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2023 is going to be a brutal “forest fire” market cleansing for non-profitable startups. As these companies run short on cash the best of the best will convince

• kwertyoowiyop 4y ago
  Just like a forest fire, if you let it happen when it should, it’s not so bad. But if you keep suppressing it (with firefighters…or low interest rates) then when it finally happens, it can be a disaster.
  • wpietri 4y ago
    Low interest rates didn't force VCs to invest this money. And it didn't force LPs to give the money to VCs. And obviously, startup founders weren't forced to take it. The various central banks played a role here, but definitely not a starring one.
    • hn_throwaway_99 4y ago
      > Low interest rates didn't force VCs to invest this money. And it didn't force LPs to give the money to VCs. One can debate whether "force" is the right word, but 100%, absolutely the goal of low interest rates was to force savers into riskier assets, when banks and bonds were returning close to 0. So many companies never would have funded in a normalized rate environment.
      • wpietri 4y ago
        Can you show me something from a few central banks saying that they were trying to force savers into riskier assets? I agree that can be a consequence (although it isn't necessarily so; many people just leave their savings be), but I don't believe it ever was a goal. And regardless, I think it's a big leap from "some savers wanted higher returns" to "let's throw a lot of money into things without due diligence or a coherent success story". Which unarguably happened lately. E.g., all the "smart" money invested in FTX, which we now know to be an absolute clown show. Other, better choices were possible. Including the supposed experts saying, "Sorry, we can't deploy this capital for you, as we don't think there are good opportunities in the current market conditions."
        • hervature 4y ago
          Here you go: https://en.wikipedia.org/wiki/IS%E2%80%93LM_model https://en.wikipedia.org/wiki/IS%E2%80%93LM_model From the article: I(r) represents business investment decreasing as a function of the real interest rate Businesses invest less as the rate increases. That's equivalent to businesses save less as the rate decreases.
          • wpietri 4y ago
            That's a theoretical model of a consequence. I never denied the consequence, I denied that this particular consequence is the goal for central banks. Which is why I asked for something different than what you provided.
            • 1123581321 4y ago
              Central banks are famously cryptic. If you’re looking for a smoking gun, this 2020 statement by Powell might satisfy you. “If you look at P/Es they’re historically high, but in a world where the risk-free rate is going to be low for a sustained period, the equity premium, which is really the reward you get for taking equity risk, would be what you’d look at,” Powell said. As you may know, this statement was made after Powell famously reversed course on his 2018 unwind of Yellen’s put after asset prices started to fall. https://www.hindustantimes.com/world-news/powell-busts-out-fed-model-to-defend-high-equity-valuations/story-EaUaBbV06sYj8edEdT8FYO.html https://www.hindustantimes.com/world-news/powell-busts-out-f...
    • berkle4455 4y ago
      That’s quite literally the goal of low interest rates is to encourage spending and investing.
      • wpietri 4y ago
        The general goal of rate cuts is, yes, to increase overall economic activity. But that doesn't mean that any specific person is obliged to put money in a particular thing if it's bad. E.g., when interest rates drop, so do auto loan rates. But even if you can now suddenly afford a Hummer, you still get to decide whether or not that is a good choice for you. And if it turns out it wasn't, you don't get to blame the Federal Reserve for your choice.
        • CharlieDigital 4y ago
          A Hummer is not an investment. The problem in a low interest environment is that parked cash loses value to inflation so it is forced to flow.
          • wpietri 4y ago
            Then it's a good thing I never said a Hummer was an investment. Cash isn't forced to do anything. It's not an actor here. People are. Those people make choices with their money. They choose more risk during a recession rather than a predictable loss.
            • CharlieDigital 4y ago
              > But even if you can now suddenly afford a Hummer, you still get to decide whether or not that is a good choice for you Our question here is whether wealthy investors should invest their capital into VCs or interest-linked instruments. The whole point is that your analogy of the buying the Hummer is useless because a Hummer isn't an investment but an expense so there's no point in using your analogy.
              • 4y ago
  • duxup 4y ago
    > or low interest rates Are VCs borrowing heavily? For some reason I imagined that wasn’t the case generally.
    • CharlieDigital 4y ago
      That's not it. When interest rates are low and you have piles of money, you seek higher risk investments with higher returns because low risk investments have virtually no returns on interest (if you factor in inflation, you've lost money over time in a low interest environment). Think about this way: you wouldn't put $10,000 into a cash deposit for risk free 0.1% annualized return, but you might for 5%. So the shift in interest has changed the favorability of different investment vehicles. If you are a VC, you might fund 100 companies and only 2-3 will be super profitable and generate the majority of your returns. Those returns in aggregate need to be greater than what could be achieved by parking the money in lower risk instruments. Easy in 2020 when interest was nearly 0. Now? Those lower risk instruments are much higher performing than they were 3 years ago. So if a VC portfolio had returns of 5% previously and now I can just park my $1m in a CD and get 4% RISK FREE, that VC suddenly has to perform at a higher level to compete. Otherwise if I'm a wealthy investor, why not just park my money in bonds or other investments that benefit from higher interest?
    • michaelt 4y ago
      No, but some people have put their money into startups because banks were paying 0.5% interest. Now, investors are getting a much better offer from the banks. Maybe they'll decide selling $10 taxi rides for $7 isn't something they want to continue funding.
      • mrweasel 4y ago
        Most banks would pay a negative interest. If you have any sort of fortune, you need to invest to make any interest, otherwise you'd see that fortune become smaller and smaller. Arguably some have found it beneficial to invest in bonds with negative yields, because then they'd at least know that their money was safe and exactly how much it would cost over a given period.
    • 4y ago
  • echelon 4y ago
    Low interest rates lower the activation energy to discovering good ideas too.
    • hef19898 4y ago
      In reality, low interest rates allow businesses building a growth story on sellong dollars for pennies to survive much longer rhan they should. All while ruining businesses that would otherwise be totally viable and sustainable but don't have access to VC money. IMHO, the start-up cleaning that seems to be on the horizon can only be a good thing.
  • emodendroket 4y ago
    Depends on for whom we mean. I don’t mind having had the opportunity to book a lot of wages in the meantime.
  • trogdor 4y ago
    The Forest Service lands in the middle. The contemporary approach to land management in relation to fire involves regularly setting controlled fires under optimal weather conditions. It’s good for forest ecology, which depends on fire, and it’s good for people, since we generally don’t like crazy forest fires. https://www.fs.usda.gov/managing-land/prescribed-fire https://www.fs.usda.gov/managing-land/prescribed-fire
• fuzzfactor 4y ago
  >take a down-round hit That sounds like it could be below-the-belt.
• abirch 4y ago
  Downround or liquidation preference.
• xwolfi 4y ago
  It's a pyramid scheme not an unprofitable startup. You could always pivot, find a relative with more money, make your guys work as cheap consultants for bigger corps. But who will hire or lend or invest in a crypto thing NOW, afrer FTX Bahamas extradition and the Celsius examiner's report. Now all is clear: there is no business model, there is simply a black box where there is less money coming out than there was coming in. It doesnt transform nature (what people call "adding value" or "providing utility") so it can't make money.
• cgb223 4y ago
  > The M&A scenario is where you hear about a startup getting acquired for a billion $ and employees are popping corks only to find out that they get nothing (despite all those options/shares) and are now an employee of some other shop that has them on a short list to be axed to realize “synergies” created by the deal. Can you explain this point a bit more? If a company was acquired for billions, and they have a contract entitling them to shares of the company, why wouldn’t they have a nice exit?
  • deleted 4y ago
    [deleted]
  • jmalicki 4y ago
    The investors usually have liquidation preferences and/or participating preferred stock, or similar. Common stockholders (including founders) are only entitled to a share of what's left over after investors are paid, as their equity rights are more junior -though often founders/execs will get large bonuses to make the deal happen even if their stock is worthless.
  • godzillabrennus 4y ago
    Preferred shares with liquidation preferences can entitle an investor to recoup a multiple (or at least not lose money) before any common shares shareholders can get paid anything. VC stands for Vulture Capital in some circles.
  • zaroth 4y ago
    Preferred shares get paid first. Most investors get preferred shares that give them a “liquidation preference” which means they can get the money they put into the company back out (or some multiple of that money) off the top of the purchase price. If the purchase price of the company isn’t greater than the money VCs put into the company, the common shares are typically worthless. Sometimes preferred shareholders have to choose “exercise this preference” and then the shares go poof (“non-participating preferred”) and sometimes preferred shareholders can get this preference AND then also become common shareholders alongside everyone else and get to share what’s left after the preference is paid (“participating preferred”)