So I may be a fucking idiot, but can anyone tell me how VC now is not just a bunch of highly pedigreed fuckwits living off the capital of their LPs while running around playing hot potato with the latest shit investment they’ve rationalized, so that eventually they can dump the steaming pile of shit companies onto the public to gtfo? These firms are literally running around with a fucking deal shotgun doing 7-10 deals a quarter looking for a god damn unicorn; companies that have no business existing are getting funded and for multiple rounds too. It is literally like buying high-end art, where you don’t care how much it is, someone will always be willing to pay more, thus giving the piece value.
Like say you did the series A for a company and are kind of worried because even after all the bullshit analysis you did saying that this company was great, it’s still cash flow negative and shows no signs of turning around, but this is totally fine! Your friend, pedigreed fuckwit #2 at “insert tree species name” Capital, has decided this is also a good investment and will do the series B at a higher valuation than series A! So, on paper you’re good! Your firm is now making money, your LPs are making money, and you’re making money! And if worst comes to worst, you can just wait for pedigreed fuckwit #3 to do the series C which will make you EVEN MORE MONEY!! And if all else fails, you can just hype up the company and go public to dump this shit sandwich on some non-target hardos that get their investment advice from Reddit.
I laughed
.
pumping SPACs instead seemed the morally sound thing to do!
Chamath is a fool, a phony. He claims his net worth is $15 billion. Gimme me a fucking break.
This guy's platform exploded in 2017 just around the bitcoin boom. He also had momentum from buying the Warriors
But recently he's positioned himself as a man of the people and democratizing the markets (see the recent GME debacle).
I doubt it's genuine but its in vogue for these wealthy folks to basically pretend on the side of the "little guy"
edit I just saw his Bloomberg interview this guy's completely fallen in love with himself and wears a turtleneck to seem like an intellectual
edit 2: In fairness, prior to these PR campaigns, Chamath has been critical of the capital allocation in his own asset class that more or less confirm the OP's point about the hot-potato game
depending on the size of his Bitcoin holding that might be possible. I like Chamath, he has gotten some really good returns, don’t be a hater. I do hate his turtleneck in his latest interview though, mans looking like a Sri Lankan Bond villain
I refuse to listen to a podcast where grown men refer to themselves as "besties". Someone who has seen it, please tell me – are they wearing pajama onesies? Does Chamath's beard wife interrupt the stream and breastfeed him? Guy is dollar for dollar the most insecure douchebag out there.
Dude has gone full social media influencer between the podcast and other shit, it's embarrassing to watch. I am immediately skeptical of anyone who pretends to be changing the world with fucking SPACs lmao.
There's a whole cult of personality around this guy like he's a youtuber, but his merch is these shitty overvalued SPACs...Hindenburg and Hedgeye did some great work last week on what a turd CLOV is.
.
Step 1: invest in every single company not run by developmentally delayed marmosets.
Step 2: the hot potato game detailed in the OP
Step 3: look like a genius when you 'invested early in Facebook' when the fact is you invested early in everything and have the same 1-3% hit rate as all the other VCs
Step 4: work hard with all your pedigreed fuckwit friends to obfuscate the fact that not a single VC firm is any better at picking winners than another
There's a positive feedback loop that comes with receiving an investment from the top VCs, accelerators, or corporate VCs - once Benchmark, Sequoia, Y Combinator, or Google Ventures have given a startup their stamp of approval it immediately grants them legitimacy with media, customers, new investors, etc. These firms tend to have amazing returns, partially because they invest in good ideas (and have the connections to get in early with promising teams) but also (I'd argue largely) because their cachet actually creates scale in these companies. Obviously not every time, but often enough (and they cast a wide enough net) that the fund-wide returns look stellar.
There's a huge dispersion of VC returns - everyone else sees what these guys are doing and wants to invest in money pits because Sequoia can do it and occasionally turn a 50x or more, so lesser VCs throw money around at massive valuations hoping to do the same. I think there's a lot of value in someone being willing to take the risk and finance long-term disruptive concepts, but there's also a much larger delta between Tier 1 and Tier 3 VC funds than there is between Tier 1 and Tier 3 PE funds, and I don't think enough people appreciate the self-perpetuating nature of that dynamic.
It's no different than a B or C stage company receiving investment from a strategic partner: validation from people who allegedly know what they're doing that allows for further fundraising
Reminds me of Theranos. All general VCs backing it. No Healthcare VC investing in a healthcare company. Looks how it turns out.
The top few VCs are effectively kingmakers who give the company ridiculous amounts of money to spend a huge majority on Sales and Marketing, which is also bad business. Products and services should win the long run after years of trial and error, and slowly changing to what the broader public wants and desires. With our current VC model, Sequoia or Benchmark picks a company eay (too early as well) and forces then onto the public through crazy marketing campaigns and connections, thereby bringing inferiror products to market too fast.
i mean what are you trying to do, wait *years* for your returns?
what are you, some kind of boomer?
(i kid, i kid)
Agreed on the positive feedback loop. A lot of these VC funds are creating value by plugging portfolio companies into their ecosystem. Getting in at a double digit revenue multiple makes a lot of sense when you can roll our their software to hundreds of thousands of people through some introductions. The funny part is that some VC funds function act more like corporate development arms of companies that are their anchor investors or majority owners.
Clubhouse and Andressen Horowitz is a good example of this. It became successful and will probably get acquired for $5B not because it was a particularly novel or good idea, or the first of its kind to market but because a16z people valued it at $100M in series A, which ascribes value to it. There's no way in hell it would’ve been successful without a16z hyping it up and juicing it, but they probably have a 50x on their hands within a year or two because they did. Pretty freaking smart by all parties involved honestly. But that’s the way of the world - we value name brands and elite sponsorships. Rich dumbfuck gets into Harvard based on family connections, now he’s a Harvard graduate, which ascribes to him a certain value in the minds of many, not because he’s actually particularly smart, but because he’s a Harvard graduate. He’s no better than any other dumbfuck out there, but because he has the Harvard stamp and Harvard resources he has access to certain levels and circles that others would not. YC and Sequoia and a16z are name brands which work in the same way, simply having their name brands will juice their portfolio companies into success.
And this dumbfuck comes up with some "meh" idea, packages it well, tells his other dumbfuck friends working at these firms about it, they say "Hey! checkout this guy and his great company! He even went to Harvard like us, so we know that his business will be successful and therefore we should invest!" And then the cycle goes from there.
Yeah this is definitely it right here. I'd say that the big names are able to do what they do with a mixture of luck and stupidly thick networks that are able to help get their portfolio companies up and running. The fact of the matter is though that it's hard if not near impossible to make a sound investment into a company with no revenue, cash flow, or even those blue ocean ideas that have zero comparables. The market is definitely flooded with new VC shops and more opening up every single day. It's started to become a buyer's market lately too where startups are turning away VCs during rounds because there's just so many of them and realistically having a no-name VC on your cap table is basically a death sentence for future rounds if you're trying to pull in one of those Sequoia/Accel/Bessemer/Benchmark funds. I definitely think that there is a bubble forming around the new Gen Z VC space. There are some large masses of 22-24-year-olds that are opening their own funds and syndicating angel/micro-seed investments after getting an internship at a VC fund for a summer. I don't see that trend lasting very long, or even understand exactly how somebody with 3 months of venture experience thinks they're qualified to act in their LP's best interest and actually make sound investment choices (it's almost 100% luck for these funds in my opinion if they break even). It's almost like a strange Ponzi scheme where they're getting all of their college friends with a few $1K lying around to invest in their syndicate and then syphoning off the 2% while they go invest it in some renewable coffee k cup startup that's run by another set of their undergrad college friends that just took Principles of Innovation BU-201.
In a weird way it's basically just an iteration of celebrity branding.
Love the analogy to high end art. After reading Tom Wolfe’s Painted Word it really seems like an apt comparison.
Love the analogy to high end art. After reading Tom Wolfe’s Painted Word it really seems like an apt comparison.
Tom Wolfe is a fantastic author. SB'd.
Haven't read this, will check it out.
You mean money laundering?
Hey man, I fully agree. But it's whatever the market is willing to bare, right?
Close, but not exactly. It’s what the market is willing to ‘bear’.
Before you had people throwing money at private tech cos stupidly now they figured a way to also do that in public markets with SPACs. Just wonder when all of this will crumble. Also has any firm developped a SPAC ETF? Surely that'd be a booming thing no?
SPAK and SPCX exist.
AirBnB
DropBox
DoorDash
all these companies and more were all funded by VC in the early days...
I would bet on just eat takeaway before I bet on doordash
"tree species capital" LOL
for real though why the fuck is every other firm named after foliage, bodies of water or masses of rock? who's idea was this lol
lack of originality lol
I spoke to a founder at a very small shop (like 5 ppl) and he said that most times, it's to symbolize organic growth, strong foundation, and longevity. I completely get the need to create an appearance and air of legitimacy, but maan, I had to bite my tongue during that explanation.
It's funny because of how true it is. I can think of several tree species capitals I've seen and applied to in the last 6 months alone.
lmaoooooo "insert color" "insert object in nature" capital / partners / management
What the hell am I doing wrong???!
I mean you can pretty much summarise all of the buyside as "pedigreed fucks buying and selling from each other in a zero sum game". Ditto the sellside is basically just "pedigreed fucks being slimey middlemen and taking a cut whilst their at it".
Would be incredibly diminutive and would show a complete lack of appreciation for nuance (or even a lack of understanding in the importance of these fields) though.
Aha, if it isn't highly pedigreed fuckwit #4!
Jk of course there is nuance to this, but I was more commenting in regards to how the general state of the industry looks to me as someone on the outside.
As much as people hate Chamath, he is good at what he does and knows what's going on.
And yet here he is taking the ponzi scheme full circle by opening up this market to retail via SPACs, for which he will be rewarded handsomely.
gotta look out for #1. There's money to be made. You would do the same.
Literally this
dont blame the players, blame the game
Please do this take on buyout next.
I sort of already did this at the beginning of the pandemic you can find it in my post history haha. That one was slightly less satirical, but I was an idiot and did not count on the fed stepping in to provide liquidity.
Chamath is a sales guy. He plays different league than most of us do, sometimes even different game (although still a money game). I like to listen to him because he is well articulated but there is not much deep knowledge shared beside some fundamental generalisations which look like clever observations. Some is just pure buzzwords spray.
In a big picture, he is just another oppinion, with some weight based on a fact that he has a good CV (FB CEO, humble roots, blabla) and is arguably good at attracting money.
So take it for what it is and not for what you "feel" it could be. He is still a sales guy.
If there is something to learn then it is HOW he can present his thoughts.
he is arguably one of the most articulated people in the world
Sounds like a good reason to be cautious, doesn't it?
You're absolutely right. We've been playing it by buying into seed rounds or Series A and flipping the subsequent round via secondaries after we help clean up a few things. Even when the music stops we'll have net out much more than we can possibly lose as we aim for very very short hold periods.
Wait is this for real a thing lol. This seems like the ultimate scheme because everything nowadays will get funding at ridiculous multiples at Series A so I assume you are just crushing it if you can consistently sell your stakes
Yup, if you set things up correctly you can almost guarantee liquidity for yourself during a subsequent round. Don't want to give away too much here but obviously a shorter hold period makes this a lot less risky than a typical venture deal.
Example of a deal we did recently:
Invested @ $11M or $12M valuation
Currently tagged @ $40M+
Will sell in a few months once a few tax benefits kick in at $35M - $50M valuation.
Don't care much about selling at the top. Only quick liquidity so we can redeploy as fast as possible. Unfortunately a lot of my time has been eaten up with a control deal I'm running right now but might hire someone to run with this in the next few months.
I think it's important not to buy into caricatures/extreme characterizations of anything, entire industries in particular. It's hilarious to see folks like the OP try and square things into their narrow world view and get mad when things don't compute.
Outsiders think PE = boring bankers and value investors who put numbers into excel and wouldn't understand technology/new ways of thinking if it hit them over the head. Is that a fair characterization, or is it exaggerated?
There's some good discussion here that I'd maybe add some framing to.
a) Different assets serve different purposes in a portfolio
b) Median VC underperformance is a feature, not a bug of the asset class: why are the best endowments and asset managers overweighted in venture? Even a 60-70th percentile VC firm with the potential to 3-5x a fund can be a better risk-adjusted return than alternatives. Yale's CIO literally wrote the book on managing PE/VC portfolios and his disciplies have consisntently outperformed due to their inclination towards venture.
c) The meme of "all VCs beside the top-tier firms suck" is taken to an insane extreme. Outside of poor business cycle/timing, most half-decent VC firms generate 1.75x MOIC and 12% IRR+. There are a ton of seed-stage firms who are included in these analyses but are casual observers who manage family money who want to say they are a VC. I think if you cullled this tier you'd have a very diffeerent data set on the asset class. As opposed to PE, there are many more of these because check/fund sizes can be smaller and barrier to entry is lower as well. I'm not saying it would get rid of the insane performance skew or even median underperformance relative to PE, but the risk-adjusted return profile would be much clearer.
d) VC is largely public/a media show because the skewed nature of the asset class (losses don't matter as much as how big are your wins?) encourages public parading of investments and faux thought leadership. The reason it's so weird to folks is because other industries tend not to attract the same profiles of investors nor have the same incentive structure or media coverage.
e) Re: Chamath - If you follow the breadcrumbs back enough you'll get a sense for what he can be like to work with and what he's about.
f) The points on name branding helping companies and leading to a hype cycle here is true, but that can be both good or bad.
Lastly, the fact that a discussion on this largely turned into a forum on a tech investor who is regularly CNBC/Squawkbox but had his last firm filled with talented investors depart, basically proves my point that folks like the OP basically just want to take broad media charecterizations of whatever the fuck they don't understand so they can dismiss it.
You don’t actually think I wholeheartedly believe in my own take do you? What do you think I am, an idiot?
It's the internet
1.75x MOIC and 12% IRR+ is an absolutely dreadful return when you consider the amount of risk a VC takes. Namely, investing in extremely early-stage, illiquid startups, with an insanely long time horizon to potential exit, if any. 12% IRR / 1.75x is a losing proposition unless you are deploying a metric fuckton of capital, which you probably are not if those are the types of returns you are boasting. Would be surprised if any VC could fundraise with those types of returns.
Yep...
You can literally get better returns from infra funds with a only a minimum amount of the risk associated
Great. Now do the top 25%, top decile and top 5% of infrastructure firms and compare returns.
We use investment-level data to study performance persistence in venture capital (VC). Consistent with prior studies, we find that each additional initial public offering (IPO) among a VC firm’s first ten investments predicts as much as an 8% higher IPO rate on its subsequent investments, though this effect erodes with time. In exploring its sources, we document several additional facts: successful outcomes stem in large part from investing in the right places at the right times; VC firms do not persist in their ability to choose the right places and times to invest; but early success does lead to investing in later rounds and in larger syndicates. This pattern of results seems most consistent with the idea that initial success improves access to deal flow. That preferential access raises the quality of subsequent investments, perpetuating performance differences in initial investments.
This paper measures the mean, standard deviation, alpha and beta of venture capital investments, using a maximum likelihood estimate that corrects for selection bias. Since firms go public when they have achieved a good return, estimates that do not correct for selection bias are optimistic. The selection bias correction neatly accounts for log returns. Without a selection bias correction, I find a mean log return of about 100% and a log CAPM intercept of about 90%. With the selection bias correction, I find a mean log return of about 7% with a -2% intercept. However, returns are very volatile, with standard deviation near 100%. Therefore, arithmetic average returns and intercepts are much higher than geometric averages. The selection bias correction attenuates but does not eliminate high arithmetic average returns.
This study analyzes how investor attention to industries affects firm valuations in the venture capital market. Relying on aggregate search frequency in Baidu, we construct a direct measure of investor attention to industries (ASVI). Our results show that an increase in ASVI predicts higher firm valuations. We prove that the price increase is an attention-induced result rather than an information-based fundamental premium, which is due to the evidence of a long-run reversal of firm valuations and worse performance of VC investments. Our findings continue to hold across a wide range of robustness checks, including sample selection, endogeneity, alternative measures of ASVI. We also find that syndicated investments and involvement of experienced venture capitalists attenuate the effect of ASVI on firm valuations, further supporting the attention-induced view.
Narratives and conventions have received considerable attention in recent discussions of the valuation of financial assets. Narratives and conventions, however, can only be effective to the extent that they attract and persuade audiences, and this article makes the case for paying more attention to those audiences. In particular, the article argues that financial assets can only be established as assets if there is a group of potential investors that has been persuaded to accept them as such: to take them seriously as potential investments. The article coins the term asset circles to refer to such groups and supports the argument with a discussion of venture capital and its role in the production of unicorns: private companies with extraordinary valuations. Venture capital firms may be thought of as value entrepreneurs, and much of the venture capital process is oriented towards constructing both value narratives for the companies they invest in and asset circles prepared to accept those value narratives. Their aim in these processes is a profitable exit, in which the venture capital firm converts its investment back into cash at a considerable profit through either an acquisition or a flotation.
https://twitter.com/VCBrags/status/1360348072002408448
How do this many people in banking not understand how private markets work
We’re all non targets, what do you expect? In all seriousness though my take was pretty satirical so I wouldn’t put too much stock in it.
Haha fair enough, I was triggered since VC doesn’t get much attention on WSO
Duuuuude, its this thing called exposure dude, and likeee, your one good investment kinda like pays off all the bad ones. Craaaaazy
Can we get a VC section of WSO... It's time to bring this to the west coast
I believe it did exist but has since been acquired by the PE tab.
I have a friend in VC...he's a "Partner" in his early thirties but since COVID started he's just been living in different cities for periods of months at a time. Not sure what he does, but doesn't seem like he actually works lol. I actually think I want to be him when I grow up. I've saved a shitload so I might just quit banking and try to "work in VC".
This is the way
Sounds like my friend. A lot of these guys don't make as much as you think though, the discrepancy in pay in VC is night and day. Quite similar to entrepreneurs too, which makes sense.
Which HF did you end up choosing? Start-up or established? Did you become rich?
Bump
reply
Bump
great post.
Bump
VC is for midwits
the furthest to the right on the IQ bell curve are at hedge funds. the furthest to the left on the IQ bell curve (not a bad thing, IQ isn't necessary to be successful in all situations) are in real estate. not sure where private equity fits but it's either far left or far right. extremely high IQ and extremely low IQ both make money, midwits get slaughtered.
OK intern
>"insert tree species name" Capital
Omfg SBed
This is all funny, but I think you guys just make fun of VC because you have no fucking clue about it.
Without VCs taking these 'dumb risks', we would not have internet as we know it. We would not have biotech innovations, social media, online news, clean energy. You name it.
Venture capitalists are THE people in finance, who drive innovation and spot groundbreaking ideas providing capital and network, when boomers just sit back and invest in another real estate.
Is VC a stupid game sometimes, with valuations reaching insane amounts and water startups getting $50M checks? Sure. But that doesn't change the underlying narrative.
Good VCs are one of the smartest people in business and anyone saying this is 'dumb money' is fucking retarded.
Agree with you here except that SOME VCs are THE people in finance. The reality is that the majority of VCs are very bad at their job, but can survive for some time because there is a good probability of getting lucky (especially at seed stage), and we've seen a massive tech bullrun since 2001
VC is a misnomer - more like some form of human resources
(stole that from an interview and love it)
the biggest issue for me is that it's turned financial/tech twitter into an advertising/ego stroking zone for VCs to brag about their winners like they're some kind of oracle while ignoring their losers
"You are always winning if you don't count your losses."
And by "your losses" I mean LP's losses.
This is the main thing that bothers me in the industry. The incentive structure is so fucked and most VCs are obnoxious self-promoters who just got lucky.
Nah bro, you just don't understand. If you look at the P/Tesla, you'll see how undervalued these startups really are! /s
https://www.notboring.co/p/dreams-all-the-way-up
FWIW, I'm in B school and a considerable amount of my classmates are headed to VC with backgrounds ranging from zero to decent finance experience. Some of them seemed to struggle in the more basic corporate finance classes. I have no idea what their roles will be, but seems strange.
You don't need finance experience (wall street) to be a VC.
Only a few of the BEST VC's have a finance background Neil Shen and Gurley are the two who pop in my head. Many of the top VC's like Doerr, Marc A, Vinod, Thiel, and Hoffman were all operators at their companies before VC.
A lot of startups don't want to work with bankers who have never started their own businesses before and that is understandable. So sourcing might be difficult for your peers.
Good points, but I’m trying to understand who is doing the valuation etc at these places
I have read it is extremely difficult to break into VC even if you get an MBA at Stanford. Where are your classmates working and any idea of comp?
When I was first starting out, rants like this taught me how things actually work.
“insert tree species name” Capital 🤣🤣🤣🤣
I seriously don’t understand the appeal of working in VC.
Some people would rather work in Palo Alto than Manhattan; which is understandable. Or they actually care about innovation but have no technical skills and want to help with their capital.
Love the user name.
Cheap money desperately looking for yield, creating massive misallocation of capital and lots of waste in the process... but also a few gems
VC definitely is a bit of a circle jerk. This much cannot be denied. But, they do a lot of good for the economy by making people who design fuck apps think they’ve really created something profound.
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