[HN Gopher] Abundant Capital
___________________________________________________________________
Abundant Capital
Author : tomhoward
Score : 254 points
Date : 2021-02-22 16:54 UTC (6 hours ago)
(HTM) web link (blog.aaronkharris.com)
(TXT) w3m dump (blog.aaronkharris.com)
| enahs-sf wrote:
| my question after reading this essay is,
|
| 1. why are there no startups building VC investing as a platform
| akin to what carta has done for equity.
|
| 2. are there any ways to shore up the cost of the transaction
| such that they benefit both parties as a service (eg. shore up
| lawyer fees which are currently passed onto the fundraiser)
| fallingfrog wrote:
| What goes up,
| Liron wrote:
| > Founders should approach every fundraising as an auction.
|
| I agree. So what's the auction marketplace of startup fundraising
| - a place where every deal can be posted publicly, or as close to
| that as possible?
| drewrv wrote:
| Carta is building a private exchange, and their CEO alluded to
| the possibility of using it to raise money in his blog post
| announcing the trial run.
|
| https://henrysward.medium.com/finally-a-private-stock-exchan...
|
| _Once we have a liquid and active market for our shares, (in
| our case we have enough liquidity to support ~ $100M of volume
| per quarter), when we want to raise primary capital we simply
| sell common shares out of treasury.
|
| This is powerful for a couple of reasons. First, we get better
| price discovery on CartaX than going door-to-door on Sand Hill
| Road. Second, all shares bought on CartaX are common stock.
| There is no preferred stock, board seat, or covenants to deal
| with in a primary.
|
| But perhaps most importantly, CEOs and CFOs don't have to spend
| months raising money, doing roadshows, meeting with investors,
| and negotiating termsheets._
| akharris wrote:
| Demo Day does this for YC companies. Angel List does it, to
| some extent.
|
| Other than that, it doesn't exist. Got some thoughts on this
| part of the dynamic in the works.
| borski wrote:
| This, while seemingly a natural extension, is a bad idea, imho.
| Investing in startups is inherently one of the riskiest
| investments you can make, and having deals be public is a
| problem, as 'normal' investors will be swayed by charismatic
| founders into losing their homes.
|
| That said, 'auctions' for accredited investors already exist,
| if the company choose to take advantage of it. There are seed
| funding sites as well as AngelList, etc., to publicize deals.
|
| Some founders also choose not to publicize a raise (except
| among the VC/angel networks) so as to remain under the radar
| until they are ready to launch.
| guntars wrote:
| > 'normal' investors will be swayed by charismatic founders
| into losing their homes.
|
| You mean their second or third homes, right? There's a
| minimum net-worth requirement before you're able to invest in
| a startup so a failed investment is not going to bankrupt any
| investors. The founders are much more likely to end up in the
| poorhouse if things don't work out than investors are.
| seibelj wrote:
| Another thing is it seems people want to move into VC rather than
| keep building products. Investing is inherently lazy, it requires
| decision making but not much work if you are the person who has
| the connections to raise the fund. You can hire other people to
| do the effort of managing investments because you can't be
| dethroned from having the money connections.
|
| So people who actually make successful products get valued more
| and more. The unfortunate part is you actually have to work for a
| living, but luckily you keep getting more of the lazy people's
| money.
| poochinienini wrote:
| This conversation is a bit misguided in its premises. There is
| not that much excess capital compared to yesteryears when one
| considers the real value vs the nominal amount. If anything, sure
| capital will flow more freely and be doled out more freely in
| ever increasing nominal amounts.
|
| However, let's stop and ponder, how much more will this capital
| buy? Will it buy more actual assets? Will salaries go up? Then
| you will get the same amount of engineers for the capital. This
| is quite a decaying state, not that different to how despite,
| more food being produced, and salaries "going upz and increasing"
| the average person in the US can afford, worse quality food and
| housing despite having "muh iphones".
|
| Long term this trend will further bitcoin's position as a more
| useful nominal quantity. When will the salaries in fixed BTC
| begin? Right now it is a bit unstable, sure "muh transaction
| costs". But imagine schemes where pay is paid out yearly,
| reducing the number of transactions, or where it is held in
| escrow.
| corry wrote:
| With interest rates so low (and lots of headwinds for them to
| increase in the short-term), one has to think that this will be
| the new normal for a few years at least. The rise of SPACs is
| another sign - they are disrupting both later-stage VC funds as
| well as obviously vanilla IPOs.
|
| I wonder if the abundance of capital is not evenly distributed
| through the startup lifecycle, but more heavily-weighted towards
| later stages.
|
| Anecdotally, I've heard from founders that SEED rounds are
| getting harder despite all the frothiness. Even back when we did
| our seed rounds ~2015, we already heard "today's seed round is
| yesterday's Series A" in terms of $ size but also minimum bar of
| progress. And these days it seems that is EVEN MORE true. It's
| also true it's easier to start a SaaS company than ever before.
| But it's ALSO ALSO true that there is less and less SaaS
| greenspace. Hmmmm.
| ac29 wrote:
| > With interest rates so low (and lots of headwinds for them to
| increase in the short-term)
|
| Note that while interest rates are fairly low (especially for
| short term <5 yr debt), the yield on a 10 year US treasury,
| which is often used as a benchmark, has been consistently
| increasing for about 6 months and is ~50% higher than it was at
| the beginning of the year:
| https://fred.stlouisfed.org/series/DGS10/
| fspeech wrote:
| Yes but it is still below projected inflation, i.e. 10 year
| real yield is still negative.
| wayoutthere wrote:
| So I actually think the flip side of this is that the founders
| finding success tend to be much older -- in their late 30s or
| early 40s -- because the green space that's available for SaaS
| focuses on niche problem sets with mastery of a field required
| to even define a product.
|
| This path to success is becoming the norm, but it happens
| quietly because "guy leaves director-level role at a global
| bank to build a billion dollar fintech startup" isn't as
| appealing of a story to the media. This kind of founder is much
| less of a risk in many ways than a younger one, but while the
| founder may be willing to live off savings for a year or two,
| the talent they would need to surround themselves with is also
| more experienced, with domain knowledge themselves. So why
| bother with a $500k seed round when it's going to take $5M at a
| minimum to take a real crack at it? Now that we're out of the
| "SaaS all the things" phase of this economy, you can't just
| throw a bunch of overachieving 20 year olds at every problem.
| seibelj wrote:
| Salaries for good engineers have simply gone up. Competing with
| FAANG for good engineers is expensive. Need $5mil to get a
| small team for a couple years runway. That used to be an A.
| Having one or more cofounders as capable engineers to get MVP
| out is also beneficial.
| flyinglizard wrote:
| None of the early stage startups I know even tries to compete
| with FAANGs on compensation. I don't know if it's because of
| disparity of information on the side of the employees, or
| simply people joining for a wild ride (I suspect it's both).
| Not to say salaries have not gone up, but not to those
| levels.
|
| That said, it is also uncommon for me to see startup
| employees which previously worked for FAANGs (you do see
| founders).
| seibelj wrote:
| No one is trying to pay 500k total comp but higher salaries
| have become the norm. Getting someone sub-100k with
| experience and knows what they are doing is impossible
| unless you are exploiting them.
| zhoujianfu wrote:
| I wonder if the issues with seed rounds is that it's too much
| work to deploy the (abundant) capital.
|
| If you've got e.g. $300M to deploy, you really don't want to be
| doing less than $5-10M a pop. Seed rounds (even these new big
| ones) are too small. If you do put $5M in, now you've now got
| to lead. Ugh, more work.
|
| Easier to just plow $50M a pop into a few series Ds led by
| others.
| corry wrote:
| Great point. YC's model allowed them to do seed investing at
| scale, but the classic way is likely difficult to do well
| even if you're great at picking companies.
| fractionalhare wrote:
| Harder to hedge against downside risk if you deploy $300M
| capital in six bets rather than 30, though.
| filoleg wrote:
| Not universally true. I would assume that an average Series
| D startup has way less risk of evaporating to zero than a
| seed stage startup. With that in mind, the risk hedging
| might actually work in favor of "six bets rather than 30".
| But you will need actual numbers to do that risk
| assessment, and I assume VCs do that.
|
| Let's say you invest $300mil into 30 seed bets, with each
| bet having a 10% chance of returning a 10x, 15% returning a
| 3x, and 85% of going to zero. But when you invest that same
| amount into 6 series D bets, each bet might have a 50%
| chance of returning 2x, 30% chance of going to zero, and
| 20% chance of going 3-4x. If you do the math to calculate
| the average expected payout using these numbers, you will
| get an expected average payout higher for the latter
| scenario. And assuming each bet is completely independent
| from another, it seems like a pretty solid hedge.
|
| Numbers are obviously made-up for illustrative purposes and
| are not the source of truth, but it shows a pretty good
| hypothetical situation when doing 6 bets is safer than 30
| bets (given you have the same amount of money to spend on
| those bets). But, I think, it is fairly commonly agreed on
| that a Series D startup is way less likely to go to zero
| than a seed stage one, thus making a singular bet on a
| Series D startup much safer (but also less profitable in
| case of a success). Given many enough of those bets, the
| risk becomes pretty manageable and, imo, less risky than
| seed stage investing. I am not trying to say that what I am
| describing is the case, I am trying to say that it is a
| realistically possible case.
|
| Saying this as someone with no experience with that model
| whatsoever, so anyone is welcome to correct me if there is
| something glaringly wrong or missing in my assessment of
| this.
| [deleted]
| Judgmentality wrote:
| > I would assume that an average Series D startup has way
| less risk of evaporating to zero than a seed stage
| startup.
|
| My estimate, admittedly not looking at data right now,
| would be that a Series D company is roughly 100x more
| likely to succeed than a seed stage company.
|
| But then again your returns could easily be less than
| 100%, whereas with seed you can literally get a 100x ROI
| (this actually happened for Uber).
| rossdavidh wrote:
| What we've heard/read about Softbank and companies like
| WeWork definitely sounds like they were turning what should
| have been smaller investments into larger ones, because they
| needed to find a home for so much capital.
| f430 wrote:
| > As a thought experiment, assume that the abundance model is
| here to stay
|
| this is a dangerous assumption. The feds are poised to raise
| interest rates this year and it will have ripple effects, in
| particular the abundance period of capital is slowly being
| reigned in to avoid a loss of faith in the dollar and slow down
| inflation.
| mdorazio wrote:
| > and slow down inflation
|
| What inflation? CPI has been absurdly flat for years, despite
| all the QE and pandemic relief funds. Inflation is only showing
| up in property and securities.
| ajsharp wrote:
| Not sure where you're getting this, but the Fed has already
| signalled ZIRP through 2023, and there is little to no
| inflation showing up in headline measures. Medium to long term
| rates will likely rise this year, but historically cheap
| capital is likely here for a few years at least.
| mbesto wrote:
| For the people in this thread who are unfamiliar with the current
| capital markets:
|
| There is roughly 2.5T dollars in dry powder (uncalled capital).
| In laymen's terms this means there is currently 2.5T dollars
| sitting there not being deployed and $830B of this for PE Buyouts
| alone. It looks like VC is ~$300B. In other words, investors
| can't spend allocated money (from LPs) fast enough.
|
| https://www.bain.com/globalassets/noindex/2020/bain_report_p...
| -> Figure 1.12
| siruva07 wrote:
| From the title of the post, I thought he launched his own VC
| firm. FWIW It's a good name.
| cvaidya1986 wrote:
| Agreed on most points. I'd add that some investors such as a16z
| or YC add way more value by acting as partners so there is such a
| thing as more 'valuable' capital.
| nikanj wrote:
| Prominent VCs like to spread this message. I'd take it with a
| healthy pinch of "remember who's bringing the news". Obviously
| the people offering less money are trying to sell the idea that
| less money is somehow more valuable.
| borski wrote:
| Honestly, as a founder...it is. Dumb money is, in effect,
| pretty useless, whereas 'smart money' comes with additional
| benefits (provided you and the partner get along, etc.). It
| isn't guaranteed, but we leaned _heavily_ on our investors
| for advice and help, especially in those times when we were
| either at a crossroads or dealing with a situation we had
| never seen before (b2b enterprise contracts when all our
| customers were SMB, etc.).
|
| Some of them were also helpful just as the equivalent of
| 'executive coaches.' Being in the weeds constantly means it's
| hard to be objective sometimes. Good VCs and good angels are
| usually experienced and helpful, even if the incentives
| aren't perfectly aligned. They mostly are though; growth
| helps both the VC and the founder, so in that sense they're
| aligned.
|
| But when deciding how big your option pool should be, your
| incentives are no longer directly aligned. :)
| playeren wrote:
| Isn't that the case for most reputable VCs? Marketing your
| product, identifying synergies in portfolio companies,
| recruiting opportunities and so forth? Or are a16z & YC in a
| class of their own in that regard?
| borski wrote:
| It's true for any of the tier 1 VCs. YC and a16z (and others,
| like SV Angel) have some of the highest reputations in this
| regard, though.
| ihm wrote:
| It's tautological but worth noting: capital is abundant for
| projects which VCs as a class are already eager to fund. If you
| have an idea which does not appeal to VCs, capital is not
| abundant for you.
| zuhayeer wrote:
| With all the noise around NFTs right now, my immediate thought
| was "Hmm so treat companies like NFTs, where investors bid on
| price"
| corry wrote:
| Perhaps I'm a minority, but I got A LOT of value from my
| investors (both pre-seed, seed, and series A). To the point where
| I'd consider them core partners in my journey of building the
| business.
|
| I know Aaron isn't saying that the investors don't matter.
|
| But when I think about why VCs hate going through an auction-like
| process, at least part of it is human nature. Like, we're about
| to work together for a long time. Let's not start off by
| commoditizing what we each bring to the table. I understand the
| POV that 99.999% of what VCs bring to the table is the literal
| commodity of cash... but if you have good ones, they really can
| help.
|
| In our case, we had multiple term sheets for our Series A so I
| was able to optimize terms and get the partner/fund who I thought
| would add the most value but at "market" on the other terms.
| "Market" being what was on the other term sheets. That seemed to
| work OK as a softer way of actually doing the auction.
|
| The real point in all of this is that if the VC's value-add is
| true, then you shouldn't NEED to discount things because of that.
| If it's real, then they should be happy to pay 'market rate' to
| invest in you, and the impact of their other value will be that
| together you build a better business, which is more valuable to
| them too.
| villasv wrote:
| > To the point where I'd consider them core partners in my
| journey of building the business.
|
| The startup ecosystem in Brazil is probably in a time lag and
| perhaps this is why my experience might not be as insightful
| here. Still, I agree with your comment 100%. The majority of
| our early investors held some relevant experience in our field
| or offered tangibly valuable networking opportunities.
|
| In fact, I think that the abundance of venture capital has the
| effect of flooding the ecosystem with "regular-value investors"
| (those that only have cash to contribute with), so these
| "extra-value investors" that actually partner with you are
| harder to find. And taking the authors suggestion of
| intentionally starting a bidding war further exacerbates the
| problem.
|
| Instead of finding someone with experience and maturity in the
| field you're going to venture into, it increases the odds of
| picking investors that don't really know much exactly because
| they won't realize the bid was getting too high. By design
| you're trading knowledge for higher expectations.
| borski wrote:
| Sure, but that's not how negotiation works; both parties are
| trying to get as much out of the deal as they can, assuming it
| beats both parties' BATNA.
|
| Also, that you had multiple term sheets means you... ran an
| auction. It's wonderful that most of the terms were similar,
| but getting multiple term sheets is effectively generating a
| bidding war. You don't have to pick the one that is monetarily
| best (we didn't, because we preferred the partners), but that's
| why you're doing. :)
| corry wrote:
| Well, if we're defining "auction" to mean anything with
| competing options -- rather than its typical usage, which is
| price-only competition of something rather commodity-ish --
| then sure.
|
| My process had elements of an auction - using competing
| options to determine "a market price" for various terms. BTW
| - the VCs also had that, in that they could have put that
| same capital to work in other companies vs mine.
|
| But that's not a pure auction. i.e. there's still room for
| qualitative choice and optimization on both sides. This
| should be most obvious to you in the non-monetary terms and
| how difficult it would be to translate into $ terms (for
| instance - how many seats on the board? How much lower/higher
| of price makes sense for more/fewer board seats? Well, for
| starters, it would depend on which VC is asking and what
| stage the biz is in). Clearly these aren't pure auctions.
|
| Because (back to my original point) this is possibly a 10+
| year partnership you're getting into (longer than many
| marriages).
|
| A good process is more equivalent to (1) speed dating, which
| leads to (2) a handful of non-exclusive longer dates, (3) a
| period of exclusivity (no-shop) and 'meeting the family'
| (diligence), and then possibly, finally, (4) marriage.
| nitsky wrote:
| When I saw the headline of this article on HN, I assumed Aaron
| Harris was starting a new venture capital fund called "Abundant
| Capital" after leaving YC. How ironic that the article is about
| how "new funds... seem to launch on a daily basis"!
| cs702 wrote:
| I agree, _at present_ , capital is abundant. That is, at the
| moment: S(capital available) > S(investment
| opportunities)
|
| And this imbalance of demand for and supply of investment
| opportunities is showing up everywhere as... _asset price
| inflation_.
|
| You can see it in rising angel valuations, rising early-stage VC
| valuations, rising later-stage VC valuations, rising growth-
| equity valuations, rising leveraged buyout valuations, rising
| stock market valuations, rising cryptocurrency prices, rising
| home prices, etc. Feeding frenzies and bidding wars for high
| quality assets have become more and more common. Asset prices
| keep going up and up and up...
|
| The _multi-trillion-dollar_ question:
|
| Is this _sustainable?_
| akharris wrote:
| I'm not sure that any founder should make a decision based on a
| future prediction of sustainability. Each founder should make
| decisions based on the environment he encounters when making a
| decision.
|
| In this case, the imbalance has existed for years and is
| getting more pronounced. My thoughts here are based on that
| dynamic. If this changes, then I'd likely change the advice.
| SandersAK wrote:
| Where do I sign up to LP for the AKH firehose fund?
| borski wrote:
| Importantly, the imbalance _has_ changed, and the valley has
| not seemed to hold a grudge. There have been shifts during
| the recessions, and certainly after the 2000 bust, but it 's
| a fact of life: the power dynamic sometimes changes, and the
| best deal you're able to get at the time is the deal you are
| going to get.
|
| It's not entirely unlike mortgage rates, tbh; when you refi
| matters, due to the rates being variable. When you raise also
| matters, but sometimes raising is the important part, and the
| terms are the terms.
| throwz3123 wrote:
| This sounds awfully a lot with stagflation.
|
| How can money which can't be spent hold value?
| nostrademons wrote:
| Of course not, but that doesn't matter if a.) you can get out
| before the top or b.) the world will have changed by then in a
| way that makes your _current_ position worthless or c.) there
| is no alternative.
|
| Right now all three of those are true, to varying degrees. If
| you correctly called the top in 2007 and got out of the market,
| it wouldn't matter unless you got back in before 2012. As
| someone who lived through those years - at every point during
| that period, there was a _loud_ chorus of voices saying that we
| were about to have a double-dip, prices didn 't really correct
| far enough, and fair value indicated they should've gone back
| to where they were in 2002-2004.
|
| Remember that if you're in cash, you've chosen to put your
| wealth in an asset class whose controlling authority's _stated_
| policy is to make it worth consistently less every year.
| grey-area wrote:
| Everyone in every bubble since the beginning of stock markets
| has thought:
|
| a) _They_ were getting out before the top, they 'd sell to
| some other poor fool when it was time
|
| b) The world had changed completely and it was a new paradigm
| (it's different this time!)
|
| It's wise to avoid cash in the long term, but it's unwise to
| avoid it completely, and certainly when you sense things are
| getting a little crazy, it is not at all unwise to shift some
| of your holdings to cash, though you'll be mocked for it by
| many, for whom risk is a distant prospect which happens to
| some other poor sucker.
| andi999 wrote:
| Well, one thing is different. No inflation in commodities,
| since China is offsetting it by cheap production. This
| allow the central bank to keep interest low, which leads to
| high inflation in assets.
|
| So depending on what the central bank will do, cash might
| be good or not.
| grey-area wrote:
| Copper is seeing massive inflation right now. Retail
| prices are not as yet, and perhaps they won't, but if
| they see too much interest rates will rise and the free
| money spigot will be turned off.
| mbesto wrote:
| > Copper is seeing massive inflation right now.
|
| An asset that isn't used as a medium of exchange does not
| have the characteristic of _inflation_. An asset can have
| an _inflated_ price (in a currency) but the asset itself
| (in this case copper) cannot have _inflation_ if its not
| used as a medium of exchange. The distinction is
| important.
| grey-area wrote:
| How would you best describe the price rises in copper and
| copper miners? Just copper prices are going up right now?
| nostrademons wrote:
| Commodities are going crazy:
|
| https://www.cnn.com/business/markets/commodities/
|
| Crude oil, natural gas, silver, corn, wheat, lumber, all
| up 2-3x since the bottom in April. In many cases (i.e.
| everything not oil-related), this is not just recovery
| from a dip: prices are significantly higher than
| 2017-2020 levels.
|
| That said, I don't buy the conventional Wall Street
| narrative that this means the Fed'll raise rates and
| we'll get a stock market crash. Or rather, I believe
| that'll happen, but it'll be too late and the currency
| will have devalued 10x or more by then. The Fed has
| pledged to keep rates low through 2023, and to allow
| inflation to overshoot the 2% target to make up for the
| last decade of ~1.5% inflation rates, and that any rate
| movements will be "well telegraphed" for a long period of
| time beforehand. They still have tens of millions of
| people out of work. I doubt they'll act until it shows up
| in headline CPIs for a year or two.
|
| Once inflation rates really get going, it's hard to tamp
| them down. The Fed has a pretty fun (and quite
| educational) game where you get to play the Fed chair:
|
| https://www.sffed-education.org/chairthefed/default
|
| Try playing one of the inflationary scenarios (they're
| random, but just keep playing till you get one with a
| tight labor market rather than a housing crash or
| recession). If you don't raise rates early and often, you
| quickly get into a situation where inflation is 7-8% and
| you have to hike rates to 15% or more to tamp it down.
| Why? Because inflationary expectations are subtracted
| from the nominal interest rate to get to the real
| interest rate. If inflation is high, you have to hike
| nominal rates _even higher_ to get real rates to go up at
| all, and you have to hike real rates pretty high to make
| a meaningful dent in the money supply.
| ac29 wrote:
| > that'll happen, but it'll be too late and the currency
| will have devalued 10x or more by then
|
| Im curious why you think inflation in the US is going to
| go from <2%, not to 3, or 5, or 10%, but to 1000%?
| nostrademons wrote:
| Because in the absence of quick intervention (i.e.
| Volcker), it's a feedback loop.
|
| The basic money equation from macro-econ 101 is MV = PQ:
| money supply * velocity of money = average price level *
| quantity of goods sold. Under normal conditions, V is
| assumed to be constant, and so you either increase the
| money supply to keep up with greater economic output (M
| [?] Q) or if you increase it too fast, you get inflation
| (M [?] P). This is "ordinary" inflation: it's
| predictable, controllable by the central bank, and
| follows roughly linear equations.
|
| When people _notice_ and then start to _assume_
| inflation, their behavior changes. If you _know_ that
| your dollars are going to be worth 20% less next year,
| you have an incentive to get rid of your dollars as
| quickly as possible. You 'll spend them as soon as you
| get them, because they'll quickly become worthless
| otherwise. This shows up as an increase in V, and it
| means that _even holding the money supply constant_ , you
| still get inflation (V [?] P). Moreover, because the
| cause of the increased price level was increased velocity
| of money, this feedback loop becomes self-reinforcing:
| the higher prices go, the quicker people want to get rid
| of their money and turn them into hard goods. At this
| point the central bank has lost control of the economy,
| and you have hyperinflation.
|
| Looking at data on a few dozen instances of
| hyperinflation, the threshold seems to be ~20% inflation
| annually. Below this, consumers write off inflation as
| annoying but don't change their behavior significantly.
| Above it, hyperinflation seems inevitable: there are very
| few instances of sustained inflation above 20%/year where
| the government has later managed to bring it down, and it
| usually ends with hyperinflation, a currency crisis, and
| the replacement of the currency (and usually government)
| with a new one.
|
| We've observed price increases > 20% in a number of
| industries this year: commodities (listed above),
| housing, food, and labor is getting up there. It hasn't
| filtered down into CPI numbers because those are
| averages, and inflation is flat or even negative among
| some demographics. But prices in fundamental industries
| tend to bubble up eventually, and if the Fed is focused
| on bringing back the stagnant parts of the economy while
| other areas are raising prices at 50-100%/year, inflation
| will cross that threshold throughout the economy before
| they can react.
|
| (Incidentally, historical incidents of hyperinflation
| usually happen in the transition between a command to a
| market economy, the two most common examples being when
| wartime gives way to peacetime, and when communism gives
| way to capitalism. The transition from a pandemic economy
| to a normal economy has many elements in common with
| that: there's a large shift in consumer demand while the
| economy has been optimizing for pandemic production for
| the last year.)
| nostrademons wrote:
| I agree with your reasoning, but I don't believe things are
| "a little crazy", at least compared with how crazy they're
| about to get.
|
| IMHO, we're at Greenspan's "irrational exuberance" speech
| of 1996. If you pulled out of the NASDAQ in 1996, you
| _never made it back_. (The nadir of the dot-com bust had
| the NASDAQ at 1139 in Sept 2002; it was at 1133 in July
| 1996.) In the meantime you would 've missed out on 4x gains
| in the NASDAQ itself, and up to 100x in certain specific
| assets.
|
| My indicator for when we're near the top of the bubble and
| it's time to pull out is that folks like you will drop out
| of the discussion and start keeping their opinions to
| themselves. That's when it's time to sell; when you're
| ridiculed for it.
| grey-area wrote:
| I do think there are some scary indicators (Value/GDP,
| CAPE, MAPE, calls/puts) which indicate we're farther
| along than that, but yes this could take years to reach a
| top. The GME escapade and the massive rush of retail
| investors into risky assets with perfect indifference as
| to whether they are investing or speculating indicate to
| me we're reasonably close. I have also been ridiculed
| many times over the last year for expressing hesitation
| about current valuations of Bitcoin, TLSA, GME or ARB.
|
| Perhaps you're right though, and this has a long way to
| run... I'm afraid I just can't bring myself to invest in
| things which are overvalued due to FOMO rather than
| actually making money or having a prospect of making
| money. Old-fashioned I know.
|
| The Shiller book on Irrational Exuberance is better than
| the Greenspan movie IMO ;)
| cs702 wrote:
| Agree. I like to think of a), b), and c) as:
|
| a) "epistemic arrogance" -- you believe you're smarter and
| know more than everyone else;
|
| b) "heads, you might win, tails, everyone loses anyway" -- so
| you might as well gamble on heads;
|
| c) "f*ck it, load up!"
|
| And there's also d):
|
| d) "wait it out" -- if you're already rich and infinitely
| patient, like Mr. Buffett. Maybe find a hobby to occupy your
| brain -- e.g., play Bridge online.
| usmannk wrote:
| a) "epistemic arrogance" -- you believe you're smarter and
| know more than everyone else;
|
| No, more like you decide to be less greedy than everyone
| else. You choose to leave money on the table in favor of
| getting out early.
| bobthepanda wrote:
| If you want to not get hurt, b makes this not necessarily
| a good idea.
|
| If you think things are overvalued, there are two ways
| for it to go:
|
| - the value of equities crashes in nominal terms and
| consumer prices are stable
|
| - the value of the dollar itself declines, so that the
| nominal values of equities stay the same but consumer
| prices inflate to make the real value of equities revert
| to the norm
|
| It's probably a mix of a and b, but outcomes that tilt
| more heavily towards the latter would hurt people holding
| cash more. And right now b is closer to official Fed
| policy, since it would prefer that to getting into a
| Japanese deflation trap.
| dr_dshiv wrote:
| Or, you know, try to create value day in and day out :)
| cs702 wrote:
| That's a _given_ -- at least from my standpoint.
| woofie11 wrote:
| I don't think this is a bubble, but expected inflation, due
| to COVID19.
|
| I am guessing we will see cash devalue roughly 2x in the next
| five years. As a result, there's a scramble where to put
| money safely.
|
| If the alternative -- cash -- loses half of its value once
| COVID19 financial measures start unwinding, all of a sudden,
| investments just need a 50% ROI to be profitable. If I dump a
| million dollars into a startup, and it sells for the
| equivalent of $500k in five years ($1M after inflation), I've
| come out neutral.
| lotsofpulp wrote:
| >Remember that if you're in cash, you've chosen to put your
| wealth in an asset class whose controlling authority's stated
| policy is to make it worth consistently less every year.
|
| We might as well consider VTI to be better than FDIC insured
| on a 5+ year timeframe. FDIC only protects nominal values.
| The Fed can protect real values.
| dv_dt wrote:
| If it is sustainable depends on the quality of investment
| returns. But that phrase abstracts a lot - the quality of
| things/services/business produces for that investment need to
| lead to new or improved productivity in economic activity.
|
| It also may take a longer time frame for the improved
| productivity to manifest than it does for the economic metrics
| to reflect it. Meaning that one thing to watch out for is that
| the capital abundance may recede before the investments are
| able to return the productivity - and that would be tragic
| because there are an abundance of neglected investment areas
| which we as a society and an economy can realize benefits. To
| the extent that our capital investment allocation paths don't
| match societal needs is the real challenge with this bubble.
| jasode wrote:
| _>... asset price inflation. [...] Is this sustainable?_
|
| No but society has basically locked us all into it. I made a
| previous comment on why devaluing the currency causes a
| worldwide game theory of economic actors _protecting their
| purchasing power_ to counteract it:
| https://news.ycombinator.com/item?id=15728480
|
| Can we reconfigure society? It doesn't seem like it. Some
| critics today think that Bitcoin's limit of 21 million to
| support its philosophy against inflation is _wrong_.
|
| Hey, maybe it isn't society that wants inflation but it's the
| US Govt and/or The Fed Reserve forcing it on us. Well, surveys
| say the majority of Americans want $2000 stimulus checks so
| that money has to come from _somewhere_. It 's easier for
| politicians to _print new money_ rather than sell Yellowstone
| Park to China for a few trillion dollars.
| loceng wrote:
| It seems that capital is only abundant through the VC-finance
| industrial complex, relative dumb money from LPs who buy into
| whatever thesis a VC firm constructs, and then those VCs will
| relatively poorly make decisions - only expecting the success
| of 2-3"unicorns" to pay off their losses and make all their
| profit - meanwhile that forces, applies pressure to all of
| their investments to charge more than they may otherwise need
| to, and use tactics that may not be great, and then that leaves
| them open to be competed against, disrupted; mind you, their
| ideal scenario/exit is to IPO and pass that risk off onto
| society in general. I am trying to combat this with the design
| decisions for my projects, we'll see if I succeed or if it has
| any impact.
| s17n wrote:
| The root cause is increased wealth inequality. "Capital" is
| assets that are invested by their owner instead of just
| immediately consumed. So, the amount of capital that exists is
| variable, depending on the preference of asset owners, which is
| a function of the rates of return they can expect, as well as
| the utility of consumption. So its backwards to to say "rates
| of return go down because there's too much capital" - what's
| really happening is that a lot of assets are held by people who
| are so rich that the marginal utility of additional consumption
| to them is essentially zero, which in turn means that they are
| willing to invest their assets until the rate of return is also
| close to zero.
| nly wrote:
| Interesting concept. Do you have any links to research or
| theories about this way of looking at it?
| s17n wrote:
| Nah, just made it up, it's probably total crap
| danans wrote:
| Even if you made it up, your comment is basically
| describing the diminishing marginal utility of wealth. ht
| tps://www.economicshelp.org/blog/12309/concepts/diminishi
| n...
|
| https://www.investopedia.com/ask/answers/072815/what-
| margina...
|
| The net effect is that consumption (and associated
| demand) is suppressed at the lower to middle end of the
| income scale, where individuals' income isn't enough to
| sustain their needs + wants. When these individuals
| spend, the demand for labor + raw materials per $ spent
| is high, because they are often buying consumables or
| durables (food, washing machines, etc).
|
| At the high end of the income/wealth distribution, there
| are few needs that aren't met or exceeded, so their
| wealth ends up chasing assets and investments that induce
| far less demand for labor per $ invested. A the extreme
| end of this are private equity funds (billions managed by
| a small number of people).
| A12-B wrote:
| Ironically, whoever answers the question probably wont be paid
| trillions of dollars. That is because the most likely answer to
| the question is that it is not sustainable, meaning there's two
| options: we switch to a non-capital system, and they don't get
| paid, or everyone chooses to ignore them and they still don't
| get paid.
| idlewords wrote:
| If you're new enough to computerworld that you've never been
| through a downturn (and it's been a long time!), then take note:
| this is what a crazy asset bubble looks like. This is what 1998
| felt like.
| rmonroe wrote:
| This article raises some awesome points. As a founder who is
| going through a seed round right now, I'm working hard to
| optimize our own fundraising process. Aaron refers to a plethora
| of resources for effective fundraising, but it's often hard to
| identify experts from rabble.
|
| Has anyone already curated a list of quality resources? I would
| be greatly appreciative!
| mritchie712 wrote:
| I felt this pain when looking for debt so I put together a
| curated list of non-dilutive capital providers [0].
|
| Capital is abundant, but it's also pretty easy to dilute
| yourself into single digit ownership.
|
| 0 - https://www.trypaper.io/
| akharris wrote:
| There's good stuff on YC's Startup School Library:
| https://www.ycombinator.com/library?categories=Fundraising%2...
| borski wrote:
| read all of Venture Hacks, seriously. Trust me, you won't be
| disappointed: https://venturehacks.com/archives
|
| [edit] It's a bit dated, but the points and lessons are
| timeless. The 'norm' has changed (SAFEs are more common over
| convertible notes now, for example), but the rest is still
| accurate.
| josephjacks wrote:
| This is horrifically BAD advice. Shopping a TS to a few folks is
| not an unwise thing to do, but running a full-blown auction
| absolutely is!
|
| Founders: If you want to ONLY optimize for max price + max check
| size, the "partners" you bring into your business are bankers.
| borski wrote:
| You missed the point; Aaron wasn't saying to always optimize
| for price and take "dumb money." His point was that founders
| today have a choice, and that choice is important, and worth
| recognizing. Because of the (present) imbalance of power,
| founders _can_ be more aggressive with their fundraising. That
| isn 't always true, though.
| josephjacks wrote:
| I hear you... but this "run an auction" narrative he's
| proposing is very dangerous if implemented in any way close
| to actual auctions.
| hamhamed wrote:
| I don't know about abundance. Maybe Aaron has confirmation bias
| being around the industry so closely. Or maybe other founders
| here can tell me otherwise. From my side, I can't vouch for an
| over abundance of capital.
|
| It's been a year we're trying to close our round, missing 350k
| from the $1M round and yet still growing 30% MoM. Yes covid
| fucked our business in a sense, and we got hit since March - but
| we remain ever so bullish esp given our sustaining growth.
| di4na wrote:
| That is the access problem he talks about in the notes. He is
| right. All the number that we see from the industry shows that
| there is a fuckton of capital. But it is _really badly_
| distributed. That is probably a far bigger problem right now
| and one that need to be solved if this industry want to
| maximise impact.
|
| There are interesting things happening in that space, but they
| are still at the fringe.
| corry wrote:
| I made a comment further down that your comment jives with.
| It's the idea that abundant capital doesn't necessarily mean
| it's evenly distributed through the various stages. In
| particular, seed stage seems not to have seen the effect yet.
|
| Hard data on aggregate seed funding through the years would be
| interesting.
|
| Also - hang in there! 30% MoM is no joke, sounds like you've
| done one the hardest things (made something people want).
| pge wrote:
| To add another nuance here - the other issue to consider is the
| power-law nature of VC returns (meaning a small number of
| investments disproportionately contribute to returns). Given that
| dynamic, funds are eager not to miss out on those big winners.
| The supply of companies that look like they have that potential
| is less than the available capital can fund, so to those
| companies, capital looks very abundant. Companies that do not
| appear to have that potential may not experience the same
| abundance of capital. The challenge for funds is identifying the
| signifiers of potential outperformance, and it seems to me that a
| lot of funds are looking at the same indicators (whether or not
| they are the right ones) which makes for a feeding frenzy on
| those companies.
| lumost wrote:
| From a fund perspective doesn't this eventually lead to the
| softbank model? where winners are _made_ through overwhelming
| capital.
| kkotak wrote:
| Completely agree. Capital is used to make Kings. Companies
| like Uber, Lyft, WeWork - won't exist without this. As for
| quality of the founders, I think, with enough money (and loss
| appetite), a mediocre team can execute well on an decent
| opportunity.
| borski wrote:
| It is hard for an incredible team to execute well on a
| decent opportunity, even with ample capital; the 'it is
| trivial once you have money' trope is just that, a trope.
| Money does not make a company successful; financing helps
| along the route, and helps allow the founders to take
| bigger risks (with hopefully similarly outsized rewards),
| but it does not execute for the founders. That part is
| still on the founders, and is still the most important part
| of any startup bet; 'can they raise future capital' is
| certainly a factor in the decision, too.
| borski wrote:
| It can, but that implies capital is the only thing required
| for good execution, and we know that's not true (as we saw
| with some of the Softbank failures).
|
| However, if you need to make a bet, you make a bet, because
| for a VC fund, the small chance of an outsized return (that
| can return your fund) is better than a more likely chance of
| a 'decent' return, so you often make a bet and double down
| while it still seems viable.
|
| There's a reason Lyft kept getting funded even when Uber
| raised significantly more.
| technotony wrote:
| > [3] When a company IPOs, it opens ownership up to anyone who
| can afford a share. Imagine, for a second, an investor arguing
| that this is a sign of low quality.
|
| I thought this note was important, this is precisely what
| investors signalled when startups started being able to crowdfund
| equity under Regulation CF.
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