Hacker News Reader

Comment by zminjie | Hacker News Reader

You are thinking from the perspective of an individual investor. For VCs, this kind of return is abysmal since it won't cover the 7/10 companies that went completely bust. In order to VCs to take high risks on early stage companies, they need the winners to return 100x so the fund even makes financial sense. It's one of the main reasons why VCs constantly push startups for hyper growth.

This is certainly better than losing the investment completely but I can't imagine the investors being too thrilled about this outcome.

View on HN

Who cares if it's bad for VCs. They already get paid over 200k+ in carry every year for over 10 years. They are also not investing their own personal money.

The point is that if all startups behave like that, thr VC business model doesn't work out, will vanish, we will all have to stop playing the startup game since there is no one providing that kind of funding anymore.

No it won't. One case in either direction means anything.

The game is that VCs will adjust, then founders. Then VCs. Then founders ad nauseam forever. This is just one small piece of a giant play being performed by many in different ways every day.

It means the three that have a liquidity event only need to cover 5/10 instead of 7/10.

Is that not a helpful result?

Ha, venture math is pretty hilarious. VCs basically need to give back their investors a 300% return in 10 years to make up for the risk they handle. Eg. For a $40M fund that's trying to grow to $120M, $1M here and there doesn't really move the needle.

The public NASDAQ has grown to 4x over the last 10 years. VC should do better or go home.

Not quite. People invest in VC funds exactly because these returns are not correlated to the market (well, they sort of still are).

It's diversification; people investing in these funds are generally NOT looking for similar returns to the public market.

>> For VCs, this kind of return is abysmal since it won't cover the 7/10 companies that went completely bust.

Only very myopic VCs would think this way globally. If every business did this, it would be terrible. But each business is its own opportunity/set of circumstances, and forcing everyone to 10X+ is as equally stupid as cashing out $1MM on a four year term sheet on $2.5MM invested.

You must evaluate each opportunity individually to maximize profit and growth. The intentions can always be to shoot for hypergrowth, but if the probability drops below the profitability point, you shouldn't be forcing the issue. Terrible investors do this, and it happens fairly regularly, though it's slowing down as founders become a bit more intelligent with their options.

> Only very myopic VCs would think this way globally.

Might this be a (converse version of a) No True Scotsman fallacy?

Elsewhere in the thread, a comment [1] referenced an article [2] that details the return imperatives that VCs face. In particular, it details how small returns "don't move the needle".

OTOH, the article asserts that only 5% of VCs (misleading, if a percentage of number of firms instead of AUM) succeed in meeting this imperative, so I wonder how the other 95% still attract enough LP money.

[1] https://news.ycombinator.com/item?id=17872045

[2] https://news.ycombinator.com/item?id=17874278 https://techcrunch.com/2017/06/01/the-meeting-that-showed-me...

>> In particular, it details how small returns "don't move the needle".

You never want small returns. But when you can choose a small return over basically a near-zero chance of losing all your money, it isn't that difficult of a choice - or it shouldn't be.

The point is that, to a VC, a small return is indistinguishable from losing all the (not "your", since they rarely have much, if any of their own money in it) money.

Given their economics, VCs have a very strong incentive (or an imperative, according to that article) for "forcing everyone to 10X+" (and I would argue it's more like 20x+), no matter how small the likelihood of that outcome. Without at least one outsized exit, they're a failure.

Put another way, their LPs aren't paying them to, in any way, play it safe. Near-zero chance isn't the same as zero.

So, yes, the choice for a typical VC isn't difficult. It's just the opposite of what you're proposing.

VCs must aim high, but a medium-size win isn't the same as going bust. It's still better to get a return with strong linear growth than to get nothing.

Didn't the investors have the choice to take the cash-out? I am actually surprised they agreed. It seems logical Buffer is not going anywhere, and growing, and an acquisition is still very much possible which would represent much larger returns.

Reply on news.ycombinator.com