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> But not Mark Cuban, one of the renowned moguls in the VC world. Mark Cuban is certainly a renowned Angel investor, but not a VC. > For instance, Uber moved

by birken 11y ago

> But not Mark Cuban, one of the renowned moguls in the VC world. Mark Cuban is certainly a renowned Angel investor, but not a VC. > For instance, Uber moved from $17 billion to $40 billion between the two funding rounds within six months. Amazon, a public company worth ~200B billion dollars, is up 40% in value in 5 months this year. Valuations can change very quickly in technology companies, whether public or private. > This bubble is bound to burst. Ok, well I guess that settles it! > Take Uber and Airbnb for example. Both co-founders ... wealth was calculated on the basis of notional post-money valuations, figures far in excess of what these companies could actually be sold at in the market right now. Uh, says who? Both of these companies make tons and tons of money and have business models that make sense. Whether or not they are good for the world, they are certainly good businesses. What makes you so sure the valuations are wrong? All of the late-stage investments in Facebook worked out pretty well. > VCs will most likely walk away with their invested money, if not more. A VC who returns the initial fund amount (or even a small gain), over 10 years, is losing their LPs tons of money to fees and inflation. LPs will not invest in that fund again, and one bad fund has ended a lot of VC careers. Granted this is probably good for the world, but not for that VC. Saying a VC has liquidation preferences and thus they are immune from any negative consequences to a bad investment is ridiculous.

pzxc 11y ago
I don't disagree with anything you said, but I have a question. If liquidation preferences have such little value, why is it so common? Is it because founders for the most part accept whatever the VCs dictate, even things that benefit the VCs only slightly but still get thrown in because the VCs pretty much get their way no matter what?
- birken 11y ago
  Liquidation preferences have value, and a lot of value, I'm saying that they just don't make VCs immune from bad consequences. I'm sure the reason they are so common is that a VC wants it, and it seems fair to the founder and is easy to toss in. Founders certainly don't accept anything the VCs dictate, and terms like this are on the table during negotiations. This is especially why as an founder you want competition from multiple VCs so you a little bit of leverage. But at the end of the day the VCs are going to want some sort of preferences over the common stock, and this is a fairly easy one to toss in. As to why the preference might not be so great for a VC, let's imagine a hypothetical scenario. I make a 20k personal angel investment in a company with a 1x liquidation preference. A year later the company is tanking and sells for less than the valuation, but enough that I get all my money back. Great. I lost the opportunity cost of that 20k for one year, but nothing else. But imagine the same scenario with a VC, but let's say it was 20 million of their 100 million dollar fund. A year after they make the investment, they get the money back. But they now must return that to the LPs. The fact they got the money back quickly makes no difference to them, because they can't re-invest it. And now they now have only 80% of their fund left to try and generate a big return. Yes, getting the money back is better than not getting it back, but is wasted ammo they cannot re-use in their quest to generate a big return. And also lost in this is that many times when a company is tanking they will either go completely bankrupt or not return all the money that investors put in (see: Fab).
downandout 11y ago
>> This bubble is bound to burst. Ok, well I guess that settles it! A bubble exists when enough people decide that it exists (and it seems that many people have decided this [1]). The mere existence of this article and the thousands like it that have been written recently are setting the stage for it. It probably won't begin to pop until the fed raises rates (likely starting next month), but it appears inevitable that a major slowdown in tech funding will occur this year. It's highly likely that a fair number of engineers are going to be unemployed by the end of the year. [1] http://www.google.com/trends/explore#q=%22tech%20bubble%22 http://www.google.com/trends/explore#q=%22tech%20bubble%22

by birken 11y ago

pzxc 11y ago

I don't disagree with anything you said, but I have a question. If liquidation preferences have such little value, why is it so common? Is it because founders for the most part accept whatever the VCs dictate, even things that benefit the VCs only slightly but still get thrown in because the VCs pretty much get their way no matter what?

birken 11y ago
Liquidation preferences have value, and a lot of value, I'm saying that they just don't make VCs immune from bad consequences. I'm sure the reason they are so common is that a VC wants it, and it seems fair to the founder and is easy to toss in. Founders certainly don't accept anything the VCs dictate, and terms like this are on the table during negotiations. This is especially why as an founder you want competition from multiple VCs so you a little bit of leverage. But at the end of the day the VCs are going to want some sort of preferences over the common stock, and this is a fairly easy one to toss in. As to why the preference might not be so great for a VC, let's imagine a hypothetical scenario. I make a 20k personal angel investment in a company with a 1x liquidation preference. A year later the company is tanking and sells for less than the valuation, but enough that I get all my money back. Great. I lost the opportunity cost of that 20k for one year, but nothing else. But imagine the same scenario with a VC, but let's say it was 20 million of their 100 million dollar fund. A year after they make the investment, they get the money back. But they now must return that to the LPs. The fact they got the money back quickly makes no difference to them, because they can't re-invest it. And now they now have only 80% of their fund left to try and generate a big return. Yes, getting the money back is better than not getting it back, but is wasted ammo they cannot re-use in their quest to generate a big return. And also lost in this is that many times when a company is tanking they will either go completely bankrupt or not return all the money that investors put in (see: Fab).

downandout 11y ago

>> This bubble is bound to burst. Ok, well I guess that settles it! A bubble exists when enough people decide that it exists (and it seems that many people have decided this [1]). The mere existence of this article and the thousands like it that have been written recently are setting the stage for it. It probably won't begin to pop until the fed raises rates (likely starting next month), but it appears inevitable that a major slowdown in tech funding will occur this year. It's highly likely that a fair number of engineers are going to be unemployed by the end of the year. [1] http://www.google.com/trends/explore#q=%22tech%20bubble%22 http://www.google.com/trends/explore#q=%22tech%20bubble%22