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Rise of ‘zombie’ VCs as startup valuations plunge
- brmgb 4y agoTLDR: With interests rising and growth slowing down, it's getting harder for VCs to find capital. Therefore, some funds have stopped investing in new companies and are just managing their existing portfolio. These funds will most likely slowly wind down their activities and shed employees as the size of their portfolio dwindles. Unclear to me how it's an issue for investors however.
- skeeter2020 4y agoAs I commented independently, I'm not sure how this isn't both expected and a good thing.
- HDThoreaun 4y agoI think the issue is that the VC funds are sitting on billions of unallocated capital with interests rates at levels not seen in decades. LPs might want their money back for that sweet risk free return but VCs aren't going to return even though they're not investing it either.
- epoch_100 4y agoIf the VCs haven’t made a capital call, then that unallocated money is likely still sitting with the LPs collecting that sweet risk free return.
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- ttul 4y agoWe saw this after the dot com crash and the GFC too. VC offices became sad places. Lots of meetings but no deal making. It’s during this downturn phase of the cycle that the 2% management fees charged by VC funds seem truly excessive.
- Zetice 4y agoIt's just weird, because fundraising is hitting record levels, but funding is dropping. [0] So there's a lot of "dry powder" (I hear that phrase constantly to describe the situation) just sitting there, doing nothing. What are the VC funds preparing for? What are investors being sold on? Given all the tech layoffs, my bet is there will be a whole lot of new startup growth coming soon that will "ignite" that dry powder. [0] bizjournals.com/sanjose/news/2023/02/15/despite-us-fundraising-activity-hitting-record-h.html
- rcme 4y agoThere is a crazy amount of dry powder in the U.S. financial system. A lot of the money printed during the pandemic is just sitting there, growing at ever-higher risk-free interest rates.
- boringg 4y agoQuick reminder here. Money sitting at banks in “risk free” interest rates is losing money in real terms. There arent a lot of good investments in the market right now especially when adding inflation costs. I highly doubt your described situation exists.
- celestialcheese 4y agoI don't know about pandemic checks causing this, but VC's have a huge amount of undeployed capital from the boom of 20/21. https://www.theinformation.com/articles/venture-firms-290-billion-dry-powder-is-about-to-revive-startup-funding https://www.theinformation.com/articles/venture-firms-290-bi... There's a lot of money specifically allocated to venture funds that needs to be deployed.
- rcme 4y agoIt's only losing money in "real terms" if you use CPI. Given that VCs aren't buying cars and televisions, that's not an appropriate measure of inflation to use. Tech valuations have been falling, so the assets purchased by VCs (equity in tech companies) is deflationary.
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- teetertater 4y agoSomething I've personally noticed: Zombie incubators. Seems like only a single incubator survived the pandemic in my city
- robocat 4y agoSurely the vast majority of incubators fail? Running an incubator is high status so it attracts peacocks not busy beavers, plus it is an extremely difficult business to be successful at. The incubator in New Zealand that I had experience of was government funded, so that incubator also had perverse non-financial incentives. A bit more on my opinion of the problems with being a company at an incubator: https://news.ycombinator.com/item?id=30130572 https://news.ycombinator.com/item?id=30130572
- monero-xmr 4y agoTo be a partner at a VC firm you used to have to be a successful entrepreneur. Now a degree from Stanford and two years as a PM at a YC company seems to be the bar for getting on the VC track. I have been very underwhelmed with my conversations with many people who decide where to invest hundreds of millions of dollars.
- aaronbrethorst 4y agoDon't forget the Patagonia vest and a pair of Allbirds.
- MrMan 4y agoI love those quilted vests a little grey at the temples also adds a lot of gravitas
- sitkack 4y agoThrow in some long pauses, dropping some quotes from someone everyone claims to have read and haven't and be 5% underweight while having pronounced delts or triceps. Throw on a pair of Sundar glasses and slip a moleskine notebook and a Montblanc Meisterstuck and you are platinum. Catalyze those synergies across complimented verticals!
- LargoLasskhyfv 4y agoPfft. Lamy Unic
- sitkack 4y agoNice, the notebook would have to be quadrille. The PhD VC angle. You would have to focus on technicals over the pure MBA pastiche.
- gamblor956 4y agobe 5% underweight while having pronounced delts or triceps. I don't get that part of the joke. Most VCs are skinny AF or quite chubby, but none of them seem to have any semblance of muscle mass?
- Night_Thastus 4y agoWhat do you call the other side of this? A startup funded massively by VC's, but can't actually turn a profit and is only sustained by the continuous funding pumped into it? A "zombie startup"? IE, Doordash.
- fakedang 4y agoHey add Zomato to it too. I just got an update a few days back on my terminal, saying "no longer forecast to breakeven".
- arbuge 4y agoWhat terminal is that?
- SkyMarshal 4y agoThe only terminal I know of that broadcasts financial data is the Bloomberg Terminal. https://www.bloomberg.com/professional/solution/bloomberg-terminal/ https://www.bloomberg.com/professional/solution/bloomberg-te... Thought in this context “terminal” might be a generic term for any other financial data service, not just Bloomberg.
- fakedang 4y agoBloomberg terminal. You get notifications when analyst reports pop in. Consensus was that Zomato can't breakeven even by 2025.
- jatins 4y agoAdjusted for losses, Zomato is breakeven now[0] [0] https://twitter.com/deepigoyal/status/1623679354772541443 https://twitter.com/deepigoyal/status/1623679354772541443
- fakedang 4y ago"Adjusted for losses". There, ftfy.
- skeeter2020 4y agoAm I the only one who thinks this may be a good thing? We saw ridiculous growth in marginal VC firms; they SHOULD experience the same trials that their portfolio companies are now facing. The funds are actively managed and then wound down; why shouldn't the larger organizations do this as well? If you're VC firm is no longer relevant, and was only raising money because low interest rates the alternative investments so poor, good riddance.
- aliqot 4y agoVC is a fading model. Might be rude to say it here, but at least call it what it is. Money costs more than ever, why take on that stress?
- CyberDildonics 4y ago> Money costs more than ever The Fed funds rate, which is the rate banks charge each other for overnight loans, hit 20 percent in 1980, and 21 percent in June 1981. https://www.loanatik.com/827-2/ https://www.loanatik.com/827-2/
- aliqot 4y agoFinance does not exist in an idempotent vacuum
- CyberDildonics 4y agoDid you take that to mean that every other interest rate was low at the same time? Mortgage rates were over 18% You're the one making a claim with nothing to back it up.
- Jommi 4y agoWhat's the next model?
- torbTurret 4y agoI went to a top university. Everyone I know from it who became a VC wasn’t impressive, above-average, or even average in some cases. However, they were extremely money obsessed.
- outside1234 4y agoVC is a sales business. Their business is to sell startups for money. In fact, I would say that money is really their only value, so you really want them to be money obsessed.
- walleeee 4y agoOne wants them to be money obsessed only if one thinks selling startups for money is a valuable economic activity
- mariosisters 4y agoI mean, it’s valuable to me to sell my startup for more money. Valuable economic activity indeed. I would say if you are in the business of selling startups, you’re probably in the same boat.
- walleeee 4y agoClearly true, if you value money more than whatever it is you founded your startup to do. Which is likely true, if you're in the business of selling startups. Now we're going in circles.
- wpietri 4y agoLong ago I read a memoir from a Hollywood writer whose name escapes me at the moment. One of her points was that many of the people making deals in Hollywood were not so much "extraordinary" as "extra ordinary". They were the people who actually liked standard middlebrow Hollywood fare. That gave them a competitive advantage in producing dreck because they weren't troubled by things like "artistic vision" or "scruples".
- __bjoernd 4y agoSo there are downsides and risks with certain businesses models and these fluctuate based on the state of the real world? Consider me shocked!
- bischofs 4y agoIs this recession going to be like the commercial production of fusion energy? Always around the corner despite nothing indicating we are anywhere near a recession. Keep in mind it's hard to have a recession when unemployment is in the 3s, and there is still high demand for products and services across the economy. But I guess if we really want to have a recession we can.
- canadiantim 4y agoAll the layoffs aren't an indication we're nearing a recession? Yes unemployment is currently low but I see that turning around in a big way imminently
- Ataraxic 4y agoLayoffs in tech. Not hearing much about other parts of the economy. Totally possible I haven't seen the reporting but I'd argue that tech/growth industries suffering layoffs don't really indicate a recession by itself even if they are large.
- vkou 4y agoYou're not missing anything. The Fed is on record that the economy is doing great, unemployment in the economy as a whole is non-existent, so it's going to continue raising interest rates. When your CEO tells you that we're in a tough economic climate, what she's actually saying is that we're in a tough monetary policy climate. The economy is (currently) fine. Expect the pain in tech to get worse, much worse, before it gets better. ------ PS. Facebook is on round 2 of layoffs.
- disgruntledphd2 4y ago> PS. Facebook is on round 2 of layoffs. Not quite yet, but certainly by mid-April.
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- Animats 4y agoOh, VCs themselves as zombies. Usually, it's VC-funded companies that become zombies - they can pay their own ongoing bills, but not pay off their investment. They have positive value, so they're not just shut down. VCs prefer a hard fail. Then they don't have to manage the ongoing company. Apparently zombies have become so common that some VC firms are now stuck with a portfolio of zombies. When you think about it, most of Alphabet's non-ad projects are zombies. They lose money or don't make significant profits, and they're not growing into something big.
- paulpauper 4y agoInvestors warn a horde of ailing venture capital “zombies” will emerge in the coming years. So like 4sqaure, groupon, Quora, Evernote and others that are kept alive in perpetuity due to funding but otherwise long peaked
- robocat 4y agoVC’s can still be milking good money from bad investments. In addition to organizational and fund expenses, [investors] typically also pay an annual management fee, calculated based on a percentage (e.g., 2% or 2.5%) of the capital commitments of the fund (as of the final closing), to the fund’s management company. As with expenses, this fee is paid by the fund out of capital contributions of the individual fund investors. Following the termination of the commitment period (when the fund is making new investments – often 5 years from the initial closing), the management fee rate is usually phased down and may be based on net invested capital as opposed to capital commitments.
- nickdothutton 4y agoKids, remember to ask: 1) When did you last make a new investment, not a follow on? 2) When did you last raise a fund and how far through are you with your current fund? 3) How many new deals did you do in the last 12 months? 4) Which partner was the last one to lead a new investment. I joined a VC shortly after the dotcom crash and yes there were quite a few zombie funds around, even a few LPs attempting to sue for the return of those funds dry powder. Very few remained truly active.