I had no idea the returns for investors was so low. There has to be more to the story other than a bunch of people chasing the next Google or Microsoft. If I remember correctly, pg said they started yc because it was fun and sort of like a real-life hack. Maybe other investors feel the same way. Or maybe they enjoy getting involved with the latest and greatest technology companies. If I had tons of cash, this type of investing would be a lot more fun than watching my money slowly grow in an indexed mutual fund.
I think most people who invest in startups do it in the hope of actually making money. And while the average return may be negative, the best investors make a lot. You just have to be honest with yourself about whether you're a good investor.
At YC what drives us to make money is not wanting to be bad at what we do. If all the startups we fund fail, then we look bad, and we are the kind of people who really hate to look bad. That's arguably one of the unseen benefits of YC: if someone takes funding from us, they put themselves in a position where if they fail, we fail. YC is so public that we work much harder to make sure companies succeed than we would if we cared only about the returns.
They lose money because they forget the most basic principle of any business: moneymaking.
It seems so obvious; but everybody on Web 2.0 seems to think that exit strategies mean they don't need a business plan. The bottom line is that a business is not a business if it does not make money. By that metric, almost all internet startups, even the ones funded by VCs, are just "hobbies".
Exit strategies are great. But that does not give us the excuse to ignore the basic economics of this business.
Believe it or not, some may. Several top-tier VCs have told me (truthfully or not) that some lower-grade VCs know their funds are never likely to make money, and they're just doing it for the fat management fees.
Thats pretty amazing actually. It sounds like these lower-grade VC's could only be so cynical due to past experience, but if that is the case, who is putting them at the helm of large funds again and again?
Second-tier university endowments and pension funds, the ones trying to catch Harvard & Amherst in endowment performance. They know that if the fund performs well, they look like a genius, yet if it fails, the poor college students and retirees are left holding the bag.
The whole economy has a huge moral hazard problem. There's a reason why John Nash won a Nobel Prize.
If that's true then question then is how bad off are you if you take money from such a lower-grade fund. In the long run is it not even worth it to take their money?
Interesting question. It might actually be ok to take money from a firm like that, if you didn't have any better alternatives. You wouldn't have the brand or connections of a top VC, but you'd at least have the money, which is not nothing.
You can't talk about VCs generally because there's such a difference between the good ones and the bad ones. The good ones serve their investors pretty well.
We'd never compete with VCs, incidentally. It's a completely different world from ours. They invest on behalf of other people (or more often, institutions). So while they have huge resources at their command, they have to answer to their investors, and this makes them excessively conservative. We much prefer using our own money, even if it limits what we can do.
"I remember my father-in-law telling me about the virtues of a balanced investment portfolio. I told him that my portfolio is balanced. I have risky investments balanced by outrageously risky investments.".
I guess that's cool if you're in our shoes, but boy it seems a bit risky when you're running other people's (the limited partners) money.
