There are no (absolute) red flags in venture capital(blog.aaronkharris.com) |
There are no (absolute) red flags in venture capital(blog.aaronkharris.com) |
The author's two examples of obvious fraud were called out by many people as fraudulent years before it became public knowledge. It's possible to do your own research and conclude the zeitgeist is wrong before it becomes common knowledge. It would make the argument stronger to come up with examples where there weren't numerous experts screaming fraud for years.
https://www.theguardian.com/business/2010/mar/24/bernard-mad...
It's only hindsight that shows whether your research showed something was obviously fraud.
look at herbal life as an example
or amway
It's really more like Hindenburg Research and Adani. Hindenburg Research is just better at making a splash. But the evidence was always damning.
Founders are gamblers, betting they will be the one to win against the odds. Most companies fail, and the expected returns are approximately zero, with all the average returns coming from few winners. Founders that take VC money are multiplying their risk by giving away preferential shares (founder gets approximately zero if business is just mildly successful), founder radically increasing the pressure upon themselves, and if you need VC money you are usually by definition in a highly competitive market where growth-rate wins the market.
VCs are irrational because the vast majority of VC funds fail to beat the market. Fund managers do OK from their 2% fees, but a majority of VCs will not make excessive money (while some minority do make a lot). https://techcrunch.com/2017/06/01/the-meeting-that-showed-me... references slide 14[2] that shows 2% of VC funds (the top 20) rake in 95% of market returns: VC fund returns are nearly as skewed power law as founder returns are!
Power laws of returns truely suck for the majority. Think iPhone games.
[2] https://www.slideshare.net/gilbenartzy/money-talks-things-yo...
- Are there no absolute red flags in online dating? (Some ex-convicts with teardrop tattoos may be fully reformed.)
- Are there no absolute red flags in getting into a taxi (Some angry drivers with alcohol on their breath may be capable of getting to the destination.)
In such situations, the thought experiment fails. Wrong decisions can be catastrophic or fatal. Past a certain point, we don't roll the dice, even if good outcomes are possible, too. And we cringe when others knowingly take those risks.
OP's argument probably works best for Y Combinator, where the financial risk per deal is small and fully bounded. (The portfolio is vast; there's no implicit commitment to fund any deal beyond $500k, and everything is so early stage that the worst investments will likely fail quietly. They won't become the reputation-ruining messes of expose journalism, indictments, etc. that will impair your ability to stay in the venture business.)
For larger VC firms, particularly ones that get most of their capital from scandal-wary limited partners at universities or state retirement orgs, it's a different story. Extreme investment outcomes (good or bad) define your reputation in ways that can last for many years. Even a single deal's red-flag implosion can hurt your credibility far longer than you'd like.
So, bravo to OP for working at a firm where periodic red flags can be safely ignored. Do be careful in your choice of taxi drivers or online dates.
However, for an investor, a red flag is first and foremost just a piece of information. To make use of it, he must put it into a proper, objective context: Such as that we readily accept bridges made out of wood and ropes on our playgrounds - or that model railroad enthusiasts successfully used cardboard as a bridge-building material for decades.
Then the information must be weighed against expected rewards and mitigating factors, like the expected toll revenue before collapse or the fact that the location is close to the Mexican border, so everyone affected can quickly leave the country, should the need arise.
Only after carefully weighting all those pieces of information can an investor make an informed decision.
Bob has secured ownership of the section of river and a contract with the local town to pay bob 100k when he connects the two sides of the river together. He just needs an investment of $1,000 in exchange for 10% of his company - (to buy the zip ties) - so he can get started with construction.
Looks like at least a 10 bagger, the investment committee is going to absolutely love Bob - I LOVE THIS FOUNDER! 10 out of 10! Might even be able to make more if Bob doesnt make it to the other side of the river and you can sell him off in an acqui-hire to someone looking for their very own Bob.
Why not? If the founder is sufficiently charismatic, huge followers and lots of suckers willing to pile in. Sure the odds of a real product are zero but odds of a 100x exit are non zero. It may be a decent enough investment dispite being outright fraud. If you think you are in early enough in the scam and you can get out.
What does this post really say beyond "gee, there sure are a lot of different ways to think about investment in a company?"
Society recently felt government accountable to the range and gradient of human conditions was immoral so it changed the rules to let private power pick and choose and private power is pricing everyone out of homes and food, which is apparently quite moral.
Nevermind the state of reality we leave behind for the future; we’ll be dead. Those old religious metaphors about hell on Earth must be made so! Buy cars! Fly! We were promised this! Again the epitome of moral behavior.
Humans fairy tales run the world.
Last time I checked it was the government preventing me from building more dense housing as well as requiring parking minimums.
A local twp near me as expressed in their meeting minutes let's outside interests redline and rewrite their zoning laws, given enough capital and sway. It's very specific to the municipality, the mechanisms and processes they have in law to change the current ones, and the local base it is comprised of.
Mega-corp didnt have problems with getting approval (and a healthy cash grant to build it) for the exact same application. I wonder what they did differently?
The US did. That mentality is not present in the rest of the world.
The food part couldn’t be more wrong:
https://www.ers.usda.gov/amber-waves/2020/november/average-s...
I see bottled water being sold for $6 for a 12 pack when it used to be $2 for a 24. Convince me that isn't price gouging. It's literally plastic and water.
Rich industrialists buy up raw materials, package it, and sell it leaving less raw material (or lightly refined like flour from wheat, sugar from cane) for the masses to get cheap.
We pay to cover the industrial cost of the work to package cereal rather than the cost of flour and sugar.
It’s simple arithmetic and a bunch of philosophy, platitudes, and euphemisms justifying it.
A friend of mine is a collections agent who just signs computer generated letters just to role play our socioeconomic game. Give them an equivalent UBI, and we don’t have to provide them a work computer to go along with their personal gadgets.
We produce way more than we need to to satisfy the job LARP.
Not that I fundamentally disagree, but your example is probably not a great one.
First is that fuel costs were abnormally high for several months and water in plastic bottles isn't exactly cheap to transport.
Second is that plastic is sourced from oil and guess what? It's been quite expensive until the recent leveling off.
Third is that as some regions of the US start to run out of ground water due to unusually long drought conditions, the availability of local water sources also dries up and thus requires buying more expensive sources of water or bringing that water in from further away.
Previously the food industry competed on price. Supply was disrupted which any econ student would tell you increases prices. But the second order consequence was that these companies no longer competed on price, for a short time. They could justify price increases because everybody including their competitors were doing it. Since the grocery stores set the price, they determined that luxuries like 'bottled water' could go up higher since their price-sensitive customers rely more on necessities. Once supply stabilizes, these companies might start competing on price again. But in a free market, as long as their competitors keep their high margin items expensive, they can do so too.
Unless you mean temporary boil water orders of which Canada has several dozen active right now.
It may or may not be immoral for participants, but illegality is a much higher bar.
So much so that both Herbalife and Amway have been under numerous consent decrees with the US government for decades [1][2].
[1] https://www.ftc.gov/news-events/news/press-releases/2016/07/...
[2] https://www.govinfo.gov/content/pkg/FR-1994-03-23/html/94-67...
That is already millions, but...
Flint still has problems. Brady Texas has radium, Washington DC has intermittently had Lead. It is entirely on well owners to test and maintain their own water. New Jersey leads the country in BPA in water, some of which is safe, but the advice is to check with each municipality if it is safe....
And so on for all kinds of places and reasons. We just don't take tap water seriously as a country even though it wouldn't be a hard problem for us to solve.
Palo Alto Park Mutual Water Company, deserving about 600 houses, in the middle of the Silicon Valley. Water is not potable.
I have an extensive filtration system for making it potable. It is expensive, but the convenience is worth it as I can afford it. My neighbor has to go out refill 18L jugs for his drinking supply.