Some great points in the post, but I also see a few additional dynamics at play:
1) The last 10 years have been great for VCs and startups, but now VCs are thinking about how to make their funds last longer. Two reasons for this: first, time diversification matters. If you think markets might go down even more, you don't want to deploy the rest of your fund quickly, you want to spread it out over a few years and get a good average cost basis. Second, there's a healthy fear among VCs that LP capital will be much harder to secure in the next 1-2 years. And you don't want to deploy the rest of your current fund in the next 6 months if you won't have a new fund ready to go for 18 months.
2) Most VCs (and founders) hate down rounds. So a lot of existing companies are stuck because they previously raised at $X valuation, and now the market price is $0.75X, and either the VC doesn't want to push for a down round or a founder won't accept it, or both.
3) Aaron mentions this in the blog post, but everyone is worried about downstream investors. Our fund is big enough to lead a seed round, but it can't put a dent in a Series A, so we depend on Series A investors eventually backing our seed companies. And Series A investors often depend on Series B investors to invest a lot in the next round. And so on. If the entire growth stage market grinds to a halt -- and it seems like it basically has -- then early stage investors start worrying about making new investments because there's way less downstream funding available. So even if a seed VC believes this is an amazing time to build a company and there are lots of great seed opportunities out there, they might still slow down investing a lot if they know their companies will need more funding and that funding doesn't seem to be there right now.
4) I've been a VC for about a decade, and the gap between VC and founder valuation expectations is greater than it's ever been during that time. 3 months ago, a median seed round was at $20m post, and a lot were at $25m-$30m post. Now I still see a lot of seed founders looking for $20m-$30m post, but a lot of VCs believe we should be back to 2020 valuations of $10m-$15m post. The gap between an expectation of, say, $13m post on one side and $25m post on the other side is huge, and lots of conversations never even begin because of that mismatch.
I’ve often heard the modern VC route described as a Ponzi scheme with the public market being the greatest of the fools, I don’t totally buy into the idea but your 3rd point really does highlight how close it all is to a Ponzi scheme.
So much value is absorbed in the VC pipe than by the time a company IPOs the chance of retail investors seeing returns is minimal to none.
(Context: I'm a successful serial entrepreneur, but never on the fundraising side)
My experience is that the best investment opportunities are counter-cyclical. During a down economy, talent is cheap. Competition is low. It's easy to build a growth business which explodes when the economy enters a growth stage. It's also cheaper, more focused, and more efficient to have 5 people work for 5 years than 100 people for 1 year. 5-20 people is sort of optimal.
That requires (more) patient capital, and longer times to IPOs, but has higher ROI.
I think I could build any of several successful businesses with a smaller investment -- on the order of $5-10M -- sustained over a longer period (optimally, around $1-2M/year over 5 years). I don't think I'd want or need series B or C funding. That can accelerate things, which is helpful if I'm competing aggressively against five companies, and it's first to grab the market, but it makes companies a lot less lean, focused, and aligned as well. It also dilutes equity a lot, for everyone. Stock options have a reputation for being worthless, and when you run the numbers, that's generally true for anyone beyond the founders.
Do you know if there are investors who can handle this type of structure? Or what constraints there are to having these kinds of investments? I understand the current time windows that a VC fund is open, but it's odd to me that there aren't more diverse types of funding available. Do you know why people haven't set up VC funds with other structures? It seems like a major inefficiency and friction....
2) Most VCs (and founders) hate down rounds. So a lot of existing companies are stuck because they previously raised at $X valuation, and now the market price is $0.75X, and either the VC doesn't want to push for a down round or a founder won't accept it, or both.
They discussed this phenomenon at length on a recent Odd Lots podcast, and I can’t understand it as anything but a market inefficiency that some smart VC firm will eventually exploit. Values (and thus prices) go up and down. Putting your head in the sand about it can’t be a winning investment strategy.
What amazes me is the seed round at 10s of millions. I was amazed to find the YC puts in 150k to each start up. I think it was 6k per founder back in the day.
Apart from companies wanting to build battery storage, what do people do with 20M of seed funding?
I mean surely it is time to pivot to finding dozens of companies wanting to just be profitable and return a dividend. Fund enough (but like YC) and one or two will become unicorns just because?
Your second point is the dynamic that makes the least sense to me. In public markets, if a stock is cheaper relative to future earnings, that makes it a better buy. In our corner of the world, the opposite often holds true.
There should be a tipping point where greed beats ego, but have not yet figured out how to find it.
As much as VCs and founders hate down rounds - if the public market has dropped in value by 50% for mostly macroeconomic reasons - isn't it fair to then suggest that properties on the private market should be similarly worth less?
We all hate for our homes to be worth 10% less in 2023 compared to 2022, but it is what it is, no?
I've been trying to understand the medium-term implications of your first point for the market.
My understanding is that if a VC raised a $1B fund, and the fund lasts for 10 years, the investments really need to be made in the first 5 years.
If VCs are sitting on the sidelines now, AND making smaller investments, what happens in year 2 or 3 when they have to deploy those funds?
Do you think deal sizes will get outrageously large because of too much money in the system? Will there be another rush to sign deals to deploy the capital?
Does this get talked about by VCs? Am I completely misunderstanding how this will play out?
Part of the difficulty in parsing public versus private company valuations is due to the time constant: It takes a while for private companies to get desperate, whereas public companies have a real-time bead on investor sentiment.
Am I correct to understand that VCs get the same share of the pie, now, that the valuations are lower?
So the valuation changes, the amount the VC puts in changed but not the % VCs get from the deal?
This seems that the founders get the short end of the stick, no?
From the linked article: "Critically, the venture market at the time was tiny relative to today’s ecosystem"
This isn't quite true. At least for US VC investment in dollars. It peaked at $66 billion in 2000, and didn't surpass that amount until 2018, according to these charts:
And if you adjust for inflation, that year 2000 $66B is $103.86B in 2021 dollars, and the 2nd chart shows 2021 getting to $128B.
Now the two different data sources do have somewhat different numbers for each comparable year. I couldn't find a comparison that covered enough years to show the difference. But I think it's pretty clear that the dot com era was a spectacularly fast increase in VC funding. And the more recent years were slower growth, but did end up getting to slightly higher numbers, if you adjust for inflation.
A lot of people became "VC"s during the bull run. They brought nothing to the table like YC did. Instead some previously reputable VCs like a16z became crypto grifters. So it's good the market clears a bunch of them so that the YCs and next generation of VCs who actually bring something new to the table come to the forefront.
i've been betting against btc from the beginning, however i truely believe there's something interesting in this field, that may end up getting some real applications sometimes.
Now what's still unknown is whether the funds that invested heavily on crypto in 2020s will have enough leftovers once this crisis is over to be a player when the crypto 2.0 era is coming.
"In contrast with the scenario in 2000, most of today’s tech companies are real businesses."
I disagree that many startups have viable ideas that will generate black numbers and organic growth.
Bold founders have sold startup ideas which are not sustainable.
Ie investment capital have prefered bold founders that could give vision of high future returns wework for example.
A small number of startups will become awesome but the majority wont.
Zero interest rates was a money rocket that fueled startups going to the sky. But what goes up usually comes down eventually with gravity/interest rates.
A small fraction of startups will become super sucessfull but the majority wont. The number of sucessfull probably follows some kind of statistical distribution of which startups is great vs bad.
Higher interest rates will adjust future return calculations that is brilliant from the article!
>Higher interest rates will adjust future return calculations that is brilliant from the article!
I think discounted future cashflow is unfit for purpose as a valuation metric in an inflationary environment. It is based on the assumption that interest rates and future cash flows are independent variables. They are not.
There's no dispute that the present value of a given amount of future cashflow is lower when interest rates are higher. This part is correct. It's simple arithmetic.
However, when interest rates rise because inflation rises, it means that future cash flows rise as well, because future cash flows are linked to future revenues, and future revenues, by definition, grow with inflation.
Rather than complain about how VCs arent good investors, people should rail on the system that selects VCs. Which is mostly admittance to prestigious MBA programs/colleges. So please write a post about how those schools arent selecting for good investors, because these diatribes about a "flawed" industry are very surface level compared to the underpinning power structures in america
How do we distinguish between: "VCs are are selected because they go to school X", "school X is good at creating VCs", and "school X receives more potential VCs"?
My guess is probably more statements 2 and 3 for the usual suspects eg Stanford
This post reminded me a little of my real estate agent's newsletter:
2007: There's never been a better time to buy!
2008: There's never been a better time to buy!
2012: There's never been a better time to buy!
2020: There's never been a better time to buy!
2022: There's never been a better time to buy!
while I agree with the general premise (majority of VCs are not good investors) it's important to remember the money they raised isn't sitting in a bank account.
It's likely still in the LPs stock portfolio, doing a capital call when everyone is down a lot can be tricky. You need to sell the investment more even though they agreed to give you the money when you asked
Fwiw - my general premise isn't that the "majority of VCs are not good investors." My point is that there's a serious disconnect in the markets right now, and that it is rooted more in fear than a lack of opportunity.
On the second point - you're right that the cash isn't literally sitting around, but VCs (generally) do not have to ask LPs for approval on a deal by deal basis. Capital calls can happen either as tranches or in response to a deal, and it is unusual for an LP to successfully refuse a capital call because of a specific deal.
Yeah I was super confused by this. VCs generally don’t have all the money ready to invest. They may have raised a $300 mil fund but they don’t get that money until they call it in. If the LP says “no deals for 6 months” that’s how it is.
The narative here seem disengenious, framing everything as one extreme to another:
Then came the coronavirus-related market shock of 2020...everyone assumed the absolute worst...then everything ... went nuts... around the beginning of this year, when it all ground down to a halt.
I don't doubt you can find (many) examples to support this, and yes, the themes are along these lines, but this is not the absolute reality in many industries, geographies and companies. If companies that have been hit hard are still able to raise, though maybe it's more painful.
My take-aways are:
* This is not the end of the world
* Poor fundamentals will be recognized and punished (finally) but only for a while
> Most of that advice focuses on how founders need to adjust to survive the deteriorating conditions—cutting cash burn by firing underperforming employees, slowing hiring…
Makes me wonder what kind of “advice” they were giving before: you should be replacing underperforming employees at any stage of a business cycle.
> In contrast with the scenario in 2000, most of today’s tech companies are real businesses.
How many of today's startups are just servicing each other with VC money? This isn't meant to be flippant - I'm genuinely curious (and while I bet it's a lot, I am skeptical it is overwhelming).
I mean if we really look at some of the business models for these companies, they're clearly unsustainable. Uber is a prime example of a company that seems destined to fail. If your unit economics don't work then you're fucked, and even if you raise literally tens of billions of dollars you will eventually run out of money. And yet companies like these are held up as prime examples of unicorn success stories. It's not just Uber - there are serious problems with many of the most acclaimed startups.
Obviously not all startups are terrible, but as someone who isn't a VC (but once considered becoming one), I think tech investors are unable to see their bias for just how awful most tech companies today are.
> I think tech investors are unable to see their bias for just how awful most tech companies today are
I agree. Ecomm broke first in other markets, and I am seeing profitable ecomm companies still having to raise capital. Uber is one of the worst ones (they took a business that is very profitable, and lost absolutely staggering amounts of money, they probably need to cut 50% of the workforce to start with, and then keep doing 50% until the business finds a level) but there are many others that have no business model or route to profit...and these are the best of the best that managed to actually list.
The public ones have a route to survival, some will raise, a lot of expense will go away with the stock price collapsing (employees getting bailed in). But most private ones won't survive. Too many staff, too little cash generation, and too reliant on the kindness of strangers (who remembers a few years ago, IPOs were so unfashionable, very old money...lol).
It is probably worse than 2000, the sector is much larger, private markets are far larger, there is so much hot money in the hands of brainless investors, it is a recipe for disaster. It is also worth saying, there will be a reprieve for a few months, then a story will break about one of the largest companies filing for bankruptcy overnight, then the private marks will come in. The losses sustained already have been some of the largest in the history of capital markets, it is the first inning.
> How many of today's startups are just servicing each other with VC money?
IMHO this is mostly the a phenomenon of the SAAS/platform space. Those practices don’t really apply to more traditional businesses (including high tech ones).
But you made me think of something else: this phenomenon was definitely booming in the 2000 crash, when net-related hardware companies were underwriting their own sales, which ended quite poorly. Not only is the subsidization you point out happening elsewhere, but hardly anyone buys much “networking gear” any more. From crucial, enabling tech to boring infrastructure in what, 15 years?
> If your unit economics don't work then you're fucked...
From the company's perspective that's certainly true.
As a regular person I'm more worried about the companies whose unit economics work too well. Companies like Amazon have so much momentum that it seems like they could go on indefinitely, instead of eventually failing and making room for new entrants.
Companies whose unit economics don't work transfer wealth from investors to customers, then get out of the way. Companies that work too well can become an inescapable force.
> Uber is a prime example of a company that seems destined to fail.
I'm not a fan of Uber, both as a company and as an investment thesis, but I think this is far too strong. Uber isn't prioritising profitability at the moment, so obviously the unit economics isn't going to work.
I think the important question to ask here is if people continue to want to pay & hail taxis from their phone? If the answer to that is yes then Uber will be fine so long as they're one of the apps that people continue to use to hail taxis. Personally I don't see taxi hailing apps going anywhere and I don't see Uber losing significant market share to its competition if they price competitively.
Where I think you have a point is in regards to Uber's potential operating margins. Is it reasonable to assign Google / Facebook sized margins to a company like Uber? Probably not imo, and that's where I have problems with it as an investment. I think as an investment it's more likely to end up like a Twitter or Snapchat. They'll make a bit of money and as a company they'll be fine, but I doubt they'll ever reach the levels of profitability that other big tech companies have achieved. The stock seems likely to trade fairly flat as they continue to see decent demand for their product, but continue to struggle to achieve significant profitability.
I'd argue taxi hailing apps (as they currently exist) are basically commodities. There's no real difference in experience between the different apps and if I'm being made to pay then I'll just pick the cheapest. Only if they're all pricing around the same will I use Uber and that's just because I know I can trust them and there's a friction in downloading and signing up for something else. They have a viable business, but very little operating leverage.
I was there in 2000, and we all thought those tech companies were real businesses! Most of today’s tech companies don't really look all that much different.
> I mean if we really look at some of the business models for these companies, they're clearly unsustainable. Uber is a prime example of a company that seems destined to fail.
Lyft and Uber are both very near profitability and things are looking pretty good for them over the next couple years.
Why do you believe they are destined to fail? Established markets have been profitable for a while.
My bigger uneasy feeling here is the advertising/marketing world where ROI basics like attribution are highly questionable and bohemeths like Apple & Google are using their $T war chests & monopoly positions to cripple the sales/marketing ecosystems of their competitors. So risks a repeat of the dotcom bubble collapse when cpm/cpc collapsed. So much of saas is directly serving these questionable areas, and in turn, more neutral b2b (data, ...) is in turn powering those and thus also fragile.
Variable sales+marketing spend is easy to scale back on during a recession. We've seen preeemptive layoffs due to valuation drops, but not this stuff yet. It's hard to handle. Our team largely focused on helping enterprise/gov/etc customers (think visibility/ai for core fraud, cyber, supply chain operations) and prioritized more self-serve etc for the crypto markets: they came to us with similar questions, but had way more risk, and so luckily we're seeing only a bit of churn right now. But if/when the sales/marketing/etc. collapses hit, that'll be much harder to avoid for many people.
The problem is that sustainability was never the goal to begin with. The goal was to generate enough hype around a product in order to go public or get acquired by someone else.
It's the rich people's version of "hodling". Just like crypto-holders that created lots of hype around various coins and whatnot, VCs just bought stakes in lots of different companies hoping that one of them would go to the moon.
I think this is the wrong model to think about companies like Uber. Their business model is not based on unit economics, but on becoming a monopoly. Their goal was to seek rent permanently on the taxi business by putting all other taxi companies out of business. If you look at it that way, losing money to put competitors out of business seems like a viable strategy.
> I think tech investors are unable to see their bias for just how awful most tech companies today are.
I think investors are more greedy than stupid. When money was essentially free, weirder and weirder investments make sense. If the world was crazy and throwing money around, why not fund a bunch of ridiculous companies with the knowledge that you can very likely unload that risk on the public when the company ipos.
And we're seeing that that logic is correct. Just look at the record numbers of IPOs that were happening right before the market started to collapse [0].
Investors know they are playing musical chairs, but they're playing with the public and the know they song quite well and can tell when the music is winding down.
Now IPO'd companies that don't know how to make a profit are the public shareholders problem, not private VCs.
100% - when interest rates are over 5% and/or gas is over $5, the delivery startups are toast. The economics just don't work. Especially when people start cutting back on conveniences.
> If your unit economics don't work then you're fucked, and even if you raise literally tens of billions of dollars you will eventually run out of money.
Hum... VCs exist exactly because this is not a general truth.
It's true for Uber, but there are many sectors where unit economics change with scale.
How many times has Detroit, housing, and finance been bailed out?
They’re all operating on magical money because money is a shared hallucination. They legalize bailouts and complain about the debt but never mention the future can just say, eh, fuck those dead peoples bullshit.
The bias you seem to not realize you’re hung up on is society looks nothing like it did 100 years ago. In another 100 they won’t give a fuck about any of this.
If we take away the money, people still need to do shit if they want to survive. Fuck their money, do weird shit. Let the olds take it to the grave.
VCs as a whole are followers, not leaders (with small exceptions). they all just fly into the latest hype bandwagon hoping to replicate the last big success.
I'll say this, as a YC founder, given the current situation, I've never been more excited.
I'm currently working with a Fortune 100 client in a recession-proof space. We have a team that's knocking it out of the park with them, that they simply cannot find an equivalent replacement for. We are cash-flow positive. And we have a route to securing more clients in the next year. We are delivering technology & innovation to companies that are decisively lacking in this area.
Once we prove out our MVP with future clients, I plan to raise seed funding, and remain cash flow positive. Our path to Series A will involve a lot of sales, and that's an area where VCs and the right networks can definitely help. We know we can solve the technology hurdles and build the product that our users actually want.
Raising funding might be tough given the macro situation. But I know our value, and we have plenty of time to wait out nervous investors. What's more likely is that we'll close our round without them, since we shouldn't need the money. We need the help.
lpolovets|3 years ago
Some great points in the post, but I also see a few additional dynamics at play:
1) The last 10 years have been great for VCs and startups, but now VCs are thinking about how to make their funds last longer. Two reasons for this: first, time diversification matters. If you think markets might go down even more, you don't want to deploy the rest of your fund quickly, you want to spread it out over a few years and get a good average cost basis. Second, there's a healthy fear among VCs that LP capital will be much harder to secure in the next 1-2 years. And you don't want to deploy the rest of your current fund in the next 6 months if you won't have a new fund ready to go for 18 months.
2) Most VCs (and founders) hate down rounds. So a lot of existing companies are stuck because they previously raised at $X valuation, and now the market price is $0.75X, and either the VC doesn't want to push for a down round or a founder won't accept it, or both.
3) Aaron mentions this in the blog post, but everyone is worried about downstream investors. Our fund is big enough to lead a seed round, but it can't put a dent in a Series A, so we depend on Series A investors eventually backing our seed companies. And Series A investors often depend on Series B investors to invest a lot in the next round. And so on. If the entire growth stage market grinds to a halt -- and it seems like it basically has -- then early stage investors start worrying about making new investments because there's way less downstream funding available. So even if a seed VC believes this is an amazing time to build a company and there are lots of great seed opportunities out there, they might still slow down investing a lot if they know their companies will need more funding and that funding doesn't seem to be there right now.
4) I've been a VC for about a decade, and the gap between VC and founder valuation expectations is greater than it's ever been during that time. 3 months ago, a median seed round was at $20m post, and a lot were at $25m-$30m post. Now I still see a lot of seed founders looking for $20m-$30m post, but a lot of VCs believe we should be back to 2020 valuations of $10m-$15m post. The gap between an expectation of, say, $13m post on one side and $25m post on the other side is huge, and lots of conversations never even begin because of that mismatch.
simonbarker87|3 years ago
So much value is absorbed in the VC pipe than by the time a company IPOs the chance of retail investors seeing returns is minimal to none.
frognumber|3 years ago
My experience is that the best investment opportunities are counter-cyclical. During a down economy, talent is cheap. Competition is low. It's easy to build a growth business which explodes when the economy enters a growth stage. It's also cheaper, more focused, and more efficient to have 5 people work for 5 years than 100 people for 1 year. 5-20 people is sort of optimal.
That requires (more) patient capital, and longer times to IPOs, but has higher ROI.
I think I could build any of several successful businesses with a smaller investment -- on the order of $5-10M -- sustained over a longer period (optimally, around $1-2M/year over 5 years). I don't think I'd want or need series B or C funding. That can accelerate things, which is helpful if I'm competing aggressively against five companies, and it's first to grab the market, but it makes companies a lot less lean, focused, and aligned as well. It also dilutes equity a lot, for everyone. Stock options have a reputation for being worthless, and when you run the numbers, that's generally true for anyone beyond the founders.
Do you know if there are investors who can handle this type of structure? Or what constraints there are to having these kinds of investments? I understand the current time windows that a VC fund is open, but it's odd to me that there aren't more diverse types of funding available. Do you know why people haven't set up VC funds with other structures? It seems like a major inefficiency and friction....
twoodfin|3 years ago
They discussed this phenomenon at length on a recent Odd Lots podcast, and I can’t understand it as anything but a market inefficiency that some smart VC firm will eventually exploit. Values (and thus prices) go up and down. Putting your head in the sand about it can’t be a winning investment strategy.
lifeisstillgood|3 years ago
Apart from companies wanting to build battery storage, what do people do with 20M of seed funding?
I mean surely it is time to pivot to finding dozens of companies wanting to just be profitable and return a dividend. Fund enough (but like YC) and one or two will become unicorns just because?
or am I dreaming
akharris|3 years ago
There should be a tipping point where greed beats ego, but have not yet figured out how to find it.
givemeethekeys|3 years ago
We all hate for our homes to be worth 10% less in 2023 compared to 2022, but it is what it is, no?
pedalpete|3 years ago
My understanding is that if a VC raised a $1B fund, and the fund lasts for 10 years, the investments really need to be made in the first 5 years.
If VCs are sitting on the sidelines now, AND making smaller investments, what happens in year 2 or 3 when they have to deploy those funds?
Do you think deal sizes will get outrageously large because of too much money in the system? Will there be another rush to sign deals to deploy the capital?
Does this get talked about by VCs? Am I completely misunderstanding how this will play out?
beambot|3 years ago
Part of the difficulty in parsing public versus private company valuations is due to the time constant: It takes a while for private companies to get desperate, whereas public companies have a real-time bead on investor sentiment.
leroman|3 years ago
This seems that the founders get the short end of the stick, no?
cynusx|3 years ago
unknown|3 years ago
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kelp|3 years ago
This isn't quite true. At least for US VC investment in dollars. It peaked at $66 billion in 2000, and didn't surpass that amount until 2018, according to these charts:
https://pitchbook.infogram.com/6-vm-charts-1h8n6m3klxngj4x
https://www.statista.com/chart/11443/venture-capital-activit...
And if you adjust for inflation, that year 2000 $66B is $103.86B in 2021 dollars, and the 2nd chart shows 2021 getting to $128B.
Now the two different data sources do have somewhat different numbers for each comparable year. I couldn't find a comparison that covered enough years to show the difference. But I think it's pretty clear that the dot com era was a spectacularly fast increase in VC funding. And the more recent years were slower growth, but did end up getting to slightly higher numbers, if you adjust for inflation.
ilrwbwrkhv|3 years ago
unknown|3 years ago
[deleted]
foobiekr|3 years ago
bsaul|3 years ago
Now what's still unknown is whether the funds that invested heavily on crypto in 2020s will have enough leftovers once this crisis is over to be a player when the crypto 2.0 era is coming.
acd|3 years ago
I disagree that many startups have viable ideas that will generate black numbers and organic growth.
Bold founders have sold startup ideas which are not sustainable.
Ie investment capital have prefered bold founders that could give vision of high future returns wework for example.
A small number of startups will become awesome but the majority wont.
Zero interest rates was a money rocket that fueled startups going to the sky. But what goes up usually comes down eventually with gravity/interest rates.
A small fraction of startups will become super sucessfull but the majority wont. The number of sucessfull probably follows some kind of statistical distribution of which startups is great vs bad.
Higher interest rates will adjust future return calculations that is brilliant from the article!
fauigerzigerk|3 years ago
I think discounted future cashflow is unfit for purpose as a valuation metric in an inflationary environment. It is based on the assumption that interest rates and future cash flows are independent variables. They are not.
There's no dispute that the present value of a given amount of future cashflow is lower when interest rates are higher. This part is correct. It's simple arithmetic.
However, when interest rates rise because inflation rises, it means that future cash flows rise as well, because future cash flows are linked to future revenues, and future revenues, by definition, grow with inflation.
fdgsdfogijq|3 years ago
xthrowawayxx|3 years ago
My guess is probably more statements 2 and 3 for the usual suspects eg Stanford
openfuture|3 years ago
kbuchanan|3 years ago
2007: There's never been a better time to buy! 2008: There's never been a better time to buy! 2012: There's never been a better time to buy! 2020: There's never been a better time to buy! 2022: There's never been a better time to buy!
pdx6|3 years ago
Recessions are good times to take risks since people are afraid and while capital isn’t cheap this time around, assets are.
quickthrower2|3 years ago
All years: There’s never been a better time to sell!
In other countries the agents only make commissions from the seller not the buyer, hence getting the listing is the big thing.
blitzar|3 years ago
xisthesqrtof9|3 years ago
thdxr|3 years ago
It's likely still in the LPs stock portfolio, doing a capital call when everyone is down a lot can be tricky. You need to sell the investment more even though they agreed to give you the money when you asked
akharris|3 years ago
On the second point - you're right that the cash isn't literally sitting around, but VCs (generally) do not have to ask LPs for approval on a deal by deal basis. Capital calls can happen either as tranches or in response to a deal, and it is unusual for an LP to successfully refuse a capital call because of a specific deal.
seibelj|3 years ago
skeeter2020|3 years ago
Then came the coronavirus-related market shock of 2020...everyone assumed the absolute worst...then everything ... went nuts... around the beginning of this year, when it all ground down to a halt.
I don't doubt you can find (many) examples to support this, and yes, the themes are along these lines, but this is not the absolute reality in many industries, geographies and companies. If companies that have been hit hard are still able to raise, though maybe it's more painful.
My take-aways are:
* This is not the end of the world
* Poor fundamentals will be recognized and punished (finally) but only for a while
* There are some really good deals out there
gumby|3 years ago
Makes me wonder what kind of “advice” they were giving before: you should be replacing underperforming employees at any stage of a business cycle.
ffggvv|3 years ago
MegaButts|3 years ago
How many of today's startups are just servicing each other with VC money? This isn't meant to be flippant - I'm genuinely curious (and while I bet it's a lot, I am skeptical it is overwhelming).
I mean if we really look at some of the business models for these companies, they're clearly unsustainable. Uber is a prime example of a company that seems destined to fail. If your unit economics don't work then you're fucked, and even if you raise literally tens of billions of dollars you will eventually run out of money. And yet companies like these are held up as prime examples of unicorn success stories. It's not just Uber - there are serious problems with many of the most acclaimed startups.
Obviously not all startups are terrible, but as someone who isn't a VC (but once considered becoming one), I think tech investors are unable to see their bias for just how awful most tech companies today are.
skippyboxedhero|3 years ago
I agree. Ecomm broke first in other markets, and I am seeing profitable ecomm companies still having to raise capital. Uber is one of the worst ones (they took a business that is very profitable, and lost absolutely staggering amounts of money, they probably need to cut 50% of the workforce to start with, and then keep doing 50% until the business finds a level) but there are many others that have no business model or route to profit...and these are the best of the best that managed to actually list.
The public ones have a route to survival, some will raise, a lot of expense will go away with the stock price collapsing (employees getting bailed in). But most private ones won't survive. Too many staff, too little cash generation, and too reliant on the kindness of strangers (who remembers a few years ago, IPOs were so unfashionable, very old money...lol).
It is probably worse than 2000, the sector is much larger, private markets are far larger, there is so much hot money in the hands of brainless investors, it is a recipe for disaster. It is also worth saying, there will be a reprieve for a few months, then a story will break about one of the largest companies filing for bankruptcy overnight, then the private marks will come in. The losses sustained already have been some of the largest in the history of capital markets, it is the first inning.
gumby|3 years ago
IMHO this is mostly the a phenomenon of the SAAS/platform space. Those practices don’t really apply to more traditional businesses (including high tech ones).
But you made me think of something else: this phenomenon was definitely booming in the 2000 crash, when net-related hardware companies were underwriting their own sales, which ended quite poorly. Not only is the subsidization you point out happening elsewhere, but hardly anyone buys much “networking gear” any more. From crucial, enabling tech to boring infrastructure in what, 15 years?
throwk8s|3 years ago
From the company's perspective that's certainly true.
As a regular person I'm more worried about the companies whose unit economics work too well. Companies like Amazon have so much momentum that it seems like they could go on indefinitely, instead of eventually failing and making room for new entrants.
Companies whose unit economics don't work transfer wealth from investors to customers, then get out of the way. Companies that work too well can become an inescapable force.
kypro|3 years ago
I'm not a fan of Uber, both as a company and as an investment thesis, but I think this is far too strong. Uber isn't prioritising profitability at the moment, so obviously the unit economics isn't going to work.
I think the important question to ask here is if people continue to want to pay & hail taxis from their phone? If the answer to that is yes then Uber will be fine so long as they're one of the apps that people continue to use to hail taxis. Personally I don't see taxi hailing apps going anywhere and I don't see Uber losing significant market share to its competition if they price competitively.
Where I think you have a point is in regards to Uber's potential operating margins. Is it reasonable to assign Google / Facebook sized margins to a company like Uber? Probably not imo, and that's where I have problems with it as an investment. I think as an investment it's more likely to end up like a Twitter or Snapchat. They'll make a bit of money and as a company they'll be fine, but I doubt they'll ever reach the levels of profitability that other big tech companies have achieved. The stock seems likely to trade fairly flat as they continue to see decent demand for their product, but continue to struggle to achieve significant profitability.
I'd argue taxi hailing apps (as they currently exist) are basically commodities. There's no real difference in experience between the different apps and if I'm being made to pay then I'll just pick the cheapest. Only if they're all pricing around the same will I use Uber and that's just because I know I can trust them and there's a friction in downloading and signing up for something else. They have a viable business, but very little operating leverage.
ceejayoz|3 years ago
blakesterz|3 years ago
dahdum|3 years ago
Lyft and Uber are both very near profitability and things are looking pretty good for them over the next couple years.
Why do you believe they are destined to fail? Established markets have been profitable for a while.
lmeyerov|3 years ago
Variable sales+marketing spend is easy to scale back on during a recession. We've seen preeemptive layoffs due to valuation drops, but not this stuff yet. It's hard to handle. Our team largely focused on helping enterprise/gov/etc customers (think visibility/ai for core fraud, cyber, supply chain operations) and prioritized more self-serve etc for the crypto markets: they came to us with similar questions, but had way more risk, and so luckily we're seeing only a bit of churn right now. But if/when the sales/marketing/etc. collapses hit, that'll be much harder to avoid for many people.
elforce002|3 years ago
The camel concept is gaining traction since they focus on profitability from the get go, healthy runway and steadily grow.
thr0wawayf00|3 years ago
It's the rich people's version of "hodling". Just like crypto-holders that created lots of hype around various coins and whatnot, VCs just bought stakes in lots of different companies hoping that one of them would go to the moon.
vaidhy|3 years ago
time_to_smile|3 years ago
I think investors are more greedy than stupid. When money was essentially free, weirder and weirder investments make sense. If the world was crazy and throwing money around, why not fund a bunch of ridiculous companies with the knowledge that you can very likely unload that risk on the public when the company ipos.
And we're seeing that that logic is correct. Just look at the record numbers of IPOs that were happening right before the market started to collapse [0].
Investors know they are playing musical chairs, but they're playing with the public and the know they song quite well and can tell when the music is winding down.
Now IPO'd companies that don't know how to make a profit are the public shareholders problem, not private VCs.
0. https://stockanalysis.com/ipos/statistics/
cpursley|3 years ago
TfyD3eYNen4XhbN|3 years ago
fairity|3 years ago
Have you actually studied Uber’s recent earnings? I’m pretty sure rideshate contribution margin is positive in all their tenured markets.
baby|3 years ago
echelon|3 years ago
The B2B SaaS ones.
marcosdumay|3 years ago
Hum... VCs exist exactly because this is not a general truth.
It's true for Uber, but there are many sectors where unit economics change with scale.
JakeAl|3 years ago
dubswithus|3 years ago
turns0ut|3 years ago
They’re all operating on magical money because money is a shared hallucination. They legalize bailouts and complain about the debt but never mention the future can just say, eh, fuck those dead peoples bullshit.
The bias you seem to not realize you’re hung up on is society looks nothing like it did 100 years ago. In another 100 they won’t give a fuck about any of this.
If we take away the money, people still need to do shit if they want to survive. Fuck their money, do weird shit. Let the olds take it to the grave.
ffggvv|3 years ago
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rexreed|3 years ago
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andrewstuart|3 years ago
"Greedy" conjures images of ravenous VCs exploiting startups.
"Hungry" sounds like they have a healthy appetite for investing.
Just MHO.
unknown|3 years ago
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jonathanehrlich|3 years ago
shaburn|3 years ago
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shaburn|3 years ago
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HorizonXP|3 years ago
I'm currently working with a Fortune 100 client in a recession-proof space. We have a team that's knocking it out of the park with them, that they simply cannot find an equivalent replacement for. We are cash-flow positive. And we have a route to securing more clients in the next year. We are delivering technology & innovation to companies that are decisively lacking in this area.
Once we prove out our MVP with future clients, I plan to raise seed funding, and remain cash flow positive. Our path to Series A will involve a lot of sales, and that's an area where VCs and the right networks can definitely help. We know we can solve the technology hurdles and build the product that our users actually want.
Raising funding might be tough given the macro situation. But I know our value, and we have plenty of time to wait out nervous investors. What's more likely is that we'll close our round without them, since we shouldn't need the money. We need the help.