Remember: if VCs believed in what they were doing they would not take a 2% annual management fee and 20% of the upside.
They’d take 40% of the upside and live on ramen noodles.
VCs make money by raising money from LPs.
They spend this money on investments which don’t look too bad if they fail, because nearly all of them fail. Looking good while losing all of your investors money on companies which go broke is the key VC skill.
Once in a while you get a huge hit. That’s a lottery win, there is no formula for finding that hit. Broad bets helps but that’s about it. The “VC thesis” is a fundraising tool, a pitch instrument, it makes no measurable difference to success. It’s a shtick.
Sympathy, however, for the VC: car dealership sized transactions paired with the diligence burdens of real finance. It’s a terrible job.
Once you understand that VC is one of the worst jobs in finance and they don’t believe most of their own story — it’s fundraising flimflam for their LPs - it’s a lot easier to negotiate.
1) we are a sound bet not to get you in trouble if we fail (good schools and track records)
2) we will work hard on things which your LPs and their lawyers understand, leaving evidence of a good effort on failure
3) we know how the game works and will play by the unwritten rules: keep up appearances
The kind of lunatics who actually stand to make money with a higher probability than average - the “Think Different” category - usually violate all of these rules.
1) they have no track record
2) they work on esoteric nonsense
3) they look weird in public
And they’re structurally uninvestable.
Once you get this it’s all a lot easier: the job of a VC is not to invest in winners, that’s a bonus.
The job of a VC is to look respectable while losing other people’s money at the roulette wheel, and taking a margin for doing so.
> Remember: if VCs believed in what they were doing they would not take a 2% annual management fee and 20% of the upside.
This makes no sense. Companies have fees, junior associates have student loans, buldings require rent to be paid.
This is a foolish sentiment, unless you would apply it to all employees everywhere. If startup employees truly believe in their company they would also take no salary at all and just live on ramen noodles.
But if you think this through you realize that employees also have costs in their lives that they need money for.
> Once you get this it’s all a lot easier: the job of a VC is not to invest in winners, that’s a bonus.
> The job of a VC is to look respectable while losing other people’s money at the roulette wheel, and taking a margin for doing so.
This really makes me question which VC firm you work at as you don't seem to understand how they work. If VC firms had no alpha then they wouldn't be able to raise a second fund at all. And you'd never see VC funds stick around.
They fact that Y combinator exists for all these years and A16Z, sequoia, etc are all around for so long indicates that they are good at their job and their job is to make returns for the LPs.
I work at a firm, i'd be happy to help you understand how these firms work as you seem to have a very outsiders view on it, i can help clear up alot of your blind spots if you want to talk!!
Do you know if those stats took into account massive economic events? Such as market crashes?
Which tend to happen at least once a decade?
People often have a point to make, and will often ignore such data to make it. To add to this, outside of honest intent prejudiced with personal bias, there are parties lookong to undermine any aspect of success the West has, by invalidating those successful models.
If your strategy is successful 8/10 years and your lose enough money during the other 2 to be marked as unsuccessful, is that really a "successful model"?
> If startup employees truly believe in their company they would also take no salary at all and just live on ramen noodles.
Not if you have no capital -- You still have to eat and be housed and that costs a lot if you don't have family wealth or other income streams, even with a good salary.
People also naturally have different levels of risk aversion. Not everyone can/should be putting it all on red every day.
> This really makes me question which VC firm you work at as you don't seem to understand how they work. If VC firms had no alpha then they wouldn't be able to raise a second fund at all. And you'd never see VC funds stick around.
You're looking at it at the 'fund' level not the individual businesses that make up the fund. To use the roulette example, if I bet specific numbers or splits, I will expect any one of those to certainly lose, but I just need one to hit to cover the rest. Since the individual bets here are human beings and companies and not chips on a table, there's definitely an element of what the top commenter said IMO.
> Not if you have no capital -- You still have to eat and be housed and that costs a lot if you don't have family wealth or other income streams, even with a good salary.
That's exactly their point; this exact same logic can be applied to VCs, too.
Do you mean to the employees of VCs? LPs do have capital, that's why they're LPs.
For the employees, the sentiment that you should bet on the sales pitch "I won't get you fired" over "I will make you wealthy beyond measure" still holds.
The LPs pay 2% management fee so the employees make some money regardless of the outcome, just like startup founders want to make some money even if the startup fails.
There are VCs, and there are LPs. VCs do the work of finding investments and setting up funds; LPs provide the money and wait for it to grow.
Of course, from a startup perspective, both really just look like VCs. But in reality, the people working at VCs but who are not LPs are not usually rich.
Nobody who writes a comment like that wants to know why they’re wrong. “Money people bad” is their mantra. You’ll never change it, they’ve swallowed too much propaganda.
Is that supposed to mean something? Half of Hacker News is a startup CEO.
By your own logic, you better pay yourself a $0 salary, $0 on secondaries, and invested all your personal savings into the project, because otherwise clearly you don't believe in your own company. Right? And I hope that is also true about every one of your employees?
Haha, yeah I’m still a CEO of a YC-backed company too. I wouldn’t use it as evidence of anything except that I’m capable of having a company not go bankrupt for 17 years. (Man typing that makes me feel old.)
CEOs of tech companies fall for the anti-capitalist propaganda as much as anyone, in fact maybe more. There’s always been a far-left political lean to tech. Which hey, whatever floats your boat.
Seven years in business. Number of staff varies with the environment but we've had as many as 40 on all hands, mostly part-timers with specialised skills.
It's not a very ordinary company. Too many lawyers.
I worked in hedge funds, even there the management fee (2%) covers the fixed costs (legal, trading operations, treasury, IT operations, etc.) whereas the performance fee (20%) incentivises the alpha.
In VC it's even worse, because at least hedge funds are liquid. VC investments don't realize their value for 5-10 years! Are they supposed to work for free for 10 years? Even the support staff?
Fees such as trading costs are a percentage of trading volume.
Therefore, the more money you are managing, the higher your trading costs. (i.e those costs are "fixed" but its a "fixed percentage" rather than a static number.)
In that case, how can the rate be fixed or does that mean that the hedge fund limits its trade turn-over. In other words, if your trading fees are 0.2% and your trading volume is 10 times the capital raised, you already burned through your management fee.
How would you raise capital for operations separately from LPs? What's the upside of that for any investor? Do they get part of fund returns? Nobody is giving any kind of fund any money unless they get part of the fund returns for it.
So they take 40% of future portfolio returns, and then sell half of that up front in return for investment of 2% of total funds managed and end up exactly where we are now but with added complexity....
A market is very liquid and trading is cheap, and the relevant starts are publicly aggregated. Transactions for an index fund are probably billions a day in rebalancing, withdrawal, and purchases. Startup transactions take $x0,000+ in legal fees, travel costs, due diligence from domain experts, and weeks of labor for single or double digit million dollar deals. Are you seriously comparing the two?
> "The two most important things to understand about startup investing, as a business, are (1) that effectively all the returns are concentrated in a few big winners, and (2) that the best ideas look initially like bad ideas."
_initially look like bad ideas_ meaning "we can't pick them out of the crowd of other bad ideas"
> "there is probably at most one company in each YC batch that will have a significant effect on our returns, and the rest are just a cost of doing business"
> "For that reason one of my most valuable memories is how lame Facebook sounded to me when I first heard about it."
> "We'll probably never be able to bring ourselves to take risks proportionate to the returns in this business."
So it's not like this model is alien to Our Kind Hosts at YC. They understand that this is a crap shoot with a slightly tilted table, but they're optimising for staying out of the zones where everybody else is betting and not that much more.
To be remembered: if you're having a hard time getting funded, the VCs are also having a hard time funding you, because the huge returns go to things that look odd, lame, and weird.
> So it's not like this model is alien to Our Kind Hosts at YC. They understand that this is a crap shoot with a slightly tilted table, but they're optimising for staying out of the zones where everybody else is betting and not that much more.
Do you think this still applies, given recent waves of following the crowd in the last few years like crypto, and now AI? It seems that YC is actually in exactly the same hype zones as everyone else these days.
I'm too far away to know: based in London, mostly working in the legaltech domain, we're far far away from the SV cultural nexus (other than occasional trips to Burning Man for a refresher!)
I think there's a pretty good chance that as their original team is further and further from the operation that they're "reverting to the mean" but I have no evidence.
> if VCs believed in what they were doing they would not take a 2% annual management fee and 20% of the upside.
They’d take 40% of the upside and live on ramen noodles
So if you believed in something, you need to get rid of the concept of hedging and financial responsibility?
This kind of "believing" is what a religious zealot does. No wonder people say SV is a cult.
This correctly describes bad VCs, but not good ones. In my experience, the vast majority of VCs from outside the Bay Area are bad in this way (particularly true in Europe).
Not all VCs from the Bay Area are good, but the good ones are far more common there than anywhere else. One reason "move to SF" is such common advice.
This is the correct take, though it states a truth many don’t want to hear. Even the detractors have not been able to make solid counter arguments. Instead, they pile on hypotheticals to try and overwhelm this comment author (miring in bureaucracy).
This makes a lot of sense. I have always wondered how it is that VCs give so much weight to perceptions. Coming from academic background, it seems so strange that your school rank weights much more in getting VC funding than in PhD admissions.
VCs have a whole staff of people needed to do business and a ton of costs. There's a legal team, marketing/events, human resources, finance, some executive assistants. Screening, meeting founders, traveling to meet founders, takes up a TON of time and obviously most of the time, no investments are made! Also don't forget, VCs have an office, usually not in a cheap place, so lease costs, cleaning costs etc.
If VCs had to work for free, where would you be meeting them? Ok it's all virtual now, let's say. But the truth is, meeting people face to face when you're going to write them a cheque for 10-20M is generally a good idea. So VCs and founders will almost always need to travel. You're also always going to need lawyers and finance people, since you're dealing with term sheets and large amounts of money.
As others have said, VC investments are not liquid at all and the timeline is 10 years for any returns. So a VC investor in your world has to travel around the US, Europe or India meeting founders, has to work with lawyers, financial folks for free, gets zero benefits in terms of healthcare, etc. All for the chance at 40% of something in 10+ years, that might not work out anyway?
If run this way, the industry would simply not exist and the founders would not get any investment. And the truth is this, there are many founders out there who want and actively seek VC investment and "shock" actually are happy with the relationship with their investors because they understand a good relationship benefits both parties in the deal.
I will also add, most employees in VC firms get no percentage of the profits of the fund (i.e. the carry). Most VC employees just get a regular salary (which is often far less than tech company salaries). So if there were no fee associated, these people would never get paid, since even when the fund finishes, they wouldn't get any of the 20% carry.
They already do that... they raise funds from LPs which include a fee which covers the costs. And it works fine, LPs repeatedly invest in the same firms which they wouldn't do if they thought it was a bad deal. There are firms which have been investing for 20-30 years with the same LPs. If the business model wasn't working it would have failed and the VC firm would have closed a long time ago.
Warren Buffett has described PE as a horrible investment class populated entirely by grifters who lock up your money for 10 years and fuck around with it, producing awful returns. The way he describes it, VC sounds very similar from a LP's perspective.
So why does anyone invest? Buffett's theory is that LPs are mutual fund and pension fund managers who like the fact that there's a 10 year lockup in a private, illiquid investment because it means that the value can't be marked to market. They won't still be managing the fund at the end of the lockup and in the mean time they can mark to expectation and let the next guy deal with the fallout.
I think the answer is marginal utility of money. If I have $20 million, and I take $1m to the casino and bet it all on Red 21, maybe I come back with another $20m after taxes. Or I lose $1m then and there.
But in the process there's no control and no sense of skill or judgement or expertise. I'm just a gambler.
If on-the-other-hand I gave that money to a GP in a fund to invest on my behalf, they could come back with a game-changing amount of money in some circumstances, and there's a plausible claim of skill and expertise in my selection of the GP, and the GP's selection of investments.
Same potential for asymmetric returns as gambling, but in a format that reinforces the illusions of skill and control and just maybe really is a question of skill at some level.
I want to say that losing money by being bad at things is always possible, but making money by being good at things is far more a matter of intangibles than anybody want to admit, and proving that any success was deterministic rather than little turtles racing down the beach to the sea and on-average half make it is nearly impossible.
We all love the illusion of control. But the statistics just don't bear it out as a fact in business.
Yes, and that's healthy. Any ecosystem of companies, people, animals has failures. As far as I can see, it works fine. Just like tech companies, some VCs do amazingly, some fail. We get new VCs starting each year just like tech companies, some succeed, some fail, there's no issue here.
> If VCs had to work for free, where would you be meeting them?
It's interesting you are pointing exactly at the OP point without realizing it. If you are assuming that the VCs will be doing this for "free", it means they simply don't believe they'll have any ROI, let alone one that beats the market.
VC is a job like any other, it takes time and work/effort etc to produce output, it's also a job where you can improve with skill and experience. Just like writing code takes effort and skill, why would you spend 10 years writing code full-time for "free"?
Just like no one would edit books full-time for free, or write code full-time for free, or teach kids full-time for free, VC's wouldn't screen companies, interview founders, carry out significant due diligence processes for free either. Because they need to eat, need health-care, need money for rent/mortgages etc, just like every other professional.
It's just another job, and most people in VC are not rich, they are just earning a salary and get no carry/% of profits of the fund.
Raise money for the fund's operations with a separate investment product, and take no 2% management fee. Instead take 40% of the upside: this is _efficient_ if you think the upside will be huge.
In fact if you were certain of the huge upside, people would borrow the operating costs for the VC rather than selling equity in the fund. Most VCs in practice live off the 2% quite nicely, and pray for a big hit, but _the big hit is a bonus not the point of the fund_
The point of the fund is the 2%. The once-in-a-blue moon hit is just that.
And let me point out. The YC "big hit rate" is about 1 per 200 investments. Ballpark; you'd need to ask them the current stat.
So a fund that makes 100 investments, on those numbers, has a 50/50 chance of a big hit. 50 investments, a 25% chance.
To reliably get a big hit you either need to massively alter the odds of success for your portfolio companies, or kiss an awful lot of frogs hoping to hit the occasional prince.
VC is _extremely hard_ because it bakes in tech risk and projections about future society into a financial product called startup equity. The big hits are staggering - the best investments ever made by human beings at any point in history I would guess - but reliable prediction of those big hits is impossible.
Nearly every unicorn has a stack of 70 rejection emails. The special factor is intangible and invisible.
If it even exists.
I think Paul Graham explained all of this quite clearly in Black Swan Farming. It's slightly "between the lines" but he knows exactly what business he is in: spread betting and tipping the table as far as possible in his favour!
Generally speaking these people can retire any time they want. Not necessarily with the all the padding and status markers they'd prefer to have. But the bottom line is -- by the time they hit partner level, they definitely have enough in the bank so that they no longer have to show up at the office --- and they certainly don't need to be be anybody's employee in order to physically sustain themselves.
So in the most fundamental sense -- it absolutely is not a "job like any other".
Ok, I'm guessing you've never worked for a VC company.
Sure, IF you're a partner and IF you've been a partner for the duration of a fund (10 years) then you're probably "rich", supposing the fund was successful.
However, most employees at VC companies are not partners, they are filled with associates, vps, support staff, receptionists, personal assistants, event planners, accountants, para-legals, lawyers, etc. None of whom are rich.
In fact the average employee at Google or Netflix probably earns more than the non-partner people at a VC firm. You earn less in VC than you would do going to Netflix and being a Senior Software Engineer. The only exception is if you're very, very lucky and get a partner position at a successful fund (and last for the duration of an investing cycle - 10 years.
You're railing against things I simply didn't say.
Of course these vast majority of people at these companies are regular staff. But I was clearly referring to the folks at partner level, not the employees. It's right there, in plain English. And I certainly didn't say anything about being "rich" in SV terms.
No, it's not; or at least not supposed to. That's what communism is (regular plebs of the working class deciding how to allocate resources with no skin in the game).
It's funny that I heard a VC the other day claiming the US is turning into the Soviet Union...
So... where's the magic pixie in this story? If VC is not a job -- and remember most of the junior people in funds, it's like their first job in finance -- then what is it?
It’s a job but not like any regular jobs. In most regular jobs, you are given a set of requirements/tasks, you do them 9-5 and go home. VC decides who gets money and as a result what kinda of jobs there will be out there. Luckily, VC is only a part of the financing sector.
The problem, in my opinion, is the lack of skin in the game in many of these funds. If the alpha is the 2% of funds managed, then the investments are a side show and as a result VC are just a plunder of these funds and a misallocation of resources in the economy. (Hence my comparison with communism).
“But Russo and many other vets have heard anecdotes about workers who have pink eye and other symptoms—including fever, cough, and lethargy—and do not want to be tested or seen by doctors. James Lowe, a researcher who specializes in pig influenza viruses, says policies for monitoring exposed people vary greatly between states. “I believe there are probably lots of human cases,” he says, noting that most likely are asymptomatic.“
I have always felt the MP3 format would have been better if they had used a really high entropy test track with a lot of distorted guitars and synth noises.
7. The blockchain is now at a stage in its development equivalent to where
the internet was in or around 1995. The internet was unstoppable in 1995
and blockchain technology is unstoppable now. It will become ubiquitous
in all major industrial and financial sectors, simply because it allows for the
immutable recording of data, thereby reducing friction in commercial and
consumer transactions and obliterating the scope for dispute as to what
has occurred.
8. As the Master of the Rolls and Head of Civil Justice in England and Wales,
I hold an office that pre-dates modern trade in derivatives and
reinsurance, even steam engines, powered flight, and certainly the
internet. I am particularly and obviously concerned about the reputation
and development of English law and the jurisdiction of England and Wales.
9. Many people do not realise that English law governs trading in €600 trillion
of OTC derivatives annually, in €11.6 trillion in metals trading, in £250
billion in M&A deals, and in £80 billion in insurance contracts every year –
just to take a few examples. My hope is that English law will prove to be
the law of choice for borderless blockchain technology as its take up grows
exponentially in the months and years to come.
I still don’t understand what a fully realized crypto ecosystem would allow people to do that isn’t already being done well by standard technology. Like it or not, for most people doing most things, the government or large companies are suitable enough of a store of trust which is the problem crypto solves by being decentralized. I think it’s a neat technology for tech people but I still struggle to see why normal people doing most things would want to pay for things with bitcoin.
1) governments didn’t get to print money at will until they went off the gold standard, and the financial regime we have now is worse than the gold era. (Highly dubious, I don’t buy this entirely)
2) blockchain done right gives hub-and-spoke efficiency without creating hegemons like VISA, SWIFT and PayPal to boss around their users with impunity.
There are still significant fees doing transactions over blockchain and those giant hegemonies are what allow things like charge backs and fraud detection while if somone hacks your wallet and steals all your crypto, it’s gone forever. It’s great if you’re trying to launder money or pay for sketchy things but I still don’t get the draw for the average person, just decentralization is not that valuable
People use VISA because they like the convenience and assurance it gives them over cash or a bank transfer, both of which don’t have a fee. Crypto both has neither and is more expensive per transaction.
"By mapping the behavior of life, we paradoxically get a glimpse at where technology is headed-or “what it wants.” Kevin Kelly offers a dozen trajectories in the coming decades for this near-living system."
The nuclear family is a catastrophe all of its own. Most older cultures would consider two parents and two children in a house on their own far away from relatives a recipe for insanity in all parties, as it has been proven to be!
They’d take 40% of the upside and live on ramen noodles.
VCs make money by raising money from LPs.
They spend this money on investments which don’t look too bad if they fail, because nearly all of them fail. Looking good while losing all of your investors money on companies which go broke is the key VC skill.
Once in a while you get a huge hit. That’s a lottery win, there is no formula for finding that hit. Broad bets helps but that’s about it. The “VC thesis” is a fundraising tool, a pitch instrument, it makes no measurable difference to success. It’s a shtick.
Sympathy, however, for the VC: car dealership sized transactions paired with the diligence burdens of real finance. It’s a terrible job.
Once you understand that VC is one of the worst jobs in finance and they don’t believe most of their own story — it’s fundraising flimflam for their LPs - it’s a lot easier to negotiate.
1) we are a sound bet not to get you in trouble if we fail (good schools and track records)
2) we will work hard on things which your LPs and their lawyers understand, leaving evidence of a good effort on failure
3) we know how the game works and will play by the unwritten rules: keep up appearances
The kind of lunatics who actually stand to make money with a higher probability than average - the “Think Different” category - usually violate all of these rules.
1) they have no track record
2) they work on esoteric nonsense
3) they look weird in public
And they’re structurally uninvestable.
Once you get this it’s all a lot easier: the job of a VC is not to invest in winners, that’s a bonus.
The job of a VC is to look respectable while losing other people’s money at the roulette wheel, and taking a margin for doing so.
I hope that helps.