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Is Venture Capital Worth the Risk?

• deleted 7y ago
  [deleted]
• marketingfool 7y ago
  In the article it says 80 percent of the investments fail. If you can have that risk, I genuinely don't see the problem. Heck for my personal angel investments I use 95 percent will fail. Yes it's risky, but the entire point was to find something that returns in the hundreds of percents rather than 7%. The math works out. I only worry about evil businesses getting this VC money or uneducated people making bad decisions on investments.
  • virgilp 7y ago
    Thousands of percents, right? If your 5% successes do not return at least 20x, you're globally in the red.
    • pedrosorio 7y ago
      7% is the usual figure quoted for annualized stock market returns, so I guess that’s what they mean: xyz% annualized.
      • nothrabannosir 7y ago
        Parent was referring to the “hundreds” part, not the 7. If 5% of your bets win, but only pay off in the hundreds %, you’re going bankrupt. You need at least 2000% return, amortised over the winners, to break even. More to beat that 7%.
        • vidarh 7y ago
          Yes, but the point being that 7% is an annualized number; if the hundreds of percent is also referring to annualized returns, then it makes sense.
  • ones_and_zeros 7y ago
    Genuinely curious how this works for an angel investor if the failure rate is 95%. How many companies do you have to invest in in order to spread the risk of that 95%?
    • onion2k 7y ago
      Angel investors are not VC funds. They can approach risk very differently. They don't really need to spread the risk or mitigate it if they don't want to. No one is auditing their investments (besides the tax man). The angel investors I spoke to when I was running my last startup really didn't need to make a profit. They wanted to make a profit because that meant success for a business they thought should exist (and would use in their other businesses in my case), but if they didn't they've only lost some money that they could afford to lose.
      • ones_and_zeros 7y ago
        I get that but, how much money do angel investors have? How long before the 95% failure rate drains their capital? You'd need at least 20 investments to even think about maybe beating that 95% failure rate, that seems like a very high number of investments for one person to find, evaluate, fund and wait before the 95% catches up to you.
        • learc83 7y ago
          You don't need 20 before it's more likely than not that you get a success. And I'm doubtful that the majority of angel investors actual have a net positive return.
    • LatteLazy 7y ago
      Most angle investors are either about to lose their shirt, or very lucky or very smart (it's hard to tell the difference between those last two). They usually can only do a few deals before they're spent out. Then they wait to either get 100 times their money or nothing. They're sort of like guys buying lottery tickets, except the ticket costs more than most houses. Vc Funds are plying the same game but on an industrial scale. So they get more average returns. Maybe better on average but maybe not for their investors as fees eat into that. An angle with very deep pockets is probably more like a mini VC fund than an angle. They'll hire people to find and vet investments and maybe pool capital to spread costs and risks.
  • dehrmann 7y ago
    > uneducated people making bad decisions on investments Generally, you have to be an accredited investor to invest in a VC fund, and funds aren't really allowed to advertise, so it's not easily available to most people. The post-2008 JOBS Act made it easier to regular investors to angel-invest, but I haven't heard tons of popping up from it yet. I'm more worried about pension funds investing in PE and VC.
  • jiveturkey 7y ago
    > In the article it says 80 percent of the investments fail No, the article claims that if 80% fail (but define failure: zero return? 1x?), the other 20% must return 30x in order for the fund as a whole to return 20%. Then it goes on to say that the average fund over 2 decades only broke even. This means that the successful 20% aren't returning the requisite 30x. > the entire point was to find something that returns in the hundreds of percents rather than 7%. Right, and if you don't find that something, the fund doesn't work. Funds aren't finding those somethings. >> A chastening study by the Ewing Marion Kauffman Foundation in 2012 found that the average venture-capital fund in the previous two decades, far from delivering its promised returns, had scarcely broken even. The paper cited is here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2053258 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2053258 VC are selling to LPs the same thing that VC-funded startups are selling to their employees. > I only worry about evil businesses getting this VC money And not about the other point they make in the article? : >> if your rivals are growing wildly at an early stage, and with good hookups, you’re obliged to play the game in order to keep up. VC is forcing companies that would otherwise be viable bootstrapped businesses, to fail. Then the VC-backed companies fail as well, and everyone is the poorer for it.
• FanaHOVA 7y ago
  Sometimes I wonder why people spend all this energy to bash VC. It's a 4,500 words article and there's only have 5-6 companies to mention as failures of the model in the past decade, compared to the tends of thousands that raised money, and all of those are consumer-facing products. The New Yorker uses Parse.ly (Venture backed company), GitHub (Venture backed company), BrowserStack (Venture backend company), Asana (Venture backed company), Hipchat (Venture backend company), just to name a few they listed on their Stackshare profile [0] (another venture backed company). I'm sure they are glad those were funded :) [0] https://stackshare.io/new-yorker/new-yorker https://stackshare.io/new-yorker/new-yorker
  • onion2k 7y ago
    I think you're seeing the issue as a bit too black and white. It's entirely reasonable to think many VCs and VC-backed companies are ostensibly terrible and still buy from the VC-backed companies you don't think are like that.
    • FanaHOVA 7y ago
      I agree with you. If you look at some of the examples they mention, like WeWork and Theranos, a lot of the issues there come from founders' questionable practices (or straight up fraud, depending how harsh you want to be). VCs are partially responsible for funding them, but at the same time they are not the ones building the company, and usually don't have high visibility into the day-to-day operations outside of updates the founders send (and board meetings, if they have a seat).
      • learc83 7y ago
        They create the environment that encourages and allows those actions though. If you encourage a rapid growth at all costs mindset, you can't be surprised when outright fraud results. And if the VCs that funded Theranos had done actual due diligence instead of getting so caught up in FOMO, the whole thing could have never happened.
        • 7y ago
• aloukissas 7y ago
  In short, this article can be summarized: "VC used to fund R&D-heavy startups like Genentech and Intel, now it's used to make startups grow as fast as possible at any cost, just like cancer". Mostly agree with this.
  • _rpd 7y ago
    For greenfield plays, the benefits of being market leader are so extreme that "grow as fast as possible" is almost always the right strategy.
    • mox1 7y ago
      Benefit to whom? There are at least 3 parties involved in every VC funded startup, the company, the investors and the customers. Growing as fast a possbile and becoming a market leader benefits 1 perhaps 2 of those. I would argue usually benefits 1.
      • SpicyLemonZest 7y ago
        I think it’s hard to argue growing fast doesn’t benefit customers. Becoming a market leader means almost by definition that a lot of customers are convinced you’re selling the best thing on the market.
        • gbear605 7y ago
          From another perspective, becoming the market leader might mean that a lot of consumers are convinced you’re selling the best thing on the market because you’re the only thing on the market because you bankrupted all the other choices. The venture capital growth-at-all-costs model results in monopoly or near-monopoly conditions, which is horrible for consumers. If your business doesn’t have competition, you’re probably hurting your customers.
          • SpicyLemonZest 7y ago
            I suppose I can imagine the scenario, but have any VC-backed companies actually grown big in that way? Doordash is the closest example I can think of, but unless you're considering restaurants rather than end users as their customers, it seems pretty uncontroversial to say that it's been good for customers. Alternatives exist, and both Doordash and the alternatives have significantly expanded the range of foods most people can get delivered.
• echelon 7y ago
  Are there any good guides on how to take VC funding but not lose your majority stake or control in your company? How can you raise multiple rounds but still come out like Zuckerberg? He still returned a lot to investors without ceding control to the board. Has VC plugged those holes?
  • LatteLazy 7y ago
    The actual How of doing it is not an issue. The question is whether you have the leverage to do it and still get funded. Any decent lawyer can setup voting and non voting stock, giving founders guarantees of control even if they lose a majority of ownership. Similarly you can award yourself stock at each round. But VCs are not fools. Either your product is amazing and they really believe in you (and will accept no control and possible dilution). Or they don't and you will have to cede at least some control to get funding.
  • yusef555 7y ago
    please there must be a post like this.. someone?
  • portman 7y ago
    Grow really fast. It’s fairly one-dimensional: if you are growing at +50% month/month, then you will be able to raise substantial rounds with minimal dilution. If you are not posting exponential growth, then you will likely give up more and more control with each subsequent round.
    • echelon 7y ago
      Do you need to raise fast, then?
  • mhh__ 7y ago
    This is question of salesmanship and negotiation rather than "technique", no?
  • ablekh 7y ago
    Well, there are several available options, as follows: 1. Bootstrap first, then raise one or more VC rounds. 2. Go typical VC route (angel/pre-seed/seed, Series A, etc.), but skip a round or, better, two. 3. Establish a multi-class equity structure, where a) founders are issued equity with increased voting power (typically, 10+ votes per share vs. 1 vote per share for common [and sometimes even preferred] shares) or b) founders' equity has voting power, while common shares have zero voting power (more often used for crowdfunding and Reg D private offerings). There is an extensive debate on advantages, disadvantages and ethical aspects of this approach. 4. Use alternative funding approaches (e.g., SMB loans, asset-based lending and revenue-based lending). P.S. Hi from ATL! :-)
• brenden2 7y ago
  "Is having money better than not having money?"
  • ssalazar 7y ago
    There are multiple possible funding models for technology companies. VC is not the only way for “having money.”
    • jiveturkey 7y ago
      It can be, if your product has enough VC-funded competitors. The article specifically makes this point.
    • say_it_as_it_is 7y ago
      Such as?
      • ssalazar 7y ago
        Bootstrap, private equity, angel/friends+family investment
• deleted 7y ago
  [deleted]
• tristor 7y ago
  I have a different take on VC and what it means. It's one of the reasons I'm where I'm at in my career. VC-backed companies are worse for employee and the technology community, because they'll optimize the use of open-source software but not the giving back. So your career in a VC backed company (at least in Ops) is mostly cobbling together multiple disparate open source projects into something that "works", but you're restricted from sharing your work publicly to give back to the community. Contrasting that with large public companies or small bootstrapped companies, both have been much more willing to allow me to open-source my work or contribute to existing projects in a public way. I'm very happy to work for a bootstrapped small company that only produces 100% pure open-source software these days. Something which was always out of reach when I was bouncing between VC-backed startups.
  • mistrial9 7y ago
    very noticeable change in Silicon Valley culture pre-2007 and post-2008 on this topic ; it appeared that there used to be a detectable, "moral" element to FOSS contributions by stakeholders, but post-2008, pure ROI drives have changed that argument .. they stay silent, don't communicate and don't reciprocate.. Apple Inc, who always was in that direction anyway, embraced the change and stopped pretending to give back, too.