[HN Gopher] VCs are scared when they should be greedy
___________________________________________________________________
VCs are scared when they should be greedy
Author : mlchild
Score : 153 points
Date : 2022-07-20 18:35 UTC (4 hours ago)
(HTM) web link (blog.aaronkharris.com)
(TXT) w3m dump (blog.aaronkharris.com)
| [deleted]
| gumby wrote:
| > Most of that advice focuses on how founders need to adjust to
| survive the deteriorating conditions--cutting cash burn by firing
| underperforming employees, slowing hiring...
|
| Makes me wonder what kind of "advice" they were giving before:
| you should be replacing underperforming employees at any stage of
| a business cycle.
| ffggvv wrote:
| tell that to fang companies. some fire less than 2% of the work
| force.
| gumby wrote:
| Startups can't afford to be like that. Those huge companies
| have a lot of fat so can get away with being slack, which is
| also why a company like Google can drift around in such an
| indifferent and aimless manner for over a decade.
|
| BTW the "N" has long had a "fire early" philosophy, and so it
| will be interesting to see how their current troubles play
| out.
| ilrwbwrkhv wrote:
| A lot of people became "VC"s during the bull run. They brought
| nothing to the table like YC did. Instead some previously
| reputable VCs like a16z became crypto grifters. So it's good the
| market clears a bunch of them so that the YCs and next generation
| of VCs who actually bring something new to the table come to the
| forefront.
| bsaul wrote:
| i've been betting against btc from the beginning, however i
| truely believe there's something interesting in this field,
| that may end up getting some real applications sometimes.
|
| Now what's still unknown is whether the funds that invested
| heavily on crypto in 2020s will have enough leftovers once this
| crisis is over to be a player when the crypto 2.0 era is
| coming.
| oarsinsync wrote:
| > i've been betting against btc from the beginning
|
| Not literally, I assume? Or you've got a tiny position and
| have been (relative to the size if your position)
| haemorrhaging money for ~13 years? Or successfully rode some
| down waves? (I'm super jelly if you did the latter)
| bsaul wrote:
| of course not, i would be broke :))
|
| I do have a bet with a friend regarding btc price going
| under 1k i made in 2019 but it's just for fun..
| danuker wrote:
| Bitcoin has seen several 80%+ crashes and bounced back.
|
| It is all in the demand.
|
| A lot of that 80% flucuation is made up of short term
| speculators.
|
| But some people are hardcore holders, and others use it
| because their national currency is worse (Venezuela, Sri
| Lanka).
|
| Couple that with the network effects (BTC is the largest
| still), and that's all it takes for the price not to go
| to zero.
| [deleted]
| jonathanehrlich wrote:
| Thanks. Please write more frequently.
| thdxr wrote:
| while I agree with the general premise (majority of VCs are not
| good investors) it's important to remember the money they raised
| isn't sitting in a bank account.
|
| It's likely still in the LPs stock portfolio, doing a capital
| call when everyone is down a lot can be tricky. You need to sell
| the investment more even though they agreed to give you the money
| when you asked
| seibelj wrote:
| Yeah I was super confused by this. VCs generally don't have all
| the money ready to invest. They may have raised a $300 mil fund
| but they don't get that money until they call it in. If the LP
| says "no deals for 6 months" that's how it is.
| ericd wrote:
| If the LPs don't meet the capital calls, they're in breach of
| their investor agreement, and the penalties are generally
| quite harsh, including potentially forfeiting a lot of the
| value they currently have in the fund.
| jacquesm wrote:
| Exactly. You either have the capital ready to roll or you
| should not engage in any such commitment.
| jacquesm wrote:
| As an LP in a large fund: that's definitely not how it is.
|
| As an LP you pre-commit to a certain level, and when the
| capital call comes you perform or you will be found to be in
| default when a whole pile of clauses kicks in that you really
| do not want to have to deal with. You will have to have an
| extremely good reason (such as being already bankrupt) to be
| able to avoid a capital call that you have committed to.
| Bubble_Pop_22 wrote:
| There are LPs and LPs.
|
| The LPs which the user above refers to are the APGs, the
| PFZWs type.
| jacquesm wrote:
| Show me a contract where an LP gets to renege penalty
| free on their obligations to a VC and I'll be happy to
| believe you.
|
| I have been part of 222 VC/PE deals to date (that's not a
| typo, just a coincidence) and _not once_ has an LP
| reneged on their obligation to honor a capital call
| without penalty. That 's not saying it doesn't happen, it
| may well happen, or it may have happened and it was kept
| so quiet that nobody picked up on it (which is somewhat
| believable, because it would reflect very badly on the
| fund).
|
| Just to give you one example: a VC enters into a deal,
| signs a non-binding terms sheet conditional on doing DD,
| goes through a full DD and then has to back out of the
| deal because a large LP does not honor their commitment.
| The fall out from that would be massive.
|
| What is far more likely to happen is that a VC can't find
| a good way to spend the funds committed capital. In that
| case there might be extensions of the funds run or they
| might end up simply not calling up the available capital.
| This I've seen a couple of times. But an LP that refuses
| a capital call I've yet to see. I've even seen an estate
| that was held to perform when an LP ended up with the
| very best reason for non-performance of all.
| Bubble_Pop_22 wrote:
| I understand all the above, but the general rules kinda
| supercede it all.The general rules are that when you are
| the best/biggest thing around the block, rules just don't
| apply to you.
|
| Also in general when government is involved rules don't
| apply to it. 80% or more of the amount of money that LPs
| as a whole administer are either Govt. Pension Funds or
| SWFs.
|
| So in the case of big LPs it's one of the rare cases
| where both the above rules are at play to give them carte
| blanche.
| EGreg wrote:
| What if the LP says no deals for 50 years? These "fund raised
| X" means nothing if they can't enforce capital calls
| killjoywashere wrote:
| That should be actionable as a breach of contract, with a
| notable exception of sovereign wealth funds, which may or
| may have immunity:
| https://www.reedsmith.com/en/perspectives/2013/11/capital-
| ca...
| akharris wrote:
| Fwiw - my general premise isn't that the "majority of VCs are
| not good investors." My point is that there's a serious
| disconnect in the markets right now, and that it is rooted more
| in fear than a lack of opportunity.
|
| On the second point - you're right that the cash isn't
| literally sitting around, but VCs (generally) do not have to
| ask LPs for approval on a deal by deal basis. Capital calls can
| happen either as tranches or in response to a deal, and it is
| unusual for an LP to successfully refuse a capital call because
| of a specific deal.
| fullshark wrote:
| If you just view VCs as any other business, it involves
| revenue (exits) and costs (investments). The market turmoil
| is affecting the volume and size of exits in at least the
| short term, which means they are cutting costs. It's not
| clear the number of opportunities have grown/shrank but i
| guess fewer people trying to invest means the number of
| available opportunities to you as a player has grown.
| ffggvv wrote:
| VCs as a whole are followers, not leaders (with small
| exceptions). they all just fly into the latest hype bandwagon
| hoping to replicate the last big success.
| [deleted]
| fdgsdfogijq wrote:
| Rather than complain about how VCs arent good investors, people
| should rail on the system that selects VCs. Which is mostly
| admittance to prestigious MBA programs/colleges. So please write
| a post about how those schools arent selecting for good
| investors, because these diatribes about a "flawed" industry are
| very surface level compared to the underpinning power structures
| in america
| xthrowawayxx wrote:
| How do we distinguish between: "VCs are are selected because
| they go to school X", "school X is good at creating VCs", and
| "school X receives more potential VCs"?
|
| My guess is probably more statements 2 and 3 for the usual
| suspects eg Stanford
| openfuture wrote:
| Central planners 2.0, welcome to the soviet union.
| kbuchanan wrote:
| This post reminded me a little of my real estate agent's
| newsletter:
|
| 2007: There's never been a better time to buy! 2008: There's
| never been a better time to buy! 2012: There's never been a
| better time to buy! 2020: There's never been a better time to
| buy! 2022: There's never been a better time to buy!
| pdx6 wrote:
| The phrase over the years is more like "buy now or be priced
| out forever."
|
| Recessions are good times to take risks since people are afraid
| and while capital isn't cheap this time around, assets are.
| xisthesqrtof9 wrote:
| Easy to fuel the fire when you have unlimited wood to burn.
| shaburn wrote:
| [deleted]
| rexreed wrote:
| Easy to say when it's not your money you're investing, and when
| you have a business that depends on the continued flow of VC
| money.
| shaburn wrote:
| acd wrote:
| "In contrast with the scenario in 2000, most of today's tech
| companies are real businesses."
|
| I disagree that many startups have viable ideas that will
| generate black numbers and organic growth.
|
| Bold founders have sold startup ideas which are not sustainable.
|
| Ie investment capital have prefered bold founders that could give
| vision of high future returns wework for example.
|
| A small number of startups will become awesome but the majority
| wont.
|
| Zero interest rates was a money rocket that fueled startups going
| to the sky. But what goes up usually comes down eventually with
| gravity/interest rates.
|
| A small fraction of startups will become super sucessfull but the
| majority wont. The number of sucessfull probably follows some
| kind of statistical distribution of which startups is great vs
| bad.
|
| Higher interest rates will adjust future return calculations that
| is brilliant from the article!
| kelp wrote:
| From the linked article: "Critically, the venture market at the
| time was tiny relative to today's ecosystem"
|
| This isn't quite true. At least for US VC investment in dollars.
| It peaked at $66 billion in 2000, and didn't surpass that amount
| until 2018, according to these charts:
|
| https://pitchbook.infogram.com/6-vm-charts-1h8n6m3klxngj4x
|
| https://www.statista.com/chart/11443/venture-capital-activit...
|
| And if you adjust for inflation, that year 2000 $66B is $103.86B
| in 2021 dollars, and the 2nd chart shows 2021 getting to $128B.
|
| Now the two different data sources do have somewhat different
| numbers for each comparable year. I couldn't find a comparison
| that covered enough years to show the difference. But I think
| it's pretty clear that the dot com era was a spectacularly fast
| increase in VC funding. And the more recent years were slower
| growth, but did end up getting to slightly higher numbers, if you
| adjust for inflation.
| lpolovets wrote:
| (Context: I'm a VC)
|
| Some great points in the post, but I also see a few additional
| dynamics at play:
|
| 1) The last 10 years have been great for VCs and startups, but
| now VCs are thinking about how to make their funds last longer.
| Two reasons for this: first, time diversification matters. If you
| think markets might go down even more, you don't want to deploy
| the rest of your fund quickly, you want to spread it out over a
| few years and get a good average cost basis. Second, there's a
| healthy fear among VCs that LP capital will be much harder to
| secure in the next 1-2 years. And you don't want to deploy the
| rest of your current fund in the next 6 months if you won't have
| a new fund ready to go for 18 months.
|
| 2) Most VCs (and founders) hate down rounds. So a lot of existing
| companies are stuck because they previously raised at $X
| valuation, and now the market price is $0.75X, and either the VC
| doesn't want to push for a down round or a founder won't accept
| it, or both.
|
| 3) Aaron mentions this in the blog post, but everyone is worried
| about downstream investors. Our fund is big enough to lead a seed
| round, but it can't put a dent in a Series A, so we depend on
| Series A investors eventually backing our seed companies. And
| Series A investors often depend on Series B investors to invest a
| lot in the next round. And so on. If the entire growth stage
| market grinds to a halt -- and it seems like it basically has --
| then early stage investors start worrying about making new
| investments because there's way less downstream funding
| available. So even if a seed VC believes this is an amazing time
| to build a company and there are lots of great seed opportunities
| out there, they might still slow down investing a lot if they
| know their companies will need more funding and that funding
| doesn't seem to be there right now.
|
| 4) I've been a VC for about a decade, and the gap between VC and
| founder valuation expectations is greater than it's ever been
| during that time. 3 months ago, a median seed round was at $20m
| post, and a lot were at $25m-$30m post. Now I still see a lot of
| seed founders looking for $20m-$30m post, but a lot of VCs
| believe we should be back to 2020 valuations of $10m-$15m post.
| The gap between an expectation of, say, $13m post on one side and
| $25m post on the other side is _huge_ , and lots of conversations
| never even begin because of that mismatch.
| [deleted]
| akharris wrote:
| Your second point is the dynamic that makes the least sense to
| me. In public markets, if a stock is cheaper relative to future
| earnings, that makes it a better buy. In our corner of the
| world, the opposite often holds true.
|
| There should be a tipping point where greed beats ego, but have
| not yet figured out how to find it.
| lpolovets wrote:
| I agree. The aversion to down rounds feels mostly
| psychological and overblown to me.
| twoodfin wrote:
| _2) Most VCs (and founders) hate down rounds. So a lot of
| existing companies are stuck because they previously raised at
| $X valuation, and now the market price is $0.75X, and either
| the VC doesn 't want to push for a down round or a founder
| won't accept it, or both._
|
| They discussed this phenomenon at length on a recent Odd Lots
| podcast, and I can't understand it as anything but a market
| inefficiency that some smart VC firm will eventually exploit.
| Values (and thus prices) go up and down. Putting your head in
| the sand about it can't be a winning investment strategy.
| lpolovets wrote:
| I agree, I think this is an inefficiency. But it's a tough
| one to correct because startups are a repeated game, and
| everyone's worried about upsetting people they'll have to
| keep playing with.
|
| I think the logic is "I like this company, but if I offer a
| down round then will I piss off their existing investors?
| Will those investors stop sharing good investment
| opportunities with me? ... Ah screw it, I'll just skip this
| down round and focus on other prospective investments."
|
| I think multi-stage investors are probably best-positioned to
| address this, since they are both new and existing investors
| in the companies they back, so they should be able to offer
| market price down rounds for companies that are still
| promising but unable to attract external capital.
| singron wrote:
| Down rounds are bad for employee morale too since it puts
| previously issued options below water. It's probably worth
| it to re-issue equity, but that's messy and a lot of
| companies don't do it.
| swyx wrote:
| > Values (and thus prices) go up and down.
|
| you might be underestimate the importance of narrative in a
| startup. a startup takes a tremendous amount of belief to
| will into existence, and a lot of belief depends on an
| unbroken narrative. to most outward folks, a startup
| generally wants to appears to be continuously crushing it -
| people understand that there are ups and downs, but generally
| have no patience for a "well we had a slow 3 years where we
| made a lot of mistakes" nuance.
|
| if you doubt this, consider how you eval a startup when
| joining as an employee, much less as an investor.
| givemeethekeys wrote:
| As much as VCs and founders hate down rounds - if the public
| market has dropped in value by 50% for mostly macroeconomic
| reasons - isn't it fair to then suggest that properties on the
| private market should be similarly worth less?
|
| We all hate for our homes to be worth 10% less in 2023 compared
| to 2022, but it is what it is, no?
| xmprt wrote:
| When you raise funding at a startup, you're usually creating
| new shares which dilute old shares. If a seed round VC is
| able to get out with a 20% loss then they might be happy, but
| what will actually happen is that the seed round VC's 10%
| share turns into a 8% share AND they look like they've taken
| a loss because the 8% share is worth less.
|
| In growing markets, the 10% turning into 8% doesn't matter
| because it was 10% of a $1M company vs 8% of a $10M company.
| You're still richer (at least on paper) than you used to be.
| gumby wrote:
| The dilution is what makes it so much worse in the venture
| market than in the public markets.
| beambot wrote:
| On (4), it looks like the median seed valuation is still
| hovering around $25M based on AngelList statistics:
| https://stack.angellist.com/valuations
|
| Part of the difficulty in parsing public versus private company
| valuations is due to the time constant: It takes a while for
| private companies to get desperate, whereas public companies
| have a real-time bead on investor sentiment.
| gkapur wrote:
| Angellists data is flawed here--- you ideally want to look at
| seeds that are completely new or coming from sub $2 million
| pre-seeds. They include seed extensions, seed extension
| extensions, high priced note extension to seed rounds, etc.
| and when the market slows down you see a lot of extension
| rounds which pushes that number up but those are not really
| new seed rounds.
|
| There are a host of other way their data is flawed as well :)
| but that's a much longer topic.
| cynusx wrote:
| are these US or EU observations?
| cam0 wrote:
| He works at a US fund (www.susaventures.com/), so most likely
| US observations.
| lpolovets wrote:
| US
| [deleted]
| MegaButts wrote:
| > In contrast with the scenario in 2000, most of today's tech
| companies are real businesses.
|
| How many of today's startups are just servicing each other with
| VC money? This isn't meant to be flippant - I'm genuinely curious
| (and while I bet it's a lot, I am skeptical it is overwhelming).
|
| I mean if we really look at some of the business models for these
| companies, they're clearly unsustainable. Uber is a prime example
| of a company that seems destined to fail. If your unit economics
| don't work then you're fucked, and even if you raise literally
| tens of billions of dollars you will eventually run out of money.
| And yet companies like these are held up as prime examples of
| unicorn success stories. It's not just Uber - there are serious
| problems with many of the most acclaimed startups.
|
| Obviously not all startups are terrible, but as someone who isn't
| a VC (but once considered becoming one), I think tech investors
| are unable to see their bias for just how awful most tech
| companies today are.
| echelon wrote:
| > How many of today's startups are just servicing each other
| with VC money?
|
| The B2B SaaS ones.
| time_to_smile wrote:
| > I think tech investors are unable to see their bias for just
| how awful most tech companies today are.
|
| I think investors are more greedy than stupid. When money was
| essentially free, weirder and weirder investments make sense.
| If the world was crazy and throwing money around, why _not_
| fund a bunch of ridiculous companies with the knowledge that
| you can very likely unload that risk on the public when the
| company ipos.
|
| And we're seeing that that logic is correct. Just look at the
| record numbers of IPOs that were happening _right before_ the
| market started to collapse [0].
|
| Investors know they are playing musical chairs, but they're
| playing with the public and the know they song quite well and
| can tell when the music is winding down.
|
| Now IPO'd companies that don't know how to make a profit are
| the public shareholders problem, not private VCs.
|
| 0. https://stockanalysis.com/ipos/statistics/
| turns0ut wrote:
| How many times has Detroit, housing, and finance been bailed
| out?
|
| They're all operating on magical money because money is a
| shared hallucination. They legalize bailouts and complain about
| the debt but never mention the future can just say, eh, fuck
| those dead peoples bullshit.
|
| The bias you seem to not realize you're hung up on is society
| looks nothing like it did 100 years ago. In another 100 they
| won't give a fuck about any of this.
|
| If we take away the money, people still need to do shit if they
| want to survive. Fuck their money, do weird shit. Let the olds
| take it to the grave.
| fairity wrote:
| > Uber is a prime example of a company that seems destined to
| fail. If your unit economics don't work then you're fucked
|
| Have you actually studied Uber's recent earnings? I'm pretty
| sure rideshate contribution margin is positive in all their
| tenured markets.
| lmeyerov wrote:
| My bigger uneasy feeling here is the advertising/marketing
| world where ROI basics like attribution are highly questionable
| and bohemeths like Apple & Google are using their $T war chests
| & monopoly positions to cripple the sales/marketing ecosystems
| of their competitors. So risks a repeat of the dotcom bubble
| collapse when cpm/cpc collapsed. So much of saas is directly
| serving these questionable areas, and in turn, more neutral b2b
| (data, ...) is in turn powering those and thus also fragile.
|
| Variable sales+marketing spend is easy to scale back on during
| a recession. We've seen preeemptive layoffs due to valuation
| drops, but not this stuff yet. It's hard to handle. Our team
| largely focused on helping enterprise/gov/etc customers (think
| visibility/ai for core fraud, cyber, supply chain operations)
| and prioritized more self-serve etc for the crypto markets:
| they came to us with similar questions, but had way more risk,
| and so luckily we're seeing only a bit of churn right now. But
| if/when the sales/marketing/etc. collapses hit, that'll be much
| harder to avoid for many people.
| Supermancho wrote:
| > Apple & Google are using their $T war chests & monopoly
| positions to cripple the sales/marketing ecosystems of their
| competitors.
|
| To be fair, they are doing so by forcing competitors to in-
| house their advertising efforts. Largely, AdTech in large
| companies is outsourced to 3rd parties and those existing
| workflows calcify into positive signal. There hasn't been
| much incentive to change. Recently, the belts are starting to
| tighten and network (public market) adtech companies, even
| with big accounts, are always in danger of disappearing
| overnight.
|
| Many companies rather continue with the few winners in the
| network adtech space, than engage in the lengthy and risky
| in-house development. It's slow to see all of the parallel
| development efforts coming to fruition, when no company wants
| to make PR announcements that it's no longer sending customer
| data to a 3rd party, but still collecting it all the same for
| an internal platform. This migration is happening
| nonetheless. Amazon built out their platform in under 2 years
| and the ripple has pushed many others forward toward
| dogfooding their own adtech stacks.
| gumby wrote:
| > How many of today's startups are just servicing each other
| with VC money?
|
| IMHO this is mostly the a phenomenon of the SAAS/platform
| space. Those practices don't really apply to more traditional
| businesses (including high tech ones).
|
| But you made me think of something else: this phenomenon was
| definitely booming in the 2000 crash, when net-related hardware
| companies were underwriting their own sales, which ended quite
| poorly. Not only is the subsidization you point out happening
| elsewhere, but hardly anyone buys much "networking gear" any
| more. From crucial, enabling tech to boring infrastructure in
| what, 15 years?
| lurkervizzle wrote:
| Specific anecdote - SaaS companies selling to other SaaS
| companies is going to cause a mini-winter in that sector. My
| company (which we thankfully sold last year :praise) had
| several (though not exclusively) high-growth tech companies
| as customers.
|
| Now, when I look at layoff announcements, I see a lot of our
| former customers. Additionally, with budget freezes (driven
| by VC RIP decks), these same companies aren't buying new
| software for a while, even if they would benefit from it. And
| many tools now are priced based on headcount. So it's sort of
| the perfect storm - valuation resets so you have to go a lot
| farther with your current funding, reduced retention revenue
| because your customers are paying for fewer seats and harder
| sales because of budget freezes. Ick.
| gumby wrote:
| > And many tools now are priced based on headcount.
|
| Ah, live by the ARPU, die by the ARPU: you lack of control
| over the "U" means your company performance is coupled to
| the broad market!
|
| Thanks for this example. It's obvious in retrospect but
| apparently not prospectively.
| upupandup wrote:
| Isn't this what YC does essentially? YC backed SaaS companies
| buy each others products, write favorable case studies and
| use that to convince other enterprises to buy in, and to IPO
| quickly they raise lot of money to have the market share that
| commands the multi billion valuations with insane revenue
| multiples?
|
| Seems like this model is beginning to fail, most YC backed
| IPOs are now trading in deep red. ex) coinbase
|
| edit: lurkervizzle I can't respond to you since im throttled
| but this is what I wrote in response to add on to what you
| wrote in the other comment
|
| this is far more serious than I thought I seemingly just made
| the connection that YC backed SaaS (or any other accelerator
| schemes) were essentially just writing cheques to each other
| and playing whack a mole: You direct your cohort members to
| send cheques to one SaaS, raise series B & C, push for IPO
| after making splashes on media outlets (also owned and
| controlled by stakeholders), which in turn generates more
| fervor from retail investors eager to get in on the "next"
| Facebook.
|
| Then you would naturally use these beacons to essentially
| send more cheques, this time across many tiny bets that they
| can cycle through one after the other. Some make it to IPO,
| many don't so they get "acquired".
|
| The more I look at the YC business model and silicon valley
| in general is that very small group of people are actually in
| it to build sustainable businesses, since the Uber secondary
| market successes of VCs that successfully dumped their shares
| on Masayoshi, the SaaS have become the new "social media
| opex", where losing $2 to make $1 _is_ preferred over slower
| growing but consistent net profit generating ones.
|
| By next year I anticipate ton of pain and anger. I took a
| look at some TC figures and they are roughly 30/70 mix of
| cash and RSUs. Many of those people are also in debt through
| real estate using HELOCs too.
|
| What I think we are headed for is something unprecedented
| because there are 3 major bubbles imploding: crypto, real
| estate, dot com
|
| Even more crazy is that we had the exact setup going into the
| new millenia: e-gold, real estate, dot com but the difference
| back then was that monetary supply was nowhere near as low as
| they have been in the past 3 years (take a look at the M2
| supply/velocity chart).
|
| https://www.pennmutualam.com/market-insights-
| news/blogs/char...
| gumby wrote:
| Yes, at least in the startup SaaS space. As lurkervizzle
| put it, it's a kind of ponzi scheme, though in that case I
| think the "victims" are investors. And mostly the seed
| investors, less the LPs and GPs of the VC firms.
| [deleted]
| lurkervizzle wrote:
| 100% this - a good chunk of initial traction for YC
| companies is other YC companies - which is great in some
| ways to bootstrap initial growth/credibility, but the
| uncharitable view is that it's a Ponzi scheme in a way.
| oldsecondhand wrote:
| One way to look at it is ponzi scheme, but a more
| charitable interpretation is just eating your own
| dogfood.
| potatolicious wrote:
| I think Ponzi is an overstatement, though I agree with
| the general sentiment.
|
| There's in principle nothing wrong with clusters of
| companies that are inter-dependent on selling stuff to
| each other. Car parts manufacturers live and die by the
| big car companies - and to some degree vice versa - but
| we would hesitate to call that a Ponzi scheme.
|
| The key is whether or not this clustered ecosystem is
| bringing in money from the outside. _Somebody_ in the
| ecosystem has to be making money from the "outside"
| world. It's the sustainability of this outside connection
| that really matters.
|
| For a lot of SaaS companies I think the rude wakeup is
| that the "outside" source of money was never an actual
| business but instead was just endless rounds of VC cash.
| Likewise (and IMO more offensively) with crypto the
| "outside" money source was hyped-up retail investors (and
| hyped-up VCs) and not any actual useful business.
|
| I do agree though - the VC sphere has spent the last 10+
| years building up an entire web of companies that inter-
| depend on each other but where the "outside money" was
| always highly dubious. This is distinctly unlike the
| older crop of BigTech companies where the outside money
| is (relatively) stable: actual advertising, actual
| hardware in people's hands...
| elforce002 wrote:
| Uber is the prime example of get out while you're ahead. The
| founders cashed in and let the the $@#& pile to the rest.
|
| The camel concept is gaining traction since they focus on
| profitability from the get go, healthy runway and steadily
| grow.
| ceejayoz wrote:
| Uber's a VC success story because the VCs managed to realize
| their profits before it can collapse when it went IPO.
| upupandup wrote:
| They were lucky to find a whale like Masayoshi to dump their
| shares but seems the equivalent of bragging about how you got
| rich in the early phases of a ponzi scheme with the losers
| holding bags.
| dubswithus wrote:
| Very good points MegaButts. Crypto is VC funded too. Hence the
| crazy market caps because most of the VC owned supply is locked
| up.
| blakesterz wrote:
| I was there in 2000, and we all thought those tech companies
| were real businesses! Most of today's tech companies don't
| really look all that much different.
| bshipp wrote:
| I read this line and wondered what really has changed in the
| past 20 years?
|
| "In 2000, the Nasdaq superheated due to the large number of
| companies that skyrocketed into the public markets fueled by
| fanciful metrics disengaged from revenue."
|
| Interest rates have been held around zero since almost the
| dot com crash and certainly since 2008. No wonder VCs were
| given gobs of cash to try and eek out a better market return.
| The injection of cash on Wall Street resulted in huge amounts
| ending up in the stock market, perpetuating those returns
| once they went public and encouraging more VC activity. Is
| there any realistic forecasted revenue stream that justifies
| the valuations of some of these companies?
|
| Some good companies and good prospects are going to get lost
| when this monetary bubble bursts. It's a shame, but
| inevitable considering how long the Fed has been holding
| their finger on the scale.
| upupandup wrote:
| it's also interesting to see the impact of cheap capital on
| software development trends. for instance to reproduce the
| same SEO server-rendered site we had pre-2008, we have
| increase in complexity and costs.
|
| Applications and websites that should be more than fine to
| be rendered on MVC frameworks are now sending several
| megabytes of javascript down the wire, as a result our
| devices have more memories, more computing power, thereby
| consuming more energy than ever before contributing to the
| growing global warming crisis that we are only beginning to
| witness now.
|
| Coupled with lobbying for not regulating personal data in
| databases connected to the internet thereby allowing a
| select few giants to essentially act both as cartels to
| monopolize the arbitrage of the data of everyone on earth.
| The labor market are also controlled as a result of this
| monopoly, it feels like the best version of state
| sanctioned businesses: self-sufficient on its own while
| gathering data on everyone as the price of privacy is
| artifically suppressed.
| powerhour wrote:
| I was there too and I remember a distinct malaise about
| pointless tech companies that would make up for per customer
| losses with scale. There were a lot of companies whose only
| product was eyeballs for advertisers. (Ok, that part is the
| same.)
| excitom wrote:
| pets.com, webvan, drkoop, kozmo, garden.com ... ah, the
| memories.
| chromaton wrote:
| A lot of them were just early.
|
| pets.com => Chewy. Also PetSmart operates the pets.com
| domain now apparently.
|
| webvan => Amazon Fresh, Instacart
|
| kozmo => DoorDash, Uber Eats, etc.
| geoffjentry wrote:
| Not only that, but it wasn't even the largest issue.
|
| People point at pimentoloaf.com or whatever and laugh. But
| when those companies went under, they took away real dollars
| from "real" B2B companies. And then when those companies went
| under, "real" companies who depended on them went under. And
| so on.
| thr0wawayf00 wrote:
| The problem is that sustainability was never the goal to begin
| with. The goal was to generate enough hype around a product in
| order to go public or get acquired by someone else.
|
| It's the rich people's version of "hodling". Just like crypto-
| holders that created lots of hype around various coins and
| whatnot, VCs just bought stakes in lots of different companies
| hoping that one of them would go to the moon.
| skippyboxedhero wrote:
| > I think tech investors are unable to see their bias for just
| how awful most tech companies today are
|
| I agree. Ecomm broke first in other markets, and I am seeing
| profitable ecomm companies still having to raise capital. Uber
| is one of the worst ones (they took a business that is very
| profitable, and lost absolutely staggering amounts of money,
| they probably need to cut 50% of the workforce to start with,
| and then keep doing 50% until the business finds a level) but
| there are many others that have no business model or route to
| profit...and these are the best of the best that managed to
| actually list.
|
| The public ones have a route to survival, some will raise, a
| lot of expense will go away with the stock price collapsing
| (employees getting bailed in). But most private ones won't
| survive. Too many staff, too little cash generation, and too
| reliant on the kindness of strangers (who remembers a few years
| ago, IPOs were so unfashionable, very old money...lol).
|
| It is probably worse than 2000, the sector is much larger,
| private markets are far larger, there is so much hot money in
| the hands of brainless investors, it is a recipe for disaster.
| It is also worth saying, there will be a reprieve for a few
| months, then a story will break about one of the largest
| companies filing for bankruptcy overnight, then the private
| marks will come in. The losses sustained already have been some
| of the largest in the history of capital markets, it is the
| first inning.
| vcfundedmylife wrote:
| I agree, crypto and fintech will be the first dominos to fall
| - they're in free fall already.
|
| There's a lot of copycat B2B startups that extremely
| dependent on crypto and fintech for their revenue. They will
| be the next domino to fall.
|
| After that, it would be infrastructure, security, and
| analytics vendors that will face a revenue crunch and will be
| unable to raise another round of funding. And then, all the
| startups for startups vendors like Rippling and Brex.
|
| And the final domino would be currently well funded private
| companies such as Airtable, Notion, Loom, and possibly even
| Figma. We'll learn that none of these products had any
| significant traction outside of VC-land.
|
| This would be even worse for the Bay Area than 2000. Remote
| work is still the norm here (I'm typing this on my lunch
| break in my nearly empty SF office). An economic downturn
| coupled with destigmatized remote work is an environment ripe
| for outsourcing.
| jcmontx wrote:
| > the final domino would be currently well funded private
| companies such as Airtable, Notion, Loom, and possibly even
| Figma
|
| How can you make such claims? These are great products
| vcfundedmylife wrote:
| I don't deny that they are great products with incredibly
| talented engineering teams.
|
| All of that doesn't matter when 90% of your revenue comes
| from series C startups that will go bust in a year, or
| switch to cheaper and marginally worse alternatives.
| greedo wrote:
| The world is littered with dead companies that had great
| products.
| disgruntledphd2 wrote:
| That matters in a growth market, only revenue and
| positive margins matter now.
| moneywoes wrote:
| What can we do to insulate ourselves from this? As a
| software engineer at a startup
| disgruntledphd2 wrote:
| Hit profitability on a unit cost basis yesterday. Try to
| hit overall profitability before the VC cash burns out.
| djbusby wrote:
| Ask management about the numbers, evaluate their answer.
| If you don't get an answer: run.
| vcfundedmylife wrote:
| If you work in crypto or fintech, run.
|
| Otherwise, I don't think there's much you can do to
| insulate yourself. It's never obvious how resilient your
| employer is relative to the rest of the industry.
|
| Just reset your expectations on what working in tech will
| be like for the next few years. And prioritize learning
| and building your network - whether at work or outside -
| over trying to climb the career ladder. It will pay off
| in the long run and you'll be happier.
|
| Also, articles like this show that we're nowhere near
| capitulation. When we actually get there, stay passionate
| about tech. There will be another boom.
| drchopchop wrote:
| I'd disagree re: Figma and Notion. These are very sticky,
| best-in-class tools which have a lot of use outside of "VC-
| land". Figma is becoming the de-facto way to share designs
| across the internet. Notion has a good shot at becoming the
| internet's default business wiki, killing Confluence.
| btown wrote:
| Figma's incredibly hard to replace because its tools are
| highly customized for specific design workflows. Notion,
| I'm not nearly as sure about.
|
| With Google Workplace having pageless Google Docs now,
| and other shops having content centralized on Office 365,
| a lot of cost-cutting companies will ask "we just use
| Notion for a wiki anyways, can we migrate over to the
| system we're already paying for?" And sure, Notion is
| making the right move here, to move rapidly on becoming a
| hub for project planning and other structured content,
| which is harder to move into a plain collaborative
| document. But is enough of Notion's userbase using those
| table features to such a level that it would cause pain?
| I'm truly not sure.
| blueboo wrote:
| This is a 2000s mindset as well. Designers are a few
| YouTube tutorials away from jumping from Figma to Dingus
| or whatever will come next. Notion's moat erodes with
| every iteration of Google Docs and Office -- it'll be the
| WordPerfect of 2025.
|
| Maybe, anyway
| ProfessorLayton wrote:
| I won't disagree here. Before Figma it was Sketch, and
| before Sketch it was Photoshop etc.
| skippyboxedhero wrote:
| But the problem isn't the product. That is the mistake
| that people make when they say it is nothing like 2000.
|
| The problem is: way too many staff, not enough revenue,
| no route to profit. It doesn't matter if you have a
| "best-in-class" tool...where is the money coming from,
| how are you making payroll next month with no VCs.
|
| The main problem with tech companies isn't the products,
| the products are fine. The issue is that they have taken
| a profitable product and built an economic model around
| that product that incinerates money.
| TfyD3eYNen4XhbN wrote:
| It seems to me the VCs probably made quite a bit of money from
| Uber's IPO, no? Especially before their stock price halved
| itself (LOL).
| throwk8s wrote:
| > If your unit economics don't work then you're fucked...
|
| From the company's perspective that's certainly true.
|
| As a regular person I'm more worried about the companies whose
| unit economics work _too_ well. Companies like Amazon have so
| much momentum that it seems like they could go on indefinitely,
| instead of eventually failing and making room for new entrants.
|
| Companies whose unit economics don't work transfer wealth from
| investors to customers, then get out of the way. Companies that
| work too well can become an inescapable force.
| ruined wrote:
| eventually, their business becomes politics. see:
| unionization, windfall tax, the nascent antisurveillance
| backlash, ftc action...
|
| once your business becomes everyone's business, they'll just
| go ahead and make decisions about it without you
| gumby wrote:
| > Companies whose unit economics don't work transfer wealth
| from investors to customers, then get out of the way.
|
| Not always. Consider the rash of subsidized "we'll pick up
| your dry cleaning and then save by doing the work at a
| centralized facility elsewhere). These parasites wiped out
| the network of local dry cleaners, in particular in SF.
|
| You could say, well, they wiped out the buggy whip makers.
| But actually they wiped out the infrastructure and _then_
| went bust, leaving a desert (in dry cleaning terms) behind.
|
| Parasite is too kind a word.
| christophilus wrote:
| It's never happened, though. Buffett likes to say something
| along the lines of, "I like to invest in businesses that
| could be successfully run by a monkey, because eventually
| they will be."
|
| My prediction is that every behemoth of today will be
| tomorrow's Sears Roebuck, GE, West India Trading Company,
| etc. At some point, they'll become mired in bureaucracy.
| Enough incompetence will eventually rise to the top to allow
| competitors to pounce.
|
| I'd bet on that, if I had to.
|
| That said, I may easily be wrong, and I honestly share your
| concern about Amazon, Google, Facebook, Apple, etc.
|
| In particular, I want a successful OSS phone competitor to
| Apple and Google. I don't think something as important as our
| telecommunication devices should be run by a duopoly. There's
| no freedom in the phone market the way there is in the PC
| market, and I'd really like to see that change.
| JumpCrisscross wrote:
| I agree with the premise. Success is never immortal. The
| gap, however, is in societies being intended to be
| immortal. If you let companies run amok, so the thinking
| goes, when goes the company so goes the country. Limiting
| companies' power let's them creatively destroy one another
| without threatening the culture at large.
| marcosdumay wrote:
| > If your unit economics don't work then you're fucked, and
| even if you raise literally tens of billions of dollars you
| will eventually run out of money.
|
| Hum... VCs exist exactly because this is not a general truth.
|
| It's true for Uber, but there are many sectors where unit
| economics change with scale.
| dahdum wrote:
| > I mean if we really look at some of the business models for
| these companies, they're clearly unsustainable. Uber is a prime
| example of a company that seems destined to fail.
|
| Lyft and Uber are both very near profitability and things are
| looking pretty good for them over the next couple years.
|
| Why do you believe they are destined to fail? Established
| markets have been profitable for a while.
| christkv wrote:
| In a recession they provide a luxury good that might be down
| prioritized by customers to save money.
| PeterisP wrote:
| In a recession some people suddenly are eager for any job,
| no matter how bad, driving down Uber's "cost of goods sold"
| i.e. driver fees..
|
| But in general economic downturns are tricky, as they
| affect different groups differently - are the people who
| would suffer in a recession the same people who are
| currently using Uber?
| juve1996 wrote:
| That's not true, really, in this case with inflation.
|
| There will be no point in taking such low paying jobs.
| We're already seeing massive shortages at the low end of
| employment - working for that cheap simply doesn't make
| economic sense.
| vkou wrote:
| Driver fees are already so low that between depreciation,
| gas, and your time, you're barely making ends meet
| driving. They can't squeeze the drivers any further,
| unless they only want people to be driving 15-year-old
| beaters.
| missedthecue wrote:
| Boy, this is an evergreen narrative on HN, but I don't
| really think it's true. The total all-in cost of a Prius
| (depreciation, maintenance, gasoline, etc...) is about 30
| cents per mile. Uber drivers make about $1-$2 per mile
| which is a pretty big margin.
|
| Uber has been around for over 10 years now. Sure, not
| everyone is an accountant, but if Uber drained every
| driver's wallet, they'd have noticed by now. Interesting
| that it's usually only people who have never driven for
| Uber that claim it's completely unprofitable.
| disgruntledphd2 wrote:
| Back when I used to work for a FAANG in advertising I
| looked at how much money Uber was spending on driver
| advertising. At that point, I became convinced that Uber
| were doomed.
| vkou wrote:
| How many uber drivers are in Priuses? I haven't ridden in
| a single one...
|
| How many people do you personally know that make their
| living as an Uber driver? I don't mean pensioners making
| beer money, or people doing it as a side job, here.
|
| I know one. He's been doing it for a year and half, or
| so. He doesn't own his car. he has to lease it on a
| weekly basis, and he's paying through the nose for the
| privilege. He's doing it because his credit is shit, and
| he has no savings to buy a car outright.
|
| He's getting ahead, but if driver rates get cut, he'll be
| going right back to being a line cook.
| missedthecue wrote:
| Almost every Uber I've ever taken has been a Prius, save
| for the few occasions I've been in an Uber black.
|
| Still, the math isn't much different for a Corolla or
| Civic. And the more you drive, the cheaper the cost per
| mile is.
|
| Personally, I don't know anyone driving full time, but
| still know several driving 10 or so hours per week and
| they make about $300 for it.
| Jommi wrote:
| the first sentence is a terrible take unfortunately,
| prius one of the most popular taxi and ridehailing cars
| ever, it's sully arund >50% of car supply in most western
| cities.
|
| As usual, you are conflsting your singular consumer
| experience of Uber with the global business giant Uber.
| vkou wrote:
| Oh, I don't disagree about taxis. Priuses are everywhere
| in that space, and for good reason. If you are going to
| make a living driving, you should probably drive one.
|
| I do disagree on Ubers. I see very few Priuses, but
| there's a different explanation to that, that I missed.
| Casual drivers, people doing it as a side thing, or for
| beer money didn't optimize their car purchase for the
| purpose of driving a taxi. I suppose full-time drivers
| are more likely to drive one.
| mdorazio wrote:
| PSA: Data on these kinds of questions is available.
| Here's the data for Chicago on Uber/Lyft vehicle type:
| https://data.cityofchicago.org/d/bc6b-sq4u/visualization
|
| It will vary by year and city, but generally speaking
| Toyotas tend to dominate ride share with Camry usually
| #1, then Prius, Corolla, and RAV4. However, the long tail
| is _very_ long and you 're about as likely to get a ride
| in a less cost effective vehicle.
| roughly wrote:
| > The total all-in cost of a Prius (depreciation,
| maintenance, gasoline, etc...) is about 30 cents per mile
|
| One thing to note about Uber drivers is they're typically
| putting 50-75k+ miles per year on their cars. I'm curious
| what that does to those depreciation/etc figures.
| ceeplusplus wrote:
| If you assume 25k MSRP on a base model Prius, and that
| the car will sell for $5k after 150k miles (absolute
| garbage offer - an actual number would be something like
| $10k-12k in today's market), then you get a worst case
| depreciation of 13 cents/mile. Let's say a Prius gets 45
| mpg, gas costs $5/gal which gives you 11 cents/mile.
| Factor in tires and oil/brake fluid changes and maybe you
| get another $2k all in costs over the 150k miles, which
| is 1.3 cents/mile.
|
| All in costs around 30 cents seems right. That assumes
| absolute worst case depreciation too. And don't forget,
| the government lets you deduct 58 cents/mile off your
| taxes, so you actually make a profit off every mile
| driven.
| rileymat2 wrote:
| You need to do the math on a deduction v credit.
|
| If you are spending .30 and deducting .58, you need to
| multiply the .58 by your tax rate.
|
| You can't simply say .58 - .30 is .28 and that is a
| profit of .28. Deductions don't work that way.
| rileymat2 wrote:
| From the Uber fare estimator for a trip in East Lansing
| Michigan. Per-minute $0.17 Per-mile $1.20
|
| ----
|
| What is the catch? Drivers do not make any money while
| driving to pick someone up or after dropping someone off.
| Often, when I tried out driving, about half the miles
| driven were without a fare.
|
| Subtract the service fees from those numbers and it gets
| less lucrative.
| rileymat2 wrote:
| Often pickup traffic was very "directional" people going
| to the bar at one time, people leaving at another, so
| often you would have to drive back to where you started
| the last fare for the next one.
| KptMarchewa wrote:
| Yeah - Uber both eats and taxi part was extremely cheap
| during any restrictions. Now it's easily 100-150% more
| expensive here.
| georgeecollins wrote:
| >> Lyft and Uber are both very near profitability
|
| As they have been for over a decade. Just not actually GAAP
| profitable, except maybe a one off sale to DiDi.
|
| >> Established markets have been profitable for a while.
|
| So what market is Uber not established in? Are they pouring
| their oceans of profit from New York, Los Angeles and London
| into building a business in La Paz? I am sure they are trying
| to grow in places but they are way past the point where their
| profitable markets could fund growth. But they don't seem to.
|
| I am sure there is a profitable and enduring business in Uber
| in some markets and at some prices. I just think they know
| that the economic realities of that business would not
| support their public stock valuation. So they work on self
| driving and buy postmates rather than focus on those
| profitable established markets.
| ceeplusplus wrote:
| Uber's net GAAP loss, excluding losses from investments in
| DiDi and other companies, is around 300m last quarter [1]
| which is a ~1% loss on their gross bookings. Most of that
| is stock based comp. Their FCF loss was only 47m last
| quarter.
|
| I know HN likes to hate on Uber and other gig apps but a 1%
| margin is something they can easily make up given their
| stated take rate on mobility and delivery is around 20%.
|
| > So what market is Uber not established in
|
| If you follow their earnings calls (or that of DoorDash as
| well), advertising is a huge growing market for these
| companies. My guess is they take on an airline business
| model: zero to slim margins on the core offerings, but huge
| money on advertising and ancillary sources of revenue (for
| airlines, this is credit card points).
|
| [1] https://investor.uber.com/news-events/news/press-
| release-det...
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