
Broken Syndicates - prostoalex
https://avc.com/2018/11/broken-syndicates/
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Animats
Now that's an interesting failure mode. VCs want a 10x win. As the author
points out, early failures aren't a big problem. YC encourages early failures.
They underfund one-idea startups, so they fail fast rather than trying to
"pivot" to doing something else.

The usual VC company failure mode is the "zombie". A zombie generates enough
cash to cover its operating expenses, but no significant return for investors.
It _won 't die_. It demands attention from the VCs on the board for years on
end. Too many zombies can choke a VC firm.

The "broken syndicate" thing seems to refer to companies that didn't make it
to self-supporting zombie status, are not dead yet, have potential value, and
have outgrown the funding resources of the original money source. Kill them
off, or find them another funding round? Often this situation involves a "down
round", where the early investors lose much of their stake. How often does an
eventual success emerge?

I've been involved, as a creditor, not an investor, with one company that went
through that - Havok, the game physics engine company. They overexpanded, lost
money, found more capital but the founders were replaced, and eventually sold
out to Intel. Intel then sold them to Microsoft, where they seem to have be in
maintenance mode. So the second round investors came out OK. First round
investors, not so much. Creditors got paid because there was never a
bankruptcy.

Uber is perhaps the biggest "broken syndicate" company. Despite losing money
at an all time record rate, they keep finding new funding sources.

~~~
fake-name
> The usual VC company failure mode is the "zombie". A zombie generates enough
> cash to cover its operating expenses, but no significant return for
> investors. It won't die. It demands attention from the VCs on the board for
> years on end. Too many zombies can choke a VC firm.

This is basically the _problem_ with VCs. If a company is making enough money
to cover it's expenses, _it 's successful_. We need more companies like this,
rather then more companies that try abusive practices to extract more market
share.

~~~
timr
_" This is basically the problem with VCs. If a company is making enough money
to cover it's expenses, it's successful."_

If a company is making enough money to cover expenses, they don't need follow-
on funding and aren't going to succumb to this failure mode. It's the ones
that are trying to _raise_ that suffer from broken syndicates. And if you
can't continue to exist without raising funds, you don't actually have a
successful business, even if you're technically cash-flow positive.

But more importantly, while there can absolutely be perverse incentives in the
VC world, this isn't one of them. If you're just barely making a company
trundle along, you're wasting your one-and-only life. It's a _mercy_ to have
someone take you aside and tell you that it's time to give up. From personal
experience, it isn't noble, glamorous or fun to have a startup that is just
lurching sideways. It sucks, and you feel trapped. You are stuck in eternal
grind-mode. Having investors who will tell you to stop doing this is not evil,
but a sign of good, professional investors.

Investors get many shots at the goal each year. You get a few shots in your
lifetime. Don't waste them on bad opportunities.

~~~
fastball
By the time you are a zombie, your board could still be populated by members
that want a 10x exit, not long-term profitability. The internal conflict
between "should we continue growing at a healthy rate" vs. "what can we do to
find a buyer or position for an IPO" can still ruin a company.

~~~
timr
VCs can force a company into selling. That's true, and that is one of the
misaligned incentives that comes from VC funding. It also _only_ happens if
you don't maintain board control. It's not as if young, slow-growth companies
are being abducted by evil VCs handing out cash from an unmarked van. You know
what you're getting into when you sign the contract.

It's also not the scenario of a "zombie startup". If you're a zombie, _nobody_
wants to buy you. If investors can line up an acquihire in that scenario, it
again falls under the category of "mercy", not "evil".

The case of the happy, naïve, slow-growth company who is forced to sell out by
evil investors is more theoretical than real. The people who complain about
that outcome are shooting for the moon, not for a lifestyle business.

