It is because venture funding has become a legal Ponzi scheme. Seed investors make money by convincing Series A investors to follow and buy them out. Series A does the samr to Series B, etc. The final suckers are ordinary people whose investment/retirement funds buy stock when the company goes public. Enough companies start to create actual value throughout the process to justify the scheme. And this is the reason why, when someone boasts that his startup is valued at X, I ask about annual revenue first.
Not quite, everyone dumps on you and your mom’s 401k when the company goes public, and you’re legally shut out from investing in the private rounds in a perpetual caste system that people barely know exists, by design.
Its a pretty awesome deal, when you can do it fast enough, or often enough.
I would say what the investors do is more Ponzi like than what they do with the shares.
Some investors, the VCs, pretty much guarantee the portfolio company some business by making their other portfolio companies the customers, which gooses the revenues of the primary company and then they make up the revenue multiple to convince others to buy some more shares at a 12x higher valuation (which means its the same money going around in a circle, VC money invested in one company and that company becomes a customer buying the widgets using the of the next company the same VC invested additional money into, but the widgets were also bought with the VC money invested into the first company). Until going public and dumping yet again in the public market. Rinse, repeat.
All this time the VCs are often raising additional funds and going into the the same company’s rounds. So the VCs are more ponzi like than any individual company, but the company does also overlap with some aspects of a ponzi.
(I dont have an issue with any of this except for the aforementioned caste system, let the people invest and fight for deal flow)
Seed investors almost never sell in series a or series a investors in series b. Company just raises more money and dilutes the previous investor. Investors only get bought out if there is a serious issue or reason to remove an investor, or later stage there is lot of demand for the stock so the company offers a secondary. Investors are not really in the business of making small returns.
IPO and public markets are different case where private valuation can turn out to be inflated and tanks after the IPO. However, retirement funds usually cant buy in to IPOs and institutions can often buy the stock before the stock trades publicly so in that case it can be the public who is left holding the bag.
Is it common for seed investors to want to be bought out by Series A investors? I've only read a little about the process, and was left with the impression that the inverse would be more common: seed investors really wanting to also invest in Series A to maintain their share (pro rata).
It's highly, highly uncommon, which is why the "Ponzi scheme" label falls flat to anyone who is close to venture. Seed investors will typically not exit their positions until very late in the company's life, either in later growth rounds (C, D, etc.) or at IPO.
Not really. Just because they exit at a later stage doesn't mean its not a ponzi scheme. Chamath Palihapitiya certainly disagrees with you (https://youtu.be/RwRZtZQoLtQ). Skyhigh valuations with no product market fit and no path to revenue certainly sounds like one to me. Many startups burn money to acquire customers, but churn is high because they don't have PM fit. It becomes an endless cycle of raising to acquire more customers. Once the money stops, someone will eventually be holding the bag.
This isn’t true, every venture capitalist pretty honestly says only 1/10 or 2/10 of their investments will make all the returns.
And they do.
Just because you see 9/10 failures and think it’s a Ponzi scheme doesn’t mean it is, especially when the market is quite happy with what’s happening, and there are still plenty of profitable unicorns being created.
You are skewing your opinion towards not survival bias but failure bias basically.
