

the_cat_kittles 9y ago

because there is a pervasive interest in making alot of money quickly here. i think (and im probably projecting a bit) that this community exaggerates how interested it is in tech and engineering based on merits, and down plays how much its interested in them as means to an end (wealth). it bothers me because its dishonest, and its also a bit sad to not know the difference between liking something because its cool, and liking something because its going to help you get rich. small criticisms, dont apply to everyone, yadda yadda

hinkley 9y ago
I wonder how true that is. One thing engineers and scientists suffer from in spades is the Illusion of Control. Venture Capitalists are strange creatures that can make you rich or lay you off seemingly on a whim. Trying to manage them makes us feel like we have some say in the outcome. Thing is, VCs are making money off of information asymmetry, just like most of us. As soon as you think you've figured out one thing they just move the goal posts and you're in the dark again. Letting some of us win the lottery once in a while is how they keep the rest of us docile. I'm pretty done with it. I already leaned this way anyway, but if I work for a startup again it'll only be because I believe in what they're doing, not because there will be a payday. The execs will see almost all of the upside of you moving heaven and earth. What trickles down to you isn't that much.

lordnacho 9y ago

I find it interesting coming from the stocks/bond/etc side of finance. Just interesting to see how other people think of investment. I also trade on orders-of-magnitude shorter timescales, and it's important to see what I'm not seeing on the longer timeframe.

CalChris 9y ago

> I generally think it’s helpful for founders who take VC money to understand the business of their investors because it impacts their incentives and how they see the world. If you're anywhere in the startup ecosystem, it's helpful to know venture mechanics. If you're a VC it's essential since yours and your LPs paycheck are on the line. However if you a founder, a would-be founder, maybe even a senior engineer, ..., it's necessary to understand where your VC is coming from and what the term sheet means. This is necessary before you get a term sheet. There's a lot of information out there now that didn't used to be out there. You can find out that Shaquille O'Neal, Tiger Woods, Arnold Schwarzenegger and Henry Kissinger were in on the A round for Google. I don't know if that's useful information. But it's out there. https://www.crunchbase.com/search/principal.investors/field/funding_round.has_funding_round.forward/num_investors/google-series-a--6c4715f9 https://www.crunchbase.com/search/principal.investors/field/... There are a lot more startups and a lot more investors, VCs and angels. Maybe 30 years ago, this was backroom stuff between founders, investors and their lawyers. It isn't anymore.

teddyh 9y ago

Every SF techbro is a temporarily embarrassed VC.

rb808 9y ago

This website is run by a VC which isn't a coincidence.

jacquesm 9y ago

I suspect that a very important part of it is that in the life of an entrepreneur capital is a very important tool in the toolbox and to know how some of the providers of capital think and are organized can help maximize the use of that tool. Knowing what the other party is looking for is a very important bit of knowledge during any kind of negotiation.

mbesto 9y ago
Right - but the mechanics of VCs are well documented at this point. I feel like the content is just all a re-hash of the same thing with individuals all jockeying for the latest position. PS - Jacques, we should sync up sometime, I'll be doing some tech diligence in the EU/UK market in the future and I understand you're based there. If I recall correctly, we've gone back and forth about the topic of diligence on here before.
- csa 9y ago
  It needs to be both well-documented as well as easy to find in "native" internet circles. Currently I would humbly suggest that the content is not easy to find for most people. As a simple example in a different field, 'patio11 has taken standard practices in the online marketing world and exposed them to the engineer set with a fairly decent level of success and exposure. Very little of what he has said is original or novel... to those who hang out in marketing circles. That said, he has been able to open the eyes of many engineers to the realities of marketing via using appropriate communication style and sharing it in appropriate forums (in the broad sense of the term).
  - 1337biz 9y ago
    The translation aspect is an important point. But also all the personal perspectives, anecdotes, ramblings are highly interesting to those who look for the outliers. The perspectives that don't fit into the current frame of explanation are so essential for any new hypothesis to arise.
  - shostack 9y ago

fnl 9y ago

I completely agree. The mathematics behind the argument are so boring and obvious, yet explained in an extremely convoluted language. Fascinating how you can describe 10+1=11% to otherwise intelligent people here and get to the frontpage of HN, just because it's about VC.

IAmGraydon 9y ago

Because people want to know how people who have money got it. What kind of question is that?

yesenadam 9y ago
Well, I thought, a perfectly reasonable one. I don't want to know how people who have money got it. (I find 'money' the most boring subject in the world, by some distance.) Perhaps, it seems, you assume everyone wants to know that. Well, maybe everyone you know does. But I found your comment extremely strange at first. ..well, I'm not in the USA - such a mindset seems rather estadounidense.
- IAmGraydon 9y ago
  I'm not sure why it seems strange to you. The desire for wealth is certainly not uniquely American. Money is the means by which most people in the world get what they want. What do you think motivates millions of people around the world to go to work every day? We all want money, and we all like to learn about more efficient ways to obtain it. You can pretend you're above that if you want, but if you've worked for any amount of wealth in your life then you're just lying to yourself. Maybe you haven't. Most of us have.

ci5er 9y ago

For me, it's understanding which types of parties across the table can and can not do what. Saves a lot of time!

deleted 9y ago

[deleted]

csa 9y ago

People are fascinated by it, but many people (even those seeking funding) don't really seem to have a solid understanding of what they are getting themselves into when they are seeking funding. Specifically, I think that there are many people who make companies that are better off being bootstrapped, but they go the VC route because that's the sexy thing that gets reported on and talked about. They don't understand why they get no interest from good VCs when they have good product-market fit and are making money. It's usually a market that's too small or a trajectory that's too flat, but these ideas do not really resonate with most people who don't spend a lot of time around financial people/ideas. Hearing VC explained in different ways and in different voices is a healthy thing. If anything, it will help people either correctly self-select out of the VC funding process or create a company that has the potential to work at VC scale. I would spend more time writing about this topic using the questions and wording that you hear from people who are curious about the VC world but clearly don't know the answers. This will probably mean talking in a way that is more engineer/maker-oriented than financier-oriented.

deepnotderp 9y ago

Because as an entrepreneur I've spent way too much of my life chasing funding. I just want to build tech and make money from it so I can make more tech ( and so forth), the fastest way to do that is to understand investor incentives.

mancerayder 9y ago

Because many of us techies fortunately or unfortunately live off of VC capital, indirectly, via jobs. More information is better than less information.

yesenadam 9y ago

Ohh thank you, I was wondering what "VC" was.