5 ms·

Broken Syndicates

54 points by prostoalex 8y ago

Animats 8y ago
Now that's an interesting failure mode. VCs want a 10x win. As the author points out, early failures aren't a big problem. YC encourages early failures. They underfund one-idea startups, so they fail fast rather than trying to "pivot" to doing something else. The usual VC company failure mode is the "zombie". A zombie generates enough cash to cover its operating expenses, but no significant return for investors. It won't die. It demands attention from the VCs on the board for years on end. Too many zombies can choke a VC firm. The "broken syndicate" thing seems to refer to companies that didn't make it to self-supporting zombie status, are not dead yet, have potential value, and have outgrown the funding resources of the original money source. Kill them off, or find them another funding round? Often this situation involves a "down round", where the early investors lose much of their stake. How often does an eventual success emerge? I've been involved, as a creditor, not an investor, with one company that went through that - Havok, the game physics engine company. They overexpanded, lost money, found more capital but the founders were replaced, and eventually sold out to Intel. Intel then sold them to Microsoft, where they seem to have be in maintenance mode. So the second round investors came out OK. First round investors, not so much. Creditors got paid because there was never a bankruptcy. Uber is perhaps the biggest "broken syndicate" company. Despite losing money at an all time record rate, they keep finding new funding sources.
- Hongwei 8y ago
  From the blog, a "syndicate" situation sounds like when investors around the table are of relatively equal size and power. In that case, a consensus is required to move forward. My guess is Softbank at Uber owns the largest single stake and has the deepest pockets to fund further growth. They bought out part of TK's founding stake iirc. That means they can probably dictate terms unilaterally if investors needed to put more cash in and would also have a veto if external money was involved. (This is just my guess based on news and I have no inside info)
- fake-name 8y ago
  > The usual VC company failure mode is the "zombie". A zombie generates enough cash to cover its operating expenses, but no significant return for investors. It won't die. It demands attention from the VCs on the board for years on end. Too many zombies can choke a VC firm. This is basically the problem with VCs. If a company is making enough money to cover it's expenses, it's successful. We need more companies like this, rather then more companies that try abusive practices to extract more market share.
  - timr 8y ago
    "This is basically the problem with VCs. If a company is making enough money to cover it's expenses, it's successful." If a company is making enough money to cover expenses, they don't need follow-on funding and aren't going to succumb to this failure mode. It's the ones that are trying to raise that suffer from broken syndicates. And if you can't continue to exist without raising funds, you don't actually have a successful business, even if you're technically cash-flow positive. But more importantly, while there can absolutely be perverse incentives in the VC world, this isn't one of them. If you're just barely making a company trundle along, you're wasting your one-and-only life. It's a mercy to have someone take you aside and tell you that it's time to give up. From personal experience, it isn't noble, glamorous or fun to have a startup that is just lurching sideways. It sucks, and you feel trapped. You are stuck in eternal grind-mode. Having investors who will tell you to stop doing this is not evil, but a sign of good, professional investors. Investors get many shots at the goal each year. You get a few shots in your lifetime. Don't waste them on bad opportunities.
    - fastball 8y ago
      By the time you are a zombie, your board could still be populated by members that want a 10x exit, not long-term profitability. The internal conflict between "should we continue growing at a healthy rate" vs. "what can we do to find a buyer or position for an IPO" can still ruin a company.
      - ChuckMcM 8y ago

54 points by prostoalex 8y ago

Now that's an interesting failure mode. VCs want a 10x win. As the author points out, early failures aren't a big problem. YC encourages early failures. They underfund one-idea startups, so they fail fast rather than trying to "pivot" to doing something else. The usual VC company failure mode is the "zombie". A zombie generates enough cash to cover its operating expenses, but no significant return for investors. It won't die. It demands attention from the VCs on the board for years on end. Too many zombies can choke a VC firm. The "broken syndicate" thing seems to refer to companies that didn't make it to self-supporting zombie status, are not dead yet, have potential value, and have outgrown the funding resources of the original money source. Kill them off, or find them another funding round? Often this situation involves a "down round", where the early investors lose much of their stake. How often does an eventual success emerge? I've been involved, as a creditor, not an investor, with one company that went through that - Havok, the game physics engine company. They overexpanded, lost money, found more capital but the founders were replaced, and eventually sold out to Intel. Intel then sold them to Microsoft, where they seem to have be in maintenance mode. So the second round investors came out OK. First round investors, not so much. Creditors got paid because there was never a bankruptcy. Uber is perhaps the biggest "broken syndicate" company. Despite losing money at an all time record rate, they keep finding new funding sources.

Hongwei 8y ago
From the blog, a "syndicate" situation sounds like when investors around the table are of relatively equal size and power. In that case, a consensus is required to move forward. My guess is Softbank at Uber owns the largest single stake and has the deepest pockets to fund further growth. They bought out part of TK's founding stake iirc. That means they can probably dictate terms unilaterally if investors needed to put more cash in and would also have a veto if external money was involved. (This is just my guess based on news and I have no inside info)
fake-name 8y ago
> The usual VC company failure mode is the "zombie". A zombie generates enough cash to cover its operating expenses, but no significant return for investors. It won't die. It demands attention from the VCs on the board for years on end. Too many zombies can choke a VC firm. This is basically the problem with VCs. If a company is making enough money to cover it's expenses, it's successful. We need more companies like this, rather then more companies that try abusive practices to extract more market share.
- timr 8y ago
  "This is basically the problem with VCs. If a company is making enough money to cover it's expenses, it's successful." If a company is making enough money to cover expenses, they don't need follow-on funding and aren't going to succumb to this failure mode. It's the ones that are trying to raise that suffer from broken syndicates. And if you can't continue to exist without raising funds, you don't actually have a successful business, even if you're technically cash-flow positive. But more importantly, while there can absolutely be perverse incentives in the VC world, this isn't one of them. If you're just barely making a company trundle along, you're wasting your one-and-only life. It's a mercy to have someone take you aside and tell you that it's time to give up. From personal experience, it isn't noble, glamorous or fun to have a startup that is just lurching sideways. It sucks, and you feel trapped. You are stuck in eternal grind-mode. Having investors who will tell you to stop doing this is not evil, but a sign of good, professional investors. Investors get many shots at the goal each year. You get a few shots in your lifetime. Don't waste them on bad opportunities.
  - fastball 8y ago
    By the time you are a zombie, your board could still be populated by members that want a 10x exit, not long-term profitability. The internal conflict between "should we continue growing at a healthy rate" vs. "what can we do to find a buyer or position for an IPO" can still ruin a company.
    - ChuckMcM 8y ago