>This is why everyone who is smart about raising money for ventures underpromises and overdelivers. The opposite, overpromising and underdelivering, is a road to hell.
The vast majority of startups fail! From a financial point of view, most startups look a lot like Ponzi schemes; the difference is that startup investors know it's risky.
Most startups (in the tech sense) are ventures. They are attempts to generate new cash flows and create something new that didn't previously exist (or a new twist on something that already existed).
They are unproven. They are risks. But the vast majority are not Ponzi schemes.
> The best investors don’t spend a lot of time on what can go wrong. They already know the odds are against every startup that ever comes into existence. They already know every startup is a shit show. Those will be the reasons why all the other investors will miss out on an unpredictable opportunity. The best investors try to figure out what can go right. They dream a little with the startup and they then sell that vision back to the founders.
> The problem is that when they fail, their clients lose money, and they don't.
This isn't really a problem - they only take accredited investors because of this risk.
VCs also lose money when startups fail, but they don't ask the founders and employees to pony up past salaries. Understanding of the risk of failure with no recourse is a prerequisite to investing.
> So the lesson here is get in on this early, profit harvest, and get the fuck out before it crashes due to irrational exuberance.
Investments in early-stage startups are highly illiquid so in most cases, getting in early won't mean a thing because you will never be able to get your money out.
Actually, the worst case is keeping a company going even though the fundamentals of the business are imprecise, hard-to-define or just plain wrong.
You end up wasting resources of all kinds for everyone involved. Investors, employees, and founders, to varying degrees, will squander time, energy, enthusiasm, money in pursuit of a mirage.
Money isn't everything, surprisingly, even in a round of funding. If you accept a huge sum of cash with a giant valuation attached, you must have reasonable certainty that you will at some point achieve that valuation without more raising. Mental gymnastics aside, I don't think most startups can guarantee outcomes, but they must be, at least, certain of their motives.
Are you raising because you're at the scaling stage? Or are you raising to buy yourself a little bit more time to hopefully, maybe, figure things out?
The latter reason is a poor reason to raise, and most of the time, only staves off the inevitable at the cost of unnecessary suffering and hardship.
> funding startups that are not attractive to traditional investors
It's a great way to lose a lot of money. It's why venture capitalists prefer to play with other people's money.
You better absolutely love playing god with start-ups, because there is a hellish nightmare that can go with allocating capital to high-risk new businesses, tracking everything, being responsible for it, enforcing legal agreements, dealing with lawyers and accountants, dealing with conflicts, watching people do incredibly stupid things with your money, and on and on and on it goes.
And you can't just hire people to entirely remove you from the annoying aspects, because that's an even faster way to lose a lot of money.
> They’re investing in startups that have the potential to get something like 1,500% or 5,000% returns on their money and many times, they eventually succeed
And many, many, many more times they fail. The higher the risk-free interest rate, the higher the returns need to be to justify high-risk investment unless, like SBF, you simply eschew risk premiums. But most sane people, even VCs, aren’t that risk insensitive.
> Which is why many startups fail: people have no idea what they are getting themselves into. At least burning through your own money teaches a harsh lesson. Burning through free money hurts a lot less.
Couldn't agree more. I agree crowdfunding should require a little more upfront from the project managers (or rather we as a community should refuse to fund projects that don't) which will no doubt turn some people away from seeking crowdfunded money but that's probably for the best.
> A VC which is a serial idiot will eventually run out of money.
This is not really true as VCs are not the sources of the money they invest. VCs raise money from their backers and there really is a (virtually) infinite amount of money available to raise, even for a repeatedly unsuccessful VC firm.
As with the startups themselves, the key skill is raising, not earning the actual ROI.
Do they? Most businesses in the real world have to generate cash or they fold. Venture capital can keep small startups going far beyond their useful life.
> perpetrators are smart enough to avoid being caught.
IMO, many startups are scams on some level. VC A funds company X. VC A also funds company Y. Company Y 'decides' to use company X's hot new product and has a lofty enterprise license. This happens a few more times. Company X now has very large revenues, VC's friends at big-nation-bank decide it's time to IPO and cash out.
> when in reality that means bringing nothing to the table, save their money.
The big problem is that founders have a really hard time understanding just how cheap ideas are, so they sincerely believe that they are bringing 90% of the company's value. They look at the big successes and assume that the process went something like this:
* Founder has an idea
* Founder recruits a bunch of people to build the idea
* Customers come because the idea is so great
* Founder walks away incredibly wealthy
What they never see is the dozens of companies that attempted and failed to execute the exact same idea in the decade before the big success.
> One of the articles of faith in this industry is that good startups get investment and succeed, while bad ones fail.
Is it? I thought it was that startups with exciting books and good networks get a chance to ratchet into the next round of funding.
Great startups drown all the time for not being a VC rocketship, when they they could have grow into a perfectly successful cruiseliner under traditional fundraising or bootstrapping.
If investors are “nah pass”, it’s more about making a quick decision about near-term finance opportunities than the mid-term or long-term strength of the underlying business. VC investors inherently care more about 10x exits than sound business practices.
> One would hope your stock is appreciating in value at an equivalent or greater pace than your income.
OTOH, hope is not the same thing as reality.
Some startups will exit successfully and yield really big payouts. Some startups will have modest exists, and equity will have some additional value, but nothing to write home about.
And some startups will fail.
If you are a capital investor in lots of startups, the small share where the first occurs have a good chance of being enough to make the average return good. But if you are a 20-something that's putting 3-7 years of labor into each swing at the startup piñata...
> Anyone who did a solid research and even sold his product to people before it even existed won't be worried about putting their own money or taking a loan to finance the development.
Maybe it's just me being overly pragmatic, but if you're willing to personally secure a loan to build a startup that will probably fail, I personally find you too reckless/unintelligent/misguided to work with. Whether you get the money from a bank as a loan or from investors genuinely doesn't matter (money is definitionally fungible), what matters is that you can procure it. If you can't convince any investors to work with you and you have to take a loan out to cover the costs, that's an unimaginably large red flag and a sign of foolishness.
The vast majority of startups fail! From a financial point of view, most startups look a lot like Ponzi schemes; the difference is that startup investors know it's risky.
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