Most people who raise seed rounds aren't "printing money", and quite a few people who are "printing money" are printing the wrong kind of money to raise venture funding on.
>and quite a few people who are "printing money" are printing the wrong kind of money to raise venture funding on.
Only if you agree with the premise that "Venture Capitalists Get Paid Well to Lose Money".[1]
(I don't agree with that conclusion, I just think they're not writing enough checks for their own purposes.)
In that case the right kind of company in 2018 is an AI social media machine learning cloud platform startup, and there's a whole lot fewer than 1000 of those total worldwide due to the simple fact -- and I think you can see the end of this sentence coming -- that I just spouted gibberish.
More seriously, when Airbnb was founded ten years ago it wasn't the right company either, and the only pivot it made is from being a "rent out your apartment to tourists over the Internet" company 9 years ago to a "rent out your apartment to tourists over the Internet" company with 4 million lodging listings in 65,000 cities and 191 countries which has facilitated over 260 million bookings and as of a year ago, closed a $1 billion round at a $31 billion after becoming profitable in 2016.[2] The founders did this by selling cereal.
No, sorry, you're right that venture capital as an asset class underperforms most other investments, but that doesn't mean that every company that is "printing money" should receive investment. The mathematics of venture investing only work for a subset of businesses.
My company has a Y2 ARR(!) and revenue target that I think would make a lot of YC companies pretty happy, but we are not a sensible investment for venture capitalists.
Actually you're an extremely sensible investment. :)
If you could close it in an hour how much money would you raise on standard terms and at what valuation? (You can list both as a multiple of any metric you pick - any metric, including unjustified projections if you want - if you don't want to name figures here.) Obviously given what I just shared I'm not a VC.
No, we're a nonsensical investment: there is no story we can tell about how our equity becomes liquid in 10 years, and our growth, while very pleasant for us principals, is unlikely to lead us to a place where our eventual liquidity would pay for the failures of the other 9 companies in a portfolio that included us.
It's not a moral debate. The portfolio math has to work, and things have to work on a timescale that works for fund LPs. At the end of the day, venture capitalists are simply an adapter cable that plugs small chunks of LP endowments and funds into baskets of companies with an N% chance of exiting >7x within Y years. If your company can't do that, the adapter cable doesn't fit your company.
You seem to be mostly right. In the past, VCs funded crazy moonshots and local banks funded sensible old-school companies with 10% per year growth and 15% profit/revenue ratios.
Small community banks don't really exist anymore, and large banks don't really seem to be funding anything under $10 million nowadays, except mortgages.
This doesn't really offer that; it documents a seed round raised by angels by a company that doesn't want to engage institutional VC because they demand a 10x success.
VCs aren't demanding 10x successes because they're lazy; they do it because the winners have to pay for the losers. This isn't even a VC-specific pattern; you see it in almost every hits-driven business.
Respectfully, I think this is a rather muddy estimation of probabilities and returns, as I can illustrate like this:
Suppose I had $100 million to spend on literal lottery tickets and my goal was to average a 10% per year return on it across all of my "investments". Mainly I try to find places that haven't paid out a large jackpot yet receive low media coverage, so that I have a positive expected return: then I buy a whole lot of lottery tickets there without alerting my competitors to the fact that the lottery tickets have a positive expected value due to the accumulated jackpot, that people seem unaware of.
Now: if my bank where I'm keeping the $100 million, which is stable and conservative, gives me an offer to purchase a 1-year bond from them that pays 12% should I take it? Will it help me achieve my goal of netting 10% returns?
You may think, "No - because that 12% is not going to pay for the non-winning lottery tickets."
But this is muddy thinking because the 12% is not in the same basket of risks as the lottery ticket purchases. It is simply incorrect thinking to group them together.
So yes, tying some of the money up for a year in a bond that pays 12% will help me make my goal of earning a 10% return, even if my strategy is to earn 10% by buying jackpots.
Of course I can be stupid and blow the $100 million on nationally announced huge jackpots where everyone else knows about it and all my competitors are also buying tickets, so that the expected value of the tickets is actually less than I pay for them. That's before the loss that I take on all the logistics, my office, etc. This is kind of what VC's do. They lose money.
You can characterize it descriptively, but please don't call it a sensible strategy.
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I'm still curious about your answer to how much money you would raise (perhaps expressed as a multiple of something) and at what valuation (again as a multiple of something, even projections if you want), if you could close it in an hour no questions asked. Just to throw this out there, I wouldn't raise $100 million at a $1 billion valuation for example, since I don't have any good use for $100 million. How much would you raise if you could, and at what valuation?
Forget the VC's, they're not in this conversation. We've already established they're in it to live on someone else's dime and lose money ;)
>Suppose I had $100 million to spend on literal lottery tickets[...] Now: if my bank where I'm keeping the $100 million, which is stable and conservative, gives me an offer to purchase a 1-year bond from them that pays 12%
In your hypothetical... if "lottery tickets" are the metaphorical stand in for "unproven startups", what does the bond paying 12% realistically stand for?
There isn't a AAA-rated bond that pays 12%. Or, to generalize further, there isn't an investment vehicle <X> that guarantees to pay VC_hoped_for_returns plus +2%. (In any case, if we're talking about AAA bonds, the LPs can just invest in that themselves without involving VCs as middlemen. E.g. you don't need VCs to buy US Treasuries on your behalf.)
To get higher interest rates that compete with good VC returns, you're getting into junk bond territory. Junk bonds have higher risk for defaults. Junk bonds require more research to assess returns. One could also try to sell the bonds on the bond market before the maturity but either way, you're now back in "lottery ticket" territory for bonds.
You're creating fictitious scenarios that don't have realistic choices.
In addition to the point 'jasode makes, I think there's an additional unrealistic subtext to the argument you're making, which is the idea that companies with stable but unspectacular growth are somehow less risky than shoot-the-moon startups.
But this just isn't true. In addition to the fact that companies fail a lot more often than operators recognize, there's the fact that a company winding down after years of solid but unspectacular returns is also a failed investment. Companies don't have to lose product/market fit to "go out of business". All they have to do is fail to compete with the operators other options. Eventually, somebody else will outbid the company for key talent.
Slow-burn companies can keep going for decades before this happens. It's not bad to be a slow-burn company! I've spent most of my career in them! But to take money from LPs, you have to have a story about how you can pay them a return.
The crux of your arguement is that the same returns can be derived using different set of probabilities and different kind of companies which probably won't achieve hyper growth but still are profitable and nice bet.
VC constraints:
1. VC has to get out within a specific timeframe, let's say 10 years and return all money to the LPs.
So VC can't afford to wait indenfinately collecting narrow streams of money.
That leaves you with very limited opportunities.
2. The number of companies they can deal with is small. There is a cost per transaction (funding), fewer transactions you make, better you do. But some transactions are must for VC math to work.
Banks also used to make only big loans in past. Micro lending is a recent thing. Algorithmic underwriting which doesn't even require manually looking at the balance sheet is based on heavy data collection, KPIs made feasable by technology advancement like big data processing etc..
3. VC can't fund anything which doesn't match their investment thesis. The LPs often start fund with a specific mission, for example, "advancement of AI for humanity". The VC partners often are veterans in specific industry and their resources are often useless in other industries.
This further reduces the number of companies they can fund.
4. You seem to assume all VC are chasing returns, well no! If our mission is "AI advancement". It's much better, if we've 2-3 focused winner companies in this niche. Fewer companies achieve better leverage, industry penetration, economies of scale and ofcourse, too big to fail.
5. Most of those small profitable companies are not able to keep stable revenue for 3years+.
One of the most misunderstood thing about VC, is that VC money wants maximum returns.
No! VC is a quest for control over new monopolies with enough holding, VC can influence and install their own management.
Money is cheap for them.
Imagine if you are an engineer and you own the largest semiconductor company. It's established fact that the old monopolies die and new disrupters emerge as new monopolies. You can't change this!
What you can do is control new disrupters by purchasing equity in them.
You do this by starting a VC fund and putting money derived from your semiconductor business in the fund. You can liquidate some of your holding it's not too hard.
Your VC funds thesis then becomes, "semiconductor advancement".
Then GPs will not chase the startups which have nothing to do with the semiconductor as their main focus.
If you don't do this, you watch your semiconductor empire dying. If don't even have stakes in new semiconductor disrupter monopoly, how do you maintain your dominance in this industry? That has a price, so absolute returns do not matter.
When a VC funded company dies, LPs do not cry. They cheer because another potential disrupter died trying, this can explain why some VCs are downright bad as they want you to fail.
Secondly, some VC funds have LPs who get their money from industry underdogs and really are after a disrupter who can unseat the current #1. So, they might be more helpful.
VCs are after potential disrupters.
Now if they want to kill the potential disrupter or help it grow that depends on the people who's money is at stake. No one is really going to share their motives upfront.
Only if you agree with the premise that "Venture Capitalists Get Paid Well to Lose Money".[1]
(I don't agree with that conclusion, I just think they're not writing enough checks for their own purposes.)
In that case the right kind of company in 2018 is an AI social media machine learning cloud platform startup, and there's a whole lot fewer than 1000 of those total worldwide due to the simple fact -- and I think you can see the end of this sentence coming -- that I just spouted gibberish.
More seriously, when Airbnb was founded ten years ago it wasn't the right company either, and the only pivot it made is from being a "rent out your apartment to tourists over the Internet" company 9 years ago to a "rent out your apartment to tourists over the Internet" company with 4 million lodging listings in 65,000 cities and 191 countries which has facilitated over 260 million bookings and as of a year ago, closed a $1 billion round at a $31 billion after becoming profitable in 2016.[2] The founders did this by selling cereal.
[1] https://hbr.org/2014/08/venture-capitalists-get-paid-well-to...
[2] https://www.reuters.com/article/us-airbnb-funding-idUSKBN16G...
[3] https://imgur.com/a/X6Ncr5E (Source: https://web.archive.org/web/20090601000000*/www.airbnb.com )