Where did the VCs get the money from [1][2]? If they didn't break a sweat, they won't hesitate to throw it around without asking questions about profitability.
EDIT: People who are downvoting are trying to hide the truth of the market, whether it's a bubble or not, this is the source of the money and in turn, your livelihood ;)
[1] Probably from banks who got it from the gov't who got it for cheap, right?
VC funds getting money from banks? I've not heard of that and your link doesn't support it. Unless the government connection you're trying to assert is that low interest rates drove more money into VC funds in order to seek higher returns.
From a 2014 WSJ article [1] : "Spanish banking giant Santander in July announced a $100 million venture capital fund to invest in fintech start-ups globally, and a few months ago HSBC allocated up to $200 million for investment in early-stage tech companies with the aim of improving its technology."
These are literally drops in the ocean for banks and VC in general.
Banks invest in VC the same way that auto manufacturers do: to suss out potential innovations and/or to have inside access to future disrupters. They don't do it for the returns.
> Unless the government connection you're trying to assert is that low interest rates drove more money into VC funds in order to seek higher returns.
This is a constantly overlooked factor in what's been driving the VC climate for the past few years. "Cheap" money (in the form of low interest rates) pushes more money into riskier positions, and the VCs have to give that money to someone. It's no coincidence that the correction is coming at the same time as interest rates finally rising again.
I get the theory there but it's never seemed realistic to me. What VC would actually change their mind about pulling the trigger on an equity by because of a fractional point change in the risk free rate? It just doesn't make sense.
Are you saying that a change in interest rates doesn't have an effect on funding decisions? Because it seems like fractional interest rate changes would have (at least) a fractional effect on risk perception.
Plus, are you accounting for tax benefits and other ancillary forces?
It's not the individual VC that changes their mind. The LP that funds the VC has to work harder for returns when money is cheap. They're incentivized to put more money into potentially higher-yielding investments (or even just keep the same asset allocation, but a bigger pool = more money going into VC at the same allocation). That in turn means they're incentivized to fund more marginal VC firms, and then it's the marginal VC firms that fund the marginal startups.
Good VCs usually maintain the same investing standards in good times and bad. But during boom times, there are more VCs, and many of the newcomers aren't particularly good at it.
That's my point: a change from 3 to 3.25% in the prime rate doesn't suddenly make CoolApprfy into a good vs a bad investment. The need to earn higher returns on cash doesn't make CoolApprfy more likely to go big and pay a return; reality doesn't work like that. If you're investing in CoolApprfy to "win back" some income streams, you're doing it for the (very) wrong reasons.
My point is that there's a wide variety of beliefs as to whether CoolApprfy is a good company. To get funded, CoolApprfy only needs to identify one person who believes it is.
When money is cheap, it is much more likely that they will be able to find someone controlling money who believes it is. When money is expensive, the intersection of [people who have money] x [people who believe CoolApprfy is a good company] is much smaller. For companies that are actually good companies, this intersection will likely (although not always; good companies fail to get funded in challenging fundraising climates all the time) still be non-zero. For companies that are bad companies, it's much more likely they will be unable to find anyone who believes they are good companies.
Markets are made up as individuals, but they don't behave like individuals. An effect does not have to be observable on the individual level for it to be observable in the behavior of the market as a whole.
That would still suggest that the set of "VC investments that depend on Fed policy" is the same as the set of "VC investments that will sputter out anyway" (module the fortuitous luck factor).
The article and infographic you link to never mentions banks or the government, and the sources it references for VC funds don't suggest "money that comes easily". (pensions, corporations, endowments, etc - primary or secondary sources that came from working for money)
That's why you're being downvoted. You're attempting to take a controversial position without any logical proof. The "truth of the market" doesn't support your conclusion.
> People who are downvoting are trying to hide the truth of the market, whether it's a bubble or not, this is the source of the money and in turn, your livelihood ;)
You are getting downvoted because while your point about money coming easily might be correct, your link for where money comes from directly contradicts your point.
VC LPs are overwhelmingly people who (a) have a financial incentive to see good returns and (b) are qualified investors. They include family offices, mutual funds, and sovereign wealth funds.
A big part of the latest outsized valuations are actually startups which route around VCs by directly taking investments from so-called "dumb money"—investors who might actually be pretty good at managing a basket of investments, but are not qualified or experienced enough to directly established suitable valuations for startups.
That and usually all employees' stock options when talking liquidation preferences, with some of them knowing and some not. At that point prepare for talent bleed until either some very good plans and news or a long, slow death.
You can't really answer that question until a startup goes to raise more money and can't get a favorable term sheet. So its kind of like the uncertainty principal. And startups, knowing that funding has been pulled back, are working harder to not have to even ask the question (they cut costs, try to boost revenue, extend the runway they have past this current period)
Good? I don't wish anyone working hardships, but being "Showered with cash" has created plenty of problems, and there is nothing at all wrong with working for it.
It's just a pendulum. It wings both ways and right now it's swinging towards startup ideas and investment where the companies have solid business models rather than hopes and dreams.
This is great news for bootstrapped companies which are likely used to running lean, might actually be profitable, and can outrun and outlast an inflated competitor.
Major cashflow changes tend to be disastrous for most companies, it's just not that easy to realign everything. If you're up against a competitor that has raised a lot easy money and now needs to show results, you should be happy to see this.
Perhaps. Or you can be stuck competing with a company that is pissing money into a hole and offering what appears to be a similar product for free. How are they ever going to become a functioning business w/ revenue > expenses? Underwear gnomes!
That's what is happening now. Once those companies run out if easy money they'll be forced to actually compete on value instead of just handing product away. Which is great news for bootstrapped companies that are used to functioning without bleeding cash.
The people that are used to easy VC money (without growth or a business model) will probably wash out of the ecosystem. I doubt they're going to reshape their business structure to be a bootstrapper competitive one.
How did the definition of bootstrapped business get redefined as "running a questionably sustainable business on millions of outside investors' dollars"?
Conventional reasoning is that decreased VC investments is actually good news for bootstrappers, as it winnows down the competition of people offering unsustainable unit prices with outsized markets. If everyone is forced to seek fast profitability, bootstrappers are the most experienced at it.
I was joking that the lack of free cash might focus the VC-backed startups on areas where bootstrapped (and presumably profitable) startups already are.
I don't actually think that will happen much: typically the structural costs associated with VC-backed companies is too high (e.g. SF rents) to even get close to what bootstrappers can do.
It's the best thing to happen for bootstrapped start-ups. They'll eat over-funded start-ups for lunch, those won't be able to get follow on money when they eventually run out and so will implode. I weathered the dot-com crash in exactly that fashion, it did wonders for us by decimating the competition.
This is generally a good sign for the market. Not so good for bloated startups without a viable business model or cash positive finances (including probably the majority of the unicorns out there at the moment). For such firms it's about to be a bloodbath, but hard facts are that there's a lot of junk out there that got funded in loftier times and now needs to be flushed out of the system.
For lean startups with a strong business model and profitability, or a clear and viable path to profitability, washing out the junk startups will only help.
Yup, same as it ever was. I remember back in 2001 saying to myself, "Good, all the bullshit is flushed out. Anything that survives this is real and should be invested in." Too bad I didnt put a few thousand into YHOO and AMZN back then: http://finance.yahoo.com/q/hp?s=AMZN&a=04&b=16&c=1997&d=04&e...
Who are these "majority of unicorns" that everyone casually passes around? Yes, there were some journalistically well covered flame-outs, but is there a trend of companies worth more than $1B flaming out?
Otherwise, companies without a promising business model flaming out is definitely a good thing.
Unlike the 90s, It has never been easy to raise $, so this belief that companies are being showered with cash indiscriminately is wrong. Ycombinator is inundated with applications, for a modest amount of money at a fairly large chunk of equity, suggesting a market that has much more supply than demand. Many start-ups get much less than a million. What we're instead seeing is a flight to quality: the cream of the crop getting showered with cash but everything else fighting for scraps.
Actually, it's the VCs' fear map that changes most radically. (Hire enough associates, and you can call 20 customers/prospects/former associates in an afternoon.)
In boom times, VCs cut short their due diligence because if they dawdle or seem too skeptical, they won't get to be in the next Theranos round.
In jittery times, VCs check everything because otherwise they will be in the next Theranos round.
I saw an echo of this with mortgage appraisals. In the housing bubble, we got refinanced one time with an appraisal that didn't involve stepping inside the house. The appraiser just took two photos from the street and didn't even ask me if the home was habitable.
After the housing finance crack-up, the next appraiser not only walked through every room, he clicked dozens of photos of everything from our smoke detectors to the straps holding on the hot-water heater. It was almost like having a crime-scene photographer pay us a visit.
That, plus it seems like in the last couple of years many people got more careful about estimating the values of privately-held companies. A $100 million investment for 10% of a company in its latest round doesn't indicate that it's worth $1 billion if there are liquidation preferences or other similar favorable terms.
I might be misreading things, but I think that has made people more conservative about what scales of exits are eventually attainable.
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[ 4.1 ms ] story [ 116 ms ] threadWhere did the VCs get the money from [1][2]? If they didn't break a sweat, they won't hesitate to throw it around without asking questions about profitability.
EDIT: People who are downvoting are trying to hide the truth of the market, whether it's a bubble or not, this is the source of the money and in turn, your livelihood ;)
[1] Probably from banks who got it from the gov't who got it for cheap, right?
[2] http://agilevc.com/blog/2014/10/29/where-do-venture-capital-...
[1] http://blogs.wsj.com/digits/2014/08/04/banks-lure-fintech-st...
Banks invest in VC the same way that auto manufacturers do: to suss out potential innovations and/or to have inside access to future disrupters. They don't do it for the returns.
This is a constantly overlooked factor in what's been driving the VC climate for the past few years. "Cheap" money (in the form of low interest rates) pushes more money into riskier positions, and the VCs have to give that money to someone. It's no coincidence that the correction is coming at the same time as interest rates finally rising again.
Plus, are you accounting for tax benefits and other ancillary forces?
Good VCs usually maintain the same investing standards in good times and bad. But during boom times, there are more VCs, and many of the newcomers aren't particularly good at it.
When money is cheap, it is much more likely that they will be able to find someone controlling money who believes it is. When money is expensive, the intersection of [people who have money] x [people who believe CoolApprfy is a good company] is much smaller. For companies that are actually good companies, this intersection will likely (although not always; good companies fail to get funded in challenging fundraising climates all the time) still be non-zero. For companies that are bad companies, it's much more likely they will be unable to find anyone who believes they are good companies.
Markets are made up as individuals, but they don't behave like individuals. An effect does not have to be observable on the individual level for it to be observable in the behavior of the market as a whole.
That's why you're being downvoted. You're attempting to take a controversial position without any logical proof. The "truth of the market" doesn't support your conclusion.
edit: Wright->Wilson, thanks gist.
You mean Fred Wilson.
You are getting downvoted because while your point about money coming easily might be correct, your link for where money comes from directly contradicts your point.
VC LPs are overwhelmingly people who (a) have a financial incentive to see good returns and (b) are qualified investors. They include family offices, mutual funds, and sovereign wealth funds.
A big part of the latest outsized valuations are actually startups which route around VCs by directly taking investments from so-called "dumb money"—investors who might actually be pretty good at managing a basket of investments, but are not qualified or experienced enough to directly established suitable valuations for startups.
If cash stops being a cocaine-tier obsession for these guys, we might have to compete with them. Sad.
Major cashflow changes tend to be disastrous for most companies, it's just not that easy to realign everything. If you're up against a competitor that has raised a lot easy money and now needs to show results, you should be happy to see this.
Been there, done that, it sucked.
The people that are used to easy VC money (without growth or a business model) will probably wash out of the ecosystem. I doubt they're going to reshape their business structure to be a bootstrapper competitive one.
Conventional reasoning is that decreased VC investments is actually good news for bootstrappers, as it winnows down the competition of people offering unsustainable unit prices with outsized markets. If everyone is forced to seek fast profitability, bootstrappers are the most experienced at it.
I don't actually think that will happen much: typically the structural costs associated with VC-backed companies is too high (e.g. SF rents) to even get close to what bootstrappers can do.
For lean startups with a strong business model and profitability, or a clear and viable path to profitability, washing out the junk startups will only help.
Otherwise, companies without a promising business model flaming out is definitely a good thing.
In other words, "We're getting less deals to look at, so we're looking at the ones we have more closely."
In boom times, VCs cut short their due diligence because if they dawdle or seem too skeptical, they won't get to be in the next Theranos round.
In jittery times, VCs check everything because otherwise they will be in the next Theranos round.
I saw an echo of this with mortgage appraisals. In the housing bubble, we got refinanced one time with an appraisal that didn't involve stepping inside the house. The appraiser just took two photos from the street and didn't even ask me if the home was habitable.
After the housing finance crack-up, the next appraiser not only walked through every room, he clicked dozens of photos of everything from our smoke detectors to the straps holding on the hot-water heater. It was almost like having a crime-scene photographer pay us a visit.
I might be misreading things, but I think that has made people more conservative about what scales of exits are eventually attainable.