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Comment by rotskoff | Hacker News Reader

I consider this a symptom of the massive wealth inequities in contemporary America. As other comments have pointed out, this phenomenon is not unique start-ups. The most direct cause of the IPO decline is a lack of necessity. Public markets used to provide crucial injections of capital for investment and growth. Currently venture capitalists control enough wealth to provide those investments directly.

This point is made most dramatically by looking at the growth of private equity investment through the early naughts. Some relevant plots can be found in [1] which uses the data to advocate for deregulation, which I do not believe gets at the underlying issue.

[1] https://www.cato.org/cato-handbook-policymakers/cato-handboo...

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The last serious study of VC performance I read suggested that, as an asset class, venture capital underperforms the S&P 500. Pension funds invest in VC not to get access to sweet sweet unicorn dollars, but because their portfolio strategies require them to have decorellated investments.

I've been in the industry long enough to remember working in it when it was very easy for tech companies to go public. It did not work out well for retail investors.

Why would VC investments be decorrelated with the stock market? Big exits are usually IPOs, no?

Decorrelation is a matter of degree, not a binary. VC funds are less tightly correlated with, say, the oil industry than the chemical industry is.

(I am not a finance guy so pardon my dumb question ) How do do startups serve decorrelation of fund portfolio? Startups valuation has to have some degree of correlation to the industry they serve. By this I am supposing that if you have a healthcare startup, its valuation would be strongly related to the performance of the healthcare sector. So if you have say healthcare stocks in your funds' portfolio, would investing in a healthcare startup serve decorrelation ?

That is why you invest in a VC who invests in a number of startups in different industries.

Startups often don't correlate very well with the industry they are in because they usually don't have the same business model. So I don't think Uber correlates with to transportation stocks, or Air BnB correlates to resorts, or 23 me correlates to Pharma etc. There is a cycle to start ups, but it is related to the broader economic outlook and the price of capital.

IPOs are a tiny part of the stock market.

Your private startup VC equity is not worth very much exactly when the stock market is doing poorly and you can't IPO or get acquired for BigCo stock. It seems very correlated to me.

Big exits can also be acquisitions (e.g. Facebook/Instagram).

I wonder if the kind of capital also matters. Does capital contributed by a partner in a venture capital firm more anonymous than money invested in a public company? Is VC money cheaper because it comes from questionable sources which can't find its way into the heavily regulated public market?

No.

Did VC underperform before or only after the (high) fees?

Venture capital isn't just a few rich people funding all the startups. There are massive funds for regular working class people like California's teachers that invest in these things.

VC grew because it got mature and turned out to work well (for recent history) and it provided a way to avoid the stresses of public market oversight while a fledgling startup is pivoting every few months and making no money.

It doesn't appear to have anything to do with wealth inequality and you didn't really provide any evidence to back up that assertion. Maybe when all you have is a hammer everything looks like a nail?

This point is really important. The biggest private equity players are invariably pension plans. Canada has been particularly good at letting quality managers run their public pensions and they have outsize importance now.

Most VCs raise from institutional funds (like banks) don’t they?

VCs overall, perform quite poorly. But they’re useful for banks, they need somewhere to put money as a hedge against more traditional investments (and currency devaluations in general I guess). For them it’s just a different risk class, and therefore useful for diversifying their risk.

No, raising money from banks is called debt financing.

No it's not necessarily. Debt and equity are distinct asset classes. Banks invest portions of their balance sheet in both.

>There are massive funds for regular working class people like California's teachers that invest in these things.

CALPERS "textbook example of the principal-agent problem" being all over VC is very bad for teachers:

https://www.nakedcapitalism.com/2018/02/calpers-chief-invest...

"Companies staying private longer is bad for investors. Eliopoulos described the motivation as “more companies staying private.” But that doesn’t mean this behavior creates an investment opportunity. In fact, it prevents the monetization that investors need to realize returns. It might be different if these VC backed companies were growing up to throw off tons of free cash flow, but as far as we can tell, that is seldom if ever the case. As we wrote regarding Uber, a prime example of this behavior:

Kalanick had maintained he wanted Uber to stay private as long as possible. That may be a fad with some unicorns, but it’s not the way for a shareholder to maximize his net worth, so it’s a preference that raises questions about the founders’ ulterior motives. Needless to say, that desire put him at odds with his investors."

The reason late stage VC investments historically were attractive was that certain marquee investors would help validate the venture shortly before a planned IPO. The limited time between the investment and the IPO (and the investors’ reputation helping assure the IPO would be priced at a healthy premium to the last pre-IPO round) meant the odds of a healthy quick profit were high.

With more companies staying private longer, these conditions aren’t operative.

If you read my assertion carefully, I said "control" not "fund". I understand that large public institutions are heavily invested in both VC and PE. My point is simply that public markets are less attractive because wealth is controlled by a small number of hands. Are the teachers themselves deciding where to put their money? Suggesting that the real beneficiaries of venture capital and private equity are the "regular working people" sounds like a fairly obvious canard.

Also, I did provide evidence---in fact the thrust of the article I cited is that diminishing numbers of IPOs are making wealth inequality more acute. Furthermore, it's presumptuous of you to assume that "wealth inequality" is my hammer of choice---I cited a piece from the Cato Institute!

Here's a good source: http://wir2018.wid.world/part-3.html

>If you read my assertion carefully, I said "control" not "fund".

So then your association with income inequality makes even less sense. If you're just referring to the centralization of the control of funds that happens with anyone who puts their money in a pool that has a manager. It has nothing to do with inequality because teachers make very little and so does their chosen pension leader and yet the latter has investment control over massive sums of money.

>sounds like a fairly obvious canard.

Yawn. An appeal to obviousness is tiresome to respond to. If you think you have a point to make, elucidate it. From where I sit, as long as pensions are involved in private equity, it benefits working people too.

>in fact the thrust of the article I cited is that diminishing numbers of IPOs are making wealth inequality more acute

So then it's not a symptom, it's a cause. To explain the difference: Lack of IPOs are not caused by income inequality but the lack of IPOs lead to more income equality.

The people who fund the VCs are pension funds and endowments. I don't think that actually reflects the wealth divide.

I think massive endowments (foundations, trusts, universities, etc) are pretty clear effects of a large wealth divide

Most of those endowments are pension funds for teachers and other non-wealthy jobs...

The majority of the stock market is owned by a few funds as well.

Both are individually poor examples of the wealth inequality as a driver of trends in the capitalization of tech businesses...

One is an alternative to the other. And typically the biggest investors/funds/endowments do both as a diversification strategy.

Wondering if these funds may be obligated to work in the interest of their investors vs just maximize dollar value. For example, should a factory worker retirement fund invest in robotic companies that automate workers out of a job? I suppose the argument is that if they don’t someone else will.

What you’re referring to is activist investing, or what is more descriptively known in most cases as activist divesting. Activist groups put pressure on funds to invest in, or divest from, certain assets.

For example, my college’s endowment was invested to varying degrees in the oil/energy industries. A bunch of forestry school grad students organized a “divestment campaign” to pressure the investment office to divest from anti-environment assets. I’m not sure how effective they were in the end, but they sure made a lot of noise.

So yes, endowments/pensions/sovereign wealth funds are certainly obligated to listen to their “constituents” if you will, but only by societal contract. A big enough PR storm should be sufficient to drive investment or divestment, if enough people are emotional and aggressive in marketing their argument.

The interest on university endowments funds financial aid.

He is not arguing usage but existence. The existence of large endowments surely displays wealth inequality, regardless of the utilitarian nature that may result as the outcome.

Large institutions are wealthier than individuals? Large institutions are wealthier than small institutions? Neither of these realities are surprising or concerning in any of the ways that wealth disparity between individuals is.

> Schools spend an average of a little more than 4 percent of their endowment funds annually.

---

> “Endowments aren’t generally used to lower tuition,” said Richard Vedder, an economist at Ohio University, testified before the House Ways and Means Committee last year. “Typically less than 20 cents of every dollar of endowment income is used for scholarships to lower fees for students. Making college more affordable is not the dominant use of endowment resources.”

---

> Critics note that a lot of endowment money goes toward glitzy student centers, athletic fields and pricey academic buildings.

From here: http://wfae.org/post/colleges-pressured-spend-more-endowment...

An endowment is there to provide investment income over tens/hundreds of years. Spending even 100% of that year's capital gains would be grossly irresponsible. The article you linked is calling for 5% vs. 4%... sure there are probably some institutions being too stingy, but on the whole, taking small distributions is the point.

Spending more than 4% of the endowment would be highly irresponsible. The entire point of an endowment is to not decline in value over time—they should consistently spend less than investment returns annually.

Endowments themselves accrue over time. There's no need to indulge some wealthy person's fantasy of everlasting life through their money, especially after they're dead, when more people will be along to take their place.

I don’t understand. Are you claiming universities should throw themselves on the mercy of year-over-year changes in donations?

The most valuable asset an institution like that has is time. Mere mortals can only start to live on investment income in their twilight years, but universities don’t die. As they get old enough, they could even become entirety self-sustaining.

Harvard's endowment is over $37 billion. Is that enough to be self-sustaining?

What number is enough?

Why would there need to be a limit? Do you imagine that Harvard having a large endowment is somehow depriving others of money? If so, you are fundamentally misunderstanding - endowments are invested in the economy.

A nonprofit institution doing good work should always seek to expand its reach and the extent to which it fulfills its mission. Are you concerned that the American people are too educated, or that too much is invested in research?

Currently, the incentives are to (a) give the fund administrators nice big bonuses, (b) increase the wealth of the organization, and (c) give the donors a kind of lingering life after death from their bequest, thus lots of strings and clauses.

The thing that's missing in this is progressing the goals of the organization itself, its mission.

Universities shouldn't be hedge funds with a sideline in teaching and research.

Increasing the wealth of the institution and giving donors life-after-death are both about serving the goals of the institution. I agree that excessive management fees can be a problem, but universities aren’t selling shares. The hedge fund’s gains serve the university’s mission, not to enrich some investor.

Universities shouldn’t be fundraisers and lobbyists with a sideline for teaching and research. Becoming independently wealthy frees them from that.

You’re forgetting family offices. Family offices are huge and growing LPs in PE and VC.

Don't forget about LPs, a typical fund can take in 100's of millions from just a few 10's of LPs.

Some of them certainly are. But what fraction? Is there a breakdown somewhere of the sources of VC funds?

A complimentary factor may be the lower capital requirements to get something off the ground these days.

That's a bit of a simplistic view. It costs a LOT of money to do an IPO. Considering most startups make a few million a year in niche markets, it's hardly worthwhile to invest in going public.

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