4 ms·

Because this is not what the VC wants. The VCs are diversified across many startups and frankly make most of their money from tail event startups in their portf

Because this is not what the VC wants. The VCs are diversified across many startups and frankly make most of their money from tail event startups in their portfolio (e.g. Uber / Facebook). Since they don't know which startup will be the tail event, they don't want a profitable business, but a max growing business. This is different from the bootstrap model.

paulryanrogers 3y ago
Then why not sell it as a viable business? Or would it be too costly to trim it back and execute the sale?
- gtirloni 3y ago
  It's about perspective. What to you (and pretty much anyone else) looks like a business that just needs adjustments to reach profitability, to the VCs it's profile maintenance work for little relative benefit in the long-term. The chances of that company turning 10-20x profits in the next few years is basically zero and they just cut their losses (in their view).
- PeterisP 3y ago
  When it's still enough runway to trim it down, there's often still some hope of greater success - and a VC investor might believe that it's more valuable to have a 1% chance of it becoming a unicorn or a few percent chance of arranging some last-minute buyout, rather than pick up the 100% certain but low price it has as a non-growth business based on its revenue.
  - senderista 3y ago
    Yes, due to their large bankroll and diversified position, VCs can afford to be risk-neutral and only care about expected returns. Founders and employees obviously cannot be risk-neutral, ergo startups are a great bet for a VC and a terrible bet for anyone else.
    - wbl 3y ago
      The amount of VC-founder side deals that are possible is pretty shocking. Stuff like letting them cash out early.
      - PeterisP 3y ago
        I don't really see why such a side deal would be possible - if the VC goal is to get the founder-manager to try for that narrow hope of few percent of major success and discourage them from settling for a lower-value stable business, allowing the founders to cash out would be counterproductive, it's in the VCs interests to ensure that founders personal financial motivation is aligned to theirs, that the founders are also motivated to go big or go bust. In essence, if the startup is slowing down and perhaps not going anywhere, then the standard existing deal with founders where the founders can cash out only if they enable to VCs cash out at a profit (for example, if they manage to pull out all the stops to make a failing startup look attractive to some bigger fool) is exactly what VCs want, and in such a situation the founders have no leverage to extract a compromise that's worse for VCs.
        wbl 3y ago
        The typical situation is the company has been around for a few years and the founder has some reasonable sounding expenses. Then the next round includes some cashing out as new investors join.
deleted 3y ago
[deleted]
jongjong 3y ago
I know this is the case but I wonder if this is a self-fulfilling prophesy. I can easily imagine an alternate reality where VCs invest more thoughtfully based on more careful analysis of companies and they would have a much higher success rate and end up with even higher returns without creating unsustainable wealth inequality.
- TuringTest 3y ago
  > an alternate reality where VCs invest more thoughtfully based on more careful analysis of companies and they would have a much higher success rate and end up with even higher returns without creating unsustainable wealth inequality. Unlikely. The problem of that view is that, when you're handling large uncertainty, you don't know which projects are the ones you should cancel and which ones to nurture. Past performance is a terrible indicator for lucky shots. See the Talent-Luck simulation for instance.[1] You measure a population of projects affected affected by random events and profiting proportionally to talent, and the projects that end better off are the ones that chain multiple beneficial lucky strikes, with talent having little influence past a minimum level. And the way to maximise gains over the whole population is setting a small flat subsidy for all, allowing everybody to explore their talent even after a wrong turn. 1 https://www.inc.com/chris-matyszczyk/so-youre-smart-but-youre-not-rich-this-eye-opening-new-scientific-study-tells-you-why.html https://www.inc.com/chris-matyszczyk/so-youre-smart-but-your...
  - jongjong 3y ago
    >> And the way to maximise gains over the whole population is setting a small flat subsidy for all, allowing everybody to explore their talent even after a wrong turn. I don't think that's what VCs did. It looks more like they dumped millions of funding on a tiny number of hand-picked companies and used short term traction as the main metric and they equated profitability as anti-growth, failing to realize that, without demanding profits, growth could be produced artificially using money/advertising and that it doesn't mean that users actually want to use the product in the long run. Profitability is how you know that users want to use a product; otherwise a company could just 'launder' investment money to their users somehow and of course nobody will refuse free surplus value and hence they will attract users... Until the investment money runs out and the surplus value stops being handed out to users. Just think of Uber investors subsidizing rides as an example, as soon as that subsidy goes away, there's a good chance it will start declining. Uber is still unprofitable.
firecall 3y ago
I had to search up what a Tail Event Startup was :-) TIL a new term :-)

paulryanrogers 3y ago

Then why not sell it as a viable business? Or would it be too costly to trim it back and execute the sale?

gtirloni 3y ago
It's about perspective. What to you (and pretty much anyone else) looks like a business that just needs adjustments to reach profitability, to the VCs it's profile maintenance work for little relative benefit in the long-term. The chances of that company turning 10-20x profits in the next few years is basically zero and they just cut their losses (in their view).
PeterisP 3y ago
When it's still enough runway to trim it down, there's often still some hope of greater success - and a VC investor might believe that it's more valuable to have a 1% chance of it becoming a unicorn or a few percent chance of arranging some last-minute buyout, rather than pick up the 100% certain but low price it has as a non-growth business based on its revenue.
- senderista 3y ago
  Yes, due to their large bankroll and diversified position, VCs can afford to be risk-neutral and only care about expected returns. Founders and employees obviously cannot be risk-neutral, ergo startups are a great bet for a VC and a terrible bet for anyone else.
  - wbl 3y ago
    The amount of VC-founder side deals that are possible is pretty shocking. Stuff like letting them cash out early.
    - PeterisP 3y ago
      I don't really see why such a side deal would be possible - if the VC goal is to get the founder-manager to try for that narrow hope of few percent of major success and discourage them from settling for a lower-value stable business, allowing the founders to cash out would be counterproductive, it's in the VCs interests to ensure that founders personal financial motivation is aligned to theirs, that the founders are also motivated to go big or go bust. In essence, if the startup is slowing down and perhaps not going anywhere, then the standard existing deal with founders where the founders can cash out only if they enable to VCs cash out at a profit (for example, if they manage to pull out all the stops to make a failing startup look attractive to some bigger fool) is exactly what VCs want, and in such a situation the founders have no leverage to extract a compromise that's worse for VCs.
      - wbl 3y ago
        The typical situation is the company has been around for a few years and the founder has some reasonable sounding expenses. Then the next round includes some cashing out as new investors join.

deleted 3y ago

[deleted]

jongjong 3y ago

I know this is the case but I wonder if this is a self-fulfilling prophesy. I can easily imagine an alternate reality where VCs invest more thoughtfully based on more careful analysis of companies and they would have a much higher success rate and end up with even higher returns without creating unsustainable wealth inequality.

TuringTest 3y ago
> an alternate reality where VCs invest more thoughtfully based on more careful analysis of companies and they would have a much higher success rate and end up with even higher returns without creating unsustainable wealth inequality. Unlikely. The problem of that view is that, when you're handling large uncertainty, you don't know which projects are the ones you should cancel and which ones to nurture. Past performance is a terrible indicator for lucky shots. See the Talent-Luck simulation for instance.[1] You measure a population of projects affected affected by random events and profiting proportionally to talent, and the projects that end better off are the ones that chain multiple beneficial lucky strikes, with talent having little influence past a minimum level. And the way to maximise gains over the whole population is setting a small flat subsidy for all, allowing everybody to explore their talent even after a wrong turn. 1 https://www.inc.com/chris-matyszczyk/so-youre-smart-but-youre-not-rich-this-eye-opening-new-scientific-study-tells-you-why.html https://www.inc.com/chris-matyszczyk/so-youre-smart-but-your...
- jongjong 3y ago
  >> And the way to maximise gains over the whole population is setting a small flat subsidy for all, allowing everybody to explore their talent even after a wrong turn. I don't think that's what VCs did. It looks more like they dumped millions of funding on a tiny number of hand-picked companies and used short term traction as the main metric and they equated profitability as anti-growth, failing to realize that, without demanding profits, growth could be produced artificially using money/advertising and that it doesn't mean that users actually want to use the product in the long run. Profitability is how you know that users want to use a product; otherwise a company could just 'launder' investment money to their users somehow and of course nobody will refuse free surplus value and hence they will attract users... Until the investment money runs out and the surplus value stops being handed out to users. Just think of Uber investors subsidizing rides as an example, as soon as that subsidy goes away, there's a good chance it will start declining. Uber is still unprofitable.

firecall 3y ago

I had to search up what a Tail Event Startup was :-) TIL a new term :-)