19 ms·

VCs are scared when they should be greedy

223 points by mlchild 4y ago

thdxr 4y ago
while I agree with the general premise (majority of VCs are not good investors) it's important to remember the money they raised isn't sitting in a bank account. It's likely still in the LPs stock portfolio, doing a capital call when everyone is down a lot can be tricky. You need to sell the investment more even though they agreed to give you the money when you asked
- seibelj 4y ago
  Yeah I was super confused by this. VCs generally don’t have all the money ready to invest. They may have raised a $300 mil fund but they don’t get that money until they call it in. If the LP says “no deals for 6 months” that’s how it is.
  - EGreg 4y ago
    What if the LP says no deals for 50 years? These “fund raised X” means nothing if they can’t enforce capital calls
    - killjoywashere 4y ago
      That should be actionable as a breach of contract, with a notable exception of sovereign wealth funds, which may or may have immunity: https://www.reedsmith.com/en/perspectives/2013/11/capital-call-facilities-basics-challenges-and-oppo https://www.reedsmith.com/en/perspectives/2013/11/capital-ca...
  - ericd 4y ago
    If the LPs don’t meet the capital calls, they’re in breach of their investor agreement, and the penalties are generally quite harsh, including potentially forfeiting a lot of the value they currently have in the fund.
    - jacquesm 4y ago
      Exactly. You either have the capital ready to roll or you should not engage in any such commitment.
  - jacquesm 4y ago
    As an LP in a large fund: that's definitely not how it is. As an LP you pre-commit to a certain level, and when the capital call comes you perform or you will be found to be in default when a whole pile of clauses kicks in that you really do not want to have to deal with. You will have to have an extremely good reason (such as being already bankrupt) to be able to avoid a capital call that you have committed to.
    - Bubble_Pop_22 4y ago
      There are LPs and LPs. The LPs which the user above refers to are the APGs, the PFZWs type.
      - jacquesm 4y ago
        Show me a contract where an LP gets to renege penalty free on their obligations to a VC and I'll be happy to believe you. I have been part of 222 VC/PE deals to date (that's not a typo, just a coincidence) and not once has an LP reneged on their obligation to honor a capital call without penalty. That's not saying it doesn't happen, it may well happen, or it may have happened and it was kept so quiet that nobody picked up on it (which is somewhat believable, because it would reflect very badly on the fund). Just to give you one example: a VC enters into a deal, signs a non-binding terms sheet conditional on doing DD, goes through a full DD and then has to back out of the deal because a large LP does not honor their commitment. The fall out from that would be massive. What is far more likely to happen is that a VC can't find a good way to spend the funds committed capital. In that case there might be extensions of the funds run or they might end up simply not calling up the available capital. This I've seen a couple of times. But an LP that refuses a capital call I've yet to see. I've even seen an estate that was held to perform when an LP ended up with the very best reason for non-performance of all.
        Bubble_Pop_22 4y ago
        I understand all the above, but the general rules kinda supercede it all.The general rules are that when you are the best/biggest thing around the block, rules just don't apply to you. Also in general when government is involved rules don't apply to it. 80% or more of the amount of money that LPs as a whole administer are either Govt. Pension Funds or SWFs. So in the case of big LPs it's one of the rare cases where both the above rules are at play to give them carte blanche.
  - spoonjim 4y ago
    No, that's not how it is. If the LP doesn't pay their capital call they go into default and the returns on all the money they've invested so far can be taken away. The only LPs who default on the capital call are individual investors who are flat out broke. They will of course default on their capital call before their mortgage.
    - grey-area 4y ago
      What if there are no returns on all the money they have invested so far? This is quite possible in a bubble followed by a downturn.
      - jacquesm 4y ago
        Then you refer to your contract where on page 1 it states fairly clearly that there are no guarantees of returns and that the management fee is on the amount 'under management', and that a capital call will be inbound. Obviously all of these scenarios tend to be covered by the contracts and if you can't read a contract of that level of complexity then you should not be playing this game.
- akharris 4y ago
  Fwiw - my general premise isn't that the "majority of VCs are not good investors." My point is that there's a serious disconnect in the markets right now, and that it is rooted more in fear than a lack of opportunity. On the second point - you're right that the cash isn't literally sitting around, but VCs (generally) do not have to ask LPs for approval on a deal by deal basis. Capital calls can happen either as tranches or in response to a deal, and it is unusual for an LP to successfully refuse a capital call because of a specific deal.
  - fullshark 4y ago
    If you just view VCs as any other business, it involves revenue (exits) and costs (investments). The market turmoil is affecting the volume and size of exits in at least the short term, which means they are cutting costs. It's not clear the number of opportunities have grown/shrank but i guess fewer people trying to invest means the number of available opportunities to you as a player has grown.
MegaButts 4y ago
> In contrast with the scenario in 2000, most of today’s tech companies are real businesses. How many of today's startups are just servicing each other with VC money? This isn't meant to be flippant - I'm genuinely curious (and while I bet it's a lot, I am skeptical it is overwhelming). I mean if we really look at some of the business models for these companies, they're clearly unsustainable. Uber is a prime example of a company that seems destined to fail. If your unit economics don't work then you're fucked, and even if you raise literally tens of billions of dollars you will eventually run out of money. And yet companies like these are held up as prime examples of unicorn success stories. It's not just Uber - there are serious problems with many of the most acclaimed startups. Obviously not all startups are terrible, but as someone who isn't a VC (but once considered becoming one), I think tech investors are unable to see their bias for just how awful most tech companies today are.
- blakesterz 4y ago
  I was there in 2000, and we all thought those tech companies were real businesses! Most of today’s tech companies don't really look all that much different.
  - bshipp 4y ago
    I read this line and wondered what really has changed in the past 20 years? "In 2000, the Nasdaq superheated due to the large number of companies that skyrocketed into the public markets fueled by fanciful metrics disengaged from revenue." Interest rates have been held around zero since almost the dot com crash and certainly since 2008. No wonder VCs were given gobs of cash to try and eek out a better market return. The injection of cash on Wall Street resulted in huge amounts ending up in the stock market, perpetuating those returns once they went public and encouraging more VC activity. Is there any realistic forecasted revenue stream that justifies the valuations of some of these companies? Some good companies and good prospects are going to get lost when this monetary bubble bursts. It's a shame, but inevitable considering how long the Fed has been holding their finger on the scale.
    - 4y ago
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fdgsdfogijq 4y ago
Rather than complain about how VCs arent good investors, people should rail on the system that selects VCs. Which is mostly admittance to prestigious MBA programs/colleges. So please write a post about how those schools arent selecting for good investors, because these diatribes about a "flawed" industry are very surface level compared to the underpinning power structures in america
- xthrowawayxx 4y ago
  How do we distinguish between: "VCs are are selected because they go to school X", "school X is good at creating VCs", and "school X receives more potential VCs"? My guess is probably more statements 2 and 3 for the usual suspects eg Stanford
  - HighlandSpring 4y ago
    It could be mostly 1) If you hire a smart kid with an MBA from stanford and he gives you a bad name with a series of mistakes, well, bad apples happen. If you hire a smart kid from a no name university and the same happens people will be quicker to blame you. Credentialism is a thing for the same reason brand recognition is a thing. When a product with good reputation fails it's bad luck. When a product with bad reputation fails it's to be expected. Power perpetuates.
- openfuture 4y ago
  Central planners 2.0, welcome to the soviet union.
  - unity1001 4y ago
    In the USSR, there was democratic control by the public at each given level of the economy. Which is why people who were born to poor rural farmers were able to get education, and then get to the top of the USSR's economy and politics. In the US, that never has been the case. Even in its golden years. https://whorulesamerica.ucsc.edu/power/class_domination.html https://whorulesamerica.ucsc.edu/power/class_domination.html Even in 1960s, 30,000 people (families, children included) dominated all US economic and political institutions. This group was an exclusive group with class consciousness, thwarting any reduction of their control and keeping outsiders out. This phenomenon continues today. Some freak successes in tech space did not change the pattern.
ilrwbwrkhv 4y ago
A lot of people became "VC"s during the bull run. They brought nothing to the table like YC did. Instead some previously reputable VCs like a16z became crypto grifters. So it's good the market clears a bunch of them so that the YCs and next generation of VCs who actually bring something new to the table come to the forefront.
- deleted 4y ago
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- bsaul 4y ago
  i've been betting against btc from the beginning, however i truely believe there's something interesting in this field, that may end up getting some real applications sometimes. Now what's still unknown is whether the funds that invested heavily on crypto in 2020s will have enough leftovers once this crisis is over to be a player when the crypto 2.0 era is coming.
  - oarsinsync 4y ago
    > i've been betting against btc from the beginning Not literally, I assume? Or you’ve got a tiny position and have been (relative to the size if your position) haemorrhaging money for ~13 years? Or successfully rode some down waves? (I’m super jelly if you did the latter)
    - bsaul 4y ago
      of course not, i would be broke :)) I do have a bet with a friend regarding btc price going under 1k i made in 2019 but it's just for fun..
      - danuker 4y ago
        Bitcoin has seen several 80%+ crashes and bounced back. It is all in the demand. A lot of that 80% flucuation is made up of short term speculators. But some people are hardcore holders, and others use it because their national currency is worse (Venezuela, Sri Lanka). Couple that with the network effects (BTC is the largest still), and that's all it takes for the price not to go to zero.
lpolovets 4y ago
(Context: I'm a VC) Some great points in the post, but I also see a few additional dynamics at play: 1) The last 10 years have been great for VCs and startups, but now VCs are thinking about how to make their funds last longer. Two reasons for this: first, time diversification matters. If you think markets might go down even more, you don't want to deploy the rest of your fund quickly, you want to spread it out over a few years and get a good average cost basis. Second, there's a healthy fear among VCs that LP capital will be much harder to secure in the next 1-2 years. And you don't want to deploy the rest of your current fund in the next 6 months if you won't have a new fund ready to go for 18 months. 2) Most VCs (and founders) hate down rounds. So a lot of existing companies are stuck because they previously raised at $X valuation, and now the market price is $0.75X, and either the VC doesn't want to push for a down round or a founder won't accept it, or both. 3) Aaron mentions this in the blog post, but everyone is worried about downstream investors. Our fund is big enough to lead a seed round, but it can't put a dent in a Series A, so we depend on Series A investors eventually backing our seed companies. And Series A investors often depend on Series B investors to invest a lot in the next round. And so on. If the entire growth stage market grinds to a halt -- and it seems like it basically has -- then early stage investors start worrying about making new investments because there's way less downstream funding available. So even if a seed VC believes this is an amazing time to build a company and there are lots of great seed opportunities out there, they might still slow down investing a lot if they know their companies will need more funding and that funding doesn't seem to be there right now. 4) I've been a VC for about a decade, and the gap between VC and founder valuation expectations is greater than it's ever been during that time. 3 months ago, a median seed round was at $20m post, and a lot were at $25m-$30m post. Now I still see a lot of seed founders looking for $20m-$30m post, but a lot of VCs believe we should be back to 2020 valuations of $10m-$15m post. The gap between an expectation of, say, $13m post on one side and $25m post on the other side is huge, and lots of conversations never even begin because of that mismatch.
- twoodfin 4y ago
  2) Most VCs (and founders) hate down rounds. So a lot of existing companies are stuck because they previously raised at $X valuation, and now the market price is $0.75X, and either the VC doesn't want to push for a down round or a founder won't accept it, or both. They discussed this phenomenon at length on a recent Odd Lots podcast, and I can’t understand it as anything but a market inefficiency that some smart VC firm will eventually exploit. Values (and thus prices) go up and down. Putting your head in the sand about it can’t be a winning investment strategy.
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shaburn 4y ago
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rexreed 4y ago
Easy to say when it's not your money you're investing, and when you have a business that depends on the continued flow of VC money.
shaburn 4y ago
kbuchanan 4y ago
This post reminded me a little of my real estate agent's newsletter: 2007: There's never been a better time to buy! 2008: There's never been a better time to buy! 2012: There's never been a better time to buy! 2020: There's never been a better time to buy! 2022: There's never been a better time to buy!
- pdx6 4y ago
  The phrase over the years is more like “buy now or be priced out forever.” Recessions are good times to take risks since people are afraid and while capital isn’t cheap this time around, assets are.
- xisthesqrtof9 4y ago
  Easy to fuel the fire when you have unlimited wood to burn.
- blitzar 4y ago
  Only superseeded by hearing from friends "house prices never go down, there has never been a better time to buy"
- quickthrower2 4y ago
  My agents: All years: There’s never been a better time to sell! In other countries the agents only make commissions from the seller not the buyer, hence getting the listing is the big thing.
  - lotsofpulp 4y ago
    Assuming you are referring to the US, buy side real estate agents get paid by the sell side real estate agent (technically the real estate seller pays commission to the sell side real estate broker, which then pays the sell side real estate agent and the buy side real estate broker which then pay the buy side real estate agent).
    - rypskar 4y ago
      Is buyer side real estate agent normal in other countries and what do they do except making it even more expensive to buy a house? It is still the buyer who pays even if it is the seller who pay the commission since the commissions are baked into the sell price
gumby 4y ago
> Most of that advice focuses on how founders need to adjust to survive the deteriorating conditions—cutting cash burn by firing underperforming employees, slowing hiring… Makes me wonder what kind of “advice” they were giving before: you should be replacing underperforming employees at any stage of a business cycle.
- ffggvv 4y ago
  tell that to fang companies. some fire less than 2% of the work force.
  - gumby 4y ago
    Startups can't afford to be like that. Those huge companies have a lot of fat so can get away with being slack, which is also why a company like Google can drift around in such an indifferent and aimless manner for over a decade. BTW the "N" has long had a "fire early" philosophy, and so it will be interesting to see how their current troubles play out.
    - quickthrower2 4y ago
      Is Google a kind of Basic Income?
acd 4y ago
"In contrast with the scenario in 2000, most of today’s tech companies are real businesses." I disagree that many startups have viable ideas that will generate black numbers and organic growth. Bold founders have sold startup ideas which are not sustainable. Ie investment capital have prefered bold founders that could give vision of high future returns wework for example. A small number of startups will become awesome but the majority wont. Zero interest rates was a money rocket that fueled startups going to the sky. But what goes up usually comes down eventually with gravity/interest rates. A small fraction of startups will become super sucessfull but the majority wont. The number of sucessfull probably follows some kind of statistical distribution of which startups is great vs bad. Higher interest rates will adjust future return calculations that is brilliant from the article!
- fauigerzigerk 4y ago
  >Higher interest rates will adjust future return calculations that is brilliant from the article! I think discounted future cashflow is unfit for purpose as a valuation metric in an inflationary environment. It is based on the assumption that interest rates and future cash flows are independent variables. They are not. There's no dispute that the present value of a given amount of future cashflow is lower when interest rates are higher. This part is correct. It's simple arithmetic. However, when interest rates rise because inflation rises, it means that future cash flows rise as well, because future cash flows are linked to future revenues, and future revenues, by definition, grow with inflation.
kelp 4y ago
From the linked article: "Critically, the venture market at the time was tiny relative to today’s ecosystem" This isn't quite true. At least for US VC investment in dollars. It peaked at $66 billion in 2000, and didn't surpass that amount until 2018, according to these charts: https://pitchbook.infogram.com/6-vm-charts-1h8n6m3klxngj4x https://pitchbook.infogram.com/6-vm-charts-1h8n6m3klxngj4x https://www.statista.com/chart/11443/venture-capital-activity-in-the-us/ https://www.statista.com/chart/11443/venture-capital-activit... And if you adjust for inflation, that year 2000 $66B is $103.86B in 2021 dollars, and the 2nd chart shows 2021 getting to $128B. Now the two different data sources do have somewhat different numbers for each comparable year. I couldn't find a comparison that covered enough years to show the difference. But I think it's pretty clear that the dot com era was a spectacularly fast increase in VC funding. And the more recent years were slower growth, but did end up getting to slightly higher numbers, if you adjust for inflation.
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ffggvv 4y ago
VCs as a whole are followers, not leaders (with small exceptions). they all just fly into the latest hype bandwagon hoping to replicate the last big success.
jonathanehrlich 4y ago
Thanks. Please write more frequently.
skeeter2020 4y ago
The narative here seem disengenious, framing everything as one extreme to another: Then came the coronavirus-related market shock of 2020...everyone assumed the absolute worst...then everything ... went nuts... around the beginning of this year, when it all ground down to a halt. I don't doubt you can find (many) examples to support this, and yes, the themes are along these lines, but this is not the absolute reality in many industries, geographies and companies. If companies that have been hit hard are still able to raise, though maybe it's more painful. My take-aways are: * This is not the end of the world * Poor fundamentals will be recognized and punished (finally) but only for a while * There are some really good deals out there
andrewstuart 4y ago
I'd have preferred "hungry" instead of "greedy". "Greedy" conjures images of ravenous VCs exploiting startups. "Hungry" sounds like they have a healthy appetite for investing. Just MHO.
HorizonXP 4y ago
I'll say this, as a YC founder, given the current situation, I've never been more excited. I'm currently working with a Fortune 100 client in a recession-proof space. We have a team that's knocking it out of the park with them, that they simply cannot find an equivalent replacement for. We are cash-flow positive. And we have a route to securing more clients in the next year. We are delivering technology & innovation to companies that are decisively lacking in this area. Once we prove out our MVP with future clients, I plan to raise seed funding, and remain cash flow positive. Our path to Series A will involve a lot of sales, and that's an area where VCs and the right networks can definitely help. We know we can solve the technology hurdles and build the product that our users actually want. Raising funding might be tough given the macro situation. But I know our value, and we have plenty of time to wait out nervous investors. What's more likely is that we'll close our round without them, since we shouldn't need the money. We need the help.

223 points by mlchild 4y ago

while I agree with the general premise (majority of VCs are not good investors) it's important to remember the money they raised isn't sitting in a bank account. It's likely still in the LPs stock portfolio, doing a capital call when everyone is down a lot can be tricky. You need to sell the investment more even though they agreed to give you the money when you asked

seibelj 4y ago
Yeah I was super confused by this. VCs generally don’t have all the money ready to invest. They may have raised a $300 mil fund but they don’t get that money until they call it in. If the LP says “no deals for 6 months” that’s how it is.
- EGreg 4y ago
  What if the LP says no deals for 50 years? These “fund raised X” means nothing if they can’t enforce capital calls
  - killjoywashere 4y ago
    That should be actionable as a breach of contract, with a notable exception of sovereign wealth funds, which may or may have immunity: https://www.reedsmith.com/en/perspectives/2013/11/capital-call-facilities-basics-challenges-and-oppo https://www.reedsmith.com/en/perspectives/2013/11/capital-ca...
- ericd 4y ago
  If the LPs don’t meet the capital calls, they’re in breach of their investor agreement, and the penalties are generally quite harsh, including potentially forfeiting a lot of the value they currently have in the fund.
  - jacquesm 4y ago
    Exactly. You either have the capital ready to roll or you should not engage in any such commitment.
- jacquesm 4y ago
  As an LP in a large fund: that's definitely not how it is. As an LP you pre-commit to a certain level, and when the capital call comes you perform or you will be found to be in default when a whole pile of clauses kicks in that you really do not want to have to deal with. You will have to have an extremely good reason (such as being already bankrupt) to be able to avoid a capital call that you have committed to.
  - Bubble_Pop_22 4y ago
    There are LPs and LPs. The LPs which the user above refers to are the APGs, the PFZWs type.
    - jacquesm 4y ago
      Show me a contract where an LP gets to renege penalty free on their obligations to a VC and I'll be happy to believe you. I have been part of 222 VC/PE deals to date (that's not a typo, just a coincidence) and not once has an LP reneged on their obligation to honor a capital call without penalty. That's not saying it doesn't happen, it may well happen, or it may have happened and it was kept so quiet that nobody picked up on it (which is somewhat believable, because it would reflect very badly on the fund). Just to give you one example: a VC enters into a deal, signs a non-binding terms sheet conditional on doing DD, goes through a full DD and then has to back out of the deal because a large LP does not honor their commitment. The fall out from that would be massive. What is far more likely to happen is that a VC can't find a good way to spend the funds committed capital. In that case there might be extensions of the funds run or they might end up simply not calling up the available capital. This I've seen a couple of times. But an LP that refuses a capital call I've yet to see. I've even seen an estate that was held to perform when an LP ended up with the very best reason for non-performance of all.
      - Bubble_Pop_22 4y ago
        I understand all the above, but the general rules kinda supercede it all.The general rules are that when you are the best/biggest thing around the block, rules just don't apply to you. Also in general when government is involved rules don't apply to it. 80% or more of the amount of money that LPs as a whole administer are either Govt. Pension Funds or SWFs. So in the case of big LPs it's one of the rare cases where both the above rules are at play to give them carte blanche.
- spoonjim 4y ago
  No, that's not how it is. If the LP doesn't pay their capital call they go into default and the returns on all the money they've invested so far can be taken away. The only LPs who default on the capital call are individual investors who are flat out broke. They will of course default on their capital call before their mortgage.
  - grey-area 4y ago
    What if there are no returns on all the money they have invested so far? This is quite possible in a bubble followed by a downturn.
    - jacquesm 4y ago
      Then you refer to your contract where on page 1 it states fairly clearly that there are no guarantees of returns and that the management fee is on the amount 'under management', and that a capital call will be inbound. Obviously all of these scenarios tend to be covered by the contracts and if you can't read a contract of that level of complexity then you should not be playing this game.
akharris 4y ago
Fwiw - my general premise isn't that the "majority of VCs are not good investors." My point is that there's a serious disconnect in the markets right now, and that it is rooted more in fear than a lack of opportunity. On the second point - you're right that the cash isn't literally sitting around, but VCs (generally) do not have to ask LPs for approval on a deal by deal basis. Capital calls can happen either as tranches or in response to a deal, and it is unusual for an LP to successfully refuse a capital call because of a specific deal.
- fullshark 4y ago
  If you just view VCs as any other business, it involves revenue (exits) and costs (investments). The market turmoil is affecting the volume and size of exits in at least the short term, which means they are cutting costs. It's not clear the number of opportunities have grown/shrank but i guess fewer people trying to invest means the number of available opportunities to you as a player has grown.

MegaButts 4y ago

> In contrast with the scenario in 2000, most of today’s tech companies are real businesses. How many of today's startups are just servicing each other with VC money? This isn't meant to be flippant - I'm genuinely curious (and while I bet it's a lot, I am skeptical it is overwhelming). I mean if we really look at some of the business models for these companies, they're clearly unsustainable. Uber is a prime example of a company that seems destined to fail. If your unit economics don't work then you're fucked, and even if you raise literally tens of billions of dollars you will eventually run out of money. And yet companies like these are held up as prime examples of unicorn success stories. It's not just Uber - there are serious problems with many of the most acclaimed startups. Obviously not all startups are terrible, but as someone who isn't a VC (but once considered becoming one), I think tech investors are unable to see their bias for just how awful most tech companies today are.

blakesterz 4y ago
I was there in 2000, and we all thought those tech companies were real businesses! Most of today’s tech companies don't really look all that much different.
- bshipp 4y ago
  I read this line and wondered what really has changed in the past 20 years? "In 2000, the Nasdaq superheated due to the large number of companies that skyrocketed into the public markets fueled by fanciful metrics disengaged from revenue." Interest rates have been held around zero since almost the dot com crash and certainly since 2008. No wonder VCs were given gobs of cash to try and eek out a better market return. The injection of cash on Wall Street resulted in huge amounts ending up in the stock market, perpetuating those returns once they went public and encouraging more VC activity. Is there any realistic forecasted revenue stream that justifies the valuations of some of these companies? Some good companies and good prospects are going to get lost when this monetary bubble bursts. It's a shame, but inevitable considering how long the Fed has been holding their finger on the scale.
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fdgsdfogijq 4y ago

Rather than complain about how VCs arent good investors, people should rail on the system that selects VCs. Which is mostly admittance to prestigious MBA programs/colleges. So please write a post about how those schools arent selecting for good investors, because these diatribes about a "flawed" industry are very surface level compared to the underpinning power structures in america

xthrowawayxx 4y ago
How do we distinguish between: "VCs are are selected because they go to school X", "school X is good at creating VCs", and "school X receives more potential VCs"? My guess is probably more statements 2 and 3 for the usual suspects eg Stanford
- HighlandSpring 4y ago
  It could be mostly 1) If you hire a smart kid with an MBA from stanford and he gives you a bad name with a series of mistakes, well, bad apples happen. If you hire a smart kid from a no name university and the same happens people will be quicker to blame you. Credentialism is a thing for the same reason brand recognition is a thing. When a product with good reputation fails it's bad luck. When a product with bad reputation fails it's to be expected. Power perpetuates.
openfuture 4y ago
Central planners 2.0, welcome to the soviet union.
- unity1001 4y ago
  In the USSR, there was democratic control by the public at each given level of the economy. Which is why people who were born to poor rural farmers were able to get education, and then get to the top of the USSR's economy and politics. In the US, that never has been the case. Even in its golden years. https://whorulesamerica.ucsc.edu/power/class_domination.html https://whorulesamerica.ucsc.edu/power/class_domination.html Even in 1960s, 30,000 people (families, children included) dominated all US economic and political institutions. This group was an exclusive group with class consciousness, thwarting any reduction of their control and keeping outsiders out. This phenomenon continues today. Some freak successes in tech space did not change the pattern.

ilrwbwrkhv 4y ago

A lot of people became "VC"s during the bull run. They brought nothing to the table like YC did. Instead some previously reputable VCs like a16z became crypto grifters. So it's good the market clears a bunch of them so that the YCs and next generation of VCs who actually bring something new to the table come to the forefront.

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bsaul 4y ago
i've been betting against btc from the beginning, however i truely believe there's something interesting in this field, that may end up getting some real applications sometimes. Now what's still unknown is whether the funds that invested heavily on crypto in 2020s will have enough leftovers once this crisis is over to be a player when the crypto 2.0 era is coming.
- oarsinsync 4y ago
  > i've been betting against btc from the beginning Not literally, I assume? Or you’ve got a tiny position and have been (relative to the size if your position) haemorrhaging money for ~13 years? Or successfully rode some down waves? (I’m super jelly if you did the latter)
  - bsaul 4y ago
    of course not, i would be broke :)) I do have a bet with a friend regarding btc price going under 1k i made in 2019 but it's just for fun..
    - danuker 4y ago
      Bitcoin has seen several 80%+ crashes and bounced back. It is all in the demand. A lot of that 80% flucuation is made up of short term speculators. But some people are hardcore holders, and others use it because their national currency is worse (Venezuela, Sri Lanka). Couple that with the network effects (BTC is the largest still), and that's all it takes for the price not to go to zero.

lpolovets 4y ago

(Context: I'm a VC) Some great points in the post, but I also see a few additional dynamics at play: 1) The last 10 years have been great for VCs and startups, but now VCs are thinking about how to make their funds last longer. Two reasons for this: first, time diversification matters. If you think markets might go down even more, you don't want to deploy the rest of your fund quickly, you want to spread it out over a few years and get a good average cost basis. Second, there's a healthy fear among VCs that LP capital will be much harder to secure in the next 1-2 years. And you don't want to deploy the rest of your current fund in the next 6 months if you won't have a new fund ready to go for 18 months. 2) Most VCs (and founders) hate down rounds. So a lot of existing companies are stuck because they previously raised at $X valuation, and now the market price is $0.75X, and either the VC doesn't want to push for a down round or a founder won't accept it, or both. 3) Aaron mentions this in the blog post, but everyone is worried about downstream investors. Our fund is big enough to lead a seed round, but it can't put a dent in a Series A, so we depend on Series A investors eventually backing our seed companies. And Series A investors often depend on Series B investors to invest a lot in the next round. And so on. If the entire growth stage market grinds to a halt -- and it seems like it basically has -- then early stage investors start worrying about making new investments because there's way less downstream funding available. So even if a seed VC believes this is an amazing time to build a company and there are lots of great seed opportunities out there, they might still slow down investing a lot if they know their companies will need more funding and that funding doesn't seem to be there right now. 4) I've been a VC for about a decade, and the gap between VC and founder valuation expectations is greater than it's ever been during that time. 3 months ago, a median seed round was at $20m post, and a lot were at $25m-$30m post. Now I still see a lot of seed founders looking for $20m-$30m post, but a lot of VCs believe we should be back to 2020 valuations of $10m-$15m post. The gap between an expectation of, say, $13m post on one side and $25m post on the other side is huge, and lots of conversations never even begin because of that mismatch.

twoodfin 4y ago
2) Most VCs (and founders) hate down rounds. So a lot of existing companies are stuck because they previously raised at $X valuation, and now the market price is $0.75X, and either the VC doesn't want to push for a down round or a founder won't accept it, or both. They discussed this phenomenon at length on a recent Odd Lots podcast, and I can’t understand it as anything but a market inefficiency that some smart VC firm will eventually exploit. Values (and thus prices) go up and down. Putting your head in the sand about it can’t be a winning investment strategy.

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shaburn 4y ago

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rexreed 4y ago

Easy to say when it's not your money you're investing, and when you have a business that depends on the continued flow of VC money.

shaburn 4y ago

kbuchanan 4y ago

This post reminded me a little of my real estate agent's newsletter: 2007: There's never been a better time to buy! 2008: There's never been a better time to buy! 2012: There's never been a better time to buy! 2020: There's never been a better time to buy! 2022: There's never been a better time to buy!

pdx6 4y ago
The phrase over the years is more like “buy now or be priced out forever.” Recessions are good times to take risks since people are afraid and while capital isn’t cheap this time around, assets are.
xisthesqrtof9 4y ago
Easy to fuel the fire when you have unlimited wood to burn.
blitzar 4y ago
Only superseeded by hearing from friends "house prices never go down, there has never been a better time to buy"
quickthrower2 4y ago
My agents: All years: There’s never been a better time to sell! In other countries the agents only make commissions from the seller not the buyer, hence getting the listing is the big thing.
- lotsofpulp 4y ago
  Assuming you are referring to the US, buy side real estate agents get paid by the sell side real estate agent (technically the real estate seller pays commission to the sell side real estate broker, which then pays the sell side real estate agent and the buy side real estate broker which then pay the buy side real estate agent).
  - rypskar 4y ago
    Is buyer side real estate agent normal in other countries and what do they do except making it even more expensive to buy a house? It is still the buyer who pays even if it is the seller who pay the commission since the commissions are baked into the sell price

gumby 4y ago

> Most of that advice focuses on how founders need to adjust to survive the deteriorating conditions—cutting cash burn by firing underperforming employees, slowing hiring… Makes me wonder what kind of “advice” they were giving before: you should be replacing underperforming employees at any stage of a business cycle.

ffggvv 4y ago
tell that to fang companies. some fire less than 2% of the work force.
- gumby 4y ago
  Startups can't afford to be like that. Those huge companies have a lot of fat so can get away with being slack, which is also why a company like Google can drift around in such an indifferent and aimless manner for over a decade. BTW the "N" has long had a "fire early" philosophy, and so it will be interesting to see how their current troubles play out.
  - quickthrower2 4y ago
    Is Google a kind of Basic Income?

acd 4y ago

"In contrast with the scenario in 2000, most of today’s tech companies are real businesses." I disagree that many startups have viable ideas that will generate black numbers and organic growth. Bold founders have sold startup ideas which are not sustainable. Ie investment capital have prefered bold founders that could give vision of high future returns wework for example. A small number of startups will become awesome but the majority wont. Zero interest rates was a money rocket that fueled startups going to the sky. But what goes up usually comes down eventually with gravity/interest rates. A small fraction of startups will become super sucessfull but the majority wont. The number of sucessfull probably follows some kind of statistical distribution of which startups is great vs bad. Higher interest rates will adjust future return calculations that is brilliant from the article!

fauigerzigerk 4y ago
>Higher interest rates will adjust future return calculations that is brilliant from the article! I think discounted future cashflow is unfit for purpose as a valuation metric in an inflationary environment. It is based on the assumption that interest rates and future cash flows are independent variables. They are not. There's no dispute that the present value of a given amount of future cashflow is lower when interest rates are higher. This part is correct. It's simple arithmetic. However, when interest rates rise because inflation rises, it means that future cash flows rise as well, because future cash flows are linked to future revenues, and future revenues, by definition, grow with inflation.

kelp 4y ago

From the linked article: "Critically, the venture market at the time was tiny relative to today’s ecosystem" This isn't quite true. At least for US VC investment in dollars. It peaked at $66 billion in 2000, and didn't surpass that amount until 2018, according to these charts: https://pitchbook.infogram.com/6-vm-charts-1h8n6m3klxngj4x https://pitchbook.infogram.com/6-vm-charts-1h8n6m3klxngj4x https://www.statista.com/chart/11443/venture-capital-activity-in-the-us/ https://www.statista.com/chart/11443/venture-capital-activit... And if you adjust for inflation, that year 2000 $66B is $103.86B in 2021 dollars, and the 2nd chart shows 2021 getting to $128B. Now the two different data sources do have somewhat different numbers for each comparable year. I couldn't find a comparison that covered enough years to show the difference. But I think it's pretty clear that the dot com era was a spectacularly fast increase in VC funding. And the more recent years were slower growth, but did end up getting to slightly higher numbers, if you adjust for inflation.

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ffggvv 4y ago

VCs as a whole are followers, not leaders (with small exceptions). they all just fly into the latest hype bandwagon hoping to replicate the last big success.

jonathanehrlich 4y ago

Thanks. Please write more frequently.

skeeter2020 4y ago

The narative here seem disengenious, framing everything as one extreme to another: Then came the coronavirus-related market shock of 2020...everyone assumed the absolute worst...then everything ... went nuts... around the beginning of this year, when it all ground down to a halt. I don't doubt you can find (many) examples to support this, and yes, the themes are along these lines, but this is not the absolute reality in many industries, geographies and companies. If companies that have been hit hard are still able to raise, though maybe it's more painful. My take-aways are: * This is not the end of the world * Poor fundamentals will be recognized and punished (finally) but only for a while * There are some really good deals out there

andrewstuart 4y ago

I'd have preferred "hungry" instead of "greedy". "Greedy" conjures images of ravenous VCs exploiting startups. "Hungry" sounds like they have a healthy appetite for investing. Just MHO.

HorizonXP 4y ago

I'll say this, as a YC founder, given the current situation, I've never been more excited. I'm currently working with a Fortune 100 client in a recession-proof space. We have a team that's knocking it out of the park with them, that they simply cannot find an equivalent replacement for. We are cash-flow positive. And we have a route to securing more clients in the next year. We are delivering technology & innovation to companies that are decisively lacking in this area. Once we prove out our MVP with future clients, I plan to raise seed funding, and remain cash flow positive. Our path to Series A will involve a lot of sales, and that's an area where VCs and the right networks can definitely help. We know we can solve the technology hurdles and build the product that our users actually want. Raising funding might be tough given the macro situation. But I know our value, and we have plenty of time to wait out nervous investors. What's more likely is that we'll close our round without them, since we shouldn't need the money. We need the help.