Slashdot Mirror
Silicon Valley Firms Having Cash Showers
Carl Bialik from WSJ writes "'The market for high-technology start-up businesses is so intense in Silicon Valley that some companies are being showered with millions of dollars from investors -- without even asking for it,' the Wall Street Journal reports. The home-improvement website Done Right received an email from a well-known investment firm inquiring about putting cash into the company. 'Paul Ryan, Done Right's chief executive officer, says the missive wasn't sent to him or to his executives -- it landed in a general corporate email inbox,' the WSJ reports. 'Mr. Ryan wasn't put off by the impersonal plea: "We're having very good discussions with [the firm] right now," he says, declining to name the potential investor.' The Journal notes that 'pre-emptive' funding is, of course, risky, and harkens back to bubble-year investment trends."
Better to be showered in green than in gold.
Using pure economic reasoning to guide your decisions does of course leave history, or memory, out of the equation. Something that looked like a good idea and failed can still be a good idea five, ten or twenty years down the track, when you're armed only with analysis and a set of rules. Perhaps one history elective during that MBA would've helped cut down of this sort of tomfoolery.
5% (or 1 in 20) make it giving a 10 fold return = bankruptcy for the venture capitalist.
Perhaps you should spend more time in your math class and less time karma-whoring here?
Bad analogies are like waxing a monkey with a rainbow.
Where do I sign up?
Depends upon VC's vision about technology whether it is in phase A or phase C of the famous Hype Cycle
hilarious
All I get is suggestions how to increase my malehood.
The only ones that deal with money come from widows of late Nigerian presidents. Must be tough to live there when every few days a prez is killed. Kinda makes me want to send our government there, for development aid.
Whether I'm concerned with their or our well being in doing so, is up to the reader.
We used to have a Bill of Rights. Now, with the rights gone, all we have left is the bill.
Sounds to me like the CEO is being taken by a 419 variant scam -
"Hi, we am interesting in investing to your company, the money will arrive from my dead uncles account of [insert country here]. We will just be needing $10k to release those funds please thank you. Did I mention that I am a civil servant..?"
Actually the maths are weak but not "really false".
Typically a VC does not win all or nothing.
It is more like in 20 deals:
1 is a big success: *10 and most real (effectivelly freed money) was
done here.
5 deals are huge flop, one of them hurts (it looked good and then failed, so more than seed money was spent).
10 deals fail and the VC is only recouping 1/3rd of their investment
4 deals work quite well but not stellar, so the VC gets *2
At the end the VC gets 30% more per year than what they invested.
I reckon we're at about the right time for internet investments to start up again. Technology has caught up with the ideas. If Google's payment gateway plans live up to the rumours then the possibility of micropayment subscriptions for premium content is very real. Add to that the fact internet users are a much more clued up and savvy bunch with good, fast access and, critically, a willingness to spend money online there's a real opportunity here. The problem however is that investors are buying into (IMHO) the wrong thing. The biggest chunks of capital are going on things like social networking sites .. basically people are buying premium ad space. Online advertising is the old model .. the one that didn't work. It works for Google because they're not in the business of displaying adverts. They sell the distribution. Actually displaying the adverts doesn't yield much profit (a million here or there maybe, but not the hundreds of millions the venture capitalists want). I believe the future is in charging lots of users small sums for things the want .. like iTunes.
http://twitter.com/onion2k
...we're getting Bubble 2.0 as well.
It is said that economy works in 7-year cycles. Let me be the first to publicly call this "Hype 2.0"
There is no such thing as good luck. There is only misfortune and its occasional absence.
We are starting to recover in the smallest markets. We are finally getting rid of the final vestiges of people who were in it totally for the money and salaries are starting to stablise. It takes several years for it to trickle down to us.
.com stuff). Having a second one isn't going to help matters any - I want a moderatly stable job with a decent salary. If you get a .com type of thing save up and don't become greedy, it's not going to last.
Even then it's tough to get a job if you graduated in the height of the dot com boom and lost your job in the worst of it (especially in small markets like where I live and are in the position I am in - though my personal timing has nothing to do with the
For the sake of the industry I hope not - one would think that people learned in the last one. While it's not so bad on the large stable markets it kills the smaller ones.
------- Sorry about the spelling, I suffer from two problems. Dyslexia makes it difficult to spell well, lazy makes it
If you haven't read it - the 80/20 principal is a fascinating book. And one of the conclusions that Koch came to was that capital investors are every day living in great fear that tech innovators, especially in the software development industry will all come to realise that capital investment really isn't the cornerstone of the start-up the way it used to be (like when building cotton raddling factories etc).
I don't think we are going to see the death throes of the VCs just yet - but there is a certain 'writing on the wall', of which this kind of thing is indicative.
If you want to know what God thinks of money, look at who he gives it to.
Genesis 1:32 And God typed
> AT the end everyone got burnt
Not everyone. Many people knew the game ahead of time and had their exit strategy planned. The CxOs had their business insurance. The investment brokers knew how to sell the funds that would ultimately fail to the less priveleged brokers. In the end the money was raked in by the folks at the top while the losses were lumped onto the insurance companies--who then distributed the losses by raising rates on health, auto, and home insurance.
The government itself is not stealing your liberties. Their new programs are enabling criminals who will.
Being showered with money isn't much of a blessing. Before you know the investors are knocking on your door wanting to know where their ROI is, and why you haven't spent the X millions given (apparently spending the money is a sign of progress).
The money is a burden; a HUGE burden.
When in this situation, be honest with yourself. What will you spend the money on. If you cite PR, furniture, company stationary, etc, run the other way. If you cite "more employees", triple-check your logic to see if they are really needed before taking the money.
"Pigs get fatter, hogs get slaughtered."
-- Jim http://www.runfatboy.net/
Dear Mr Nice VC Person,
Please send all your money to the email address on this post and we will give you lots of love
Thanks
Bob
SolarVPS - Quality Windows and Linux Virtual Servers
The NYT and The Merc both already had coverage last fall of some of the investor fallout from pent-up money combined with low-overhead startups. 2.05 billion was thrown around the Bay Area in quarter of 2005 (representing 40% of nationwide VC spending - NY was 2nd at 12%) but it wasn't easy. Firms in Palo Alto were turning down money offers from longer than lunch hour away commutes - and I've seen VC cold-calls come in at 2 off my contracting clients (seriously).
But when companies can make do with 250,000 instead of 20 million whatchagonnado?
This gives me no small measure of hope that something different might be emerging.
"Thanks, Mr. Simpson. Because of you, we're all taking golden showers! [offstage laughter] What?"
We know where leadership by an anti-intellectual "strongman" who scapegoats minorities and likes boisterous rallies goes
Return on investment for a VC company is dependant on a probability curve.
The cumulative profits of the companies in any given sector follow a probability distribution where small number of companies are stars, a small number are total wash-outs and a big number sits somewhere in the middle.
Depending on the sector (and the status of the overall economy) the curve might me higher or lower with relation with the break-even line (ie the average profit of all companies sits at a higher/lower profit point - or if below the break-even line lower/higher loss point).
Also, the steepness of the curve might be higher or lower (i.e. more or less companies are at the extremes of the curve than at the center). Investment restricted to younger/non-listed companies probable matches a steeper curve (i.e. more likelly to be a wash-out or the next big thing).
Since nobody knows beforehand where each companies profit will be in this curve (remember this is a cumulative profit curve - u only know it when u get there), to decrease the investment risk VCs (and any wise investor) always invest in multiple companies (each investment representing a point in the curve). Thus they decrease the risk of doing a single investment which is a total wash-out and loosing it all.
VCs try to beat the market by:
Still, the returns on investment of a VC are still constrained by that curve - they might get a star, they might get a total wash-out and most of their investment will be in companies that fall in the middle. I dare even say: the less a VC can provide guidance and expertise the more likelly it is that their return on investment will match the average on that sector.
A VC company whose ROI matches the market average on a sector is little more than an extra expensive fund or index tracker on that sector.
It wants it's hype back
My Starcraft 2 Blog
It looks like investors have come up with a new gambling strategy - bubble or quits.
Not everyone. ... who then distributed the losses by raising rates on health, auto, and home insurance.
And since everyone, as in everybody (or at least almost everybody), pays health, auto and home insurance, everyone got burnt.
Hey! That's my sig you're smoking there!
I am a technology analyist for a hedge fund and I must say that there is a buzz around the "new dot com" companies. However, for the sophisticated/value investor, it is never good enough to simply have a good idea - the company must be ready to capitalize on it. I see at least one company per week that has a brilliant idea but no strategy to make it profitable. The difference between the way I look at a business and the way VC firms look at a company is that they will initially accept poor mangement because they will require oversight and the ability to put some of their own people in place. Some hedge funds do this but they are often not the high-risk/high return types. VC firms (and to a more important degree these days "angel investors") will get into a company for a good idea, a recognizable brand, a value-chain opportunity with other investments or for some more highly speculative reason. VC don't initially chase profits or earnings, they operate mainly outside of the realm of "fundamentals" by looking to capture as much of a company's ideas and future updise while accepting many (oft. deplorable) downside risks. A quick note about hedge funds for people that are quick to label them as horrible groups that short stocks and cause companies to go down in flames: there are firms, like the one I work for, that do not short their investments (we invest with a company for the long-term and often help them with their second and third rounds of fundraising) and many don't get into death spiral warrents that cause companies to dilute their stock over and over (and lose current investors tons of money). Hedge fund is just a generic term for a private investment company - the ones that give "hedge fund" a bad name are a very small minority.
I don't keep a lid on my coffee so when I walk around I look busy -me
Don't get me wrong. Our product is great, and our users love it - but the attention given to a two-man startup around for such a short period of time was disproportionate to what we had proved to the market at the time.
We decided to hold off on trading a large amount of equity for a relatively small amount of cash - especially when cash isn't needed to bootstrap a company like ours. In our situation, it makes better sense to seek angel funding before talking to VCs when we need money for growth.
Although venture capitalists ARE strangers with candy, they're not necessarily evil or stupid. In this current environment where a lot of small companies are flipped, speculation makes financial sense. Given the potential returns, an investment of a million or two is chump change for these firms. For small companies, that's all you need; what's actually more important is that VCs provide all-important media and business contacts. The bottom line is that you should be wary of the candy, but it can help you realize your ideas. If you are motivated, skilled, and have an idea, this is a great time to join the gold rush.