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Comment by mring33621 | Hacker News Reader

Here is the model, as I currently understand it:

1) some people are rich and want to get richer

2) Ivy educated VCs invest money for group (1) in start-up companies, while paying themselves handsomely with that same pool of money

3) Ivy educated kids start companies using money from group (2), while paying themselves handsomely with that same pool of money

4) sometimes, through a combo of hard work, skill and luck, things work out and everyone makes more money than was spent

5) sometimes, because they are mostly, actually a bunch of yahoos and/or scammers, things don't work out and group (1) loses their money

There are some oversimplifications here, but in general, this seems to be the way.

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This seems to be largely what is going on. I think also, there are a few startup ideas considered to be "the future", and VCs are basically just choosing which horse they will bet on for that idea. So they pick through different founders chasing that market, and invest. Then all the other VCs pile in on those chosen horses, regardless of the due diligence.

As a naive and younger outsider I always thought these people were all very competent. Clearly there is something very different going on here.

> I think also, there are a few startup ideas considered to be "the future"

This. I’m getting annoyed with my jQuery/Spring app with ~million of revenue that I can’t get sexy for employees nor for funding; sometimes I want to throw away ethics and say we’re building “a blockchain of solar-powered AI european-central-bank ledgers”. It would be so much easier. Nah, we’re just storied field data in 7 tables, and customers love it.

But the tide is turning. I have a friend who mentioned the blockchain on his funding papers and he can’t even get an office in my city (France). I’m happy the tide finally turns for the blockchain, to value it for what it’s worth: A good idea for 1% of the present usecases, and bad idea for everything else. Even though not being able to sign an office lease for insurance reasons is quite comical.

You're almost there. Make it a "blockchain powered 3D PRINTED solar AI bank ledger" and you'll be funded in no time.

You forgot to add "to the moon!" at the end /s

Did you even read the article? Make it "blockchain-free 3D PRINTED solar AI bank ledger".

99% of the time when someone can’t hire the problem isn’t the tech or the product-space, it’s that they aren’t paying enough. If you pay me a million per year I will build boring crud apps and web integrations for you all day.

This is exactly the answer. I've worked on one very old codebase in my career. I was paid well for doing so.

The graph of investment in software starts high with greenfield projects, drops over time to an all-time low as optimizations take hold, and as the software continues existing will rise to the greenfield (or more) levels of cost. The interesting thing to me is what substantiates the rises; for instance, in greenfield experimentation and iteration is what costs the most. In old software it's usually the employees.

I'd love to actually document this sometime.

You won’t get a million per year from my revenue since I’ve built it and I’ll still be there come hell or fire; but you can get 10% at the beginning and I don’t hesitate to increase employees as they maintain the existing one or contribute to increasing the revenue. In fact I generally give them more than they contribute, and I’ve increased my employees 30% this year in average, unprompted.

But there is always this HN comment with, no matter how much you pay, they put exclamation marks about how little the compensations are in France and how 35hrs is too long or having to be in office a few days a week is the bane of their existence. I’m always wondering whether we’re unionized here, it looks like a systematic complaint, no matter the conditions.

Well, I don’t know, create your own company I guess.

You missed the point. You can't recruit because you aren't paying enough to be competitive.

So what is your salary range?

1) has several layers of middlemen that all take cuts along with 2) and 3). Typical LPs for VC funds are often institutional investors like university endowments and pension funds, or they are hedge funds that are themselves funded by university endowments and pension funds. So when #5 happens, the loser is oftentimes not an individual rich person (though family offices participate in this ecosystem as well), but a collection of not-very-rich people that have entrusted their money to a professional money manager.

Couldn’t have put it better.

Here’s a true story: a friend and former startup coworker got verbal agreement on funding a startup. His business pitch consisted only of a list of names of people he’d worked with in the past who could execute well.

So where is the due diligence that the VCs talk so much about, especially in the case with FTX, which supposedly didn’t have any appropriate financial management?

Having been through due diligence with several top VC funds (Softbank Vision Fund and others) I would say that due diligence generally focusses in on a few key areas which are crucial to the upside and risk factors in the specific business. For example, is the financial model broadly accurate (ie there’s nothing in the finances that would cause the investment hypothesis not to work out), if they’re a software or saas company, do they own their software or are they exposed to IP litigation risks etc[1], what’s the cyber risk like, etc. Then they will deep dive on anything that gives them a spidey sense tingle during that first phase. It’s not a general seal of approval of all the controls in the company, they know for a startup you’re building the plane while you’re trying to fly it, they don’t expect perfection they just want the plane not to crash into the mountain before they hit their exit.

On that basis, the FTX thing is kind of baffling because the financial controls would seem to be core to the thesis. Having read some of the things sequoia said about their original meetings with SBF it seems they were dazzled by him personally and allowed their greed to overcome basic prudence.

[1] So for example for SVF I had to go through all the transitive dependencies of all our software (which for JS and python is generally a lot), check the licenses and actually track down authors of a few packages in the node ecosystem and ask the authors to explicitly license their software so we knew we had a right to “depend” on it.

The TLDR of the above which I never actually state is you should never think because X investor is in a situation that you don't need to do your own diligence/research. You should always do your own research and satisfy yourself before putting your own money at risk.

Wait. What happened to all the middle class chumps who got tempted by "influencers" and reassured by rich people saying "I'm in!" in your model?

This model of yours suggests that rich people played with fire and rich people got burned.

Is that what is happening? That doesn't seem to be a complete model.

You are missing the key point. It's not hard work, skill and luck.

The Fed has been on a money-printing spree since 2008 [0]. The idea was that it would create jobs and stimulate economic activity. In reality, it lowered the bar for things considered investable, so the Ivy-educated VCs were trying to tap into that stream of cheap money, while paying themselves handsomely. Either get acquired (using cheap debt that will also be used to pay the acquiring execs) or IPOed (using the excess money from the public). Profitability was out of question for at least a decade.

[0] https://tradingeconomics.com/united-states/money-supply-m0

The Fed doesn’t give VCs money.

It prints money, that money flows into institutions and chases returns. Much of it flows to VC, guaranteed. That’s what the Fed was literally created to do.

New money is created through bank loans, or monetizing government spending, or emergency asset purchases by the Fed – none of which are the typical source of VC funds.

From https://hackernoon.com/the-macroeconomics-of-venture-capital...: "when the Fed engages in quantitative easing, it goes a step further and attempts to keep returns for longer-term bonds down as well. In the United States, this meant the purchasing of mortgage-backed securities and government bonds. (In Japan, central bankers have had to utilize even more extreme measures, going so far as directly buying not only government bonds but also stocks on the public market). By bidding up the prices of long-term bonds through quantitative easing, the Fed forces investors to seek returns in even riskier assets, such as equities.

As investors flow into the equity market, stock prices are bid up to the point at which expected returns for stocks also become unattractive. At this point, the logical next move for global, institutional investors is to move to more risky investment options such as private equity and venture capital. This is exactly what we’ve seen."