[HN Gopher] Venture-backed startups are failing at record rates
___________________________________________________________________
Venture-backed startups are failing at record rates
Author : rustoo
Score : 148 points
Date : 2023-08-06 11:10 UTC (11 hours ago)
(HTM) web link (www.fastcompany.com)
(TXT) w3m dump (www.fastcompany.com)
| xg15 wrote:
| Also if this resulted in the "grow at any cost - monopolize -
| enshittify" playbook finally dying, I think it would in fact make
| the world a better place by a significant margin.
| nologic01 wrote:
| Without precluding such positive surprises, there is currently
| little available evidence that they are coming soon.
| baq wrote:
| Enshittification is basically monetization, so... it's only
| going to get worse as they invent new ways of 'extracting
| value'.
| Gigachad wrote:
| Tbh I'm only bothered by the annoying and shitty ways they do
| it. Stuff like spamming notifications, spamming my email,
| annoying popups, addiction mechanics, etc.
|
| I'm quite happy with the products where you just directly pay
| them and receive a service. Fastmail monatizes their users
| and doesn't have to do it in a shitty way.
| moffkalast wrote:
| The problem, as I understand it, is that direct
| monetization only provides fixed growth and isn't enough
| for what venture capitalists demand. So the only solution
| that satisfies them is to continuously invent new and more
| insidious dark patterns to monetize the existing users.
| ghaff wrote:
| >continuously invent new and more insidious dark patterns
| to monetize the existing users.
|
| Which by and large doesn't work but staves off the
| inevitable for a while.
|
| A lot of news has been in this boat for a while. More
| obnoxious patterns trying to get you to subscribe. More
| ads. While cutting staff to the bone and more. (And
| that's not even VCs for the most part.)
|
| A lot of things that people want, not enough are willing
| to actually pay for.
| Xcelerate wrote:
| > I'm quite happy with the products where you just directly
| pay them and receive a service
|
| I'm the same way, but we're a strong minority of users. I
| love that I can simply pay for YouTube Premium and not have
| ads, but that's generally not a workable business model for
| many types of tech companies. In fact, I'm a bit surprised
| Google hasn't done away with that yet, because I worked at
| a different tech company that frequently assessed the
| feasibility of subscription payments vs ad revenue, and the
| math just never worked out. There simply aren't enough
| people willing to pay an amount that would offset the ad
| revenue loss. It's the difference between stated preference
| and observed preference in consumer behavior.
| Gigachad wrote:
| I think the option to go with ads or payments is fine. I
| pay for YouTube and receive a wonderful experience,
| others don't want to or can't pay, and they can still use
| the platform.
| danenania wrote:
| I think paying subscribers are generally much more
| valuable than users monetized by ads. The problem is just
| that only a small percentage are willing to pay. But I'm
| pretty sure that per user YouTube Premium subscribers are
| worth a lot more to Google than free users, so I doubt
| they'll get rid of it (for financial reasons anyway).
| tiffanyg wrote:
| _worth a lot more ... than free users_
|
| Why?
|
| I'm not sure about that, either way. I feel like I've
| seen cases where this is true, and cases where it isn't.
|
| For YouTube, for example, I'd guess this _could_ be true,
| now. It depends on hours and type of content watched,
| yes? While the charge to advertisers per ad impression is
| very low, and low enough for click-throughs / other
| categories that might be considered 'hits' in
| advertisers' _search_ for customers*, it is presumably
| carefully metered to ensure solidly net positive
| "monies"** to Google. YouTube premium is billed at a flat
| rate - hence, its worth likely varies rather inversely by
| "hours watched" as compared to ad-supported viewing,
| right? I.e., _the best_ "premium" customer, strictly from
| the POV of max direct revenue / profit should be one who
| pays and doesn't watch even a second of YouTube content
| in a given month.
|
| Obviously, I'm simplifying all of this a bit, and, also,
| not really getting to the point efficiently - Sunday
| morning blah blah. So, to wrap, it's all about
| distributions. Oftentimes, when companies introduce plans
| like "premium", the heaviest users immediately sign up.
| The distribution is often heavily skewed, initially. Over
| time, "non-addicts" and such do accrete ... distribution
| shifts a bit. That's basically why it's not so clear to
| me - on the one hand, YT premium charges quite a lot,
| AFAIK, compared to $ / ad ... but, at some number of
| hours viewed, that stat flips. I.e., YT makes less money
| (directly, at least) from Premium. Now, that's probably a
| quite high # of hours. But, I just have no sense of what
| it might be and what the metrics look like.
|
| And, ultimately, this ended up also being a long-winded
| way of saying my brain still isn't fully online and I'm
| too dull / lazy to try and pull up Google's / Alphabet's
| 10-Ks etc. ... but not too dull / lazy to let the world
| read a big ol' pile of words! Ugh... Almost as bad as
| drunk texting.....
|
| * I.e., "more money" - https://youtu.be/aN8wxQDqfRk
|
| ** https://youtu.be/5I_B5mdLry4?t=6m40s
| AmericanOP wrote:
| Short-term monetization. Like Reddit kicking mods to extract
| value built from years of diligent practices, but damaging
| future value of the same resource as content quality
| degrades.
| BaseballPhysics wrote:
| I don't agree.
|
| The whole idea Doctorow was pointing at is that startups
| could use massive amounts of VC funding to attract a large
| base of users, often by dumping their services on the market
| in order to kill competitors (what was once rebranded
| "blitzscaling" so we wouldn't notice it was at its core an
| illegal business practice).
|
| Then, once that user base was attached (and ideally stuck due
| to barriers like network effects or the lack of any viable
| competitors in the space), you start milking them by
| "enshittifying" the service.
|
| But if VC money becomes more scarce, that stops working.
| Companies will have to generate revenue much earlier, and
| compete on quality of service instead of who can raise the
| largest VC war chest to subsidize their operations. And they
| won't be able to wait until that user base is built and
| attached before they start monetizing. They'll have to create
| a revenue generating service that's _also_ good to the user
| because otherwise the users just won 't show up.
|
| For the existing services? Yup, you're right, the masks will
| start to come off (and in many cases already have).
|
| But long-term I would expect a much healthier internet to
| emerge.
| yieldcrv wrote:
| enshittify seems like it came from an MBA targeted podcast
|
| one that I dont listen to
|
| I've only seen that word on Hackernews
|
| How are you all influenced to repeat that word? Which "thought
| leader" hooked you?
| Kiro wrote:
| Most abused term on HN.
| powera wrote:
| It's proof that one is part of "the in-group".
|
| The fact that it is an extremely stupid word only serves to
| make it more valuable proof.
| zomglings wrote:
| I believe it was Cory Doctorow:
| https://www.wired.com/story/tiktok-platforms-cory-doctorow/
| yieldcrv wrote:
| is there something to know about him aside from being a
| writer at Wired? is he a guest author with additional
| clout? are people really reading Wired and influenced by
| it?
|
| its surprising how the data brokers haven't gotten me stuck
| in this algorithm based echo chamber. Its like his works
| must get shared around FAANG company chats, or a mailing
| list that all YC applicants get subscribed to out of
| prerequisite.
| pastage wrote:
| Such a strange question, I do not know what you value! He
| has written good books that cover complication of DRM
| etc. in a popular way, and is a prolific writer. Has made
| it easier for me to discuss these things with unintiated.
|
| I was never into Boing Boing but it was really shared a
| lot back in the day.
| yieldcrv wrote:
| I value adults using words that aren't attempts at being
| edgy while masquerading as a refined lexicon
|
| I would say its a very niche group thats out of touch,
| but actually maybe Cory is on to something modern, he
| needed to become relevant to everyone that wasn't still
| reporting capital loss carryovers from 1999
|
| mission accomplished
| gopher_space wrote:
| He's an author who influenced a wide range of technical
| people around the dot com era and iirc was an early
| proponent of the "we work for idiots" point of view.
|
| Not quite the John Brunner of the late 90s but in the
| same neighborhood.
| tschellenbach wrote:
| Well, the same playbook is happening right now for AI
| blantonl wrote:
| _significant margin_
|
| That's what is missing in these cases
| raincole wrote:
| It's a good strategy until everyone is doing it. Kinda like
| technical analysis.
| iamacyborg wrote:
| I don't think technical analysis has ever been a good
| strategy
| JumpinJack_Cash wrote:
| Technical analysis only works if everyone is doing it.
| gopher_space wrote:
| What does technical analysis mean in this context?
| rhyme-boss wrote:
| Surely the solution is higher executive compensation and more
| coding challenges in engineer interview process.
| dehrmann wrote:
| These concerns are mostly orthogonal to the "grow at any cost
| - monopolize - enshittify" playbook. That, and startup
| executives at this stage are doing ok, but not spectacularly
| well.
| pembrook wrote:
| That playbook has been around loooong before the 2010s VC-boom.
| It's pretty much as old as history itself.
|
| Aristotle complained about some dude corning the market in
| Olive Presses back in 300ish BC.
|
| I wouldn't bet on humans changing any time soon.
| api wrote:
| That will only die when people start seeing "free" as a
| negative or a red flag, especially when it's on a highly
| polished piece of software or a service that costs money to
| run.
|
| Until then it's impossible to bootstrap because you'll be eaten
| alive by someone with funding dumping on the market.
| BaseballPhysics wrote:
| That entire playbook is predicated on cheap and plentiful VC
| money. If that money dries up--which was the premise of the
| original comment--that strategy will die off, regardless of
| consumer behaviour.
| phkahler wrote:
| That will only die when people start seeing "free" as a
| negative or a red flag, especially when it's on a highly
| polished piece of software or a service that costs money to
| run.
|
| August 1st Facebook shut down the servers for EchoVR, a
| formerly popular VR game. The announced it months ago. In the
| days leading up to the shutdown, people were still making fun
| of those who paid for optional items. You know, supported the
| game we were all going to miss. I said maybe if more people
| paid they might not shut it down. I think one kid actually
| had a bit of an epiphany.
| dotnet00 wrote:
| That's not really the user's fault though. They didn't pay
| because the things to buy were not appealing enough. The
| developers should've either chosen a better monetization
| strategy or made the optional items sufficiently appealing.
|
| I've seen some other games too where people felt compelled
| to throw money at them because they feared that otherwise
| development would be halted and the servers shut down, and
| it has always been indicative of a game in a bad state
| (since it typically means that the players are seeing the
| player count on Steam etc and realizing that the game is
| likely financially unsustainable).
| ghaff wrote:
| >They didn't pay because the things to buy were not
| appealing enough.
|
| There are a lot of things I don't buy (both online and
| off) because I'm not willing to pay what they're sold for
| --which may or may not be what they cost. I don't have an
| unlimited pile of money.
|
| And most things end eventually although if they're
| commoditized enough they may end up continuing to be
| offered by somebody/somebodies at some price.
| jaynate wrote:
| The more interesting metric would be the number of Vc-backed
| companies are sold to their next owner for less than the total
| amount raised.
| dehrmann wrote:
| Or down rounds.
|
| I got an unsolicited email from a broker looking for buy shares
| of a company I used to work for. The offer price was below the
| price in 2018, but still up from the round before that. This
| company is a real business with real customers, is at least
| theoretically profitable, and I assume there's a little room to
| negotiate the offer price up. At the same time, the company is
| in a competitive space, it benefited from the crypto boom (it
| isn't a crypto company), and a competitor had a very
| disappointing IPO.
| meow_mix wrote:
| Fastcompany - ahh always quality journalism on HN
| tschellenbach wrote:
| This is just math, lots of companies raised at very high rates,
| market changes destroyed growth, they can't raise again and many
| can't reach profitability.
|
| The companies that can run profitably, will take over many
| markets.
| tjrgergw wrote:
| You only find out who is swimming naked when the tide goes out
|
| - Warren Buffet
| Banwarmintros wrote:
| This phenomenon is largely due to the inability or perhaps
| unwillingness of venture capitalists to identify outlier
| businesses. The recent generation of startup investors turned the
| industry into a rent-extraction scheme by chasing growth and
| paper markups over identifying valuable businesses. And research
| now shows that most of the popular heuristics VCs' use to select
| startups are negatively correlated with returns.
|
| One solution is simply to disendow large VC funds, and change the
| processes limited partners use to select investors.
|
| https://www.wired.com/story/to-save-the-innovation-economy-b...
|
| https://www.theinformation.com/articles/venture-capital-isnt...
| zackmorris wrote:
| Thank you for formally describing what's been bothering me
| about the VC system.
|
| To me, we're living in a bizarro reality that's the opposite of
| the original 90s vision of the web. The idea then was that
| geeks living in their parents' basements could build stuff like
| Netscape, eBay, PayPal, etc on a shoestring budget in the low
| $10,000s and disrupt established monopolies/evil-corps
| (Microsoft at that time) in the status quo.
|
| But today that's been replaced by VC gatekeeping, so now we
| have to live where the "network" is, San Francisco or wherever,
| and rub shoulders with someone who knows a VC and has access to
| the millions of dollars needed to start a startup and hire
| programmers for $150k per year or more. Maybe we build SAAS
| products and need a network of salespeople too. And advertising
| isn't enough, now we have to find an influencer to endorse our
| product because merit isn't enough. This is how meritocracy
| becomes illusion.
|
| I mean that's cool and everything, it's fun to make money, but
| we're still under the yoke like any other job. The dream of
| real independence is all but dead. We find ourselves locked
| into a mature and successful model whose main product is a
| failure rate so high that many of us haven't had a win in our
| entire careers. We just try to rescue project after project,
| fail, and our work gets thrown away. For every winner, there
| are 10, 100, 1000 or more losers who tried to build the exact
| same thing and got beaten to the finish line.
|
| I would propose that a better system looks like the opposite of
| all this. Rather than putting all of our eggs in one basket
| with unicorns, we should be casting a wide net. I still believe
| that nearly every programmer would work for room and board if
| it meant total control of their creative vision. Small teams
| paying perhaps $24k or $36k per year to each developer, with
| enough runway to last at least 2-3 years. Focusing on getting
| real work done above all. And most importantly, creating a pay-
| it-forward culture with a broad goal like providing UBI within
| our lifetimes to free people from servitude. Meaning something
| like a tech guild where members take an oath to pay some
| portion of their earnings into a pot shared by everyone. 1% of
| a successful billion dollar exit is $10 million, enough to
| materially change the lives of perhaps 100-1000 other
| developers at $10-$100k each. Imagine what could be done with
| 10%, or 50%.. instead of having 1 trillionaire who owns the
| world with all of us becoming renters.
|
| This voluntary wealth redistribution is a soft form of (cough)
| socialism. The inevitable conclusion of this line of thought is
| that our current crony capitalist system is not compatible with
| a benevolent future for tech workers. Currently every
| innovation enriches a handful of key players at the expense of
| everyone else. We feel this everywhere, in the long hours, lack
| of pay raises, ever-increasing rents, loss of personal
| autonomy. And soon in our unemployment as AI solves the last
| challenge of computer science, programming itself.
|
| This is why I've been disappointed with HN lately, for not
| anticipating these eventualities. I'm saddened that it's
| abandoned its original vision of handing out life-changing
| grants to a large number of promising developers and projects.
| And worry now that maybe its participation in the doubling-down
| on winner-take-all capitalism is speeding us faster towards the
| looming cliff. For all of their resources, if they can't change
| course, I wonder if they're really who they think they are, or
| just another arm of the status quo. I really hope I'm wrong,
| because I love most of what they're doing, but I can't shake
| the feeling that something's off.
|
| Edit: after writing this, I realized that it's aligned with
| academia, where successful alumni pay into a trust/endowment
| whose interest/dividends pay for future students' education,
| even at the most exclusive schools like Harvard. NASA maybe
| follows this model somewhat, using government funding to invent
| solutions used by the public. So maybe the private sector
| simply can't do this, and our resources might be better
| invested somewhere else where they can help the collective
| good.
| tschellenbach wrote:
| There is a weird bias where VC doesn't seem to care much about
| market defensibility and unit economics. Growth is good, but
| companies without solid unit economics or poor defensibility can
| get to 100m in revenue and still not be worth anything.
| lordnacho wrote:
| Why exactly is it that there seems to be only the unicorn
| strategy? What happened to the investor who just wants to make a
| few x by investing in firms that are founded by experienced
| people with connections in their industry?
|
| My suspicion is that a lot of agents, and that what they mostly
| are, simply don't know how to evaluate businesses. A unicorn
| strategy has some desirable properties:
|
| - You don't have to win many times. You can go years without a
| hit, and this is crucial in managing expectations versus
| customers.
|
| - You can forget all the investments that merely do OK. In fact,
| you can push them to try to unicorn themselves, that way when
| they either die or you get a unicorn.
|
| - When you find a winner, you can push the founders to take more
| and more money, raising ambitions to stratospheric levels. Again
| something that goes back to expectations management. You want to
| be able to say you funded Facebook.
|
| - There's a degree to which unicorn business plans depend only on
| risk taking. That's what you're there to do. What I mean is,
| there are business ideas that naturally require a huge amount of
| capital, and only a few groups in the world will be able to find
| it and try it. Other concerns are real but when capital is your
| main issue all the players who find it will do similar things:
| expand into other markets, spend heavily on tech, try to
| monopolize.
|
| By contrast, just making some nice businesses with a good ROI has
| some issues:
|
| - The fund that funds ordinary businesses needs to show results
| pretty soon. After all you're saying most of your shops will do
| fine.
|
| - Businesses that aren't burning cash like a sailor on leave need
| to make industry specific decisions that require specific
| knowledge. Not just spend a bunch of money in the hope of getting
| a monopoly, but spend wisely.
|
| - You need more staff to manage a bunch of businesses in a
| variety of industries
|
| - Some mittelstand business that's doing just fine will be
| totally unknown to your investors. They won't be thinking of you
| as "that guy who helped build that new ball bearing factory".
| goblinux wrote:
| I think it's the Moneyball strategy - teams prefer home runs to
| base hits even if it means more strikeouts
|
| Now baseball is shifting away from moneyball back to base
| hitters because they made their product super boring and stale.
| I think enshittification is a similar process in Silicon
| Valley, which might cause investors to have to look at more
| "base hitters" and not count on unicorn home runs
| telotortium wrote:
| You mean back to home runners?
| tootie wrote:
| I think it's less popular because it's harder to get rich, but
| it's possible to do debt-based funding instead of equity. Just
| agree to pay a high, fixed interest rate on investment and
| offer no equity. Once the debt is paid, there's no further
| obligation.
| 62951413 wrote:
| https://www.saastr.com/why-vcs-need-unicorns-just-to-survive...
| pas wrote:
| there's a "race to the bottom" problem too. if one VC starts
| pouring money into a sector they'll - temporarily - crowd out
| the small firms. hence all funds are incentivized to "go big or
| go home".
| lordnacho wrote:
| This is a good point too, more to the ecosystem. I'm not sure
| there will ever be a mitigation to that.
| jacquesm wrote:
| They also crowd out the small firms that were doing just fine
| before the VC funded startup entered the eco-system, spoils
| it for everybody and then goes bust leaving the market
| unserved. I hate it when that happens.
| amelius wrote:
| I think this should be encoded in antitrust law.
| jacquesm wrote:
| > Why exactly is it that there seems to be only the unicorn
| strategy? What happened to the investor who just wants to make
| a few x by investing in firms that are founded by experienced
| people with connections in their industry?
|
| That exists but then on average you'll be losing money due to
| the normally expected rate of failure. That can _still_ be a
| valid strategy, but then you 're just not in it for the money,
| but for the social impact. And some of these funds, once they
| get good at it do turn into serious moneymakers which in turn
| allows them to go for the evergreen strategy. This is the holy
| grail for social impact investing. A good example of such a
| fund is GIMV from Belgium, but there are many more.
| lordnacho wrote:
| > That exists but then on average you'll be losing money due
| to the normally expected rate of failure.
|
| Only if you cannot actually deliver on the promise of being a
| good investor. If you knew how to pick businesses you'd get
| fewer failures and more winners.
| jacquesm wrote:
| Sure, in theory. But in practice picking winners is a lot
| harder than it may seem to be at first glance and only very
| few investors beat random.
| naillo wrote:
| 54 sounds so little, I assumed way more VC backed companies were
| failing per year than that.
| mritchie712 wrote:
| This article is lazy. Not a single chart or table and they are
| projecting the number they're using for their headline:
|
| > At that rate, 108 VC-backed startups will fail by year's end,
| besting the 95 that failed during 2010.
|
| It might not even be worse then 2010, not to mention there are
| more startups today then in 2010 (higher base).
| tinco wrote:
| People in the comments here are falling for the attention
| grabbing headline. The amount of yearly venture deals is in the
| thousands if not tens of thousands.
|
| That only 108 of them file for bankruptcy in any given year,
| means that the bankruptcy rate of VC backed companies is on the
| order of 1%.
|
| That means you can't make any significant statement about VC
| general practices based on this number, except this: Generally
| the math for VC's is that 25% of the companies they back fail (to
| return on investment). If the amount of bankruptcies is only on
| the order 1% that means that _usually_ VC backed companies don 't
| take on debt (because debt is what makes you file for
| bankruptcy).
|
| This makes sense since the whole idea of VC backing is that they
| provide you with capital when traditional banking institutions
| won't.
|
| The usual way for VC backed companies to fail is they either get
| sold for pennies on the dollar to PE or a competitor, or they
| wind down, fire their employees, shut down their cloud instances
| and either become little restaurants on the web, zombies or
| simply cease to be.
|
| If this statistic of bankruptcies is anything at all, it's a
| leading indicator that things aren't going very well for
| startups/scale-ups. Either they're losing revenue, or they never
| had enough revenue and are not getting runway extensions, or
| both. And that's also what this (very short 1 minute read)
| article is about.
| ajb wrote:
| "debt is what makes you file for bankruptcy"
|
| This is true, but _taking on debt_ , as in, borrowing money, is
| not the only way to end up with more debts than you can pay.
| For example, I worked at a startup which ended up having a
| bunch of debts to retailers, because they sold physical product
| via retailers and retailers always put the risk on the vendor.
|
| Of course, your typical SAAS won't end up there, but VCs do
| fund other business models.
| nine_zeros wrote:
| It happens for SAAS, even for large public SAAS. It's called
| receivables on the balance sheet. That money may or may not
| show up. It usually does but it is not a guarantee since the
| customer can renege or default.
| te_chris wrote:
| Easy enough even for saas: a few big enterprise contracts for
| services the company uses plus a wage bill that's less than
| revenue will sink a company quickly enough.
| ajb wrote:
| True, however in many jurisdictions the employer has an
| obligation not to "crash out" and leave employees without
| their last month's salary, except when this is due to
| unforseen circumstances. They should wind down the company
| in an orderly way before it gets to that point
| cma wrote:
| > The usual way for VC backed companies to fail is they either
| get sold for pennies on the dollar to PE or a competitor, or
| they wind down, fire their employees, shut down their cloud
| instances and either become little restaurants on the web,
| zombies or simply cease to be.
|
| So if you get a loan and fail, and the business isn't worth
| taking over by the creditors to operate or sell, you wind down,
| fire employees, shut down the cloud instances, sell off the
| furniture. If The VC's investment terms allow for a clawback of
| capital, the exact same thing happens but we don't call it a
| bankruptcy, they just don't lose their full investment and the
| bankruptcy stats look great.
| rgbrenner wrote:
| _" The amount of yearly venture deals is in the thousands if
| not tens of thousands."_
|
| A lot of those companies are excluded from the data:
|
| _public companies or private companies with public debt where
| either assets or liabilities at the time of bankruptcy filing
| are greater than or equal to $2 million or to private companies
| where either assets or liabilities at the time of bankruptcy
| filing are greater than or equal to $10 million._
|
| https://www.spglobal.com/marketintelligence/en/news-insights...
| musha68k wrote:
| Workers without deeper financial literacy notoriously
| underestimate how much capital there is rotting / desperately
| waiting for any potential investment upside.
| mattmaroon wrote:
| It also leaves out how many VC funded startups there are. If
| more and more were funded every year, you'd expect more and
| more to go bankrupt every year too even if the success rate
| stayed constant.
|
| It is a bad article
| fakedang wrote:
| Honestly, in my experience (I'm not a VC but an observer - I
| often get passed pitch decks to either angel-invest or co-
| invest through my firm), most VC-backed startups are zombie
| companies. They may show outward progress, like hiring a lot
| of employees or holding/participating in conferences or
| showing so many new product "improvements" (that somehow seem
| to always be following the latest fad), but in the end, what
| matters is revenue, which they don't have.
|
| On the dark side, one will find dwindling revenue, enterprise
| contracts getting dissolved, a high attrition rate and a
| piss-poor management of finances. They'll have runway for
| years to come though, because of their cash piles, but
| nothing to justify the valuations they got from the flush
| era.
| szundi wrote:
| I am not sure but probably zombie companies are in the next
| phase?
| [deleted]
| dismalpedigree wrote:
| This wont change VC/PE at all. It fits right into the playbook.
| 1. Take on as much debt as possible. 2. Extract as much of that
| cash in the form of management fees as possible. 3. Flip to next
| phase within 3-5 years.
|
| If there is meat left on the bone, give it to another VC/PE. If
| not, try to IPO and leave the public and pensioners holding the
| bag. If its so garbage you can't IPO then declare bankruptcy and
| move on to the next victim... erhm company.
|
| Yes I know PE and VC are different. However, they both follow
| this basic playbook with some nuances.
| jasode wrote:
| _> Yes I know PE and VC are different. However, they both
| follow this basic playbook _
|
| No, they don't follow the same basic playbook and I think you
| misunderstand how different they actually are.
|
| VCs do not have their portfolio companies take on debt to pay
| dividends back to VCs. That's because the typical _startup
| companies_ that they invest in don 't have _positive cashflow_
| to service any debt payments to a bank. The banks won 't lend
| to startups because they don't have the cashflow to pay back
| the debt. The startups at the early stage of VC money don't
| have cashflow because they don't have meaningful revenue.
|
| PE's invest in _mature companies_ instead of startups. PE 's
| target established companies with real revenue and cashflow.
| That's where the debt playbook and financial manipulation
| happens.
|
| VCs and PEs are the "same" in the sense that they both
| structured as funds with "limited partners".
| dehrmann wrote:
| > VCs and PEs are the "same" in the sense that they both
| structured as funds with "limited partners".
|
| They also attract similar types of investors and are
| similarly affected by interest rates.
| TrackerFF wrote:
| But it should be mentioned that lot more (VC-funded) startups
| are being purchased by PE firms, compared to 10-20 years ago.
|
| Which makes one wonder - how "organic" are these companies?
| In the sense that they can stand on their own feet, without
| being funded by debt throughout their whole lives.
| fakedang wrote:
| Because the traditional PE model of debt-fuelled dividends
| is not feasible anymore. Back in the day it was really
| feasible to issue debt on the cheap, since you'd find
| takers, but with equity outpacing debt in returns, that
| model became infeasible.
|
| After '08, my old firm (mega PE) went on a spree away from
| the PE play book, simply because they had the dry powder
| but not enough opportunities. Commercial and residential
| real estate, biotech, tech, etc.
| JumpinJack_Cash wrote:
| > > Back in the day it was really feasible to issue debt
| on the cheap, since you'd find takers, but with equity
| outpacing debt in returns, that model became infeasible.
|
| But it should be the opposite no?
|
| PE firms acquires company, installs a new CEO and
| instructs them to knock on each and every bank lender for
| business loans taking advantage of the low interest rate
| environment.
|
| Or even mortgages if the company needs to expand its
| physical footprint.
|
| PE retains the equity and bank finances the business
| growth as per the intention of the Fed monetary policy
| 2008-2021...and maybe 2024-????
| jacquesm wrote:
| That's not how it works at all on average, though there are bad
| VC and bad PE funds. The most comparable item is that the VCs
| take on the risk that growth won't happen and the PE funds take
| on the risk that the future uncertainty is larger than their
| investment. But that's where the similarities stop, VCs are on
| a timetable, usually invest in far earlier stage companies and
| need to have a large portfolio to have a shot at breaking even
| or making money. PE is _far_ lower risk, typically anything
| that returns more than real estate is already a candidate for
| acquisition and by the time a PE fund is interested the
| business has maxed out on most of its expected growth and as a
| result the amount of uncertainty in the deals is minimized.
|
| VCs _can_ engage in 'buy and build' strategies, where they
| roll up multiple players in a market by doing one big
| investment in a company that they think has the best chance to
| become market leader and then to make that happy by funding
| this company to take over the competition. This doesn't always
| pan out either but when it does the pay-off is usually well
| worth the investment.
|
| PE and VC are sufficiently different that the LPs of those
| funds see them as different risk baskets with PE getting the
| lions share of the allocation because it is considered to be
| reasonably safe and VC looked at as lottery tickets.
| freitzkriesler2 wrote:
| Era of easy money is over...for now.
|
| Grow the old fashioned way. It's harder and slower but at least
| you won't be beholden to the big bad banker or mr money bags.
| leetrout wrote:
| it never felt "natural" to chase these big, over inflated
| values and exits to me.
| lacrimacida wrote:
| Do you think what comes next is going to be more sane?
| linster wrote:
| What comes next?
| freitzkriesler2 wrote:
| Era of organic growth and modest teams.
| mlinhares wrote:
| For a little bit, but it will eventually devolve into the
| same Unicorn or bust scheme once the interest rates go low
| enough again.
| malablaster wrote:
| An appeal-to-nature fallacy is even more silly than usual
| when used in the context of venture capitalism.
| reilly3000 wrote:
| There's at least a generation who haven't experienced the old
| ways and really lack a mental model for it. Engineering in
| cash-constrained settings brings out creativity. Growth at any
| cost engenders numbness to reality.
| ceautery wrote:
| The math in this article is wrong. Assuming companies file for
| bankruptcy at the same pace throughout the year, this article is
| simply multiplying the number of current startup bankruptcies by
| 2, but it was filed on August 4, day 216 of the year. 54 * 365 /
| 216 = 91.25, less than the 2010 value of 95.
|
| Plus, companies tend to file for bankruptcy in the first quarter,
| so we should expect the value to be even less than 91 by the end
| of the year.
|
| I'd throw in something about FastCompany's lack of journalism,
| but this seems to be just a "the sky is falling" puff piece to
| drive engagement.
| DueDilligence wrote:
| [dead]
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