VCs are scared when they should be greedy(blog.aaronkharris.com) |
VCs are scared when they should be greedy(blog.aaronkharris.com) |
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.
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.
Is any business a ponzi scheme?
P.S Saying that, there is research that buying at IPO is rarely a good idea: https://www.youtube.com/watch?v=2a7qhIpxv60
investors.gov defines a Ponzi scheme as "an investment fraud that pays existing investors with funds collected from new investors. Ponzi scheme organizers often promise to invest your money and generate high returns with little or no risk. But in many Ponzi schemes, the fraudsters do not invest the money."
A few thoughts here:
- the money is actually invested.
- the founders are the ones that decide how to use the money, not the investors. (And generally no one suggests that founders as a group are complicit in a Ponzi scheme.)
- the next investment round is not required -- some companies get to profitability or have a good exit without further funding.
- the next investment round is far from guaranteed. Most stats I've seen suggest that ~30% of seed stage companies raise a Series A. So if it's a Ponzi scheme, then it's a poorly executed one ;)
- the outcomes generated by founders who get VC funding are high impact. See: https://twitter.com/emollick/status/1546109494228402176 (quote: This paper argues that 20% of the largest three hundred US public firms & 75% of the largest VC-backed ones “would not have existed or achieved their current scale without an active VC industry.")
- the next stage investor is generally unaffiliated with the earlier investor AND evaluates a company on its merits. I.e. if our seed company can't get to a stage where they can convince at least one Series A investor to invest -- and as mentioned above, many cannot -- then it goes out of business and we lose our investment. And fwiw, if the later stage fund does a poor job picking companies, it will itself go out of business.
- 99% of the time, our investors are not paid back when another investor invests, they are paid when a company exits. That means either the public market or an individual company thought the startup was a good enough business to invest their money into.
- returns are not promised to our investors -- if anything, it's well known that VC is especially risky and that most VC funds don't have good returns.
> 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.
My understanding is that this is largely regulation related. Companies used to go public much earlier, but because there's an increasingly high burden and cost to being public, lots of companies choose to wait for as long as possible. And there is now enough funding out there that companies are able to stay private for a long time.
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....
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.
you might be underestimate the importance of narrative in a startup. a startup takes a tremendous amount of belief to will into existence, and a lot of belief depends on an unbroken narrative. to most outward folks, a startup generally wants to appears to be continuously crushing it - people understand that there are ups and downs, but generally have no patience for a "well we had a slow 3 years where we made a lot of mistakes" nuance.
if you doubt this, consider how you eval a startup when joining as an employee, much less as an investor.
I think the logic is "I like this company, but if I offer a down round then will I piss off their existing investors? Will those investors stop sharing good investment opportunities with me? ... Ah screw it, I'll just skip this down round and focus on other prospective investments."
I think multi-stage investors are probably best-positioned to address this, since they are both new and existing investors in the companies they back, so they should be able to offer market price down rounds for companies that are still promising but unable to attract external capital.
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
Hence the massive seed rounds, with equally massive bridge rounds, etc etc.
There should be a tipping point where greed beats ego, but have not yet figured out how to find it.
We all hate for our homes to be worth 10% less in 2023 compared to 2022, but it is what it is, no?
Speak for yourself. If all property drops, I'm ecstatic. I'm not moving or withdrawing money with a HELOC. So lower property values just mean less taxes for me. I mean, sure, it also means I may be underwater, but who cares?
And if I decide to move, that just means the delta between my current place and a new place is smaller in absolute terms.
There is literally no benefit to most homeowners for the real estate market being higher.
In growing markets, the 10% turning into 8% doesn't matter because it was 10% of a $1M company vs 8% of a $10M company. You're still richer (at least on paper) than you used to be.
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?
This is also likely to happen because big investors generally have their investments split between lots of asset classes by some ratio, so let's say for the sake of argument that Harvard's endowment is 30% equities, 30% private equity, 10% fixed income, and a mix of other stuff. If the value of their equities in the stock market fall through the floor that means their ratio is suddenly off, so they're going to need to rotate out of private equity and into equities.
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.
There are a host of other way their data is flawed as well :) but that’s a much longer topic.
This seems that the founders get the short end of the stick, no?
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.
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.
Not literally, I assume? Or you’ve got a tiny position and have been (relative to the size if your position) haemorrhaging money for ~13 years? Or successfully rode some down waves? (I’m super jelly if you did the latter)
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!
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.
My guess is probably more statements 2 and 3 for the usual suspects eg Stanford
If you hire a smart kid with an MBA from stanford and he gives you a bad name with a series of mistakes, well, bad apples happen. If you hire a smart kid from a no name university and the same happens people will be quicker to blame you.
Credentialism is a thing for the same reason brand recognition is a thing. When a product with good reputation fails it's bad luck. When a product with bad reputation fails it's to be expected. Power perpetuates.
In the US, that never has been the case. Even in its golden years.
https://whorulesamerica.ucsc.edu/power/class_domination.html
Even in 1960s, 30,000 people (families, children included) dominated all US economic and political institutions. This group was an exclusive group with class consciousness, thwarting any reduction of their control and keeping outsiders out. This phenomenon continues today. Some freak successes in tech space did not change the pattern.
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!
Recessions are good times to take risks since people are afraid and while capital isn’t cheap this time around, assets are.
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.
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
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.
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
Makes me wonder what kind of “advice” they were giving before: you should be replacing underperforming employees at any stage of a business cycle.
BTW the "N" has long had a "fire early" philosophy, and so it will be interesting to see how their current troubles play out.
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.
"Greedy" conjures images of ravenous VCs exploiting startups.
"Hungry" sounds like they have a healthy appetite for investing.
Just MHO.
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.
As an LP you pre-commit to a certain level, and when the capital call comes you perform or you will be found to be in default when a whole pile of clauses kicks in that you really do not want to have to deal with. You will have to have an extremely good reason (such as being already bankrupt) to be able to avoid a capital call that you have committed to.
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.
There’s a lot of copycat B2B startups that extremely dependent on crypto and fintech for their revenue. They will be the next domino to fall.
After that, it would be infrastructure, security, and analytics vendors that will face a revenue crunch and will be unable to raise another round of funding. And then, all the startups for startups vendors like Rippling and Brex.
And the final domino would be currently well funded private companies such as Airtable, Notion, Loom, and possibly even Figma. We’ll learn that none of these products had any significant traction outside of VC-land.
This would be even worse for the Bay Area than 2000. Remote work is still the norm here (I’m typing this on my lunch break in my nearly empty SF office). An economic downturn coupled with destigmatized remote work is an environment ripe for outsourcing.
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?
Now, when I look at layoff announcements, I see a lot of our former customers. Additionally, with budget freezes (driven by VC RIP decks), these same companies aren't buying new software for a while, even if they would benefit from it. And many tools now are priced based on headcount. So it's sort of the perfect storm - valuation resets so you have to go a lot farther with your current funding, reduced retention revenue because your customers are paying for fewer seats and harder sales because of budget freezes. Ick.
Seems like this model is beginning to fail, most YC backed IPOs are now trading in deep red. ex) coinbase
edit: lurkervizzle I can't respond to you since im throttled but this is what I wrote in response to add on to what you wrote in the other comment
this is far more serious than I thought I seemingly just made the connection that YC backed SaaS (or any other accelerator schemes) were essentially just writing cheques to each other and playing whack a mole: You direct your cohort members to send cheques to one SaaS, raise series B & C, push for IPO after making splashes on media outlets (also owned and controlled by stakeholders), which in turn generates more fervor from retail investors eager to get in on the "next" Facebook.
Then you would naturally use these beacons to essentially send more cheques, this time across many tiny bets that they can cycle through one after the other. Some make it to IPO, many don't so they get "acquired".
The more I look at the YC business model and silicon valley in general is that very small group of people are actually in it to build sustainable businesses, since the Uber secondary market successes of VCs that successfully dumped their shares on Masayoshi, the SaaS have become the new "social media opex", where losing $2 to make $1 is preferred over slower growing but consistent net profit generating ones.
By next year I anticipate ton of pain and anger. I took a look at some TC figures and they are roughly 30/70 mix of cash and RSUs. Many of those people are also in debt through real estate using HELOCs too.
What I think we are headed for is something unprecedented because there are 3 major bubbles imploding: crypto, real estate, dot com
Even more crazy is that we had the exact setup going into the new millenia: e-gold, real estate, dot com but the difference back then was that monetary supply was nowhere near as low as they have been in the past 3 years (take a look at the M2 supply/velocity chart).
https://www.pennmutualam.com/market-insights-news/blogs/char...
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.
Not always. Consider the rash of subsidized “we’ll pick up your dry cleaning and then save by doing the work at a centralized facility elsewhere). These parasites wiped out the network of local dry cleaners, in particular in SF.
You could say, well, they wiped out the buggy whip makers. But actually they wiped out the infrastructure and then went bust, leaving a desert (in dry cleaning terms) behind.
Parasite is too kind a word.
My prediction is that every behemoth of today will be tomorrow's Sears Roebuck, GE, West India Trading Company, etc. At some point, they'll become mired in bureaucracy. Enough incompetence will eventually rise to the top to allow competitors to pounce.
I'd bet on that, if I had to.
That said, I may easily be wrong, and I honestly share your concern about Amazon, Google, Facebook, Apple, etc.
In particular, I want a successful OSS phone competitor to Apple and Google. I don't think something as important as our telecommunication devices should be run by a duopoly. There's no freedom in the phone market the way there is in the PC market, and I'd really like to see that change.
once your business becomes everyone's business, they'll just go ahead and make decisions about it without you
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.
If they don’t get their unit economics figured out, not only will they not be Google/FB/etc., they will be nothing at all.
100% agreed. It wasn't that long ago that Amazon was starting to catch on in large part due to its (and more broadly the Internet's) reputation for low prices. Nowadays that's no longer the case, and yet here we are.
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 [...] I'd argue taxi hailing apps (as they currently exist) are basically commodities.
I would also have to agree with this. I've long since used Lyft and Uber interchangeably depending on current local prices; a third-party app could easily go further to consolidate every major ride sharing service and automatically book the cheapest ride at any given time.
I see the trajectory of Uber and Lyft more as consolidating the market share of the taxi industry into a handful of owners than really creating a novel market or economics. The economies of scale and massive VC-backed war chests could make for viable stepping stones to bringing production-ready self-driving tech to market, which would change the economics, but last I heard it seems like Waymo is leading the pack there without the albatross of a massively unprofitable service business.
People point at pimentoloaf.com or whatever and laugh. But when those companies went under, they took away real dollars from "real" B2B companies. And then when those companies went under, "real" companies who depended on them went under. And so on.
"In 2000, the Nasdaq superheated due to the large number of companies that skyrocketed into the public markets fueled by fanciful metrics disengaged from revenue."
Interest rates have been held around zero since almost the dot com crash and certainly since 2008. No wonder VCs were given gobs of cash to try and eek out a better market return. The injection of cash on Wall Street resulted in huge amounts ending up in the stock market, perpetuating those returns once they went public and encouraging more VC activity. Is there any realistic forecasted revenue stream that justifies the valuations of some of these companies?
Some good companies and good prospects are going to get lost when this monetary bubble bursts. It's a shame, but inevitable considering how long the Fed has been holding their finger on the scale.
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.
As they have been for over a decade. Just not actually GAAP profitable, except maybe a one off sale to DiDi.
>> Established markets have been profitable for a while.
So what market is Uber not established in? Are they pouring their oceans of profit from New York, Los Angeles and London into building a business in La Paz? I am sure they are trying to grow in places but they are way past the point where their profitable markets could fund growth. But they don't seem to.
I am sure there is a profitable and enduring business in Uber in some markets and at some prices. I just think they know that the economic realities of that business would not support their public stock valuation. So they work on self driving and buy postmates rather than focus on those profitable established markets.
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.
To be fair, they are doing so by forcing competitors to in-house their advertising efforts. Largely, AdTech in large companies is outsourced to 3rd parties and those existing workflows calcify into positive signal. There hasn't been much incentive to change. Recently, the belts are starting to tighten and network (public market) adtech companies, even with big accounts, are always in danger of disappearing overnight.
Many companies rather continue with the few winners in the network adtech space, than engage in the lengthy and risky in-house development. It's slow to see all of the parallel development efforts coming to fruition, when no company wants to make PR announcements that it's no longer sending customer data to a 3rd party, but still collecting it all the same for an internal platform. This migration is happening nonetheless. Amazon built out their platform in under 2 years and the ripple has pushed many others forward toward dogfooding their own adtech stacks.
The camel concept is gaining traction since they focus on profitability from the get go, healthy runway and steadily grow.
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 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.
Have you actually studied Uber’s recent earnings? I’m pretty sure rideshate contribution margin is positive in all their tenured markets.
The B2B SaaS ones.
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.
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.
Sure the core technology, right now, might be "obvious", but a company is so much more than the tech. Without a story, marketing and sales, the company is nothing!
The founders might be bringing connection, validation of the product, LOIs, etc. All of which are much, much* more difficult than the tech.
*usually.
Jokes aside, oftentimes, the most disruptive technologies are not actually technologically difficult. If we take a look at the early days of mega corps today, most of them found an edge in an emergent market with off-the-shelf tech stacks.
Blowing $500M is great for building an Amazon or an Uber -- if you require a lot of hardware or logistics. It's useful in a 4-way rat race where it's first-past-the-goalpost.
I tend to prefer deep tech, where I build something hard (or relatively hard) that's never been built.
A company like Bose has $3.2B in annual revenues, 58 years after founding, and I believe they've never raised external capital. That's because they have a big pile of unique technology. Contrary to their image, they do a lot of work which is not speakers (and which you've likely never heard of), from architectural acoustics to government.
TinySeed looks to fund small, niche SaaS companies, mostly. Most of the stuff they fund, more or less anyone with SWE background could build.
For developing hard tech, I'd pick $10M and 10 years over $200M and 2 years, any day of the week.
So VCs will have smaller Capital Calls until the market picks up again.
I suspect some VCs will get greedy as their Carry is tied to the amount invested, but the smart ones will play the long game.
When considering a trade, you have to ask yourself "what do I know about the future prospects of this asset that the other party doesn't?" For IPOs you can see how stacked this transaction is against the public.
Elsewhere in this thread there's discussion of VC concern regarding downstream investment/valuations, reluctance to have down rounds, etc. Clearly VCs can and will delay rounds unless they can earn a premium. It's self evident that this extends to IPOs, the last "downstream investor". Due to self selection, these IPOs will be biased toward times when the VCs judge that hype/expectations are high enough to unload at a premium. Part of their job is ensuring such conditions exist at exit, via marketing, etc.
Apparently the evidence bears this out -- the first two years after IPO, companies tend to underperform after adjusting for equity risk factors: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2929733
The analogy you are stating doesn't sound right.
If the early stage investors' criteria were based on startups' revenue forecasts, then yes, the metaphor would apply.
However, that's not the case. They pour the money expecting for more money to be poured in later, by others. Granted, I'm oversimplifying here, but the simple existence of such criterium is "symptomatic".
Obviously all of these scenarios tend to be covered by the contracts and if you can't read a contract of that level of complexity then you should not be playing this game.
I do have a bet with a friend regarding btc price going under 1k i made in 2019 but it's just for fun..
It is all in the demand.
A lot of that 80% flucuation is made up of short term speculators.
But some people are hardcore holders, and others use it because their national currency is worse (Venezuela, Sri Lanka).
Couple that with the network effects (BTC is the largest still), and that's all it takes for the price not to go to zero.
Applications and websites that should be more than fine to be rendered on MVC frameworks are now sending several megabytes of javascript down the wire, as a result our devices have more memories, more computing power, thereby consuming more energy than ever before contributing to the growing global warming crisis that we are only beginning to witness now.
Coupled with lobbying for not regulating personal data in databases connected to the internet thereby allowing a select few giants to essentially act both as cartels to monopolize the arbitrage of the data of everyone on earth. The labor market are also controlled as a result of this monopoly, it feels like the best version of state sanctioned businesses: self-sufficient on its own while gathering data on everyone as the price of privacy is artifically suppressed.
You could be right.
Everyone would get to pay the same tax bill proportionally, but not nominally.
In my state, your property's assessed value for taxation purposes cannot rise more than 3% per year, creating a pretty long lag time from the value going up to the taxes going up.
My home is worth about $650K, but it's being taxed as if it was only $250K.
Ah, live by the ARPU, die by the ARPU: you lack of control over the "U" means your company performance is coupled to the broad market!
Thanks for this example. It's obvious in retrospect but apparently not prospectively.
If you cannot increase pricing, then your performance is coupled to the broad market regardless of how it is measured.
I know HN likes to hate on Uber and other gig apps but a 1% margin is something they can easily make up given their stated take rate on mobility and delivery is around 20%.
> So what market is Uber not established in
If you follow their earnings calls (or that of DoorDash as well), advertising is a huge growing market for these companies. My guess is they take on an airline business model: zero to slim margins on the core offerings, but huge money on advertising and ancillary sources of revenue (for airlines, this is credit card points).
[1] https://investor.uber.com/news-events/news/press-release-det...
Yes, Uber is close to break-even and they aren't going to just disappear. But there's still a big gap for them to close between "breaking even" and "profitable enough to justify a $50B valuation."
There's plenty of room for a moderate view in which Uber survives as a business but their investors are extremely unhappy.
In the United States, maybe, the only market where credit card points are meaningful?
>It is still the buyer who pays even if it is the seller who pay the commission since the commissions are baked into the sell price
This is a trivial characterization, just like an individual who buys lettuce at the grocery store pays for the wages of the person that grows and picks and packages it.
A buyer does not have much incentive to not use a real estate agent because a seller using a real estate agent has already agreed to pay x% or $x to the sell side agent, who will give a portion of that to the buy side agent.
The reduction in costs only comes when purchasing from a home being sold without the use of a real estate agent (“for sale by owner”).
In Hungary the amount varies a lot, but it’s paid by the seller so not the buyer’s problem. Because of this, you always try to sell without an agent, and use an agent only if you can’t find a buyer by yourself.
Dunno about other countries.
Such as opening the small talk a Zoom call by saying ‘it’s been a very difficult month for us.’
There are very few VCs who won’t be influenced by a signal even as simple as this one.
The people running these funds are not idiots and would not willingly put themselves into a position like that.
Also, if credibly alleged there won't be a next installment of that particular fund.
On every capital call there is a statement that lists the total amount and the pro-rata and if the ratio there would suddenly change that would be a breach of contract. As an LP you know up front how big a chunk of the total fund your commitment will be with possible upside if the fund is oversubscribed and if it is undersubscribed it either won't launch of you will be made aware of the change and given the option to walk away.
To see the fund effectively shrink post launch and the shortfall pushed onto the smaller LPs is ridiculous, especially if LPs were not previously told that this could be the case.
The LPs which the user above refers to are the APGs, the PFZWs type.
I have been part of 222 VC/PE deals to date (that's not a typo, just a coincidence) and not once has an LP reneged on their obligation to honor a capital call without penalty. That's not saying it doesn't happen, it may well happen, or it may have happened and it was kept so quiet that nobody picked up on it (which is somewhat believable, because it would reflect very badly on the fund).
Just to give you one example: a VC enters into a deal, signs a non-binding terms sheet conditional on doing DD, goes through a full DD and then has to back out of the deal because a large LP does not honor their commitment. The fall out from that would be massive.
What is far more likely to happen is that a VC can't find a good way to spend the funds committed capital. In that case there might be extensions of the funds run or they might end up simply not calling up the available capital. This I've seen a couple of times. But an LP that refuses a capital call I've yet to see. I've even seen an estate that was held to perform when an LP ended up with the very best reason for non-performance of all.
Also in general when government is involved rules don't apply to it. 80% or more of the amount of money that LPs as a whole administer are either Govt. Pension Funds or SWFs.
So in the case of big LPs it's one of the rare cases where both the above rules are at play to give them carte blanche.
Is this in Europe?
But in general economic downturns are tricky, as they affect different groups differently - are the people who would suffer in a recession the same people who are currently using Uber?
There will be no point in taking such low paying jobs. We're already seeing massive shortages at the low end of employment - working for that cheap simply doesn't make economic sense.
Uber has been around for over 10 years now. Sure, not everyone is an accountant, but if Uber drained every driver's wallet, they'd have noticed by now. Interesting that it's usually only people who have never driven for Uber that claim it's completely unprofitable.
This statement assumes the following axioms:
- The engineers that go to work for such startups are capable of devising/deploying solutions towards climate change: Some engineers & researchers may be able to do this, but most are focused in CompSci/SoftEng, with no experience in the field that you want them to be in.
- No roadblocks exist throughout the deployment of said solutions (NIMBYs, politicians, perfectionist "environmental activists"/virtue signalers, bureaucracy, supply chain issues)
Despite the "Sounds good"ness of your statement (which I partially agree with), the practical reality is that the chances of succeeding in something like crypto is still way higher than in building infrastructure, as there are near-0 NIMBYs in crypto that will protest in the next town hall meeting, nor will there be weather issues during the deployment/upgrade of a network/smart contract.
"Software will eat the world" still rings true today, only because the deployment of software is still orders of magnitude easier than deploying something into the real world. In order to make something like infrastructure deployment that much more enticing, the (chance_of_success*windfall - chance_of_failure*investment) must be greater than investing in software, which has significantly lower development costs, does not get bottlenecked by supply chain issues, & can be deployed globally within minutes.
Cross-industry support roles contribute to endeavors: DevOps, infra, ML/data science. The a16z fueled ponzi has stripped and redirected talent from these important areas.
there's something wrong with humans, let alone the way we handle policy, economics etc
Their backend services have a "fixed cost", if you assume they've designed it to be scalable, such that the marginal cost of a new user doesn't add more cost to hosting and compute. Then fire most engineers, and keep some skeleton crew maintaining the services.
The other cost is obviously the payment to drivers. I believe the unit economics will work here, since uber is not making capital investments into equipment, and is paid per-ride. Competition would drive the margins down, but thin margin is still a positive unit economics. Right now, the cost is subsidized by uber, but only as a marketing tactic to obtain marketshare and drive out competitors (unsuccessfully i might add). Uber can choose to stop the subsidizing, which can then make the unit economics positive.
How much will their market share fall when they do this though? And will uber be able to survive the corresponding reduction in revenue?
who knows? But if their competitor is going to subsidize, but uber doesn't then they'd lose most of their marketshare. But the same story would be true for their competitors.
So the subsidy would drop slowly for every player in this market, until they reach an equilibrium, where the final margins for every player is as thin as possible but still pay the bills.
pets.com => Chewy. Also PetSmart operates the pets.com domain now apparently.
webvan => Amazon Fresh, Instacart
kozmo => DoorDash, Uber Eats, etc.
AWS is probably the biggest moat they have, but not often what people think of by "Amazon".
Buyers and sellers are not paying agents to maximize and minimize prices. They are paying real estate agents to increase the odds of having a transaction clear, with the buyer receiving property they want, and the seller receiving a price they want.
For an agent, trying to maximize price is only worth it up to a certain number of hours of work, after which time it is far better for a real estate agent to maximize number of transactions. An additional 2% of say $50k is only $1k of extra pay, whereas an additional 2% of a $500k sale is $10k.
There's in principle nothing wrong with clusters of companies that are inter-dependent on selling stuff to each other. Car parts manufacturers live and die by the big car companies - and to some degree vice versa - but we would hesitate to call that a Ponzi scheme.
The key is whether or not this clustered ecosystem is bringing in money from the outside. Somebody in the ecosystem has to be making money from the "outside" world. It's the sustainability of this outside connection that really matters.
For a lot of SaaS companies I think the rude wakeup is that the "outside" source of money was never an actual business but instead was just endless rounds of VC cash. Likewise (and IMO more offensively) with crypto the "outside" money source was hyped-up retail investors (and hyped-up VCs) and not any actual useful business.
I do agree though - the VC sphere has spent the last 10+ years building up an entire web of companies that inter-depend on each other but where the "outside money" was always highly dubious. This is distinctly unlike the older crop of BigTech companies where the outside money is (relatively) stable: actual advertising, actual hardware in people's hands...
Crypto is an almost invisible blip on the scale of the financial system. Real estate, well, there's a shortage, so I think it will take a very long time to unwind.
Dot com -- yeh, it's a mix of unsustainable Doordash/Uber/Airbnb, SaaS-for-the-SaaS market (both of which are ponzis in the context of this thread) and "AI"/"Data Science" puffery. I still can't tell if the reckoning will be quick, or if the air will simply slowly leak out.
What's the example of a company that's actually failing from this hypothesized mode of depending on other startups? I mean, better, what are five examples -- I mean, if this is a group of companies that are mutually dependent, then it can't just be one failing.
i dont think you can blame the lack of public transport investment on uber. and there's no hurting private transportation infrastructure - that's just private cars! People who ditched their car because of the availability of uber isn't getting hurt if uber goes away. They can just repurchase a car (after all, they saved money not owning a car previously, so they must be ahead already).
Huh? I’ve never had an issue finding a dry cleaning shop in SF and there’s tons that pop on Google maps - hardly seems like a dry cleaning “desert”.
Is that not the default business model of dry cleaners globally?
Chemicals like PERC are nearly completely banned in residential/commercial zones. Almost all dry cleaning in the developed world is done in centralised depots in industrial areas, for health & safety reasons.
If Amazon retreats to being AWS-only, I'll consider them to have "failed", even if AWS continues to be a success.
Again, show me. Just. One. Contract. I'll be happy to read the whole thing even if it is 200 pages.
Oh and just to be clear about this: if smaller LPs were on the hook for the full amount but larger LPs could walk at will how big do you think the chances are that those smaller LPs would still want to be part of such a fund?
Because clearly if a large contributor has a reason to back out they may have an even better reason to do the same.
Personally I would not invest in a fund where a larger LP can back out at will.
There isn't an alternate reality where contracts are meaningless.
The problem is: way too many staff, not enough revenue, no route to profit. It doesn't matter if you have a "best-in-class" tool...where is the money coming from, how are you making payroll next month with no VCs.
The main problem with tech companies isn't the products, the products are fine. The issue is that they have taken a profitable product and built an economic model around that product that incinerates money.
With Google Workplace having pageless Google Docs now, and other shops having content centralized on Office 365, a lot of cost-cutting companies will ask "we just use Notion for a wiki anyways, can we migrate over to the system we're already paying for?" And sure, Notion is making the right move here, to move rapidly on becoming a hub for project planning and other structured content, which is harder to move into a plain collaborative document. But is enough of Notion's userbase using those table features to such a level that it would cause pain? I'm truly not sure.
Maybe, anyway
Firma has a deeper moat around it
How can you make such claims? These are great products
All of that doesn’t matter when 90% of your revenue comes from series C startups that will go bust in a year, or switch to cheaper and marginally worse alternatives.
Otherwise, I don’t think there’s much you can do to insulate yourself. It’s never obvious how resilient your employer is relative to the rest of the industry.
Just reset your expectations on what working in tech will be like for the next few years. And prioritize learning and building your network - whether at work or outside - over trying to climb the career ladder. It will pay off in the long run and you’ll be happier.
Also, articles like this show that we’re nowhere near capitulation. When we actually get there, stay passionate about tech. There will be another boom.
It isnt. That cheap outsourced software engineer wont be staying for ages with any company. They get promoted or found their own businesses. They dont keep slavering away for dimes for an US company that wants to have them as sweatshop labor.
Designing, engineering and maintaining highly scalable systems is not something that you could outsource to have it done for $15/hour.
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What is the catch? Drivers do not make any money while driving to pick someone up or after dropping someone off. Often, when I tried out driving, about half the miles driven were without a fare.
Subtract the service fees from those numbers and it gets less lucrative.
One thing to note about Uber drivers is they’re typically putting 50-75k+ miles per year on their cars. I’m curious what that does to those depreciation/etc figures.
All in costs around 30 cents seems right. That assumes absolute worst case depreciation too. And don't forget, the government lets you deduct 58 cents/mile off your taxes, so you actually make a profit off every mile driven.
If you are spending .30 and deducting .58, you need to multiply the .58 by your tax rate.
You can’t simply say .58 - .30 is .28 and that is a profit of .28. Deductions don’t work that way.
30 cents per mile costs is also extremely low, at least on average.
How many people do you personally know that make their living as an Uber driver? I don't mean pensioners making beer money, or people doing it as a side job, here.
I know one. He's been doing it for a year and half, or so. He doesn't own his car. he has to lease it on a weekly basis, and he's paying through the nose for the privilege. He's doing it because his credit is shit, and he has no savings to buy a car outright.
He's getting ahead, but if driver rates get cut, he'll be going right back to being a line cook.
Still, the math isn't much different for a Corolla or Civic. And the more you drive, the cheaper the cost per mile is.
Personally, I don't know anyone driving full time, but still know several driving 10 or so hours per week and they make about $300 for it.
It will vary by year and city, but generally speaking Toyotas tend to dominate ride share with Camry usually #1, then Prius, Corolla, and RAV4. However, the long tail is very long and you're about as likely to get a ride in a less cost effective vehicle.
As usual, you are conflsting your singular consumer experience of Uber with the global business giant Uber.
I do disagree on Ubers. I see very few Priuses, but there's a different explanation to that, that I missed. Casual drivers, people doing it as a side thing, or for beer money didn't optimize their car purchase for the purpose of driving a taxi. I suppose full-time drivers are more likely to drive one.
Depending on your costs that could put you under 20 cents/mile in cost. And you get paid over $1/mile in practice, even on delivery orders. Really the only party getting screwed by gig apps is the government, because they get 0 tax revenue from these guys.
Circa 2021:
The main point I would like to make is that in my market at the time, the mileage was getting paid was .76 a mile, as I look back in the app. At the time additionally was getting .11 per a minute fare. The main issue is that the mileage rate is for time that passengers are in the car.
But about half the time it was driving to a pickup location. So you are looking at an average of .38 per mile + .11 per minute. These were city miles, not quick highway miles.
So to pull one random example from my actual history.
I did a 6 minute and 57 second trip that paid 2.86. The distance was about 2.5 miles. So by your calculations we subtract .75. This leaves 2.11 profit. The issue is it pulled me 2.5 miles from my next fare, so you need to subtract another .75 to get back. So we are at 1.36. We also have another ~7 minutes of driving.
So in 14 minutes I made 1.36... So we are talking $5.80 an hour. This is pretty poor pay for the service provided. I might quibble about your numbers in my case because it was a 2020 traverse, that was about 35k and worse gas mileage. So I was probably doing worse...
HOWEVER, that's only part of the story. Uber has bonuses, so there will be a deal where for a particular weekend, if you do 40 trips (no matter the length of each trip, which was strange to me), they might pay an additional $80 bonus. So that adds an extra $2.00 for that particular trip, if you meet the quota. And is nearly as much as the base rate. So that will push the earnings to ~$10 an hour. Significantly better!
And that is where the VC money criticism comes in claiming the subsidization is what makes it work.
TLDR; If you are very economical about the bonuses and surge rates (which the example was not) you can make better than minimum wage income, it is not a loss. But you have to be very savvy and strategic. But the bottom line is the base rates, at the time were a bit over break even, and very low if you had any down time. But the bonuses and incentives made it reasonable.
It might seem like that, but +$2/ride still puts Uber in the black here. A ride is minimum $8-9 so they're making at least $5 on that ride.
Also, I think your example is not too great because low fare/short rides disproportionately screw you because Uber takes a flat $3 per ride as a "marketplace fee" in addition to their 25% cut. If that ride was 5 miles instead of 2.5, you'd make a lot more than double 2.86.
