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I’ve often heard the modern VC route described as a Ponzi scheme with the public market being the greatest of the fools, I don’t totally buy into the idea but y

I’ve often heard the modern VC route described as a Ponzi scheme with the public market being the greatest of the fools, I don’t totally buy into the idea but your 3rd point really does highlight how close it all is to a Ponzi scheme. So much value is absorbed in the VC pipe than by the time a company IPOs the chance of retail investors seeing returns is minimal to none.

drdrek 4y ago
Think about it in this way: You want to open a wholesale food distribution business for restaurants in a Manhattan You want to make sure that enough restaurants will buy from you They want to make sure that enough costumers will buy from them The customers are going out less because of a downturn in the economy So you do not open our business because the stock market is down Is any business a ponzi scheme? P.S Saying that, there is research that buying at IPO is rarely a good idea: https://www.youtube.com/watch?v=2a7qhIpxv60 https://www.youtube.com/watch?v=2a7qhIpxv60
- sooheon 4y ago
  If early capital thought they would get better risk adjusted returns holding on to companies, they wouldn't exit. When considering a trade, you have to ask yourself "what do I know about the future prospects of this asset that the other party doesn't?" For IPOs you can see how stacked this transaction is against the public.
  - SilverBirch 4y ago
    I don't think this is right. The reason VCs exit is simple, they're VCs. They exist to invest in start ups. Their job is to invest in high growth, high risk start ups, and the risk premium reflects that, they're a certain type of asset class. That's why people give them money. People don't give money to VCs to buy Walmart stock. If a VC thinks it can get a better risk adjusted return investing in Walmart then they're not a VC. Why would a limited partner want the VC parking their cash in an established business? They already have allocated their capital amongst different investments including VCs to get the mix of investments they want. So the right thing to do is as the company matures and risk drops, they exit their investment. If the company still offers good risk free returns, well then the LPs can buy the stock, or their hedge fund investments will buy the stock. But the fundamental issue is if VCs stay in companies beyond a reasonable point then they're not doing their job.
    - kareemsabri 4y ago
      I think it's more that they have a time expectation of about 10 years to give the money back to LPs with any profits and share results of the fund.
    - sooheon 4y ago
      All good points. Those are justifications for VC's existence as a financial instrument. But that's orthogonal to whether retail should buy into IPOs. Elsewhere in this thread there's discussion of VC concern regarding downstream investment/valuations, reluctance to have down rounds, etc. Clearly VCs can and will delay rounds unless they can earn a premium. It's self evident that this extends to IPOs, the last "downstream investor". Due to self selection, these IPOs will be biased toward times when the VCs judge that hype/expectations are high enough to unload at a premium. Part of their job is ensuring such conditions exist at exit, via marketing, etc. Apparently the evidence bears this out -- the first two years after IPO, companies tend to underperform after adjusting for equity risk factors: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2929733 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2929733
- myth2018 4y ago
  > Is any business a ponzi scheme? The analogy you are stating doesn't sound right. If the early stage investors' criteria were based on startups' revenue forecasts, then yes, the metaphor would apply. However, that's not the case. They pour the money expecting for more money to be poured in later, by others. Granted, I'm oversimplifying here, but the simple existence of such criterium is "symptomatic".
- cnelsenmilt 4y ago
  Future investors are not analogous to customers.
intelVISA 4y ago
I'm fairly certain they're mostly laundering schemes at this point -- half of the tech founders I've seen seem to be pitching MVPs that could be readily found in any CS undergrad's Git repo lol.
- kubami 4y ago
  This is classic engineering thinking. Sure the core technology, right now, might be "obvious", but a company is so much more than the tech. Without a story, marketing and sales, the company is nothing! The founders might be bringing connection, validation of the product, LOIs, etc. All of which are much, much* more difficult than the tech. *usually.
- chenxi9649 4y ago
  I think a lot of the tech founders are CS undergrads haha, so you'd probably literally see their mvp in their git repo. Jokes aside, oftentimes, the most disruptive technologies are not actually technologically difficult. If we take a look at the early days of mega corps today, most of them found an edge in an emergent market with off-the-shelf tech stacks.
lpolovets 4y ago
I don't think VC is at all like a Ponzi scheme, even thought most VCs depend on there being a "next investor in line." That dependency is not because we're looking for a sucker to shift a bad investment onto, but because most companies' capital needs grow dramatically. So you end up having lots of investors of all sizes, and that works more like checks and balances than a Ponzi scheme. investors.gov defines a Ponzi scheme as "an investment fraud that pays existing investors with funds collected from new investors. Ponzi scheme organizers often promise to invest your money and generate high returns with little or no risk. But in many Ponzi schemes, the fraudsters do not invest the money." A few thoughts here: - the money is actually invested. - the founders are the ones that decide how to use the money, not the investors. (And generally no one suggests that founders as a group are complicit in a Ponzi scheme.) - the next investment round is not required -- some companies get to profitability or have a good exit without further funding. - the next investment round is far from guaranteed. Most stats I've seen suggest that ~30% of seed stage companies raise a Series A. So if it's a Ponzi scheme, then it's a poorly executed one ;) - the outcomes generated by founders who get VC funding are high impact. See: https://twitter.com/emollick/status/1546109494228402176 https://twitter.com/emollick/status/1546109494228402176 (quote: This paper argues that 20% of the largest three hundred US public firms & 75% of the largest VC-backed ones “would not have existed or achieved their current scale without an active VC industry.") - the next stage investor is generally unaffiliated with the earlier investor AND evaluates a company on its merits. I.e. if our seed company can't get to a stage where they can convince at least one Series A investor to invest -- and as mentioned above, many cannot -- then it goes out of business and we lose our investment. And fwiw, if the later stage fund does a poor job picking companies, it will itself go out of business. - 99% of the time, our investors are not paid back when another investor invests, they are paid when a company exits. That means either the public market or an individual company thought the startup was a good enough business to invest their money into. - returns are not promised to our investors -- if anything, it's well known that VC is especially risky and that most VC funds don't have good returns. > So much value is absorbed in the VC pipe than by the time a company IPOs the chance of retail investors seeing returns is minimal to none. My understanding is that this is largely regulation related. Companies used to go public much earlier, but because there's an increasingly high burden and cost to being public, lots of companies choose to wait for as long as possible. And there is now enough funding out there that companies are able to stay private for a long time.

drdrek 4y ago

Think about it in this way: You want to open a wholesale food distribution business for restaurants in a Manhattan You want to make sure that enough restaurants will buy from you They want to make sure that enough costumers will buy from them The customers are going out less because of a downturn in the economy So you do not open our business because the stock market is down Is any business a ponzi scheme? P.S Saying that, there is research that buying at IPO is rarely a good idea: https://www.youtube.com/watch?v=2a7qhIpxv60 https://www.youtube.com/watch?v=2a7qhIpxv60

sooheon 4y ago
If early capital thought they would get better risk adjusted returns holding on to companies, they wouldn't exit. When considering a trade, you have to ask yourself "what do I know about the future prospects of this asset that the other party doesn't?" For IPOs you can see how stacked this transaction is against the public.
- SilverBirch 4y ago
  I don't think this is right. The reason VCs exit is simple, they're VCs. They exist to invest in start ups. Their job is to invest in high growth, high risk start ups, and the risk premium reflects that, they're a certain type of asset class. That's why people give them money. People don't give money to VCs to buy Walmart stock. If a VC thinks it can get a better risk adjusted return investing in Walmart then they're not a VC. Why would a limited partner want the VC parking their cash in an established business? They already have allocated their capital amongst different investments including VCs to get the mix of investments they want. So the right thing to do is as the company matures and risk drops, they exit their investment. If the company still offers good risk free returns, well then the LPs can buy the stock, or their hedge fund investments will buy the stock. But the fundamental issue is if VCs stay in companies beyond a reasonable point then they're not doing their job.
  - kareemsabri 4y ago
    I think it's more that they have a time expectation of about 10 years to give the money back to LPs with any profits and share results of the fund.
  - sooheon 4y ago
    All good points. Those are justifications for VC's existence as a financial instrument. But that's orthogonal to whether retail should buy into IPOs. Elsewhere in this thread there's discussion of VC concern regarding downstream investment/valuations, reluctance to have down rounds, etc. Clearly VCs can and will delay rounds unless they can earn a premium. It's self evident that this extends to IPOs, the last "downstream investor". Due to self selection, these IPOs will be biased toward times when the VCs judge that hype/expectations are high enough to unload at a premium. Part of their job is ensuring such conditions exist at exit, via marketing, etc. Apparently the evidence bears this out -- the first two years after IPO, companies tend to underperform after adjusting for equity risk factors: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2929733 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2929733
myth2018 4y ago
> Is any business a ponzi scheme? The analogy you are stating doesn't sound right. If the early stage investors' criteria were based on startups' revenue forecasts, then yes, the metaphor would apply. However, that's not the case. They pour the money expecting for more money to be poured in later, by others. Granted, I'm oversimplifying here, but the simple existence of such criterium is "symptomatic".
cnelsenmilt 4y ago
Future investors are not analogous to customers.

intelVISA 4y ago

I'm fairly certain they're mostly laundering schemes at this point -- half of the tech founders I've seen seem to be pitching MVPs that could be readily found in any CS undergrad's Git repo lol.

kubami 4y ago
This is classic engineering thinking. Sure the core technology, right now, might be "obvious", but a company is so much more than the tech. Without a story, marketing and sales, the company is nothing! The founders might be bringing connection, validation of the product, LOIs, etc. All of which are much, much* more difficult than the tech. *usually.
chenxi9649 4y ago
I think a lot of the tech founders are CS undergrads haha, so you'd probably literally see their mvp in their git repo. Jokes aside, oftentimes, the most disruptive technologies are not actually technologically difficult. If we take a look at the early days of mega corps today, most of them found an edge in an emergent market with off-the-shelf tech stacks.

lpolovets 4y ago

I don't think VC is at all like a Ponzi scheme, even thought most VCs depend on there being a "next investor in line." That dependency is not because we're looking for a sucker to shift a bad investment onto, but because most companies' capital needs grow dramatically. So you end up having lots of investors of all sizes, and that works more like checks and balances than a Ponzi scheme. investors.gov defines a Ponzi scheme as "an investment fraud that pays existing investors with funds collected from new investors. Ponzi scheme organizers often promise to invest your money and generate high returns with little or no risk. But in many Ponzi schemes, the fraudsters do not invest the money." A few thoughts here: - the money is actually invested. - the founders are the ones that decide how to use the money, not the investors. (And generally no one suggests that founders as a group are complicit in a Ponzi scheme.) - the next investment round is not required -- some companies get to profitability or have a good exit without further funding. - the next investment round is far from guaranteed. Most stats I've seen suggest that ~30% of seed stage companies raise a Series A. So if it's a Ponzi scheme, then it's a poorly executed one ;) - the outcomes generated by founders who get VC funding are high impact. See: https://twitter.com/emollick/status/1546109494228402176 https://twitter.com/emollick/status/1546109494228402176 (quote: This paper argues that 20% of the largest three hundred US public firms & 75% of the largest VC-backed ones “would not have existed or achieved their current scale without an active VC industry.") - the next stage investor is generally unaffiliated with the earlier investor AND evaluates a company on its merits. I.e. if our seed company can't get to a stage where they can convince at least one Series A investor to invest -- and as mentioned above, many cannot -- then it goes out of business and we lose our investment. And fwiw, if the later stage fund does a poor job picking companies, it will itself go out of business. - 99% of the time, our investors are not paid back when another investor invests, they are paid when a company exits. That means either the public market or an individual company thought the startup was a good enough business to invest their money into. - returns are not promised to our investors -- if anything, it's well known that VC is especially risky and that most VC funds don't have good returns. > So much value is absorbed in the VC pipe than by the time a company IPOs the chance of retail investors seeing returns is minimal to none. My understanding is that this is largely regulation related. Companies used to go public much earlier, but because there's an increasingly high burden and cost to being public, lots of companies choose to wait for as long as possible. And there is now enough funding out there that companies are able to stay private for a long time.