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Are VCs funded by debt? I thought the funds would largely have come from existing cash or equities and were only down 15% from ATH on SPY. Is this just people

Are VCs funded by debt? I thought the funds would largely have come from existing cash or equities and were only down 15% from ATH on SPY. Is this just people being risk averse right now?

otikik 4y ago
The fact that they cite the current market means that at some point in their process they borrow money. And now that’s more expensive to do. That doesn’t mean necessarily that they are “funded by debt”. It could just mean that getting into some temporary debt is part of how they work.
- q-big 4y ago
  > at some point in their process they borrow money I would be somewhat careful with such claims. As an investor who has money available, you have two options (in this example) where none involve borrowing money: a) invest in some startups b) lend this money to other entities Increased market interest rates mean that b) becomes more attractive. In other words: the startups that you invest in for a) have to be much more promising than in a market environment with lower interest rates. This means less investing in startups.
  - yunohn 4y ago
    Sure, but we’re talking about a VC fund. I’m not convinced that YC reduces investing in startups to pivot and profit from increased lending rates.
    - q-big 4y ago
      A VC fund will only get money if the risk-adjusted rate of return is greater than the rate of interest; otherwise backers of the VC fund invest their money elsewhere. This means that VC have to become more selective with respect to the startups that they invest in, as I described.
    - Spooky23 4y ago
      YC is qualifying and preparing startups for VC. If the funnel is narrowing at the end, it doesn’t make sense to put more companies into it.
bigtunacan 4y ago
VCs aren't directly funded by debt. They generally receive funding from accredited investors, and accredited investors are as a rule wealthy. Now when you are wealthy you make money off your money (through traditional means stocks/derivatives/etc...) but you want to get even more wealthy and have access to special discounted loan rates through things like guaranteed loans. So you go to the bank and say here's some of my books over at Schwab and you can see there's 200M there and it's earning 10% a year on average. Now I want to put 50M into a VC firm so I can really leverage this shit up and make even more money, but I don't want to lose that 10% on the 50M and besides that the tax bill of I cash that position man... And so the banker is like, but of course Mr Rich Dude here's a line of credit for that 50M at a low low rate of 2% since we have so much money to lend and you can keep making the now 8% interest profits by having your cake and eating it too. And if you're 200M account starts to dip too low that you might be at risk of not being able to pay us back you can always line up some more collateral or we'll margin call and collect that 50M you owe us. Now sorry I got a bit long winded but that's really the gist of what happens, so yes indirectly VCs are largely funded by debt. And in times like these a lot of that collateral is losing value which is increasing the risk of the debt being collected, this is coupled with rising interest rates which then in turn reduces the potential reward for leveraging yourself up so much. It all becomes a vicious cycle.
- rmbyrro 4y ago
  Well, in that case, everything is indirectly funded by debt
  - dijit 4y ago
    That’s the gist of capitalism and why we have boom and bust cycles (in the short and long). Ray Dalios series on the topic of capitalism being funded by debt is quite approachable. https://youtu.be/PHe0bXAIuk0 https://youtu.be/PHe0bXAIuk0
  - deleted 4y ago
    [deleted]
  - arcticbull 4y ago
JumpCrisscross 4y ago
> Is this just people being risk averse right now? VC historically yielded 12 to 18% [1]. There is a lot of variance in those figures, with the crypto + Clubhouse guys coming in below ten, savvier funds still posting 30%+ and SoftBank + Tiger losing money. So when a bond is yielding 5 pts [2] above the 10-Treasury’s 2.75% [3], more people will chose 7 or 8% with the guarantee of the issuer’s assets over maybe twenty maybe zilch. [1] https://www.nexitventures.com/site2015/wp-content/uploads/2022/03/Fund-performance-2.png https://www.nexitventures.com/site2015/wp-content/uploads/20... [2] https://fred.stlouisfed.org/series/BAMLH0A0HYM2 https://fred.stlouisfed.org/series/BAMLH0A0HYM2 [3] https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value_month=202208 https://home.treasury.gov/resource-center/data-chart-center/...
analyst74 4y ago
There is only $2 trillion "real money", all the other money in circulation is debt. You can search for the definition of M0/M1/M2 money for more detailed explanation.

Are VCs funded by debt? I thought the funds would largely have come from existing cash or equities and were only down 15% from ATH on SPY. Is this just people being risk averse right now?

otikik 4y ago

The fact that they cite the current market means that at some point in their process they borrow money. And now that’s more expensive to do. That doesn’t mean necessarily that they are “funded by debt”. It could just mean that getting into some temporary debt is part of how they work.

q-big 4y ago
> at some point in their process they borrow money I would be somewhat careful with such claims. As an investor who has money available, you have two options (in this example) where none involve borrowing money: a) invest in some startups b) lend this money to other entities Increased market interest rates mean that b) becomes more attractive. In other words: the startups that you invest in for a) have to be much more promising than in a market environment with lower interest rates. This means less investing in startups.
- yunohn 4y ago
  Sure, but we’re talking about a VC fund. I’m not convinced that YC reduces investing in startups to pivot and profit from increased lending rates.
  - q-big 4y ago
    A VC fund will only get money if the risk-adjusted rate of return is greater than the rate of interest; otherwise backers of the VC fund invest their money elsewhere. This means that VC have to become more selective with respect to the startups that they invest in, as I described.
  - Spooky23 4y ago
    YC is qualifying and preparing startups for VC. If the funnel is narrowing at the end, it doesn’t make sense to put more companies into it.

bigtunacan 4y ago

VCs aren't directly funded by debt. They generally receive funding from accredited investors, and accredited investors are as a rule wealthy. Now when you are wealthy you make money off your money (through traditional means stocks/derivatives/etc...) but you want to get even more wealthy and have access to special discounted loan rates through things like guaranteed loans. So you go to the bank and say here's some of my books over at Schwab and you can see there's 200M there and it's earning 10% a year on average. Now I want to put 50M into a VC firm so I can really leverage this shit up and make even more money, but I don't want to lose that 10% on the 50M and besides that the tax bill of I cash that position man... And so the banker is like, but of course Mr Rich Dude here's a line of credit for that 50M at a low low rate of 2% since we have so much money to lend and you can keep making the now 8% interest profits by having your cake and eating it too. And if you're 200M account starts to dip too low that you might be at risk of not being able to pay us back you can always line up some more collateral or we'll margin call and collect that 50M you owe us. Now sorry I got a bit long winded but that's really the gist of what happens, so yes indirectly VCs are largely funded by debt. And in times like these a lot of that collateral is losing value which is increasing the risk of the debt being collected, this is coupled with rising interest rates which then in turn reduces the potential reward for leveraging yourself up so much. It all becomes a vicious cycle.

rmbyrro 4y ago
Well, in that case, everything is indirectly funded by debt
- dijit 4y ago
  That’s the gist of capitalism and why we have boom and bust cycles (in the short and long). Ray Dalios series on the topic of capitalism being funded by debt is quite approachable. https://youtu.be/PHe0bXAIuk0 https://youtu.be/PHe0bXAIuk0
- deleted 4y ago
  [deleted]
- arcticbull 4y ago

JumpCrisscross 4y ago

> Is this just people being risk averse right now? VC historically yielded 12 to 18% [1]. There is a lot of variance in those figures, with the crypto + Clubhouse guys coming in below ten, savvier funds still posting 30%+ and SoftBank + Tiger losing money. So when a bond is yielding 5 pts [2] above the 10-Treasury’s 2.75% [3], more people will chose 7 or 8% with the guarantee of the issuer’s assets over maybe twenty maybe zilch. [1] https://www.nexitventures.com/site2015/wp-content/uploads/2022/03/Fund-performance-2.png https://www.nexitventures.com/site2015/wp-content/uploads/20... [2] https://fred.stlouisfed.org/series/BAMLH0A0HYM2 https://fred.stlouisfed.org/series/BAMLH0A0HYM2 [3] https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value_month=202208 https://home.treasury.gov/resource-center/data-chart-center/...

analyst74 4y ago

There is only $2 trillion "real money", all the other money in circulation is debt. You can search for the definition of M0/M1/M2 money for more detailed explanation.