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This is nonsense... VCs have a whole staff of people needed to do business and a ton of costs. There's a legal team, marketing/events, human resources, finance

This is nonsense... VCs have a whole staff of people needed to do business and a ton of costs. There's a legal team, marketing/events, human resources, finance, some executive assistants. Screening, meeting founders, traveling to meet founders, takes up a TON of time and obviously most of the time, no investments are made! Also don't forget, VCs have an office, usually not in a cheap place, so lease costs, cleaning costs etc. If VCs had to work for free, where would you be meeting them? Ok it's all virtual now, let's say. But the truth is, meeting people face to face when you're going to write them a cheque for 10-20M is generally a good idea. So VCs and founders will almost always need to travel. You're also always going to need lawyers and finance people, since you're dealing with term sheets and large amounts of money. As others have said, VC investments are not liquid at all and the timeline is 10 years for any returns. So a VC investor in your world has to travel around the US, Europe or India meeting founders, has to work with lawyers, financial folks for free, gets zero benefits in terms of healthcare, etc. All for the chance at 40% of something in 10+ years, that might not work out anyway? If run this way, the industry would simply not exist and the founders would not get any investment. And the truth is this, there are many founders out there who want and actively seek VC investment and "shock" actually are happy with the relationship with their investors because they understand a good relationship benefits both parties in the deal. I will also add, most employees in VC firms get no percentage of the profits of the fund (i.e. the carry). Most VC employees just get a regular salary (which is often far less than tech company salaries). So if there were no fee associated, these people would never get paid, since even when the fund finishes, they wouldn't get any of the 20% carry.

leashless 2y ago
As noted, the VC would raise capital like any other business to cover its operating costs. Think about why they don’t do that.
- saberience 2y ago
  They already do that... they raise funds from LPs which include a fee which covers the costs. And it works fine, LPs repeatedly invest in the same firms which they wouldn't do if they thought it was a bad deal. There are firms which have been investing for 20-30 years with the same LPs. If the business model wasn't working it would have failed and the VC firm would have closed a long time ago.
  - leashless 2y ago
    "If the business model wasn't working it would have failed and the VC firm would have closed a long time ago." Tons of VCs do fail.
    - saberience 2y ago
      Yes, and that's healthy. Any ecosystem of companies, people, animals has failures. As far as I can see, it works fine. Just like tech companies, some VCs do amazingly, some fail. We get new VCs starting each year just like tech companies, some succeed, some fail, there's no issue here.
      - leashless 2y ago
        Agreed. VCs are companies, start ups are companies, they've got very similar dynamics. There's no magic anywhere in here.
    - jordanb 2y ago
      As a class VC is a lousy investment. Warren Buffett has described PE as a horrible investment class populated entirely by grifters who lock up your money for 10 years and fuck around with it, producing awful returns. The way he describes it, VC sounds very similar from a LP's perspective. So why does anyone invest? Buffett's theory is that LPs are mutual fund and pension fund managers who like the fact that there's a 10 year lockup in a private, illiquid investment because it means that the value can't be marked to market. They won't still be managing the fund at the end of the lockup and in the mean time they can mark to expectation and let the next guy deal with the fallout.
      - leashless 2y ago
        I think the answer is marginal utility of money. If I have $20 million, and I take $1m to the casino and bet it all on Red 21, maybe I come back with another $20m after taxes. Or I lose $1m then and there. But in the process there's no control and no sense of skill or judgement or expertise. I'm just a gambler. If on-the-other-hand I gave that money to a GP in a fund to invest on my behalf, they could come back with a game-changing amount of money in some circumstances, and there's a plausible claim of skill and expertise in my selection of the GP, and the GP's selection of investments. Same potential for asymmetric returns as gambling, but in a format that reinforces the illusions of skill and control and just maybe really is a question of skill at some level. I want to say that losing money by being bad at things is always possible, but making money by being good at things is far more a matter of intangibles than anybody want to admit, and proving that any success was deterministic rather than little turtles racing down the beach to the sea and on-average half make it is nearly impossible. We all love the illusion of control. But the statistics just don't bear it out as a fact in business.
csomar 2y ago
> If VCs had to work for free, where would you be meeting them? It's interesting you are pointing exactly at the OP point without realizing it. If you are assuming that the VCs will be doing this for "free", it means they simply don't believe they'll have any ROI, let alone one that beats the market.
- saberience 2y ago
  What? That makes no sense. VC is a job like any other, it takes time and work/effort etc to produce output, it's also a job where you can improve with skill and experience. Just like writing code takes effort and skill, why would you spend 10 years writing code full-time for "free"? Just like no one would edit books full-time for free, or write code full-time for free, or teach kids full-time for free, VC's wouldn't screen companies, interview founders, carry out significant due diligence processes for free either. Because they need to eat, need health-care, need money for rent/mortgages etc, just like every other professional. It's just another job, and most people in VC are not rich, they are just earning a salary and get no carry/% of profits of the fund.
  - leashless 2y ago
    Nobody said work for free. Raise money for the fund's operations with a separate investment product, and take no 2% management fee. Instead take 40% of the upside: this is _efficient_ if you think the upside will be huge. In fact if you were certain of the huge upside, people would borrow the operating costs for the VC rather than selling equity in the fund. Most VCs in practice live off the 2% quite nicely, and pray for a big hit, but _the big hit is a bonus not the point of the fund_ The point of the fund is the 2%. The once-in-a-blue moon hit is just that. And let me point out. The YC "big hit rate" is about 1 per 200 investments. Ballpark; you'd need to ask them the current stat. So a fund that makes 100 investments, on those numbers, has a 50/50 chance of a big hit. 50 investments, a 25% chance. To reliably get a big hit you either need to massively alter the odds of success for your portfolio companies, or kiss an awful lot of frogs hoping to hit the occasional prince. VC is _extremely hard_ because it bakes in tech risk and projections about future society into a financial product called startup equity. The big hits are staggering - the best investments ever made by human beings at any point in history I would guess - but reliable prediction of those big hits is impossible. Nearly every unicorn has a stack of 70 rejection emails. The special factor is intangible and invisible. If it even exists. I think Paul Graham explained all of this quite clearly in Black Swan Farming. It's slightly "between the lines" but he knows exactly what business he is in: spread betting and tipping the table as far as possible in his favour! A good VC approach.

leashless 2y ago

As noted, the VC would raise capital like any other business to cover its operating costs. Think about why they don’t do that.

saberience 2y ago
They already do that... they raise funds from LPs which include a fee which covers the costs. And it works fine, LPs repeatedly invest in the same firms which they wouldn't do if they thought it was a bad deal. There are firms which have been investing for 20-30 years with the same LPs. If the business model wasn't working it would have failed and the VC firm would have closed a long time ago.
- leashless 2y ago
  "If the business model wasn't working it would have failed and the VC firm would have closed a long time ago." Tons of VCs do fail.
  - saberience 2y ago
    Yes, and that's healthy. Any ecosystem of companies, people, animals has failures. As far as I can see, it works fine. Just like tech companies, some VCs do amazingly, some fail. We get new VCs starting each year just like tech companies, some succeed, some fail, there's no issue here.
    - leashless 2y ago
      Agreed. VCs are companies, start ups are companies, they've got very similar dynamics. There's no magic anywhere in here.
  - jordanb 2y ago
    As a class VC is a lousy investment. Warren Buffett has described PE as a horrible investment class populated entirely by grifters who lock up your money for 10 years and fuck around with it, producing awful returns. The way he describes it, VC sounds very similar from a LP's perspective. So why does anyone invest? Buffett's theory is that LPs are mutual fund and pension fund managers who like the fact that there's a 10 year lockup in a private, illiquid investment because it means that the value can't be marked to market. They won't still be managing the fund at the end of the lockup and in the mean time they can mark to expectation and let the next guy deal with the fallout.
    - leashless 2y ago
      I think the answer is marginal utility of money. If I have $20 million, and I take $1m to the casino and bet it all on Red 21, maybe I come back with another $20m after taxes. Or I lose $1m then and there. But in the process there's no control and no sense of skill or judgement or expertise. I'm just a gambler. If on-the-other-hand I gave that money to a GP in a fund to invest on my behalf, they could come back with a game-changing amount of money in some circumstances, and there's a plausible claim of skill and expertise in my selection of the GP, and the GP's selection of investments. Same potential for asymmetric returns as gambling, but in a format that reinforces the illusions of skill and control and just maybe really is a question of skill at some level. I want to say that losing money by being bad at things is always possible, but making money by being good at things is far more a matter of intangibles than anybody want to admit, and proving that any success was deterministic rather than little turtles racing down the beach to the sea and on-average half make it is nearly impossible. We all love the illusion of control. But the statistics just don't bear it out as a fact in business.

csomar 2y ago

> If VCs had to work for free, where would you be meeting them? It's interesting you are pointing exactly at the OP point without realizing it. If you are assuming that the VCs will be doing this for "free", it means they simply don't believe they'll have any ROI, let alone one that beats the market.

saberience 2y ago
What? That makes no sense. VC is a job like any other, it takes time and work/effort etc to produce output, it's also a job where you can improve with skill and experience. Just like writing code takes effort and skill, why would you spend 10 years writing code full-time for "free"? Just like no one would edit books full-time for free, or write code full-time for free, or teach kids full-time for free, VC's wouldn't screen companies, interview founders, carry out significant due diligence processes for free either. Because they need to eat, need health-care, need money for rent/mortgages etc, just like every other professional. It's just another job, and most people in VC are not rich, they are just earning a salary and get no carry/% of profits of the fund.
- leashless 2y ago
  Nobody said work for free. Raise money for the fund's operations with a separate investment product, and take no 2% management fee. Instead take 40% of the upside: this is _efficient_ if you think the upside will be huge. In fact if you were certain of the huge upside, people would borrow the operating costs for the VC rather than selling equity in the fund. Most VCs in practice live off the 2% quite nicely, and pray for a big hit, but _the big hit is a bonus not the point of the fund_ The point of the fund is the 2%. The once-in-a-blue moon hit is just that. And let me point out. The YC "big hit rate" is about 1 per 200 investments. Ballpark; you'd need to ask them the current stat. So a fund that makes 100 investments, on those numbers, has a 50/50 chance of a big hit. 50 investments, a 25% chance. To reliably get a big hit you either need to massively alter the odds of success for your portfolio companies, or kiss an awful lot of frogs hoping to hit the occasional prince. VC is _extremely hard_ because it bakes in tech risk and projections about future society into a financial product called startup equity. The big hits are staggering - the best investments ever made by human beings at any point in history I would guess - but reliable prediction of those big hits is impossible. Nearly every unicorn has a stack of 70 rejection emails. The special factor is intangible and invisible. If it even exists. I think Paul Graham explained all of this quite clearly in Black Swan Farming. It's slightly "between the lines" but he knows exactly what business he is in: spread betting and tipping the table as far as possible in his favour! A good VC approach.