5 ms·

Actually you're an extremely sensible investment. :) If you could close it in an hour how much money would you raise on standard terms and at what valuation? (

Actually you're an extremely sensible investment. :) If you could close it in an hour how much money would you raise on standard terms and at what valuation? (You can list both as a multiple of any metric you pick - any metric, including unjustified projections if you want - if you don't want to name figures here.) Obviously given what I just shared I'm not a VC.

tptacek 8y ago
No, we're a nonsensical investment: there is no story we can tell about how our equity becomes liquid in 10 years, and our growth, while very pleasant for us principals, is unlikely to lead us to a place where our eventual liquidity would pay for the failures of the other 9 companies in a portfolio that included us. It's not a moral debate. The portfolio math has to work, and things have to work on a timescale that works for fund LPs. At the end of the day, venture capitalists are simply an adapter cable that plugs small chunks of LP endowments and funds into baskets of companies with an N% chance of exiting >7x within Y years. If your company can't do that, the adapter cable doesn't fit your company.
- C7H8N4O2 8y ago
  > We're a nonsensical investment for a standard VC, sure. Maybe there's a venture investment philosophy for non-unicorns. [0] [0] https://sparktoro.com/blog/raised-a-very-unusual-round-of-funding-were-open-sourcing-our-docs/ https://sparktoro.com/blog/raised-a-very-unusual-round-of-fu...
  - tptacek 8y ago
    This doesn't really offer that; it documents a seed round raised by angels by a company that doesn't want to engage institutional VC because they demand a 10x success. VCs aren't demanding 10x successes because they're lazy; they do it because the winners have to pay for the losers. This isn't even a VC-specific pattern; you see it in almost every hits-driven business.
- logicallee 8y ago
  Respectfully, I think this is a rather muddy estimation of probabilities and returns, as I can illustrate like this: Suppose I had $100 million to spend on literal lottery tickets and my goal was to average a 10% per year return on it across all of my "investments". Mainly I try to find places that haven't paid out a large jackpot yet receive low media coverage, so that I have a positive expected return: then I buy a whole lot of lottery tickets there without alerting my competitors to the fact that the lottery tickets have a positive expected value due to the accumulated jackpot, that people seem unaware of. Now: if my bank where I'm keeping the $100 million, which is stable and conservative, gives me an offer to purchase a 1-year bond from them that pays 12% should I take it? Will it help me achieve my goal of netting 10% returns? You may think, "No - because that 12% is not going to pay for the non-winning lottery tickets." But this is muddy thinking because the 12% is not in the same basket of risks as the lottery ticket purchases. It is simply incorrect thinking to group them together. So yes, tying some of the money up for a year in a bond that pays 12% will help me make my goal of earning a 10% return, even if my strategy is to earn 10% by buying jackpots. Of course I can be stupid and blow the $100 million on nationally announced huge jackpots where everyone else knows about it and all my competitors are also buying tickets, so that the expected value of the tickets is actually less than I pay for them. That's before the loss that I take on all the logistics, my office, etc. This is kind of what VC's do. They lose money. You can characterize it descriptively, but please don't call it a sensible strategy. --- I'm still curious about your answer to how much money you would raise (perhaps expressed as a multiple of something) and at what valuation (again as a multiple of something, even projections if you want), if you could close it in an hour no questions asked. Just to throw this out there, I wouldn't raise $100 million at a $1 billion valuation for example, since I don't have any good use for $100 million. How much would you raise if you could, and at what valuation? Forget the VC's, they're not in this conversation. We've already established they're in it to live on someone else's dime and lose money ;)
  - jasode 8y ago
    >Suppose I had $100 million to spend on literal lottery tickets[...] Now: if my bank where I'm keeping the $100 million, which is stable and conservative, gives me an offer to purchase a 1-year bond from them that pays 12% In your hypothetical... if "lottery tickets" are the metaphorical stand in for "unproven startups", what does the bond paying 12% realistically stand for? There isn't a AAA-rated bond that pays 12%. Or, to generalize further, there isn't an investment vehicle <X> that guarantees to pay VC_hoped_for_returns plus +2%. (In any case, if we're talking about AAA bonds, the LPs can just invest in that themselves without involving VCs as middlemen. E.g. you don't need VCs to buy US Treasuries on your behalf.) To get higher interest rates that compete with good VC returns, you're getting into junk bond territory. Junk bonds have higher risk for defaults. Junk bonds require more research to assess returns. One could also try to sell the bonds on the bond market before the maturity but either way, you're now back in "lottery ticket" territory for bonds. You're creating fictitious scenarios that don't have realistic choices.
- nikanj 8y ago
  You seem to be mostly right. In the past, VCs funded crazy moonshots and local banks funded sensible old-school companies with 10% per year growth and 15% profit/revenue ratios. Small community banks don't really exist anymore, and large banks don't really seem to be funding anything under $10 million nowadays, except mortgages.

tptacek 8y ago

No, we're a nonsensical investment: there is no story we can tell about how our equity becomes liquid in 10 years, and our growth, while very pleasant for us principals, is unlikely to lead us to a place where our eventual liquidity would pay for the failures of the other 9 companies in a portfolio that included us. It's not a moral debate. The portfolio math has to work, and things have to work on a timescale that works for fund LPs. At the end of the day, venture capitalists are simply an adapter cable that plugs small chunks of LP endowments and funds into baskets of companies with an N% chance of exiting >7x within Y years. If your company can't do that, the adapter cable doesn't fit your company.

C7H8N4O2 8y ago
> We're a nonsensical investment for a standard VC, sure. Maybe there's a venture investment philosophy for non-unicorns. [0] [0] https://sparktoro.com/blog/raised-a-very-unusual-round-of-funding-were-open-sourcing-our-docs/ https://sparktoro.com/blog/raised-a-very-unusual-round-of-fu...
- tptacek 8y ago
  This doesn't really offer that; it documents a seed round raised by angels by a company that doesn't want to engage institutional VC because they demand a 10x success. VCs aren't demanding 10x successes because they're lazy; they do it because the winners have to pay for the losers. This isn't even a VC-specific pattern; you see it in almost every hits-driven business.
logicallee 8y ago
Respectfully, I think this is a rather muddy estimation of probabilities and returns, as I can illustrate like this: Suppose I had $100 million to spend on literal lottery tickets and my goal was to average a 10% per year return on it across all of my "investments". Mainly I try to find places that haven't paid out a large jackpot yet receive low media coverage, so that I have a positive expected return: then I buy a whole lot of lottery tickets there without alerting my competitors to the fact that the lottery tickets have a positive expected value due to the accumulated jackpot, that people seem unaware of. Now: if my bank where I'm keeping the $100 million, which is stable and conservative, gives me an offer to purchase a 1-year bond from them that pays 12% should I take it? Will it help me achieve my goal of netting 10% returns? You may think, "No - because that 12% is not going to pay for the non-winning lottery tickets." But this is muddy thinking because the 12% is not in the same basket of risks as the lottery ticket purchases. It is simply incorrect thinking to group them together. So yes, tying some of the money up for a year in a bond that pays 12% will help me make my goal of earning a 10% return, even if my strategy is to earn 10% by buying jackpots. Of course I can be stupid and blow the $100 million on nationally announced huge jackpots where everyone else knows about it and all my competitors are also buying tickets, so that the expected value of the tickets is actually less than I pay for them. That's before the loss that I take on all the logistics, my office, etc. This is kind of what VC's do. They lose money. You can characterize it descriptively, but please don't call it a sensible strategy. --- I'm still curious about your answer to how much money you would raise (perhaps expressed as a multiple of something) and at what valuation (again as a multiple of something, even projections if you want), if you could close it in an hour no questions asked. Just to throw this out there, I wouldn't raise $100 million at a $1 billion valuation for example, since I don't have any good use for $100 million. How much would you raise if you could, and at what valuation? Forget the VC's, they're not in this conversation. We've already established they're in it to live on someone else's dime and lose money ;)
- jasode 8y ago
  >Suppose I had $100 million to spend on literal lottery tickets[...] Now: if my bank where I'm keeping the $100 million, which is stable and conservative, gives me an offer to purchase a 1-year bond from them that pays 12% In your hypothetical... if "lottery tickets" are the metaphorical stand in for "unproven startups", what does the bond paying 12% realistically stand for? There isn't a AAA-rated bond that pays 12%. Or, to generalize further, there isn't an investment vehicle <X> that guarantees to pay VC_hoped_for_returns plus +2%. (In any case, if we're talking about AAA bonds, the LPs can just invest in that themselves without involving VCs as middlemen. E.g. you don't need VCs to buy US Treasuries on your behalf.) To get higher interest rates that compete with good VC returns, you're getting into junk bond territory. Junk bonds have higher risk for defaults. Junk bonds require more research to assess returns. One could also try to sell the bonds on the bond market before the maturity but either way, you're now back in "lottery ticket" territory for bonds. You're creating fictitious scenarios that don't have realistic choices.
nikanj 8y ago
You seem to be mostly right. In the past, VCs funded crazy moonshots and local banks funded sensible old-school companies with 10% per year growth and 15% profit/revenue ratios. Small community banks don't really exist anymore, and large banks don't really seem to be funding anything under $10 million nowadays, except mortgages.