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This does not explain why VCs are willing to invest in business models tha light cash on fire for growth in the hope of reaching a dominant market share and est

This does not explain why VCs are willing to invest in business models tha light cash on fire for growth in the hope of reaching a dominant market share and establishing a moat around the business. VCs believe in network effects, VCs believe monopolies are worth burning cash to achieve, VCs believe operating businesses can achieve what software businesses like google and Facebook achieved. Question their belief but don’t blame monetary policy or government for a clear investment thesis driven by private actors that is based on prior success of similar models. Banks lending to small businesses, hire interest rates, tighter monetary policy would not change current VCs investment thesis or make them any less willing to pursue these models.

roenxi 8y ago
> This does not explain why VCs are willing to invest in business models tha light cash Lyft just IPOd with a market cap of ~20 billion on net income of minus 1 billion that is part of a 3-year down trend. If monetary policy is causing inflated stock prices (and it isn't causing consumer inflation, so it probably is pooling in asset markets) then it seems quite rational for a VC to invest in Lyft for the sole purpose of having a stock to float without paying any attention to the other details. The evidence there is simply having a ticker and buzz is more valuable than details like returns and profits. Lyft is basically employing its customers to make its revenue look good. It is difficult to see how they will translate that into a good idea.
- trhway 8y ago
  >Lyft is basically employing its customers to make its revenue look good. " ... then you're a product" 2.0. Somewhat similar to the role of a patient in the medical business - ie. the role of gauge boson mediating the insurance-provider field interaction.
- digitaltrees 8y ago
  So you’re saying that VCs are investors in private companies with a 10 to 12 year path to going public because...”low interest rates”? And that monentary policy is a larger driver of their investment decisions than a belief that there is a credible path to building a viable business? I think that is confusing second and third order considerations with first order considerations that actually drive investors choices. Perhaps monetary policy affects the macro environment by making investment money available, but each investment is a micro decision by one firm, driven by a thesis. I find it hard to believe that investors think monetary policy is an important basis for betting on Lyft or the like. That’s like say “I won’t start a company unless tax rates are lower”. No one does that, no one cares, maybe we care later. But when you’re thinking about the founding decisions paying taxes is several orders removed from: product, team, financing, revenue, break even etc.
astrodust 8y ago
> Why VCs are willing to invest in business models that light cash on fire for growth? Lyft went to IPO. A lot of people made a ton of money on the back of that. Until that stops happening, what incentive is there for VCs to not do this?
subjectHarold 8y ago
Monetary policy is everything. Read financial history. VCs aren't some unique species that have cracked investing. Human nature is the same as always: people will do stupid stuff. If someone turns up with a check for $100m, you don't check to see whether you can invest it safely. You become a true believer, you gather assets, and if you weren't a true believer at the start you will be after you make enough...it always ends badly but this is why cycles happen. In fact, the last cycle has been particularly unusual because we have actually see the bad firms driving out the good ones (I don't know about VC but it is happening everywhere else). And this is definitely due to monetary policy. You are right. At the level of the investment, people aren't saying we should seed this company because of monetary policy...but no-one says this in any bubble. Rather what happens is that the demand for securities goes up and finance finds ways to fill this demand. Human nature being what it is, this always ends badly. To say this another way: people will find endless ways to rationalise a bad decision. And if someone is paying you to make bad decisions sound good...well then, what do you think will happen? Btw, just generally, I think VCs are less sophisticated than the average investor. The current environment has just been very forgiving. I don't think we will see anything like this again (if central bankers lose control which seems inevitable), literally firms with billions in cumulative losses trading for $10bn+. These IPOed firms will probably destroy hundreds of billions in capital alone.
- digitaltrees 8y ago
  I studied financial history extensively. I wrote a paper in law school about the origins of the financial crisis and studied most economic and financial panics for 200 years. Monetary policy is rarely the most important factor. Trade policy, Fiscal policy (government spending across national, state, local and community), Regulatory incentives, technological changes whose importance is overestimated or underestimated, Social demographics, and human psychology are all way more important than monetary policy both in contributing to bubbles and fixing the crisis that follows. Your answer itself hints at how important human psychology is. 'People do stupid stuff'. Robert Schiller won a Nobel price and said basically that. Go look at the interest rates every year in the 90s and tell me that they causes the dot com bubble. Then ask yourself if maybe investors overestimated the possible success of many business and were willing to pay crazy multiples above earnings because the 'normal rules of business don't apply to internet firms'. When the stock was skyrocketing, psychology and greed take over as it feels like confirmation that the original thesis is correct. Bitcoin recently followed a similar dynamic. In neither case was monetary policy the major driver.

roenxi 8y ago

> This does not explain why VCs are willing to invest in business models tha light cash Lyft just IPOd with a market cap of ~20 billion on net income of minus 1 billion that is part of a 3-year down trend. If monetary policy is causing inflated stock prices (and it isn't causing consumer inflation, so it probably is pooling in asset markets) then it seems quite rational for a VC to invest in Lyft for the sole purpose of having a stock to float without paying any attention to the other details. The evidence there is simply having a ticker and buzz is more valuable than details like returns and profits. Lyft is basically employing its customers to make its revenue look good. It is difficult to see how they will translate that into a good idea.

trhway 8y ago
>Lyft is basically employing its customers to make its revenue look good. " ... then you're a product" 2.0. Somewhat similar to the role of a patient in the medical business - ie. the role of gauge boson mediating the insurance-provider field interaction.
digitaltrees 8y ago
So you’re saying that VCs are investors in private companies with a 10 to 12 year path to going public because...”low interest rates”? And that monentary policy is a larger driver of their investment decisions than a belief that there is a credible path to building a viable business? I think that is confusing second and third order considerations with first order considerations that actually drive investors choices. Perhaps monetary policy affects the macro environment by making investment money available, but each investment is a micro decision by one firm, driven by a thesis. I find it hard to believe that investors think monetary policy is an important basis for betting on Lyft or the like. That’s like say “I won’t start a company unless tax rates are lower”. No one does that, no one cares, maybe we care later. But when you’re thinking about the founding decisions paying taxes is several orders removed from: product, team, financing, revenue, break even etc.

astrodust 8y ago

> Why VCs are willing to invest in business models that light cash on fire for growth? Lyft went to IPO. A lot of people made a ton of money on the back of that. Until that stops happening, what incentive is there for VCs to not do this?

subjectHarold 8y ago

Monetary policy is everything. Read financial history. VCs aren't some unique species that have cracked investing. Human nature is the same as always: people will do stupid stuff. If someone turns up with a check for $100m, you don't check to see whether you can invest it safely. You become a true believer, you gather assets, and if you weren't a true believer at the start you will be after you make enough...it always ends badly but this is why cycles happen. In fact, the last cycle has been particularly unusual because we have actually see the bad firms driving out the good ones (I don't know about VC but it is happening everywhere else). And this is definitely due to monetary policy. You are right. At the level of the investment, people aren't saying we should seed this company because of monetary policy...but no-one says this in any bubble. Rather what happens is that the demand for securities goes up and finance finds ways to fill this demand. Human nature being what it is, this always ends badly. To say this another way: people will find endless ways to rationalise a bad decision. And if someone is paying you to make bad decisions sound good...well then, what do you think will happen? Btw, just generally, I think VCs are less sophisticated than the average investor. The current environment has just been very forgiving. I don't think we will see anything like this again (if central bankers lose control which seems inevitable), literally firms with billions in cumulative losses trading for $10bn+. These IPOed firms will probably destroy hundreds of billions in capital alone.

digitaltrees 8y ago
I studied financial history extensively. I wrote a paper in law school about the origins of the financial crisis and studied most economic and financial panics for 200 years. Monetary policy is rarely the most important factor. Trade policy, Fiscal policy (government spending across national, state, local and community), Regulatory incentives, technological changes whose importance is overestimated or underestimated, Social demographics, and human psychology are all way more important than monetary policy both in contributing to bubbles and fixing the crisis that follows. Your answer itself hints at how important human psychology is. 'People do stupid stuff'. Robert Schiller won a Nobel price and said basically that. Go look at the interest rates every year in the 90s and tell me that they causes the dot com bubble. Then ask yourself if maybe investors overestimated the possible success of many business and were willing to pay crazy multiples above earnings because the 'normal rules of business don't apply to internet firms'. When the stock was skyrocketing, psychology and greed take over as it feels like confirmation that the original thesis is correct. Bitcoin recently followed a similar dynamic. In neither case was monetary policy the major driver.