Rise of ‘zombie’ VCs as startup valuations plunge
cnbc.com
cnbc.com
Keep in mind it's hard to have a recession when unemployment is in the 3s, and there is still high demand for products and services across the economy. But I guess if we really want to have a recession we can.
Expect the pain in tech to get worse, much worse, before it gets better.
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PS. Facebook is on round 2 of layoffs.
Not quite yet, but certainly by mid-April.
The rest of the economy appears to be doing just fine.
Since tech has had many years of growth while the rest of the economy has suffered don't expect much sympathy for laid-off tech workers.
No. The layoffs are really just in tech, and a fairly specific subset of tech companies at that. They are happening as a result of poor hiring decisions those companies made (hiring too many people).
The transitional period when the current next big thing you previously invested in is not delivering and has been replaced by a new and shiny next big thing with higher predicted returns.
So there's a lot of "dry powder" (I hear that phrase constantly to describe the situation) just sitting there, doing nothing. What are the VC funds preparing for? What are investors being sold on?
Given all the tech layoffs, my bet is there will be a whole lot of new startup growth coming soon that will "ignite" that dry powder.
[0] bizjournals.com/sanjose/news/2023/02/15/despite-us-fundraising-activity-hitting-record-h.html
When the investors are picking and choosing, they usually want to see that you have some ability to deliver.
It does make it harder to raise funds on vapor.
Commenter is being sarcastic, but also pointing out some truth.
For instance, this mobile operator [1] "New S’pore MVNO Gorilla Mobile lets you turn unused mobile data into digital crypto tokens" taking advantage of the AI/crypto craze introducing a completely unnecessary crypto token into the product. It's just pure marketing. Although not exactly lying, you can get the drift the commenter was making.
[1] https://vulcanpost.com/749452/gorilla-mobile-telco-singapore...
BTW: Bing is stalking me - I told Sydney it was over but it keeps heart facing me. Anybody know how to make it stop.
Also in the old days of naval warfare, if you won a battle it was accepted that the other ship (what was left of it) was your prize. Everyone in the chain of command had a predefined percentage of the ownership, with an eighth or so divided evenly among the common sailor. This ownership stake was converted into cash either by your own government or a private prize broker depending on the circumstances.
An exceptionally successful deployment would leave the common sailor with enough money to retire; the captain of the ship might even become fabulously wealthy.
But anyway. Keeping your powder dry on the way to the battle is important if you want to win, get your prize, and retire from all that cash.
I think a lot of VC and IB take the metaphor way too seriously, but you can see how many parallels there are!
I highly doubt your described situation exists.
There's a lot of money specifically allocated to venture funds that needs to be deployed.
Now let's consider VCs. Like a restaurant, VCs spend money in a way that doesn't align with the basket of goods / weighting used for CPI. VCs spend most of their money on equity in tech companies. Equity in tech companies has actually gotten cheaper. Here is a concrete example: Stripe was valued at $95 billion in 2021. In order to buy 1% of Stripe, you'd need to spend $950 million. Now, Stripe is valued at $60B. You can buy 1% of Stripe for only $600 million. That's deflationary.
I agree tech valuations have imploded. This is a function of equity being predicated on expected returns in the future. Many reasons for tech valuations imploding - part of them -> cost of salaries to match CPI and cost trimming from other companies as inflation hits their bottom line and product sales aren't as robust.
In your example the valuations are on the private market and do not replicate what the public market would pay for them because the expectations on returns are out of whack with reality. VCs bought into their own hype and started thinking that they would get absolutely bonkers returns on companies that have no ability to get the returns required to drive those valuations.
This reality is because all of a sudden there is interest rates in the market and other returns elsewhere to be gained and that interest free money is gone.
VCs might have better buying power of what portion of a company they can buy however the expected returns are no longer in the same ballpark as they were. As a function of inflation their exit from investments looks far worse than it did a short time ago. However what VCs are buying is future returns not necessarily company size. So if you can buy more of a company on lower returns it isn't far different from less of a company on higher returns.
> So if you can buy more of a company on lower returns it isn't far different from less of a company on higher returns.
There is a big difference when you're in a highly deflationary environment. Inflation and deflation can cause price spirals. In periods of high inflation, people rush to spend money because it's losing value daily, which causes prices to go even higher. In periods of deflation, the opposite happens: people hold off on spending causing further price drops. VCs are holding cash and not investing much of it because of deflationary expectations. This is causing valuations to drop even lower.
Depending on when valuations start to slide, and whether or not they ever start to accelerate like they did at the latter half of the last decade, they could get called in to a lot of hard conversations about "if you're not using my money, give it back."
If you're a VC you want to be raising new funds from your investors for the next wave of startups, you don't want to be unable to find promising investments for your current funds. You're not gonna be able to raise again in the future in that case.
AKA a "zombie."
The Fed is reducing its balance sheet to zero and the boomers are retiring. Some might argue it is a return to sanity/normalcy and you will have fewer money guys to plow enormous sums into juiceros and FTXs going forward.
I would say if you are in the business of selling startups, you’re probably in the same boat.
VCs prefer a hard fail. Then they don't have to manage the ongoing company. Apparently zombies have become so common that some VC firms are now stuck with a portfolio of zombies.
When you think about it, most of Alphabet's non-ad projects are zombies. They lose money or don't make significant profits, and they're not growing into something big.
Unclear to me how it's an issue for investors however.
Throw on a pair of Sundar glasses and slip a moleskine notebook and a Montblanc Meisterstuck and you are platinum. Catalyze those synergies across complimented verticals!
I don't get that part of the joke. Most VCs are skinny AF or quite chubby, but none of them seem to have any semblance of muscle mass?
Boulderers don't have large triceps or deltoids...to the extant that arms are used in bouldering, it is in pulling activities that develop the back, biceps, and forearms, not the deltoids or triceps.
You only get large delts and tris without developing other muscles by doing excessively long static planks.
Do you play ultimate?
Have you considered being a partner in a VC firm?
> We believe in risk taking. So should you.
I like the attitude.
https://www.theinformation.com/articles/silicon-valleys-swag...
Why? Couldn't some 3rd party put desired logos on, even if Patagonia itself wont?
It's kind of heartening to realize that the world's mostly run by the incompetent—they're really not any brighter than you or me, and blissfully-ignorantly commit obvious errors or behave irrationally all the time. You could do it too! Why not, a bunch of them are idiots. But it's also horrifying.
Whatever "meritocracy" we supposedly have, as far as I can tell, is a total fiction. Some good, capable people rise, but enough bad ones also do that the proportion's not really any better the closer you get to the top.
Worth noting that the term "meritocracy" was invented as satire: https://kottke.org/17/03/the-satirical-origins-of-the-merito...
100% this.
That's why the old saying "everyone puts their pants on one leg at a time" exists. However fancy the image, however impressive the title, the person behind it is no more likely to be exceptional than any other random person.
In addition to organizational and fund expenses, [investors] typically also pay an annual management fee, calculated based on a percentage (e.g., 2% or 2.5%) of the capital commitments of the fund (as of the final closing), to the fund’s management company. As with expenses, this fee is paid by the fund out of capital contributions of the individual fund investors. Following the termination of the commitment period (when the fund is making new investments – often 5 years from the initial closing), the management fee rate is usually phased down and may be based on net invested capital as opposed to capital commitments.IE, Doordash.
https://www.bloomberg.com/professional/solution/bloomberg-te...
Thought in this context “terminal” might be a generic term for any other financial data service, not just Bloomberg.
[0] https://twitter.com/deepigoyal/status/1623679354772541443
So like 4sqaure, groupon, Quora, Evernote and others that are kept alive in perpetuity due to funding but otherwise long peaked
The Fed funds rate, which is the rate banks charge each other for overnight loans, hit 20 percent in 1980, and 21 percent in June 1981.
You're the one making a claim with nothing to back it up.