[HN Gopher] Rise of 'zombie' VCs as startup valuations plunge
___________________________________________________________________
Rise of 'zombie' VCs as startup valuations plunge
Author : SirLJ
Score : 87 points
Date : 2023-02-16 12:17 UTC (10 hours ago)
(HTM) web link (www.cnbc.com)
(TXT) w3m dump (www.cnbc.com)
| ttul wrote:
| We saw this after the dot com crash and the GFC too. VC offices
| became sad places. Lots of meetings but no deal making. It's
| during this downturn phase of the cycle that the 2% management
| fees charged by VC funds seem truly excessive.
| bischofs wrote:
| Is this recession going to be like the commercial production of
| fusion energy? Always around the corner despite nothing
| indicating we are anywhere near a recession.
|
| Keep in mind it's hard to have a recession when unemployment is
| in the 3s, and there is still high demand for products and
| services across the economy. But I guess if we really want to
| have a recession we can.
| canadiantim wrote:
| All the layoffs aren't an indication we're nearing a recession?
| Yes unemployment is currently low but I see that turning around
| in a big way imminently
| [deleted]
| taylodl wrote:
| Layoffs are only in tech, which not coincidentally had been
| on a hiring spree since the start of the pandemic. Now
| they're scaling back.
|
| The rest of the economy appears to be doing just fine.
|
| Since tech has had many years of growth while the rest of the
| economy has suffered don't expect much sympathy for laid-off
| tech workers.
| majormajor wrote:
| The layoffs too date are much smaller than the Covid-era
| hiring. Certainly a bit of a correction. But otherwise
| spending and jobs overall are still strong. So... which way
| will it go?
| JohnFen wrote:
| > All the layoffs aren't an indication we're nearing a
| recession?
|
| No. The layoffs are really just in tech, and a fairly
| specific subset of tech companies at that. They are happening
| as a result of poor hiring decisions those companies made
| (hiring too many people).
| Ataraxic wrote:
| Layoffs in tech. Not hearing much about other parts of the
| economy. Totally possible I haven't seen the reporting but
| I'd argue that tech/growth industries suffering layoffs don't
| really indicate a recession by itself even if they are large.
| vkou wrote:
| You're not missing anything. The Fed is on record that the
| economy is doing great, unemployment in the economy as a
| whole is non-existent, so it's going to continue raising
| interest rates. When your CEO tells you that we're in a
| tough economic climate, what she's actually saying is that
| we're in a tough monetary policy climate. The economy is
| (currently) fine.
|
| Expect the pain in tech to get worse, much worse, before it
| gets better.
|
| ------
|
| PS. Facebook is on round 2 of layoffs.
| disgruntledphd2 wrote:
| > PS. Facebook is on round 2 of layoffs.
|
| Not quite yet, but certainly by mid-April.
| [deleted]
| pc86 wrote:
| The majority of the layoffs are from profitable companies and
| they're still at or above 2020-2021 headcounts.
| strangattractor wrote:
| VC's definition of recession:
|
| The transitional period when the current next big thing you
| previously invested in is not delivering and has been replaced
| by a new and shiny next big thing with higher predicted
| returns.
| aliqot wrote:
| VC is a fading model. Might be rude to say it here, but at least
| call it what it is. Money costs more than ever, why take on that
| stress?
| Jommi wrote:
| What's the next model?
| CyberDildonics wrote:
| > Money costs more than ever
|
| The Fed funds rate, which is the rate banks charge each other
| for overnight loans, hit 20 percent in 1980, and 21 percent in
| June 1981.
|
| https://www.loanatik.com/827-2/
| aliqot wrote:
| Finance does not exist in an idempotent vacuum
| CyberDildonics wrote:
| Did you take that to mean that every other interest rate
| was low at the same time? Mortgage rates were over 18%
|
| You're the one making a claim with nothing to back it up.
| nickdothutton wrote:
| Kids, remember to ask: 1) When did you last make a new
| investment, not a follow on? 2) When did you last raise a fund
| and how far through are you with your current fund? 3) How many
| new deals did you do in the last 12 months? 4) Which partner was
| the last one to lead a new investment. I joined a VC shortly
| after the dotcom crash and yes there were quite a few zombie
| funds around, even a few LPs attempting to sue for the return of
| those funds dry powder. Very few remained truly active.
| teetertater wrote:
| Something I've personally noticed: Zombie incubators. Seems like
| only a single incubator survived the pandemic in my city
| robocat wrote:
| Surely the vast majority of incubators fail? Running an
| incubator is high status so it attracts peacocks not busy
| beavers, plus it is an extremely difficult business to be
| successful at. The incubator in New Zealand that I had
| experience of was government funded, so that incubator also had
| perverse non-financial incentives. A bit more on my opinion of
| the problems with being a company at an incubator:
| https://news.ycombinator.com/item?id=30130572
| brmgb wrote:
| TLDR: With interests rising and growth slowing down, it's getting
| harder for VCs to find capital. Therefore, some funds have
| stopped investing in new companies and are just managing their
| existing portfolio. These funds will most likely slowly wind down
| their activities and shed employees as the size of their
| portfolio dwindles.
|
| Unclear to me how it's an issue for investors however.
| [deleted]
| skeeter2020 wrote:
| As I commented independently, I'm not sure how this isn't both
| expected and a good thing.
| HDThoreaun wrote:
| I think the issue is that the VC funds are sitting on billions
| of unallocated capital with interests rates at levels not seen
| in decades. LPs might want their money back for that sweet risk
| free return but VCs aren't going to return even though they're
| not investing it either.
| [deleted]
| epoch_100 wrote:
| If the VCs haven't made a capital call, then that unallocated
| money is likely still sitting with the LPs collecting that
| sweet risk free return.
| [deleted]
| [deleted]
| Zetice wrote:
| It's just weird, because fundraising is hitting record levels,
| but funding is dropping. [0]
|
| So there's a lot of "dry powder" (I hear that phrase _constantly_
| to describe the situation) just sitting there, doing nothing.
| What are the VC funds preparing for? What are investors being
| sold on?
|
| Given all the tech layoffs, my bet is there will be a whole lot
| of new startup growth coming soon that will "ignite" that dry
| powder.
|
| [0] bizjournals.com/sanjose/news/2023/02/15/despite-us-
| fundraising-activity-hitting-record-h.html
| rcme wrote:
| There is a crazy amount of dry powder in the U.S. financial
| system. A lot of the money printed during the pandemic is just
| sitting there, growing at ever-higher risk-free interest rates.
| boringg wrote:
| Quick reminder here. Money sitting at banks in "risk free"
| interest rates is losing money in real terms. There arent a
| lot of good investments in the market right now especially
| when adding inflation costs.
|
| I highly doubt your described situation exists.
| rcme wrote:
| It's only losing money in "real terms" if you use CPI.
| Given that VCs aren't buying cars and televisions, that's
| not an appropriate measure of inflation to use. Tech
| valuations have been falling, so the assets purchased by
| VCs (equity in tech companies) is deflationary.
| boringg wrote:
| Walk me through this. How is money losing buying power
| not related to this? 3% gain on something that cant buy
| as much in the future is still a loss. It is relavent
| rcme wrote:
| VC money is not losing buying power. Think about it like
| this: what is inflation, exactly? It's actually pretty
| hard to measure and the answer depends on what you're
| spending your money on. The Fed uses CPI as a proxy for
| inflation as felt by the average consumer. CPI uses a
| basket of goods and services as a measure, but really
| it's just an estimate. For instance, CPI might be 6.5%
| YoY, but if you run a restaurant, where food is a major
| expense, you're feeling inflation at something like 10%
| YoY.
|
| Now let's consider VCs. Like a restaurant, VCs spend
| money in a way that doesn't align with the basket of
| goods / weighting used for CPI. VCs spend most of their
| money on equity in tech companies. Equity in tech
| companies has actually gotten cheaper. Here is a concrete
| example: Stripe was valued at $95 billion in 2021. In
| order to buy 1% of Stripe, you'd need to spend $950
| million. Now, Stripe is valued at $60B. You can buy 1% of
| Stripe for only $600 million. That's deflationary.
| boringg wrote:
| You haven't gone through the full thought experiment.
|
| I agree tech valuations have imploded. This is a function
| of equity being predicated on expected returns in the
| future. Many reasons for tech valuations imploding - part
| of them -> cost of salaries to match CPI and cost
| trimming from other companies as inflation hits their
| bottom line and product sales aren't as robust.
|
| In your example the valuations are on the private market
| and do not replicate what the public market would pay for
| them because the expectations on returns are out of whack
| with reality. VCs bought into their own hype and started
| thinking that they would get absolutely bonkers returns
| on companies that have no ability to get the returns
| required to drive those valuations.
|
| This reality is because all of a sudden there is interest
| rates in the market and other returns elsewhere to be
| gained and that interest free money is gone.
|
| VCs might have better buying power of what portion of a
| company they can buy however the expected returns are no
| longer in the same ballpark as they were. As a function
| of inflation their exit from investments looks far worse
| than it did a short time ago. However what VCs are buying
| is future returns not necessarily company size. So if you
| can buy more of a company on lower returns it isn't far
| different from less of a company on higher returns.
| rcme wrote:
| Just like inflation can be caused by many things, e.g.
| supply chain disruption and money printing, deflation can
| also be caused by many things, including interest rates.
| In fact, isn't that what the Fed wants? To lower
| inflation / cause deflation via higher interest rates? So
| yes, I agree with you: a large part of the deflation is
| caused by interest rates, but that's still deflation
| nonetheless.
|
| > So if you can buy more of a company on lower returns it
| isn't far different from less of a company on higher
| returns.
|
| There is a big difference when you're in a highly
| deflationary environment. Inflation and deflation can
| cause price spirals. In periods of high inflation, people
| rush to spend money because it's losing value daily,
| which causes prices to go even higher. In periods of
| deflation, the opposite happens: people hold off on
| spending causing further price drops. VCs are holding
| cash and not investing much of it because of deflationary
| expectations. This is causing valuations to drop even
| lower.
| boringg wrote:
| Equities are coming back to reality while the
| underpinnings of businesses are being hit by inflation.
| The equity coming back down is a function of the
| inflation. VCs aren't investing because the returns on
| the companies look particularly poor in the current macro
| and in a macro that has interest rates as opposed to free
| money.
| rcme wrote:
| I think we're saying the same thing with different words.
| I'm saying that tech equity is deflationary. You're
| saying the price of tech equity is going down. Those are
| equivalent statements. The reasoning isn't that relevant.
| What is "macro economic outlook" other than an
| expectation about the future price?
| majormajor wrote:
| VCs are in a particular sort of situation though where
| those assets getting cheaper strongly impairs their way
| of producing returns for their investors.
|
| Depending on when valuations start to slide, and whether
| or not they ever start to accelerate like they did at the
| latter half of the last decade, they could get called in
| to a lot of hard conversations about "if you're not using
| my money, give it back."
|
| If you're a VC you want to be raising new funds from your
| investors for the next wave of startups, you don't want
| to be unable to find promising investments for your
| current funds. You're not gonna be able to raise again in
| the future in that case.
|
| AKA a "zombie."
| celestialcheese wrote:
| I don't know about pandemic checks causing this, but VC's
| have a huge amount of undeployed capital from the boom of
| 20/21. https://www.theinformation.com/articles/venture-
| firms-290-bi...
|
| There's a lot of money specifically allocated to venture
| funds that needs to be deployed.
| candiddevmike wrote:
| I have a US based startup looking for dry powder but lack any
| connections to VCs, how do I get ignition?
| strangattractor wrote:
| No self respecting VC can miss out on ChatGPT mania. Take
| whatever you are doing and reframe it as a ChatGPT
| application. This will get their juices flowing almost
| immediately (see Pavlovian response). Make sure you do not
| demonstrate an actual implementation however because reality
| may intervene in their thinking and prevent closing the deal.
| Finally prepare for a future pivot.
| ghiculescu wrote:
| This comment is a good start. I sent you an email.
| :rocket_emoji:
| SkyMarshal wrote:
| One option is create an Angel List account and use its tools
| to connect with investors. https://www.angellist.com/
| smt88 wrote:
| If you're cashflow positive (or on your way), you won't need
| connections. They'll just take the meeting.
| [deleted]
| gurumeditations wrote:
| I wonder if anyone has insight into Tilt5 with Jerry
| Ellsworth. I hear complaints that they can't raise
| constantly despite being a healthy profitable business.
| sitkack wrote:
| I was always told that revenue and profit is bad for
| valuations. Profit is for lifestyle businesses.
| lazide wrote:
| That's when it's 'oh crap, go go go' on the investor
| side, because the startup owners can't play as many games
| with valuations.
|
| When the investors are picking and choosing, they usually
| want to see that you have some ability to deliver.
|
| It does make it harder to raise funds on vapor.
| SkyMarshal wrote:
| Possibly b/c it locks in a real valuation and prevents
| playing valuation games with future expected
| MAU/cashflow.
| strangattractor wrote:
| Ask the Magic 8 ball: What over hyped tech will be invested in
| next? Answer Magic 8 Ball: Large Language Model Chatbots silly.
| recuter wrote:
| > So there's a lot of "dry powder" (I hear that phrase
| constantly to describe the situation) just sitting there, doing
| nothing. What are the VC funds preparing for?
|
| The Fed is reducing its balance sheet to zero and the boomers
| are retiring. Some might argue it is a return to
| sanity/normalcy and you will have fewer money guys to plow
| enormous sums into juiceros and FTXs going forward.
| fakedang wrote:
| Dry powder is a term that predates VC. It's fairly common in IB
| and PE too. Essentially ready cash that is looking to be
| deployed.
| Kon-Peki wrote:
| In the old days, you had to load [gun]powder into your weapon
| along with the projectile. Dry powder burns hotter and
| faster, shooting your projectile farther, faster, straighter,
| and deadlier.
|
| Also in the old days of naval warfare, if you won a battle it
| was accepted that the other ship (what was left of it) was
| your prize. Everyone in the chain of command had a predefined
| percentage of the ownership, with an eighth or so divided
| evenly among the common sailor. This ownership stake was
| converted into cash either by your own government or a
| private prize broker depending on the circumstances.
|
| An exceptionally successful deployment would leave the common
| sailor with enough money to retire; the captain of the ship
| might even become fabulously wealthy.
|
| But anyway. Keeping your powder dry on the way to the battle
| is important if you want to win, get your prize, and retire
| from all that cash.
|
| I think a lot of VC and IB take the metaphor way too
| seriously, but you can see how many parallels there are!
| monero-xmr wrote:
| To be a partner at a VC firm you used to have to be a successful
| entrepreneur. Now a degree from Stanford and two years as a PM at
| a YC company seems to be the bar for getting on the VC track. I
| have been very underwhelmed with my conversations with many
| people who decide where to invest hundreds of millions of
| dollars.
| yamtaddle wrote:
| The more exposure I've gotten to "impressive" organizations and
| individuals, the more convinced I've become that competence
| isn't any more common at all as one goes up the chain. Not less
| common! Some of them really are bright & have a level head! But
| also not more common.
|
| It's kind of heartening to realize that the world's mostly run
| by the incompetent--they're really not any brighter than you or
| me, and blissfully-ignorantly commit obvious errors or behave
| irrationally all the time. You could do it too! Why not, a
| bunch of them are idiots. But it's also horrifying.
|
| Whatever "meritocracy" we supposedly have, as far as I can
| tell, is a total fiction. _Some_ good, capable people rise, but
| enough bad ones also do that the proportion 's not really any
| better the closer you get to the top.
| enraged_camel wrote:
| >> Whatever "meritocracy" we supposedly have, as far as I can
| tell, is a total fiction.
|
| Worth noting that the term "meritocracy" was invented as
| satire: https://kottke.org/17/03/the-satirical-origins-of-
| the-merito...
| chasing wrote:
| I mean, in tech it's often a "meritocracy amongst those with
| privilege." If you ain't in the club, you're not getting in
| based on "merit."
| EGreg wrote:
| Steve Jobs said this 40 years ago:
| https://m.youtube.com/watch?v=kYfNvmF0Bqw
| ignoramous wrote:
| Read also: _There 's no speed limit_ (sivers.org),
| https://news.ycombinator.com/item?id=3761013
| JohnFen wrote:
| > competence isn't any more common at all as one goes up the
| chain
|
| 100% this.
|
| That's why the old saying "everyone puts their pants on one
| leg at a time" exists. However fancy the image, however
| impressive the title, the person behind it is no more likely
| to be exceptional than any other random person.
| andirk wrote:
| In American politics, one truly fails UP. Being an honest,
| decent human being is seen as a negative and probably in part
| because it is a threat to the rest of the scumbags. But I
| believe that some highly trained scientists who are at the
| top of their respective fields are there because they're the
| best of their breed. Maybe not, but I doubt the good ol boys
| club is that status quo in all industries.
| aaronbrethorst wrote:
| Don't forget the Patagonia vest and a pair of Allbirds.
| MrMan wrote:
| I love those quilted vests a little grey at the temples also
| adds a lot of gravitas
| sitkack wrote:
| Throw in some long pauses, dropping some quotes from
| someone everyone claims to have read and haven't and be 5%
| underweight while having pronounced delts or triceps.
|
| Throw on a pair of Sundar glasses and slip a moleskine
| notebook and a Montblanc Meisterstuck and you are platinum.
| Catalyze those synergies across complimented verticals!
| LargoLasskhyfv wrote:
| Pfft. _Lamy Unic_
| sitkack wrote:
| Nice, the notebook would have to be quadrille. The PhD VC
| angle. You would have to focus on technicals over the
| pure MBA pastiche.
| gamblor956 wrote:
| _be 5% underweight while having pronounced delts or
| triceps._
|
| I don't get that part of the joke. Most VCs are skinny AF
| or quite chubby, but none of them seem to have any
| semblance of muscle mass?
| sitkack wrote:
| It sets the stage that they have a mind over matter level
| of self control, calorie negative longevity diet, self
| measure along with wanted to "blow off some steam" with
| bouldering (a high analytical physical activity).
| gamblor956 wrote:
| Ah that's why I didn't get the joke.
|
| Boulderers don't have large triceps or deltoids...to the
| extant that arms are used in bouldering, it is in pulling
| activities that develop the back, biceps, and forearms,
| not the deltoids or triceps.
|
| You only get large delts and tris without developing
| other muscles by doing excessively long static planks.
| fakedang wrote:
| I shit you not, I often wear a vest that looks very similar
| to the Patagonia jacket, and I've been confused for being in
| the venture industry.
| andirk wrote:
| ok I'm doing this. Can I please get the details on the
| whole ensemble? Blue jeans, maybe no shoes, extremely
| expensive tacky watch? Are we still doing the yellow wrist
| band?
| matwood wrote:
| https://vcstarterkit.com/
| hotpotamus wrote:
| > Is this real? Is there a return policy?
|
| > We believe in risk taking. So should you.
|
| I like the attitude.
| andirk wrote:
| Reminds me of when my friend and I were leaving this pay-
| what-you-want pro-capitalism pop-up exhibit in Brussels.
| At the end, there was a thing asking us to donate. My
| friend said "Let's leave what a true capitalist would
| leave" and I didn't know what he meant until I saw him
| walking out without giving anything.
| cowmoo728 wrote:
| Patagonia isn't cool anymore because they stopped selling
| corporate branded vests. It's Cotopaxi now. Also fashion has
| changed, bright colors and solid shapes are in, Patagonia's
| understated look is out.
|
| https://www.theinformation.com/articles/silicon-valleys-
| swag...
| tablespoon wrote:
| > Patagonia isn't cool anymore because they stopped selling
| corporate branded vests. It's Cotopaxi now. Also fashion
| has changed, bright colors and solid shapes are in,
| Patagonia's understated look is out.
|
| Why? Couldn't some 3rd party put desired logos on, even if
| Patagonia itself wont?
| [deleted]
| greatpostman wrote:
| Why take the risk and hard work of building a company when you
| can get rich risk free (as a vc)
| JohnFen wrote:
| I don't think you can say VCs aren't taking risks. The good
| ones are hedging their bets by throwing lots of spaghetti at
| lots of walls, though.
| mikeg8 wrote:
| VCs invest other people's money from funds they raise, thus
| removing "skin in the game". The risk they bare may be
| reputational at best. Hedging bets with others peoples
| money is not real risk taking.
| JohnFen wrote:
| Excellent point, thank you.
| [deleted]
| [deleted]
| [deleted]
| torbTurret wrote:
| I went to a top university. Everyone I know from it who became a
| VC wasn't impressive, above-average, or even average in some
| cases. However, they were extremely money obsessed.
| outside1234 wrote:
| VC is a sales business. Their business is to sell startups for
| money. In fact, I would say that money is really their only
| value, so you really want them to be money obsessed.
| walleeee wrote:
| One wants them to be money obsessed only if one thinks
| selling startups for money is a valuable economic activity
| mariosisters wrote:
| I mean, it's valuable _to me_ to sell my startup for more
| money. Valuable economic activity indeed.
|
| I would say if you are in the business of selling startups,
| you're probably in the same boat.
| Animats wrote:
| Oh, VCs themselves as zombies. Usually, it's VC-funded companies
| that become zombies - they can pay their own ongoing bills, but
| not pay off their investment. They have positive value, so
| they're not just shut down.
|
| VCs prefer a hard fail. Then they don't have to manage the
| ongoing company. Apparently zombies have become so common that
| some VC firms are now stuck with a portfolio of zombies.
|
| When you think about it, most of Alphabet's non-ad projects are
| zombies. They lose money or don't make significant profits, and
| they're not growing into something big.
| Night_Thastus wrote:
| What do you call the other side of this? A startup funded
| massively by VC's, but can't actually turn a profit and is only
| sustained by the continuous funding pumped into it? A "zombie
| startup"?
|
| IE, Doordash.
| fakedang wrote:
| Hey add Zomato to it too. I just got an update a few days back
| on my terminal, saying "no longer forecast to breakeven".
| jatins wrote:
| Adjusted for losses, Zomato is breakeven now[0]
|
| [0] https://twitter.com/deepigoyal/status/1623679354772541443
| arbuge wrote:
| What terminal is that?
| SkyMarshal wrote:
| The only terminal I know of that broadcasts financial data
| is the Bloomberg Terminal.
|
| https://www.bloomberg.com/professional/solution/bloomberg-
| te...
|
| Thought in this context "terminal" might be a generic term
| for any other financial data service, not just Bloomberg.
| fakedang wrote:
| Bloomberg terminal. You get notifications when analyst
| reports pop in. Consensus was that Zomato can't breakeven
| even by 2025.
| fourseventy wrote:
| If they can't turn a profit eventually they won't be able to
| raise additional funding and will go bankrupt.
| Apocryphon wrote:
| A pre-2022 unicorn.
| skeeter2020 wrote:
| Am I the only one who thinks this may be a good thing? We saw
| ridiculous growth in marginal VC firms; they SHOULD experience
| the same trials that their portfolio companies are now facing.
| The funds are actively managed and then wound down; why shouldn't
| the larger organizations do this as well? If you're VC firm is no
| longer relevant, and was only raising money because low interest
| rates the alternative investments so poor, good riddance.
| __bjoernd wrote:
| So there are downsides and risks with certain businesses models
| and these fluctuate based on the state of the real world?
| Consider me shocked!
| paulpauper wrote:
| _Investors warn a horde of ailing venture capital "zombies" will
| emerge in the coming years._
|
| So like 4sqaure, groupon, Quora, Evernote and others that are
| kept alive in perpetuity due to funding but otherwise long peaked
| robocat wrote:
| VC's can still be milking good money from bad investments.
| In addition to organizational and fund expenses, [investors]
| typically also pay an annual management fee, calculated based on
| a percentage (e.g., 2% or 2.5%) of the capital commitments of the
| fund (as of the final closing), to the fund's management company.
| As with expenses, this fee is paid by the fund out of capital
| contributions of the individual fund investors. Following the
| termination of the commitment period (when the fund is making new
| investments - often 5 years from the initial closing), the
| management fee rate is usually phased down and may be based on
| net invested capital as opposed to capital commitments.
___________________________________________________________________
(page generated 2023-02-16 23:03 UTC)