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What I don't get is how some people have found the capital fountain but others haven't, and it seems to have nothing to do with whether the businesses are actua

What I don't get is how some people have found the capital fountain but others haven't, and it seems to have nothing to do with whether the businesses are actually working. A friend of mine runs a fashion business that has worked with actual A-list celebrities, yet turns away orders because they lack the cash to make the stuff. Others have had a hard time getting appointments with VCs to show their deck, and others have had a tough time getting those that are in touch to put any money in. But in the news it's story upon story about firms getting piles of money thrown at them. What's more is several of the ones I know about have pretty much nothing for a business, and due diligence would reveal it.

ModernMech 5y ago
The VC model is all about making a lot of huge risky bets in the hopes that at least one of them will pay off. So you don't need an actual business that's making real money. That doesn't fit into the VC model. What you need is a story about how your business will be as big as Google or Facebook. That's what VCs are buying. So if you come to them with a pitch for a business with solid fundamentals and a clear map to profit, they will not be interested. Why? Because even if you deliver 100% on your promise, it won't be enough for them to recoup the bets they made on a dozen other risky ventures. If you hit it out of the park, you better be on target to be a billion dollar unicorn. Otherwise, what's the point? They need to make up the millions upon millions of dollars they've been betting. In that sense, it's much better to have a story about a juicer that will be sold to billions of people and replace the concept of juice as we know it. Or to have a story about how you will revolutionize the world of medical testing even though the technology is science fiction. VCs don't care, they just want a story. All this talk about due diligence is them trying to feel better about their bets. Really if your idea was sound it wouldn't be something VCs would find interesting in the first place (because then it would be obvious and therefore not valuable to the tune of billions).
- x0x0 5y ago
  If you look at Theranos, the major funding sources were not traditional vcs. Total investment: $724m, approx. Waltons: $150m, Rupert Murdoch: $121m, Cox family: $100m, DeVos family: $100m, Carlos Slim: $30m, etc. I count at least $559m from non-vc sources [1]. And then you have hedge funds like Partner Fund Management: $96m. Whether you consider them a traditional vc or not, per their lawsuit, Theranos faked blood test results. I guess you can blame them, but I'm not sure how much duedil is going to catch wholesale fraud. MedVenture, a vc, did due diligence and didn't invest. GV turned them down. VCs certainly didn't make Walgreens not do duedil before partnering with Theranos. etc. I don't think Theranos is proof that vcs are, as a class, incompetent and just want a story. [1] https://www.wsj.com/articles/theranos-cost-business-and-government-leaders-more-than-600-million-1525392082 https://www.wsj.com/articles/theranos-cost-business-and-gove...
  - paxys 5y ago
    Yup, exactly. I always bring up Theranos as a success case for Silicon Valley VCs. At the surface level it should have been a slam dunk investment from day 1 – charismatic female founder, industry connections, lofty ideas, market buzz, potential revolutionary tech. Yet every single VC firm we know of passed on them. And outside investors who tried to take the short-cut to the valley got burned.
lmeyerov 5y ago
Different things. - Hard to scale a celebrity fashion business in practice and as a story. A family friend started a successful jewelry company popular w/ Hollywood types and it's growing great, just nothing like Splunk, Notion, SpaceX, etc. There are outliers here - why everyone loved D2C co's like Dollar Shave Club - but gotta fit that growth model. - Much of VC is largely story driven and, at least in b2b, rides a delegated sales/marketing motion (vs product/tech ROI motion). Once the first big money is in (pure pitch), there's a funny treadmill. Each round gets spent on artificially pumping numbers (big marketing, big sales, ...) enough to hit the next round before the money runs out. As long the #'s match what looks good in a deck, the co is largely good. However, most investors don't actually do truly deep diligence to identify whether the core is hollow, just that if there's enough that in 18mo + 36mo there's a good enough story on getting a bigger investor in. That can easily be something like "ignoring company quality, is there any sort of market demand here?" Each startup has issues and VCs often have surprisingly little time (ex: read up on Tiger), and you only hear about the Yes's and not the Passes (startups just need 1-2 Yes's), so not surprising to see some dumb/ok-money float in. So 7 years and $100M+ of funding later, sales/marketing-driven customers probably start churning out and the leads are burned, and oops... but maybe it's ok and they've exited. Bringing back to the founders, it's not that they're building a great company, but that they can sell that story and delegate operations to the 'adults' (sales/marketing/engineering) who keep the façade alive through the hollow growth of an otherwise busted product. There's probably a similarly unsatisfying set of common stories for consumer co's ;-)

ModernMech 5y ago

The VC model is all about making a lot of huge risky bets in the hopes that at least one of them will pay off. So you don't need an actual business that's making real money. That doesn't fit into the VC model. What you need is a story about how your business will be as big as Google or Facebook. That's what VCs are buying. So if you come to them with a pitch for a business with solid fundamentals and a clear map to profit, they will not be interested. Why? Because even if you deliver 100% on your promise, it won't be enough for them to recoup the bets they made on a dozen other risky ventures. If you hit it out of the park, you better be on target to be a billion dollar unicorn. Otherwise, what's the point? They need to make up the millions upon millions of dollars they've been betting. In that sense, it's much better to have a story about a juicer that will be sold to billions of people and replace the concept of juice as we know it. Or to have a story about how you will revolutionize the world of medical testing even though the technology is science fiction. VCs don't care, they just want a story. All this talk about due diligence is them trying to feel better about their bets. Really if your idea was sound it wouldn't be something VCs would find interesting in the first place (because then it would be obvious and therefore not valuable to the tune of billions).

x0x0 5y ago
If you look at Theranos, the major funding sources were not traditional vcs. Total investment: $724m, approx. Waltons: $150m, Rupert Murdoch: $121m, Cox family: $100m, DeVos family: $100m, Carlos Slim: $30m, etc. I count at least $559m from non-vc sources [1]. And then you have hedge funds like Partner Fund Management: $96m. Whether you consider them a traditional vc or not, per their lawsuit, Theranos faked blood test results. I guess you can blame them, but I'm not sure how much duedil is going to catch wholesale fraud. MedVenture, a vc, did due diligence and didn't invest. GV turned them down. VCs certainly didn't make Walgreens not do duedil before partnering with Theranos. etc. I don't think Theranos is proof that vcs are, as a class, incompetent and just want a story. [1] https://www.wsj.com/articles/theranos-cost-business-and-government-leaders-more-than-600-million-1525392082 https://www.wsj.com/articles/theranos-cost-business-and-gove...
- paxys 5y ago
  Yup, exactly. I always bring up Theranos as a success case for Silicon Valley VCs. At the surface level it should have been a slam dunk investment from day 1 – charismatic female founder, industry connections, lofty ideas, market buzz, potential revolutionary tech. Yet every single VC firm we know of passed on them. And outside investors who tried to take the short-cut to the valley got burned.

lmeyerov 5y ago

Different things. - Hard to scale a celebrity fashion business in practice and as a story. A family friend started a successful jewelry company popular w/ Hollywood types and it's growing great, just nothing like Splunk, Notion, SpaceX, etc. There are outliers here - why everyone loved D2C co's like Dollar Shave Club - but gotta fit that growth model. - Much of VC is largely story driven and, at least in b2b, rides a delegated sales/marketing motion (vs product/tech ROI motion). Once the first big money is in (pure pitch), there's a funny treadmill. Each round gets spent on artificially pumping numbers (big marketing, big sales, ...) enough to hit the next round before the money runs out. As long the #'s match what looks good in a deck, the co is largely good. However, most investors don't actually do truly deep diligence to identify whether the core is hollow, just that if there's enough that in 18mo + 36mo there's a good enough story on getting a bigger investor in. That can easily be something like "ignoring company quality, is there any sort of market demand here?" Each startup has issues and VCs often have surprisingly little time (ex: read up on Tiger), and you only hear about the Yes's and not the Passes (startups just need 1-2 Yes's), so not surprising to see some dumb/ok-money float in. So 7 years and $100M+ of funding later, sales/marketing-driven customers probably start churning out and the leads are burned, and oops... but maybe it's ok and they've exited. Bringing back to the founders, it's not that they're building a great company, but that they can sell that story and delegate operations to the 'adults' (sales/marketing/engineering) who keep the façade alive through the hollow growth of an otherwise busted product. There's probably a similarly unsatisfying set of common stories for consumer co's ;-)