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Comment by Sevrene | Hacker News Reader

This is just a natural outcome of the way venture capital funding works at the moment. When you care more about speculation than what's actually fundamentally occuring, you're going to get businesses funded that are not even able to survive on those basic fundamentals. If it weren't backed by large capital, it couldn't exist.

This isn't always a bad thing, but on a whole, it does distort the market. At some point you have to weigh up if the good effects of this are worth the bad effects. If there were higher taxes, costs, or otherwise more risk for investing, it would limit that a lot.

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I feel like the VC game is a massive bubble, similar to what happened in 2000. There are a ton of high profile startups with tons of VC capital that (from the outside) don't seem to have a clear path to profitability, yet they continue to grow regardless. Sometimes they find a niche before going bankrupt, sometimes they don't. It's a huge house of cards, and I'm worried what will happen in the next recession.

I have business ideas, but I'm completely avoiding the VC game for now because I don't want to play the "build now, figure out profitability later" game where I'll likely be be forced into a profit model I don't agree with. My current approach is:

1. brainstorm solutions to problems I see 2. brainstorm a few profit models for the best ideas 3. Build an MVP, waiving the profit model initially (free trial and whatnot) to validate the idea 4. Implement profit model 5. Seek funding for growth 6. Exit

The VC game seems to go 1, 5, 3, 2, 6 (step 4 comes when?), which seems super broken. It seems like VC funding -> IPO is the profit model for many projects, and the board (after IPO) is left to figure out how to sustain that.

Sorry for the late reply. I think you're probably right about it being in a bubble, but I'm not sure we'll see it having a large crash that we typically associate with bubbles (some people would even say there is no bubble, if it does not pop).

VCs are backed by large amounts of capital because most government policy has been to stimulate growth and the only way they know how is by giving away large loans at insanely cheap (in many cases even negative in real terms) interest. This means that VCs can actually lose out on money by not taking those loans and investing it, and that in turn drives a lot of speculatory investment, as well as inflates asset and stock prices which the government then uses to show how good it is.

This is why you correctly spotted that step 4 is not a requirement for start ups anymore, because so long as you are big enough to be speculated on, you're good for funding. Whether that means it's broken really depends upon your definition of working, as a lot of people believe it's fine because all seems to be going great. This is the gambler's fallacy. It's all fine, until it isn't.

I thought the plan was Dumping https://en.wikipedia.org/wiki/Dumping_(pricing_policy)

Step 1) Use VC money to subsidize the price so that the market price is below cost

Step 2) Continue to use VC money to subsidize while competitors, who don't have the same cash, lose customers and eventually contract or die off

Step 3) Once you are the only real player, use your dominant position to raise prices

In many cases they may find the price cannot be raised enough to generate profitability, and the service can really only exist in a speculative VC-funded bubble.

Does the strategy even go that far? I thought it was more like

1) VCs invest money in companies hoping that some of them grow very fast

2) some of them do grow fast, so more VCs invest more money

3) the really really big companies IPO and the VCs make a lot of money

All of this can happen way before your step 3.

Both of you are right from my perspective. IPOs haven't had much to do with current profit.

Here's another version:

1) Invest in startups and show/push fast growth

2) Leverage FOMO to get more investors

3) Collect management fees

Once in a while get lucky with a unicorn. Bonus.

Step 3 is to IPO and sell the shares back to public.

Most of these pump and dump startups just IPO and their shares are brought via funds and such.

I bet income inequality gradually rising due to these VC funded startups

Don't forget Step 0:

- borrow ungodly sums of money at near-zero rates for a decade, and splash it on anything that moves.

Moral hazard? never heard of it!

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