I don't see how they are a downside. I am sure that VCs and PEs are at least as tough as activist investors in making sure to keep management on its toes. Notions like MVP and ramen profitability were not invented by activist investors, after all.
In that sense, it puts the syndicate organizers in the same boat as the investors. As you point out, VCs can get quite comfortable off management fees without making investors a dime.
It’s a problem that the MO of venture capitalism is just pump and dump. The only thing VC investments optimize for are exit strategies and not creating actual value. So I wouldn’t see it as a bad thing that such investments are diminished.
Other than running up too much debt and getting bailed out (is that functionally different from getting outside funding?), I don't see any reason why these things are bad business.
Even if you're a steely-eyed capitalist, you have to admit that these were wildly successful long-term investments in developing loyal lifelong customer base.
The only difference is that the time horizon on those investments are much longer than your typical VC or PE firm cares for.
They are not long term unprofitable for the VCs. Those companies have been through rounds and rounds of growth which has brought in other investors (i.e. who VCs can sell to if they desire).
What about the company that would need to labour for 5 years before they get the MVP out the door?
It's worse than that, the VC gets millions in management fees and a 20-30% carry on a diversified portfolio so they take on no risk. There's literally no downside for them and they push companies to take on a ton of risk because they're looking for 1% of their investments to return the whole fund, which makes no sense for an employee who only has a tiny fraction of shares in one of the companies.
I don't see how SV or innovation will suffer greatly. People who don't have the nice VC connections can bootstrap and make it to profitability.
The people who stand to lose are VCs and their accredited investors. Legitimate companies with actual revenues should be able to get funding even if the VC funds leave.
One downside is that VC money is determining where the software developers go, which could lead to suboptimal allocation of skilled labor. However, some of these heretofore unprofitable ventures provide real value to the public (ie Twitter).
Crowdfunding nukes VC's downside protection. VC funds invest through preferred stock or convertible debt for its downside-protection features. If that downside protection comes at the expense of unaccredited investors, the risk that one of them sues or a regulator gets involved on their behalf goes up. That could easily neutralise or even outweigh the benefits of the protection.
This isn't limited to crowdfunding, by the way. A cap table of a hundred $10,000 cheques (I've seen these), even if all are from accredited investors, will have a harder time raising venture capital than one with a handful of early backers.
It sounds like you guys/gals made sound decisions. I think there could be other harmful side-effects you aren't considering though. VCs like to superglue a cinderblock to the gas pedal, speed up spending to get to billion dollars or bust. There is no paying dividends, no having a strong business that isn't a billion dollar business. Also when it is so easy to get a great valuation and limited dilution, it's hard to maintain that valuation after the markets turn. If you really are able to maintain control and not increase spending with the additional capital, then that's fantastic.
Largely true, not controversial, I'd say. The VCs I talked to are not in denial; but still value cash they're getting from their management fees. That phase will be over soon.
Question for Paul: what alternative investment vehicles will arise in the years to come? How about some smaller-scale buyout businesses?
Thanks for the detail. To me, that sounds like the cost of doing business as a VC, more than risk. Forgive me if I have a little less empathy for the other side :)
I'm not sure those two mean real downside protection - but your point is correct - the VCs are betting on the very small chance that Slack is actually adopted by a huge number of businesses. Right now I'd guess it has a fairly narrow adoption among leading edge companies and SF/Valley natives. I'm sure there are exceptions to this - or maybe they truly have moved beyond that core audience and that's what is driving the valuation.
But that's what VCs do - make a large number of bets that will fail and one that blows it out the park.
Their valuation is a reflection of the growth in Slack's business - meaning they have strong enough growth that they can command that kind of valuation on a huge raise. It is also like a reflection on the limited number of companies that have that kind of growth.
But these kind of valuations also create a high-wire act for the companies in my experience. Growth must be maintained at all costs to justify the valuation. They spend like they're going out of style because of this.
It's worse than that. VCs are mostly investing other people's money and earning management fees. Even if all the investments go bust they do well If they've managed to amass a big fund.
> "winner take all" mentality of most VCs a company would be penalized for being profitable too early
This can go the other way too, I know that I've found myself being more selective in which companies products I use based on their business model and if they're look like a stable company, too many flash and burns.
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