

Ask HN: What startups are highly profitible but VCs won't touch? - calbear81

In particular, what are some taboo areas that VCs in the valley tend not touch with a ten foot pole even though there may be a highly profitable business model and/or mass audience appeal?
======
pmarca
There's a subtle reason why VCs will avoid certain kinds of businesses that is
not clear until you are inside the sausage factory, which is that your LPs
(investors) are sensitive to bad perception and publicity. Specifically your
sponsor within an LP such as an endowment or foundation reports to an
Investment Committee which is typically extremely conservative. In the worst
case, you could put your sponsor's career at risk in their own profession.

------
pg
VCs are often forbidden by their agreements with their LPs to invest in
certain types of business. I forget what they are exactly, but it's not simply
a matter of taboos.

~~~
calbear81
Thanks for the quick response pg, would you say in addition to being bound
legally, there is a cultural bias against certain types of businesses (assume
fully legal)?

~~~
pg
Maybe. I can't be sure because I can't remember exactly what the LPs forbid.

There have been startups we didn't fund because they seemed like they'd be bad
for the world.

~~~
orjan
What kind of startup would you consider "bad for the world"?

~~~
anujkk
May be pornography?

~~~
Shorel
That would be only a bad business in a very competitive pool.

Also, there's nothing wrong in pornography by itself, unless you happen to be
an extreme religious person.

A bad business for the world would be something like Zynga.

------
daniel_levine
pg and pmarca (so cool that you comment on HN, looking forward to your first
submission) hit it on the head.

Regulatory uncertainty can cause difficulties investing in certain sectors
that might prove quite profitable.

Lastly, I would note that profitability as an isolated metric is not a perfect
indicator of future success. I can find a link if people are interested, but
in his latest book Robert Shiller discusses firms that created some special
financial products in the late 90s. The products were effectively betting on
black swan events happening at a certain time. They ensured a high annual IRR
but then if the event didn't occur their investors were left holding the bag.
What made the idea profitable for the firms was that LPs that invested in
years 4-6 did so based on IRR, without examining things in detail and
effectively overpaid for a piece.

------
mvkel
Beyond what was already said, it's a simple numbers game. I can have a 5
person company and yield an 80% margin. Sounds like a win, right?

What if my total revenue was $1mm, with a total market size representing about
$10mm? Technically profitable, but a terrible investment for a VC.

Ultimately VCs want to see a clear path to $50-100mm, or they'll be reluctant
to invest.

------
Turing_Machine
Sheer speculation: porn and gambling.

~~~
calbear81
Gambling seems like a no go because of legalities in the US, but there's a
huge gambling technology sector in the EU and UK where it's legal.

~~~
rolandal
What about APIs/SDKs like Betable? I know it's a UK based company, but does
this allow others outside of UK to legally use it (ex. in the US?)

~~~
collinjackson
Yes. <https://developers.betable.com/#why-its-legal>

~~~
mryan
That does not answer the question of whether it is legal for US citizens to
use this service, just that they are registered with the relevant authorities
in the UK. As I understand it, online gambling is illegal in the US, no matter
where the operation is hosted.

------
rolandal
There is a grey area that also exists for "dating" applications (ex. Grindr)
etc that could be used for other purposes.

------
OldSchool
I always sensed top-line revenue was a lot more impressive to money people
than profits. You could be making $3M/yr net profit on $6M/yr revenue and not
be given a serious look (you're just a small business...), while the $100M/yr
business that's never turned a profit and loses $10M/yr because they have only
a 5% gross profit margin somehow gets a look. Zero seems to be an exception:
what has always impressed me the most are the guys who can talk their way into
an 8-figure buyout without ever having a customer.

------
TimSchumann
I'd say currencies. It's highly profitable to control your own currency, just
ask the Rothschilds.

But, PG and YC seem to have already touched that...at least tangentially with
Coinbase.

------
10011001
Gambling, Drugs, Prostitution, Porn. In general, any business already
controlled by the mob or blue collar criminals.

~~~
geoka9
Porn is controlled by criminals?

~~~
calbear81
Seems to be a sweeping generalization but it does seem like the porn industry
attracts a certain "seedier" element of folks. These same folk also happen to
be amazing marketers and I can point to many techniques on landing pages, SEO,
etc. that were first leveraged by the adult industry.

~~~
rhizome
Generally couldn't it be moreso that being involved in porn is part of the
definition of "seedy?" It's not the people themselves, but guilt by
association.

------
jborden13
They tend to avoid business models without perceived $100M potential - oft
regardless of your margin.

------
adrianwaj
Powerplants - not sure they're a startup, though.

