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Mind going further? I read “leveraged” as “debt-funded”, but VCs get their funds from LPs (or from cash on company balance sheets). Where does leverage come int

by dfee 8y ago

Mind going further? I read “leveraged” as “debt-funded”, but VCs get their funds from LPs (or from cash on company balance sheets). Where does leverage come into play?

joejerryronnie 8y ago
One underlying reason for VCs making bad investments could be recent fiscal policies pushing interest rates way down. This causes large investors (e.g. pension funds) to look for returns in historically riskier investments, leading to much more money than usual being invested in VC funds. This leaves VCs with a huge pile of cash and looking for companies to fund which means they will make riskier investments than usual (including investing larger dollar amounts than normal). All of this, in turn, leads to a potential bubble with all the negative impacts we've experienced in past bubbles. This may not be a huge deal if it's confined to the tech startup space. But these large investors are not putting all their eggs in one basket, they're spreading money out into many other industries like housing, financials, emerging markets, etc. If this large amount of money chasing returns has the same effect in these other industries, then we have the beginnings of systemic risk. This is now a very big deal for everyone.
- dfee 8y ago
  The premise makes sense (per industry), but how are the bubbles potentially connected to make systemic risk? I’m kinda looking at it like this: per-industry, there is a local-minimum solution which is being exploited For transportation, let’s call that “cars”. Scooters are a bet that if we climb out of that hole we might be able to get to an even lower minimum (but investor dollars are the fuel that’s burned on the search path). So despite these walkabouts in the solution space (ie companies), there remains the local-minima solutions. Now, for pension funds and what not other LPs that invest in VC firms, they have made commitments for returns to their share holders (eg retirees). I think it’s disingenuous to guarantee returns for 30 years (effectively what these fin products are), which also kinda sucks, but I don’t understand the problem outside of helping previous investors keep promises they weren’t able to make in the first place. That feels like a pyramid scheme.

by dfee 8y ago

Mind going further? I read “leveraged” as “debt-funded”, but VCs get their funds from LPs (or from cash on company balance sheets). Where does leverage come into play?

joejerryronnie 8y ago

One underlying reason for VCs making bad investments could be recent fiscal policies pushing interest rates way down. This causes large investors (e.g. pension funds) to look for returns in historically riskier investments, leading to much more money than usual being invested in VC funds. This leaves VCs with a huge pile of cash and looking for companies to fund which means they will make riskier investments than usual (including investing larger dollar amounts than normal). All of this, in turn, leads to a potential bubble with all the negative impacts we've experienced in past bubbles. This may not be a huge deal if it's confined to the tech startup space. But these large investors are not putting all their eggs in one basket, they're spreading money out into many other industries like housing, financials, emerging markets, etc. If this large amount of money chasing returns has the same effect in these other industries, then we have the beginnings of systemic risk. This is now a very big deal for everyone.

dfee 8y ago
The premise makes sense (per industry), but how are the bubbles potentially connected to make systemic risk? I’m kinda looking at it like this: per-industry, there is a local-minimum solution which is being exploited For transportation, let’s call that “cars”. Scooters are a bet that if we climb out of that hole we might be able to get to an even lower minimum (but investor dollars are the fuel that’s burned on the search path). So despite these walkabouts in the solution space (ie companies), there remains the local-minima solutions. Now, for pension funds and what not other LPs that invest in VC firms, they have made commitments for returns to their share holders (eg retirees). I think it’s disingenuous to guarantee returns for 30 years (effectively what these fin products are), which also kinda sucks, but I don’t understand the problem outside of helping previous investors keep promises they weren’t able to make in the first place. That feels like a pyramid scheme.