Does anything have a $1B payout for the founder? I guess there are a few companies that achieve this, but it takes only a modicum of humility to realize you're not likely to be one of the most successful founders this decade.
= turnoff for investors. They only care for chances at homeruns — singles and doubles are not welcome. You’d better swing for the fences, because that’s the purpose of VC.
(This is my understanding, not my endorsement. Please correct as needed)
The question only seems to be whether this strategy still works in a higher interest rate environment. As I understand it this development mostly stems from it being more profitable to invest with a low ROI (or a low probability of a high ROI) than to keep the money in the bank.
Anyone can get S&P 500 returns with little to no risk. That’s not to say they won’t lose money but it’ll be market returns either way, will be very liquid, and readily transparent to the holder.
Given the risk involved in early stage investment the maths just don’t make sense for an investor to shoot for anything short of the moon.
tldr; Seed funding / early stage investing is closer to lottery tickets and Vegas than to your 401k.
Unless it’s buying SP500 index funds, I doubt it. Especially the last 15 years.
I know quite a few people who would have been further ahead (financially) if they had just invested in SP500 and retired.
I mean literal index funds.
Basically, give me my market returns if you’re not going to hit a homer so that I don’t need to keep shoveling cash and can spend my time and money on the remaining at bats.
Given the situation described in TFA, that's just as well.
VC wants to have a portfolio of 100 companies swinging for the fences, knowing most of them are going to zero.
Individual founders do not want to go to zero, and many would be happy hitting singles or doubles.
That is, VC wants their founders to take more risk than is expected value positive for any given founder. A lot of the legal & financial levers VC uses are to force this upon you as a founder.
Someone working on their $500 MRR form-builder app isn't building a startup, they're "just" building a regular ole business.
Personally I'd much rather build a business than a startup.
It's that singles and doubles aren't profitable for the VC fund.
The VC business model is based on promising investors high return in return for high risk. Typically the fund will take a management fee along the line of 0.5%-2% a year, sometimes frontloaded a bit to account for the higher cost of marketing and finding investment opportunities. 0.5%-2% does not get you rich unless you're a huge fund with very tight operations - it costs money to have people following up a large portfolio. For most smaller funds the management fee will tend towards the lower end, and will just keep the lights on.
Then on top of that you get carry. Carry can vary enormously based on your reputation, and your promises. Specifically, the higher the threshold before the carry kicks in (the hurdle), the more you can insist on retaining above that.
A not untypical example would be to retain 20% of any return over an amortized yearly return of ~7%-15%.
Put another way, in this case $400m of investment was made. The last round was 3 year prior, but much of the capital had been in the company much longer. The VC's in question would, with a 7% hurdle rate need a return of $490m before they'd see any money beyond the management fee if this company was typical of their portfolio and the entire $400m investment was "only" three years old (much of it would have been older).
As such, if the VC funds in question were otherwise successful, a $465m exit would have been dragging their profit down. Not as much as if it'd gone bankrupt, but this was a really bad exit for the VC's, and basically represented the VC's having written the company off as a failure and salvaging what they could before they lost more.
The investors in the VC (the limited partners in the VC fund) would have done better, but keep in mind 7% represents roughly the return of an index fund over time, so for them getting "only" $465m back after it had sat in the VC fund for years will also have represented a significant opportunity cost vs. putting the money in a safer vehicle that might have returned more.
Add up the IRS cut, state and local, gas tax, sales tax, fees to use services already paid for with taxes and are basically required for life in the US (road tolls, document fees, vehicle registration fees, public transit fares, etc), costs for compliance with laws like hiring someone to help you file taxes or taking a day off work to renew your driver's license, higher costs for goods and services due to monopolies granted by government (drug patents where the same drug costs a quarter of what it does in the US everywhere else the world, higher than otherwise internet fees paid to entities like Comcast who are granted monopolies, hospitals that are expensive due to monopolies granted by certificates of need, etc), inflation caused by money printing to pay for foreign wars without broad popular support, housing that is more expensive due to policies that benefit homeonwers at the expense of those without assets etc, etc.
Its way more than half of your productivity that is taken, if you are productive and earn wages. Those earning capital gains are hit about half as hard, another happy little accident that benefits primarily the wealthy and powerful to add to my list above.
Oh and the best part, after paying those taxes for decades once you get sick, all of the sudden, the government and the medical industrial complex doesn't have the money to help you. You get to live in a cardboard box under a overpass.
https://www.propublica.org/article/lord-of-the-roths-how-tec...
For comparison, the SEC filing for Paypal's IPO has Thiel Capital investing a bridge loan of $100k in 1998 which was then converted into 500 thousand shares (100x higher valuation than his individual "purchase" the following month).
https://www.sec.gov/Archives/edgar/data/1103415/000091205702...
From the ProPublica article, re: why this was problematic:
> Thiel’s unusual stock purchase risked running afoul of rules designed to prevent IRAs from becoming illegal tax shelters. Investors aren’t allowed to buy assets for less than their true value through an IRA. The practice is sometimes known as “stuffing” because it gets around the strict limits imposed by Congress on how much money can be put in a Roth.
Also, aren't taxes on things like stocks, equity, etc far lesser than personal income taxes anyway?
WhatsApp likely did.
Minecraft as well.
Instagram perhaps?
Also, an IPO?