For companies that rely on outside investment to survive however it can become a slide to oblivion.
If the company itself is profitable, then typically it can continue. There's no interest rate on VC investment, and if profitable it can run forever. Customers, employees, users and so on are all fine. Investors? Well, they're potentially getting some returns through dividends, but its minor and not what they were chasing.
Of course the VC investment model is high risk. That's kinda the point. It's a bet on IPO or (valuable) acquisition. Most companies end up as neither.
Will this affect new VC funds in the future? Maybe in the short term. But there are still enough IPOs (like SpaceX now) and still enough greedy people willing to play the lottery. Sure the absolute amount of VC money may come down, but I don't think the model is going away.
Indeed it may start to lead to saner valuations along the way.
I only wish, but rarely. This is one of the great tragedies of the grow at all cost system. There have been so many great profitable companies, where the product is great, customers love it, employees love it, everyone is happy.. except it's not growing fast enough to satisfy the leeches so it gets destroyed.
As a society we should be supportive of small companies that make a great product that everyone loves, pays good salaries and makes a profit. The more of those, the merrier. But no, unless growth is on the hockeystick curve, private equity will destroy it sooner or later.
Poor metaphor. If you decide to play with sharks which demonstrate how to eat, you shouldn't be disappointed when you find out they are cold-blooded killers.
The founders and employees and even the customers are accruing all the benefits of that capital so of course they are happy.
How else do you propose funding the quite expensive and risky enterprises that venture backs? Taxes? Paying employees less before profitability? Charging early customers a lot more? Clearly you can see the downsides of those approaches.
Easy: Risk. When you invest in a small private startup, accept that it's a crazy risky bet that will probably fail. So those investors should accept that the risk is there instead of trying to push too hard to the point of destroying the company that could've continued on a happy path of slow growth.
Founders could also buy it back if they can find a lender, but if they are profitable enough for one to be interested, but the financials rarely work out for that.
I would propose not funding them at all, because so much of the system has turned into outright grift, with wildly implausible "companies" receiving brain-melting sums so investors can pay themselves huge fees.
The companies all do things like "Pitch decks as a service" or "Coworker cafes in space" or "Fusion permanently two years from now, until we spend the money on drugs then pivot to military contracting" or "AI-powered gig economy pet sitters for the Bay Area".
There's a lot of happiness around, but there are also more useful things everyone could be doing.
You can found or work for a company like this anytime you like. But the “leeches” the op mentions are a voluntary funding mechanism for a particular kind of company. If you found or work for one of those the trade off is clear.
You can’t have it both ways though. As an employee you can’t live off the largesse of investors as you build the business and then not expect them to want an elevated return on that risk.
This isn't how VC funding works. The fund has a time limit, usually ten years, and has to wrap up and pay back in that time limit.
If your company is not profitable in that time limit, tough. The VC will exercise whatever rights they have and pull whatever they can out of it.
VCs will sometimes invest ‘convertible notes’ which start as debt and “convert” into equity in favourable scenarios.
‘Swamp’ and ‘drag’ clauses are also commmon: if a management team/CEO doesn’t meet their goals as set by the board (like give investors a meaningful exit) then investors can take over and replace that team, or force a sale.
Illiquid private equity in an early stage business, especially one that isnt growing, is hard to get rid of. That’s why investors derisk with terms that massively favour them at the expense of the business they invest in.
In other words, the sale wouldn't really achieve anything other than lock in the capital write-off. The return would be trivially small.
In some cases a VC can kind of "extend and pretend" by getting one of their other portfolio companies to do the acquisition in an all stock deal.
"Sure, we invested $100m, but you are still only breaking even. May as well close up shop, sell the data for as much as we can get and split the proceeds amongst us investors" is just as possible.
Cynically, I wonder how much of the insane (even in the moment) valuations were driven by VC firms trying to commit capital so they could collect management fees?
TFA points specifically at "recent funds" that have underperformed public markets.
More recently launched funds have been returning markedly less money to investors than those of earlier vintages, according to the World Economic Forum. They have also underperformed the S&P 500 by a wide mark, particularly those that did not invest in a small club of artificial-intelligence superstars, says Mr Cohan.
Power law at play, apparently: High risk with high rewards only for the top 5%.
... already, just 5% of them produce 90% of its profits.SpaceX’s valuation + “data centers in space” being taken as a serious pitch leads me to think it’s only getting worse.
I think it depends way more on where and how much the wealth is concentrated than anything else