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Abundant Capital (aaronkharris.com)
362 points by tomhoward 8 days ago | hide | past | favorite | 211 comments

With interest rates so low (and lots of headwinds for them to increase in the short-term), one has to think that this will be the new normal for a few years at least. The rise of SPACs is another sign - they are disrupting both later-stage VC funds as well as obviously vanilla IPOs.

I wonder if the abundance of capital is not evenly distributed through the startup lifecycle, but more heavily-weighted towards later stages.

Anecdotally, I've heard from founders that SEED rounds are getting harder despite all the frothiness. Even back when we did our seed rounds ~2015, we already heard "today's seed round is yesterday's Series A" in terms of $ size but also minimum bar of progress. And these days it seems that is EVEN MORE true. It's also true it's easier to start a SaaS company than ever before. But it's ALSO ALSO true that there is less and less SaaS greenspace. Hmmmm.

So I actually think the flip side of this is that the founders finding success tend to be much older — in their late 30s or early 40s — because the green space that’s available for SaaS focuses on niche problem sets with mastery of a field required to even define a product.

This path to success is becoming the norm, but it happens quietly because “guy leaves director-level role at a global bank to build a billion dollar fintech startup” isn’t as appealing of a story to the media. This kind of founder is much less of a risk in many ways than a younger one, but while the founder may be willing to live off savings for a year or two, the talent they would need to surround themselves with is also more experienced, with domain knowledge themselves. So why bother with a $500k seed round when it’s going to take $5M at a minimum to take a real crack at it? Now that we’re out of the “SaaS all the things” phase of this economy, you can’t just throw a bunch of overachieving 20 year olds at every problem.

I wonder if the issues with seed rounds is that it’s too much work to deploy the (abundant) capital.

If you’ve got e.g. $300M to deploy, you really don’t want to be doing less than $5-10M a pop. Seed rounds (even these new big ones) are too small. If you do put $5M in, now you’ve now got to lead. Ugh, more work.

Easier to just plow $50M a pop into a few series Ds led by others.

What we've heard/read about Softbank and companies like WeWork definitely sounds like they were turning what should have been smaller investments into larger ones, because they needed to find a home for so much capital.

You can also "dump" your service when the money pump won't stop flowing; ie operate at a loss and offer it at rates that competitors cannot beat. EDIT for context: this is illegal internationally when it comes to physical goods in almost all circumstances I'm aware of.

Harder to hedge against downside risk if you deploy $300M capital in six bets rather than 30, though.

Not universally true. I would assume that an average Series D startup has way less risk of evaporating to zero than a seed stage startup. With that in mind, the risk hedging might actually work in favor of "six bets rather than 30". But you will need actual numbers to do that risk assessment, and I assume VCs do that.

Let's say you invest $300mil into 30 seed bets, with each bet having a 10% chance of returning a 10x, 15% returning a 3x, and 85% of going to zero. But when you invest that same amount into 6 series D bets, each bet might have a 50% chance of returning 2x, 30% chance of going to zero, and 20% chance of going 3-4x. If you do the math to calculate the average expected payout using these numbers, you will get an expected average payout higher for the latter scenario. And assuming each bet is completely independent from another, it seems like a pretty solid hedge.

Numbers are obviously made-up for illustrative purposes and are not the source of truth, but it shows a pretty good hypothetical situation when doing 6 bets is safer than 30 bets (given you have the same amount of money to spend on those bets). But, I think, it is fairly commonly agreed on that a Series D startup is way less likely to go to zero than a seed stage one, thus making a singular bet on a Series D startup much safer (but also less profitable in case of a success). Given many enough of those bets, the risk becomes pretty manageable and, imo, less risky than seed stage investing. I am not trying to say that what I am describing is the case, I am trying to say that it is a realistically possible case.

Saying this as someone with no experience with that model whatsoever, so anyone is welcome to correct me if there is something glaringly wrong or missing in my assessment of this.

> I would assume that an average Series D startup has way less risk of evaporating to zero than a seed stage startup.

My estimate, admittedly not looking at data right now, would be that a Series D company is roughly 100x more likely to succeed than a seed stage company.

But then again your returns could easily be less than 100%, whereas with seed you can literally get a 100x ROI (this actually happened for Uber).

I am certainly not saying that it's 100% a "natural" example of this either. In particular, the money invested there is a lot less than a Series D startup. But, I suspect (which I cannot yet confirm) that if you did it in an attempt to maximise your gains, you'd wind up with vastly better returns than if you've chosen to run all your money on a single bet.

The most important thing here though is, that it's very likely that some of those investments will eventually yield big returns that you would like to share with your team. As that becomes a reality, your investment becomes your team's. You could then use those returns on another team as a way to further leverage their collective capital (e.g. to fund their employee hiring efforts by paying them) and they could then use their own capital as their own way to increase their employee morale (e.g. by creating a startup, selling it to a VC), without being obligated to be on the team's side.

This sort of model will likely be extremely attractive to founders to use, but it's still likely a very conservative way of approaching building a team in these types of models. This is something you can see in a lot of other sectors of the industry and it's something I have not witnessed here with the exception of maybe the big VC's. Also, as a company grows and its employees get larger, you may simply become an important part of the team and have less room to invest in your own capital as they grow. This is a fairly common phenomenon in tech circles right now in general but it's not something you might see in the tech industry with a lot of companies in general.

Worth noting that in very late mega rounds (like the Uber late rounds) there are a lot of odd things going on.

Not only are their preferential shares (which people should know about), but in some cases the investment seems to have been ways of moving and/or washing money.

Things like Chinese investment via investment funds and Saudi money via the vision fund and others can be seen as ways to move from illiquid assets to liquid holdings and these investors are prepared to lose money in that transaction.

Another factor to note is that many larger institutional funds reserve a portion of their funds for follow-on to fill up their pro rata in their winners' later rounds. Those winners tend to be where all of the returns come from anyway, so it isn't a strict distribution of one-and-done bets across companies of a similar stage.

Great point. YC's model allowed them to do seed investing at scale, but the classic way is likely difficult to do well even if you're great at picking companies.

The appetite for risk in seed funding is almost entirely gone now. Two decades ago you could raise a small seed round with very little more than a good pitchdeck. Today you won't get a dime until you have an established business with significant revenue. In some ways that's quite reasonable - the barrier to getting traction is much lower now and you can build something very cheaply. It's still frustrating when people claim there's plenty of investment money around though.

That was my experience. My guess is capital seems abundant to well connected insiders in the Bay Area. It's not in London where revenue is a prerequisite. One startup I know had to go to Berlin for funding.

That's comical because if you have an established business, you're not looking for seed funding. You're looking for funding to expand.

> With interest rates so low (and lots of headwinds for them to increase in the short-term)

Note that while interest rates are fairly low (especially for short term <5 yr debt), the yield on a 10 year US treasury, which is often used as a benchmark, has been consistently increasing for about 6 months and is ~50% higher than it was at the beginning of the year: https://fred.stlouisfed.org/series/DGS10/

Yes but it is still below projected inflation, i.e. 10 year real yield is still negative.

In an economy with a working financial system there is no such thing as abundant or scarce capital, because financial capital is not used up when an investment is made, but merely transferred to the accounts of vendors and employees who then store it in funds which in turn seek new investments elsewhere.

The issue is how a speculative cash-flow is priced relative to the risk free cash-flow - what is the discount demanded of a speculative venture?

This discount, which is not the risk discount, but rather a measure of how risk is estimated, goes through secular swings:

As investments are seen to pay off, investors update their priors and view similar investments as less risky relative to the previous pricing. In a bust, people are convinced many of the same investments wont pay off and become more skeptical of ventures.

So I don't see this as a function of low rates so much as higher levels of confidence and optimism. That's all this is -- confidence and optimism, not scarcity or abundance of capital.

If this analysis is true, then the current climate will flip back once there is a high profile series of busts, rather than once rates are raised. But as raising rates tends to slow down the economy, rising rates may be the trigger that creates the busts, but it's not the only possible trigger.

Therefore, although I believe we are in a secular period of low rates, I don't believe we are in secular period of easy venture funding or "abundant capital". Note that one example would be Japan, where venture funding is historically hard to obtain as investors are much more conservative even though they have had a period of low rates for quite a while. This is because a risk free rate change from 1% to 2% isn't going to make a whole lot of difference to the discount demanded for a bet that has maybe a 50% chance to pay off. Updates of your assessment of risk are going to dominate the pricing of the venture's cashflow.

> In an economy with a working financial system there is no such thing as abundant or scarce capital, because financial capital is not used up when an investment is made, but merely transferred to the accounts of vendors and employees who then store it in funds which in turn seek new investments elsewhere.

If you invest 10 million in my business and I use it to buy 10 million worth of 30-year treasury bonds, how exactly is this capital “seeking new investments”?

You're lending money the government who can use it to either supplement taxes (provide stimulus) or make public investments.

Does lending to a government really matter when they can (and do) print trillions of dollars to fund things all the time?

Also, if a capitalist has only $10 million to invest, and others have already started putting it all to work, there is nothing left for you if you come along afterward.

What does “secular” mean in this context?

ECONOMICS (of a fluctuation or trend) occurring or persisting over an indefinitely long period. "there is evidence that the slump is not cyclical but secular"

I'm guessing it comes from Latin. I'm kind of cheating here but "secular" means something with a duration of a century or more in Romanian ("secol" is a hundred years).

So probably something long lived.

What are the headwinds for interest rates to increase?

Pandemic and response destroyed the economy.

It is possible that by summer the pandemic is under control. So wouldn’t that suggest an interest rate increase is possible soon thereafter?

Everyone and their dog is over-leveraged to the gills. The way things are with credit card debt, mortgages, corporate debt etc, it looks like we can't really raise interest rates in the next..ever.

Salaries for good engineers have simply gone up. Competing with FAANG for good engineers is expensive. Need $5mil to get a small team for a couple years runway. That used to be an A. Having one or more cofounders as capable engineers to get MVP out is also beneficial.

None of the early stage startups I know even tries to compete with FAANGs on compensation. I don’t know if it’s because of disparity of information on the side of the employees, or simply people joining for a wild ride (I suspect it’s both). Not to say salaries have not gone up, but not to those levels.

That said, it is also uncommon for me to see startup employees which previously worked for FAANGs (you do see founders).

I always imagined that startup folks were working for a lower salary, with the expectation that if it goes big, the have a chance at a massive payoff. Is that not how it is? I'd expect discontinuous QOL changes between:

unsuccessful or not yet successful startup | working at a big company | successful startup

(I'd rather not work for a startup because the middle bracket looks fine to me).

If people are working for that startup lottery ticket and then not getting the full reward when it comes up a winner, they are just getting screwed. Which is a possibility but not very mysterious, right?

My understanding is that the actual payouts have gotten much worse for employees due to lots of special priveleges that the investors get: employees get paid last, and therefore get paid less. So the 'f you money' for an early employee these days buys a new car and that's about it. (In exchange for lost sleep and lower salary, and, oh, a high chance that you don't even get the car because most startups fail.)

As a faang employee, it just looks like the startup space is completely uninterested in trying to hire me.

> employees get paid last, and therefore get paid less

Paid by who and in what case? If the company IPOs or buys back a sizeable chunk of stock as part of fundraising or acquisition, employees with options do just fine. Employees are paid when they choose to sell.

If the company liquidates that's obviously a bad deal for employees, but it's a bad deal for everyone involved.

In some sense, working for a tech startup is like working for FAANG and spending part of your salary on buying 10 year call options on random other private tech companies (if that were possible without having VC-tier wealth). Lost sleep is a founder issue.

>If the company IPOs or buys back a sizeable chunk of stock as part of fundraising or acquisition, employees with options do just fine.

You need to read up on preferred stock vs. common stock, and the shenanigans that startups can do in order to reduce employee payouts, e.g. stock dilution.

Preferred stock by default mainly affects liquidation order when there's no dividend. If the company does very well, that won't be a factor. https://www.svb.com/blogs/lewis-hower/startup-founders-shoul...

Dilution can happen regardless of any preferred stock agreement. The biggest sources are when top leadership exercise huge options packages or when the company issues new stock for sale. If you buy stock or call options you are subject to dilution on the public market too. Under dilution, any investors that negotiated an anti-dilution clause on their preferred stock are the winners, everyone else loses. It's stacked but it doesn't break the game completely.

There's a pretty good chance of failure of this strategy. I've stuck around my company for almost 10 years to hit my FI target, and the first 2 years I didn't get equity by default as an intern. The opportunity cost is potentially huge. However, as an individual there's no way I would have been able to invest at this company at the time I got options. The job has been pretty nice in the mean time. FAANG also would have returned extremely well in that time, but more like 10x not 100x.

Is this an efficient strategy on the risk-reward frontier? I don't know. But sometimes the outcome works out very well. Unfairness in the system is there but not so different than owning any random stock. Fiduciary duty exists.

/Unfairness in the system is there but not so different than owning any random stock./

Diversification is also important, though, and is really the biggest problem with startup employee equity: your job is also your lottery ticket, and you lose both at once if/when the company fails. Dilution and preferred stock deals just make it worse.

There are, of course, other reasons to do work than money. But what charity would you give $50k/year to?

You're still getting paid a salary and can save that to diversify. Selling equity along the way isn't possible for everyone, but for example my employer IPO'd after 3 years and I've been liquidating at a schedule since then. I also got options ~300 employees, which is late in the startup game but early enough considering the company's success. That's a bit safer than super early stage.

Yes, some blind luck is needed to win at this game. However, the job market has been such that a solid programmer can get something lined up pretty quickly if their current job fails. I don't think the risk is as bad as people portray. Again, picture buying long term call options for a single stock with a proportion of income each year. Somewhat risky, but risk is capped and the payoff could be quite big. More diversification is almost definitely more efficient but carries less tail upside.

By "unfairness" I don't mean risk, I just mean unfairness.

Yeah, I think we're basically on the same page, but have plugged pretty different numbers into the proverbial Drake equation.

I agree that job loss probably isn't all that bad... (Unless it lines up with a wave of companies closing, which is known to happen from time to time.)

I can also just save + diversify /more/ with faang salary and equity than I could at a startup. The $50k/year is a lower bound on what I expect the pay cut to be in moving to a startup. So from where I sit, there's really no financial argument for moving to a startup. The startup has rather lower pay, some probability of payout multiplied by a value that I just kinda expect will be chipped away by the suits, and some probability of a bad outcome (with some bounded range of potential badness). I look at it and just think it's not interesting unless I get really, really bored.

I think your evaluation is right and sensible. If you wanted, you can also take on risky bets with more diversification.

Joining a company that's relatively close to IPO is an interesting middle area.

Getting $1 million used to be f you money, it paid for a nice home for you, college for all your kids, etc. Now, if you make a cool million off the IPO, you can put in a down payment for a house closer to the office.

I had a founder promise me millions upon millions with my equity... but even generous valuations - at a “unicorn” - with minimal dilution would leave me with <100K. Quit not long after.

No one is trying to pay 500k total comp but higher salaries have become the norm. Getting someone sub-100k with experience and knows what they are doing is impossible unless you are exploiting them.

In the US, agreed. In Eastern Europe and India, it’s very much possible. In Western Europe, you can get close.

I agree, at present, capital is abundant. That is, at the moment:

  Σ(capital available) > Σ(investment opportunities)
And this imbalance of demand for and supply of investment opportunities is showing up everywhere as... asset price inflation.

You can see it in rising angel valuations, rising early-stage VC valuations, rising later-stage VC valuations, rising growth-equity valuations, rising leveraged buyout valuations, rising stock market valuations, rising cryptocurrency prices, rising home prices, etc. Feeding frenzies and bidding wars for high quality assets have become more and more common. Asset prices keep going up and up and up...

The multi-trillion-dollar question:

Is this sustainable?

Of course not, but that doesn't matter if a.) you can get out before the top or b.) the world will have changed by then in a way that makes your current position worthless or c.) there is no alternative.

Right now all three of those are true, to varying degrees. If you correctly called the top in 2007 and got out of the market, it wouldn't matter unless you got back in before 2012. As someone who lived through those years - at every point during that period, there was a loud chorus of voices saying that we were about to have a double-dip, prices didn't really correct far enough, and fair value indicated they should've gone back to where they were in 2002-2004.

Remember that if you're in cash, you've chosen to put your wealth in an asset class whose controlling authority's stated policy is to make it worth consistently less every year.

Everyone in every bubble since the beginning of stock markets has thought:

a) They were getting out before the top, they'd sell to some other poor fool when it was time

b) The world had changed completely and it was a new paradigm (it's different this time!)

It's wise to avoid cash in the long term, but it's unwise to avoid it completely, and certainly when you sense things are getting a little crazy, it is not at all unwise to shift some of your holdings to cash, though you'll be mocked for it by many, for whom risk is a distant prospect which happens to some other poor sucker.

I agree with your reasoning, but I don't believe things are "a little crazy", at least compared with how crazy they're about to get.

IMHO, we're at Greenspan's "irrational exuberance" speech of 1996. If you pulled out of the NASDAQ in 1996, you never made it back. (The nadir of the dot-com bust had the NASDAQ at 1139 in Sept 2002; it was at 1133 in July 1996.) In the meantime you would've missed out on 4x gains in the NASDAQ itself, and up to 100x in certain specific assets.

My indicator for when we're near the top of the bubble and it's time to pull out is that folks like you will drop out of the discussion and start keeping their opinions to themselves. That's when it's time to sell; when you're ridiculed for it.

I do think there are some scary indicators (Value/GDP, CAPE, MAPE, calls/puts) which indicate we're farther along than that, but yes this could take years to reach a top. The GME escapade and the massive rush of retail investors into risky assets with perfect indifference as to whether they are investing or speculating indicate to me we're reasonably close. I have also been ridiculed many times over the last year for expressing hesitation about current valuations of Bitcoin, TLSA, GME or ARB.

Perhaps you're right though, and this has a long way to run... I'm afraid I just can't bring myself to invest in things which are overvalued due to FOMO rather than actually making money or having a prospect of making money. Old-fashioned I know.

Re pulling out of NASDAQ, I'm not sure that's a good example. You never made it back implies you lost something. You might have had indifferent returns in other assets, but not a loss. If you invested in 1999 on the other hand, you made a loss till 2013, over 10 years later, after another bubble burst. To me it is more important to avoid risk of extreme loss than attempt to chase extreme gains.

The Shiller book on Irrational Exuberance is better than the Greenspan movie IMO ;)

In the past you wouldn't put your money in something you believed it would grow faster than. And if you get a chance to make it, you'll be able to make it, with a higher level of risk than before. If you're worried about investing in this thing, I'm afraid the world is much less scary than we thought! To me, investing on a market is like investing on a stock or bond where there is a risk component, but it's also a good way to increase value through the investment of your time. You can make big investments when they are easy, but if the future is uncertain, then you'll have a real life time risk to be managed. If you have problems on your side and are not able to solve it, there's very little chance of a positive return (or loss). So a market is not a guarantee of being a good investment. And in any case, most people (including me) are afraid of risk in the markets in general.

Almost nobody is afraid of risk right now, that's the problem.

Well, one thing is different. No inflation in commodities, since China is offsetting it by cheap production. This allow the central bank to keep interest low, which leads to high inflation in assets.

So depending on what the central bank will do, cash might be good or not.

Commodities are going crazy:


Crude oil, natural gas, silver, corn, wheat, lumber, all up 2-3x since the bottom in April. In many cases (i.e. everything not oil-related), this is not just recovery from a dip: prices are significantly higher than 2017-2020 levels.

That said, I don't buy the conventional Wall Street narrative that this means the Fed'll raise rates and we'll get a stock market crash. Or rather, I believe that'll happen, but it'll be too late and the currency will have devalued 10x or more by then. The Fed has pledged to keep rates low through 2023, and to allow inflation to overshoot the 2% target to make up for the last decade of ~1.5% inflation rates, and that any rate movements will be "well telegraphed" for a long period of time beforehand. They still have tens of millions of people out of work. I doubt they'll act until it shows up in headline CPIs for a year or two.

Once inflation rates really get going, it's hard to tamp them down. The Fed has a pretty fun (and quite educational) game where you get to play the Fed chair:


Try playing one of the inflationary scenarios (they're random, but just keep playing till you get one with a tight labor market rather than a housing crash or recession). If you don't raise rates early and often, you quickly get into a situation where inflation is 7-8% and you have to hike rates to 15% or more to tamp it down. Why? Because inflationary expectations are subtracted from the nominal interest rate to get to the real interest rate. If inflation is high, you have to hike nominal rates even higher to get real rates to go up at all, and you have to hike real rates pretty high to make a meaningful dent in the money supply.

> that'll happen, but it'll be too late and the currency will have devalued 10x or more by then

Im curious why you think inflation in the US is going to go from <2%, not to 3, or 5, or 10%, but to 1000%?

Because in the absence of quick intervention (i.e. Volcker), it's a feedback loop.

The basic money equation from macro-econ 101 is MV = PQ: money supply * velocity of money = average price level * quantity of goods sold. Under normal conditions, V is assumed to be constant, and so you either increase the money supply to keep up with greater economic output (M ∝ Q) or if you increase it too fast, you get inflation (M ∝ P). This is "ordinary" inflation: it's predictable, controllable by the central bank, and follows roughly linear equations.

When people notice and then start to assume inflation, their behavior changes. If you know that your dollars are going to be worth 20% less next year, you have an incentive to get rid of your dollars as quickly as possible. You'll spend them as soon as you get them, because they'll quickly become worthless otherwise. This shows up as an increase in V, and it means that even holding the money supply constant, you still get inflation (V ∝ P). Moreover, because the cause of the increased price level was increased velocity of money, this feedback loop becomes self-reinforcing: the higher prices go, the quicker people want to get rid of their money and turn them into hard goods. At this point the central bank has lost control of the economy, and you have hyperinflation.

Looking at data on a few dozen instances of hyperinflation, the threshold seems to be ~20% inflation annually. Below this, consumers write off inflation as annoying but don't change their behavior significantly. Above it, hyperinflation seems inevitable: there are very few instances of sustained inflation above 20%/year where the government has later managed to bring it down, and it usually ends with hyperinflation, a currency crisis, and the replacement of the currency (and usually government) with a new one.

We've observed price increases > 20% in a number of industries this year: commodities (listed above), housing, food, and labor is getting up there. It hasn't filtered down into CPI numbers because those are averages, and inflation is flat or even negative among some demographics. But prices in fundamental industries tend to bubble up eventually, and if the Fed is focused on bringing back the stagnant parts of the economy while other areas are raising prices at 50-100%/year, inflation will cross that threshold throughout the economy before they can react.

(Incidentally, historical incidents of hyperinflation usually happen in the transition between a command to a market economy, the two most common examples being when wartime gives way to peacetime, and when communism gives way to capitalism. The transition from a pandemic economy to a normal economy has many elements in common with that: there's a large shift in consumer demand while the economy has been optimizing for pandemic production for the last year.)

Hyperinflation is caused by a collapse of production capacity(think of weimar republik or the collapse of coal and gas power plants in texas). Where do you see that happening? Obviously, there is a collapse in house construction rates and that's why you see house prices go up but that's a long term trend which started decades ago and not something caused by the Fed.

>(Incidentally, historical incidents of hyperinflation usually happen in the transition between a command to a market economy,

Most command economies simply didn't provide enough production capacity to meet the demand of all citizens.

>the two most common examples being when wartime gives way to peacetime, and when communism gives way to capitalism.

China had massive food shortages that were papered over by price controls. Just because someone fakes the numbers doesn't mean there was food for everyone. By introducing a free market you are merely revealing an existing collapse in production

The Weimar Republik is a classic example of a collapse in production capacity. Germany lost the war, winners destroy factories and there is a lack of working age men because they died in the war. People don't have fond memories of there being food everywhere and some speculating capitalist driving up prices because of greed. No, there were many days where they got three slices of bread per day and a hand sized lump of coal to heat their home.

>The transition from a pandemic economy to a normal economy has many elements in common with that: there's a large shift in consumer demand while the economy has been optimizing for pandemic production for the last year.)

How exactly is that going to result in a food shortage?

Why are gold prices more or less the inverse of the other commodities (including other metals)? Is it because it's used more as a portfolio hedge than a commercial good, whereas the other metals have more industrial applications?

They're not the inverse, but the price of gold had its run-up earlier than other currencies (it started rising in mid-2019 and peaked in summer 2020). This is probably because of gold's status as an inflation hedge - people started buying as soon as Powell started easing in 2019 - and because its speculative nature and easy storage makes it more responsive to future expectations. If the Fed drops rates in March 2020 and you expect this to mean major inflation will hit in Oct 2021, you can buy gold immediately to hedge this. If you try to buy corn instead, good luck storing it for the next 18 months.

It's also interesting to plot all these commodities (as well as cryptocurrencies) in terms of the S&P 500, which is rapidly becoming the true store of value. I think you'll find that their price is relatively constant in those terms, and it's the dollar that's been falling.

I was describing the last 10 years. Also probably used the wrong word, I meant consumer products (basically how you officially calculate inflation)

What makes you think that the GDP of the USA will shrink down to 2 trillion per year? (assuming current purchasing power)

Copper is seeing massive inflation right now. Retail prices are not as yet, and perhaps they won't, but if they see too much interest rates will rise and the free money spigot will be turned off.

> Copper is seeing massive inflation right now.

An asset that isn't used as a medium of exchange does not have the characteristic of inflation. An asset can have an inflated price (in a currency) but the asset itself (in this case copper) cannot have inflation if its not used as a medium of exchange. The distinction is important.

How would you best describe the price rises in copper and copper miners? Just copper prices are going up right now?

Copper is needed to move electricity

Agree. I like to think of a), b), and c) as:

a) "epistemic arrogance" -- you believe you're smarter and know more than everyone else;

b) "heads, you might win, tails, everyone loses anyway" -- so you might as well gamble on heads;

c) "f*ck it, load up!"

And there's also d):

d) "wait it out" -- if you're already rich and infinitely patient, like Mr. Buffett. Maybe find a hobby to occupy your brain -- e.g., play Bridge online.

a) "epistemic arrogance" -- you believe you're smarter and know more than everyone else;

No, more like you decide to be less greedy than everyone else. You choose to leave money on the table in favor of getting out early.

If you want to not get hurt, b makes this not necessarily a good idea.

If you think things are overvalued, there are two ways for it to go:

- the value of equities crashes in nominal terms and consumer prices are stable

- the value of the dollar itself declines, so that the nominal values of equities stay the same but consumer prices inflate to make the real value of equities revert to the norm

It’s probably a mix of a and b, but outcomes that tilt more heavily towards the latter would hurt people holding cash more. And right now b is closer to official Fed policy, since it would prefer that to getting into a Japanese deflation trap.

Or, you know, try to create value day in and day out :)

That's a given -- at least from my standpoint.

>Remember that if you're in cash, you've chosen to put your wealth in an asset class whose controlling authority's stated policy is to make it worth consistently less every year.

We might as well consider VTI to be better than FDIC insured on a 5+ year timeframe. FDIC only protects nominal values. The Fed can protect real values.

I don't think this is a bubble, but expected inflation, due to COVID19.

I am guessing we will see cash devalue roughly 2x in the next five years. As a result, there's a scramble where to put money safely.

If the alternative -- cash -- loses half of its value once COVID19 financial measures start unwinding, all of a sudden, investments just need a 50% ROI to be profitable. If I dump a million dollars into a startup, and it sells for the equivalent of $500k in five years ($1M after inflation), I've come out neutral.

How's that? I think you'd need it to sell for at least 2 mil to come out neutral. We're ignoring the reality of your shares getting diluted in future rounds.


I wrote that badly, didn't I? Let me rephrase that more clearly: Let's say I expect 100% inflation over the next 5 years.

I can buy an investment which will lose 50% of its real value over that time. I come out neutral compared to holding cash.

In dollars: I buy today at a nominal value of $1 million, and sell at $1 million. Same as cash.

In value: I buy today at a real value of $1 million. I sell at a real value of $500k in 2020 dollars.

I can buy into investments whose real value is falling, and still come out ahead in inflationary times. Value-losing startups suddenly become okay investments since they lose less value than dollars.

Both due to COVID19 and government debt generally, I think we're heading for high inflation.... People are looking for assets to put money into. Real values can go going down, while nominal (dollar) values can be going up.


Selling at $2 million would mean I didn't lose value, but I'm not sure people are finding alternative investments which won't lose value; it's why people are grabbing bitcoin, and stocks are hot.

Yep, makes sense, thanks for the explanation!

>... asset price inflation. [...] Is this sustainable?

No but society has basically locked us all into it. I made a previous comment on why devaluing the currency causes a worldwide game theory of economic actors protecting their purchasing power to counteract it: https://news.ycombinator.com/item?id=15728480

Can we reconfigure society? It doesn't seem like it. Some critics today think that Bitcoin's limit of 21 million to support its philosophy against inflation is wrong.

Hey, maybe it isn't society that wants inflation but it's the US Govt and/or The Fed Reserve forcing it on us. Well, surveys say the majority of Americans want $2000 stimulus checks so that money has to come from somewhere. It's easier for politicians to print new money rather than sell Yellowstone Park to China for a few trillion dollars.

Maybe the Fed and/or congress want a big money printing and/or tax hike, but to make it happen, they have to take a huge proportion of the profits away from the rich and give it to everybody else in the US and Europe. But to give it to everyone else they only have to get the money out of the banking system and into the banks. Then, they can decide if they want a bailout or no. We already have a banking system running at 100% capacity...

I'm not saying I'm against government regulation. I certainly am not. At all. I'd like to see some way to control inflation and the monetary system for good. But I'm against it getting too out of control in the first place. That's in my own interests. Maybe I'm wrong on that. I don't mind inflation. When it's controlled I want it to decrease, because, as I've said in other posts, more economic growth creates less government interference and I think that's what we want for Bitcoin. But I don't want anything that gets too out of control to stop the currency from appreciating. When it's artificially forced onto the market I'd like to see it to decline and be replaced with something, maybe a currency with a higher cap or something.

It's all up to us, the Bitcoin community. You choose to participate in the process or you don't.

The problem is that the fed has no direct access to the economy. Imagine being an admin and having access to the bank accounts of everyone. You could hand out money exactly where it is needed and drive 2% inflation without unintended externalities. For obvious reasons, this is never going to happen and it probably should never happen.

> $2000 stimulus checks so that money has to come from somewhere. It's easier for politicians to print new money

printing money out of thin air, vs borrowing money (via gov't bonds) are different things. I believe the US borrowed this money for the stimulus cheques.

Borrowed from whom? If it is another federal organization, then I do not see a difference. If my left pocket borrows money from the right one to give money to someone, yet my right pocket was empty to begin with, any money were created out of thin air during such a borrowing process.

> Borrowed from whom?

Borrowed from taxpayers. The instrument is an AOT tax deduction/rebate for the 2021 tax year. "We know you are going to pay your taxes, you can have some of it back right now".

Yeah a stimulus check is just a tax rebate for private individuals instead of doing a tax rebate for corporations.

The root cause is increased wealth inequality. "Capital" is assets that are invested by their owner instead of just immediately consumed. So, the amount of capital that exists is variable, depending on the preference of asset owners, which is a function of the rates of return they can expect, as well as the utility of consumption. So its backwards to to say "rates of return go down because there's too much capital" - what's really happening is that a lot of assets are held by people who are so rich that the marginal utility of additional consumption to them is essentially zero, which in turn means that they are willing to invest their assets until the rate of return is also close to zero.

The root cause is demographics. People have a standard life cycle - you save when you are young, peak saving around a decade before retirement, and then spend savings in retirement. What is different now is that China has a massive boom in working-age population, and they are rapidly becoming more affluent, and the have a savings rate that is like 10x of the average American. I wouldn't say they are "so rich," just that savings rates have a cultural component.

So anyway, you have this massive influx of savings flowing into the system, buying up investable assets to save for retirement, and thus bidding up prices. They call this the "global savings glut." There are OLG (overlapping generation) models that show how this behavior works in a simplified setting; you can easily get over-saving, dynamic inefficiency, and "rational bubbles" as an outcome in an OLG model with different demographic curves.

An aging economy would experience inflation since there aren't enough young people to take care of the old people. In practice old people keep working because they can't retire.

I don't need to do any research to tell you that the total wealth of the Chinese middle class is a lot less than the total wealth of the top 1% of Americans.

> they are willing to invest their assets until the rate of return is also close to zero.

which is how new jobs are created - from this mechanism of investment (and acceptable returns from it). The problem is whether these jobs produce value in the future, at a greater rate than the returns being expected by the owners. If the excess returns are all captured by the owners, society wouldn't have progressed forward. But if these jobs brought more value than just the ROI, then it's a good outcome.

Interesting concept. Do you have any links to research or theories about this way of looking at it?

Nah, just made it up, it's probably total crap

Even if you made it up, your comment is basically describing the diminishing marginal utility of wealth. https://www.economicshelp.org/blog/12309/concepts/diminishin...


The net effect is that consumption (and associated demand) is suppressed at the lower to middle end of the income scale, where individuals' income isn't enough to sustain their needs + wants. When these individuals spend, the demand for labor + raw materials per $ spent is high, because they are often buying consumables or durables (food, washing machines, etc).

At the high end of the income/wealth distribution, there are few needs that aren't met or exceeded, so their wealth ends up chasing assets and investments that induce far less demand for labor per $ invested. A the extreme end of this are private equity funds (billions managed by a small number of people).

The primary mistake is that the return on capital is going up. Fed is pumping money which is mostly arriving in stocks and other assets. Rich people are betting on that money and thus although the PE ratio of the asset itself is going down the returns from capital gains keep going up fast enough to counteract the loss in yield.

I'm not sure that any founder should make a decision based on a future prediction of sustainability. Each founder should make decisions based on the environment he encounters when making a decision.

In this case, the imbalance has existed for years and is getting more pronounced. My thoughts here are based on that dynamic. If this changes, then I'd likely change the advice.

Importantly, the imbalance has changed, and the valley has not seemed to hold a grudge. There have been shifts during the recessions, and certainly after the 2000 bust, but it's a fact of life: the power dynamic sometimes changes, and the best deal you're able to get at the time is the deal you are going to get.

It's not entirely unlike mortgage rates, tbh; when you refi matters, due to the rates being variable. When you raise also matters, but sometimes raising is the important part, and the terms are the terms.

Where do I sign up to LP for the AKH firehose fund?

This sounds awfully a lot with stagflation.

How can money which can't be spent hold value?

Stagflation is what happens when the central bank engages in expansive monetary policy but there are barriers to starting companies or working at jobs. This describes American healthcare, education and housing pretty well but it's a long term trend.

Think about it. The fed gives a bank money, the bank gives money to you so you can build a house and then the city denies you the construction permit. You decide to just buy an existing house instead.

If it is sustainable depends on the quality of investment returns. But that phrase abstracts a lot - the quality of things/services/business produces for that investment need to lead to new or improved productivity in economic activity.

It also may take a longer time frame for the improved productivity to manifest than it does for the economic metrics to reflect it. Meaning that one thing to watch out for is that the capital abundance may recede before the investments are able to return the productivity - and that would be tragic because there are an abundance of neglected investment areas which we as a society and an economy can realize benefits. To the extent that our capital investment allocation paths don't match societal needs is the real challenge with this bubble.

It seems that capital is only abundant through the VC-finance industrial complex, relative dumb money from LPs who buy into whatever thesis a VC firm constructs, and then those VCs will relatively poorly make decisions - only expecting the success of 2-3"unicorns" to pay off their losses and make all their profit - meanwhile that forces, applies pressure to all of their investments to charge more than they may otherwise need to, and use tactics that may not be great, and then that leaves them open to be competed against, disrupted; mind you, their ideal scenario/exit is to IPO and pass that risk off onto society in general. I am trying to combat this with the design decisions for my projects, we'll see if I succeed or if it has any impact.

Ironically, whoever answers the question probably wont be paid trillions of dollars. That is because the most likely answer to the question is that it is not sustainable, meaning there's two options: we switch to a non-capital system, and they don't get paid, or everyone chooses to ignore them and they still don't get paid.

Isn't this just another way of saying that some people think money is worth more / or less than it is currently valued?

Like - if you think there's too much capital compared to X - couldn't capital just be worth less or X be worth more?

Perhaps I'm a minority, but I got A LOT of value from my investors (both pre-seed, seed, and series A). To the point where I'd consider them core partners in my journey of building the business.

I know Aaron isn't saying that the investors don't matter.

But when I think about why VCs hate going through an auction-like process, at least part of it is human nature. Like, we're about to work together for a long time. Let's not start off by commoditizing what we each bring to the table. I understand the POV that 99.999% of what VCs bring to the table is the literal commodity of cash... but if you have good ones, they really can help.

In our case, we had multiple term sheets for our Series A so I was able to optimize terms and get the partner/fund who I thought would add the most value but at "market" on the other terms. "Market" being what was on the other term sheets. That seemed to work OK as a softer way of actually doing the auction.

The real point in all of this is that if the VC's value-add is true, then you shouldn't NEED to discount things because of that. If it's real, then they should be happy to pay 'market rate' to invest in you, and the impact of their other value will be that together you build a better business, which is more valuable to them too.

Sure, but that's not how negotiation works; both parties are trying to get as much out of the deal as they can, assuming it beats both parties' BATNA.

Also, that you had multiple term sheets means you... ran an auction. It's wonderful that most of the terms were similar, but getting multiple term sheets is effectively generating a bidding war. You don't have to pick the one that is monetarily best (we didn't, because we preferred the partners), but that's why you're doing. :)

Well, if we're defining "auction" to mean anything with competing options -- rather than its typical usage, which is price-only competition of something rather commodity-ish -- then sure.

My process had elements of an auction - using competing options to determine "a market price" for various terms. BTW - the VCs also had that, in that they could have put that same capital to work in other companies vs mine.

But that's not a pure auction. i.e. there's still room for qualitative choice and optimization on both sides. This should be most obvious to you in the non-monetary terms and how difficult it would be to translate into $ terms (for instance - how many seats on the board? How much lower/higher of price makes sense for more/fewer board seats? Well, for starters, it would depend on which VC is asking and what stage the biz is in). Clearly these aren't pure auctions.

Because (back to my original point) this is possibly a 10+ year partnership you're getting into (longer than many marriages).

A good process is more equivalent to (1) speed dating, which leads to (2) a handful of non-exclusive longer dates, (3) a period of exclusivity (no-shop) and 'meeting the family' (diligence), and then possibly, finally, (4) marriage.

I do not think the OP intended to mean a 'pure auction' in the sense you're using it. I strongly suspect he meant run a competitive bidding / auction process. Non-tangibles are absolutely acceptable tools in such a process, including future relationships, intangible terms like fewer board seats, etc. An auction does not have to be solely monetary in nature.

> To the point where I'd consider them core partners in my journey of building the business.

The startup ecosystem in Brazil is probably in a time lag and perhaps this is why my experience might not be as insightful here. Still, I agree with your comment 100%. The majority of our early investors held some relevant experience in our field or offered tangibly valuable networking opportunities.

In fact, I think that the abundance of venture capital has the effect of flooding the ecosystem with "regular-value investors" (those that only have cash to contribute with), so these "extra-value investors" that actually partner with you are harder to find. And taking the authors suggestion of intentionally starting a bidding war further exacerbates the problem.

Instead of finding someone with experience and maturity in the field you're going to venture into, it increases the odds of picking investors that don't really know much exactly because they won't realize the bid was getting too high. By design you're trading knowledge for higher expectations.

It's hard to see the VCs as victims of commoditization because the VCs commoditize it themselves. They hunt for cash-starved startups by sending out tons of rubber-stamped emails without having any clue about what the recipients do and what makes them special.

Is it really that much easier for a "typical" startup to raise money now than before? And by typical, I mean a non-Silicon Valley based startup with founders that no one has heard of before and that do not have good connections with VCs operating in a mediocre market with a decent, but not ground-breaking offering. Not a hype-driven, silicon-valley based startup in a "hot" market led by superstar founders or founders with deep networks?

It would seem that all this "easy money" is simply flowing to the places where it has always flowed before, but in larger quantities. The same big money chasing a small number of deals, just with deeper pockets and more gusto to participate in an auction if need be.

Honestly, has it really gotten any easier for the typical startup?

In my anecdotal only experience it has gotten easier for founding teams who are from central casting - known schools / former employers, tech-first business ideas that VCs can understand, other stereotypes around what it means to look like and especially talk like the pattern of a successful founder.

There's just more money sloshing around and these funds have to deploy it somewhere.

Imho the outsized benefit to being from central casting is probably a sign of the end times for western civilization etc but that's the pattern I've seen from scattered anecdotes.

If you reach the threshold required to get into YC, then your location and experience won't matter (and with the size of the batches getting larger and larger, you could argue that it is in fact getting easier to raise money now than before).

If something about your seed-stage startup is stopping you from getting into YC, then I would ask myself if I might be doing something wrong. This is coming from someone who went through YC with one startup and also got rejected in another instance. While YC does make mistakes, in my case they were spot on.

Please know that I am not discouraging you from pursuing whatever it is that you're working on - every early-stage founder has a special place in my heart. Just realize that your time on this planet is limited, and there truly is so much opportunity out there. Spend your time wisely.

So you're saying that the threshold to getting into a fairly exclusive club (getting VC funded) is to get into an even more exclusive club (getting into YC).

I find it comical that the VC community thinks it is diverisifying its entrepreneurship base by backing the same network of people that moved from San Francisco to Austin or New York.

The truth of the matter is that capital might indeed be abundant, but it is going into much the same places it always has. The concentration of wealth and opportunity continues unabated.

I challenge VCs with all this extra money sloshing around to rethink the path to sustainable entrepreneurship. If this was the late 1800s, the money would all be flowing into steel mills in Pittsburgh and the emerging oil barons and tycoons in those cities that are very much ignored today.

Just because someone could get into YC doesn’t mean they want to.

That means the signal isn’t there, even though the company is just as good as one that did enter YC.

Technically, that's a correct statement. Even if you could get into YC, nobody is forcing you to take the YC tail winds, and instead you're free to throw yourself into the head winds.

Plenty of great teams skip YC. It’s kinda known for pumping out low quality startups anyway. Most YC companies are not Dropbox.

> Plenty of great teams skip YC.

That was never up for debate. The real question is would those great teams have raised at better terms and from higher quality investors if they went through YC (obviously also accounting for the 7% YC tax)? From what I can tell by looking at the YC valuations, the answer is a no with one caveat: if they had a previous exit, their previous investors will give them a sweet deal with or without YC.

> It’s kinda known for pumping out low quality startups anyway. Most YC companies are not Dropbox.

It would be nice to see how you arrived at this conclusion. The YC portfolio is valued at over $300B [0], so I would say the investment community certainly disagrees with you (with or without Dropbox). In fact, that 300B figure was published before Stripe and Coinbase announced their IPO pricing, which has now likely added another $50B or so to the bottom line.

[0] https://www.ycombinator.com/

Just like every other VC, YC's successes are a small fraction of the investments they make. You can scroll through HN every day and see tons of YC startups no one has ever heard of/will hear of looking for engineers, launching...

> It would be nice to see how you arrived at this conclusion.

Demo days.

If a great team is skipping YC, it's safe to assume they know what they are doing.

> Just like every other VC, YC's successes are a small fraction of the investments they make.

You said "just like every other VC." So, if it's a global phenomenon that's true in every segment of the VC landscape, why bring it up as an argument against YC? This entire thread is about venture capital, so I doubt you're trying to make a point about bootstrapping or something along those lines.

I think what you're trying to say is that getting into YC is not a guarantee for success, but nobody ever claimed that. The odds are stacked against you either way, but the YC cohort's odds are way better than those of comparable startups that either didn't get admitted or never even applied to YC. If you want to debate this point, then let's see a substantive argument. Here's mine: YC's estimated IRR is 155% [0] (and this is an outdated number that doesn't include the recent IPOs). In comparison, the top ‘quartile’ of funds since Web 1.0 have returned about 20% IRR [1].

> Demo days.

I can't really do much with this response, but thank you nonetheless.

For everyone else, if you're contemplating applying to YC, I would refer you to one of the many discussions on HN where people presented actual math on when YC pays off and when it doesn't. For example, in this thread [2], the top comment links to a spreadsheet [3] that says if you want to raise $1m without YC, you should be able to get a seed valuation of $6.5m or higher, otherwise it's less dilutive to go through YC. Naturally, if you want to raise a higher amount, the threshold gets higher (eg: for $3m, the crossover valuation is $9m). Not to mention other value-added benefits, such as access to the Series A program, thousands of potential customers, etc.

[0] https://www.quora.com/What-is-Y-Combinators-IRR-or-estimated...

[1] https://www.quora.com/What-is-the-average-IRR-achieved-by-ve...

[2] https://news.ycombinator.com/item?id=24616649

[3] https://docs.google.com/spreadsheets/d/1kxOBF0CPhcktmgFvAZtY...

All your metric says is that YC has had some very large successes. It says nothing about how likely a given startup is to succeed. Just because YC can get their hands on some good deals, it doesn't mean that most YC startups aren't crap that flame out. You have cause and effect reversed.

If you can get into YC then you can raise from any number of firms on equal footing.

Would you be willing to bet that S20 won't exceed an IRR of 20%?

Edit: for context, the comment I responded to was originally linking to the S20 batch and implied that the companies are weak.

I would bet that 75% of those companies will be out of business in five years.

Sure, I'll take that bet, as long as we can bring it back to your original premise, which is that S20 sucks and that smart founders are better off skipping YC. For that point to be validated, we need to establish that a comparable cohort of non-YC companies will fare less well. So here's my proposal:

We take all companies indexed on AngelList and isolate for those started in 2021. Then we separate them into YC and non-YC cohorts. In January of 2026, we will see which cohort has a higher rate of shut downs.


That would be extremely interesting, and yeah I'd put $100 into that bet.

I am in. Here's my email: https://bit.ly/3bCwlYs. Please confirm once you have it.

We need a platform for this, not an email address. Sort of like fantasy sports, only for VC.

Raising money from YC is the same as any from any VC: you need traction or to be part of the VC’s network. If you don’t already have a bunch of users or know a bunch of VCs, you won’t be raising money.

> you need traction

Let's compare the experience of YC vs non-YC.

YC: you submit an application with about 30 inputs. One of them has to deal with traction, and it's clearly a very important one. If that's not looking good, you have 29 ways to make up for it. It's not easy, but every batch has startups that had 0 traction when they were admitted, so clearly it's possible. At the end of the day, you're guaranteed that a group of people will read your application and will discuss it internally.

Non-YC: to make an apples-to-apples comparison, I'll assume you have no prior relationship with the VC you're trying to reach. So you'll need an intro, which is nothing else but someone else taking on the burden of vouching for you. So someone at some point needs to believe that you're onto something. But if you don't know anyone, how do you get to that point, especially if you have no traction? Good luck with cold emails in that case!

> If you don’t already ... know a bunch of VCs, you won’t be raising money.

True for VCs, not true for YC. Just look at all the startups from India and Africa that got into YC and are killing it. You think they were super well-connected with the YC network when they applied?

If you have traction, YC or any other VC will invest in you.

If you have great relationships with VCs, YC or any other VC will invest in you.

You seem to be trying to make the case that YC offers some sort of unique lift to that of other firms and I don't agree, they gate on the same criteria as everyone else.

YC allows you to fill out an extensive application and then they guarantee you that they will read it several times across several people. Compared to what you get from VCs, that's a unique lift.

If you have traction, any VC will take a meeting with you.

Yes and no. There is more money available generally and that availability is more geographically distributed than it used to be. However, people that know how to raise money tend to be concentrated in areas where that is cultural knowledge. Most of the advice you read online on how to raise money from VCs is misleading at best to the naive outsider. The hard part is learning the mechanics of a real VC funding at various stages, and how that varies across funding stages. If you have that knowledge, it doesn’t matter too much where you are or how connected, you can make it work.

There is an unreal amount of capital sloshing around right now, that part is true, but there is a hurdle in knowing how to raise it and that knowledge is not evenly distributed even if you otherwise have a solid startup. I learned how to do this the hard way. There is a “fish don’t notice the water” aspect to it.

(Currently raising a large Series B outside of the west coast.)

So what advice / sources of information do you give to those naive startups that don't know the mechanics of fundraising and would like to learn how to do it right? And not be mislead by those other less useful sources of information online?

The story and narrative is everything. It isn’t a business plan competition, no one cares about the business plan. They want to feel like they are participating in something potentially legendary. And maybe they are. There is artistry to it, you are a performer.

This is how investment decisions are made. Few investors care about your three year financial projections. You still need to seriously know your stuff, but that is not enough ipso facto. The first cut will be your ability to spin an engrossing narrative.

I can go deep into the financials but no one asks me to if the story is exceptional.

Ok - I'll bite. Let's dig deeper.

Imagine you have a good story. But you have no connections. And you're in a region with a dearth of VCs. So you can't just randomly walk into (or email) a VC to get any sort of reception.

Without access to a side door, which is how the VCs currently connect with their chosen few, and with the front door basically bolted shut (very few VCs take inbound cold emails or respond to contact forms), it is impossible to just tell your amazing story to a receptive VC.

This is the issue. It's not that people don't know how to handle VC conversations. It's that they can't even get that conversation started. The VCs continue to turn to their existing networks, pools, or preferred mode of "discovering" startups. This results in the same few getting the attention.

Tell me how you solve the introduction problem.

I agree. The "story" VCs care about the most is: do other VCs want to invest in this?

That's the narrative people who raise large rounds are spinning. It has nothing to do with the tech, product... only how desirable it is to other VCs. The only way you craft that narrative is to be close to many VCs and pitch them all at the same time to create FOMO. Only those with strong existing connections make this happen.

Yes, if you built something that millions of people use the VCs will take a bet on your sure thing. That's super rare though. Most funding is going to their friends as it always has.

You don't have to sell the VC initially, just to people that a VC will listen to. It is a bootstrapping process.

Ok let's keep digging deeper. Imagine you're a startup with a great story in Nashville, TN. Or perhaps Columbus, OH. Or Riga, Latvia. Or Bogota, Colombia. The specifics don't matter, but the fact that these are in VC "back waters" is the main issue.

Who are the VCs listening to in Nashville, Columbus, Latvia, and Bogota? Or if they aren't listening regionally, then where and who are they listening to?

My understanding is that VCs, like most people, are fundamentally lazy. They won't go out of their way to listen to people they aren't already listening to. This means the same networks, inbound deal feeds, and communities.

So, you're basically running a private kickstarter scam?

Heh, no, I work in deep tech. The mistake most people make (and I used to make) is talking about the tech. Being "deep tech" you would think this is the central point but it really isn't. There needs to be a compelling narrative around why what you are doing (technically) is important but the technical details just need to check some boxes. In essence, you are painting a visceral but credible picture of the world that will exist if you are successful.

Storytelling is a critical part of fundraising. You can generate wildly different outcomes from the same set of facts.

You are correct. More money is flowing to the same type of people. It’s still incredibly difficult to raise money If you’re not an existing part of the VC network.

Are your parents potential LPs? Have a $5M seed! No? Sorry we couldn’t get to conviction.

There have been some rule changes in recent years allowing non-accredited investors to invest in startups more easily, and platforms such as SeedInvest have sprung up which facilitate this, so this is at least one new pathway, although I don’t know how much easier it is necessarily, if at all.

For the people in this thread who are unfamiliar with the current capital markets:

There is roughly 2.5T dollars in dry powder (uncalled capital). In laymen's terms this means there is currently 2.5T dollars sitting there not being deployed and $830B of this for PE Buyouts alone. It looks like VC is ~$300B. In other words, investors can't spend allocated money (from LPs) fast enough.

https://www.bain.com/globalassets/noindex/2020/bain_report_p... -> Figure 1.12

IMO (please prove me wrong! There will be info in your proof I'd like to know...) - founder immigration is the greatest bottleneck for this capital to be invested.

A startup founder visa will more than take care of this 'dry powder' and get it working to increase the US GDP. Said visa needs to have a realistic "minimum savings requirement" to come live in the US & start a company (not the $1MM or even $500k required by EB-5 that put it out of reach for most founders especially on the younger side).

Said visa is a necessity because of the way human society works & the way the global order has formed. All this Capital is in the US (reserve currency). People who control it and decide how to allocate it are in the US (history). People do not like to give capital to other people who will live and use it thousands of kilometres away (oversight becomes hard).

Wishing for more tech startup founders to spring from the general US population alone is not going to solve it, and pumping all the available money into the same companies may be quite risky from a diversification perspective for the US economy.

To add to what you said, US population growth from 2010-20 was the slowest it has been since the 1930s. Without some seriously increased immigration over the next 10-20 years, the US demographics will go the direction of Europe and Japan soon.

This article raises some awesome points. As a founder who is going through a seed round right now, I'm working hard to optimize our own fundraising process. Aaron refers to a plethora of resources for effective fundraising, but it's often hard to identify experts from rabble.

Has anyone already curated a list of quality resources? I would be greatly appreciative!

There's good stuff on YC's Startup School Library: https://www.ycombinator.com/library?categories=Fundraising%2...

Cool, thanks Aaron. I feel like we've been carried on the backs of YC SUS videos for some time, but this startup library is far more organized than what I've seen before.

I echo your sentiment, by the way: thus far, fundraising on good terms is turning out to be far easier than we expected - is it possible that low interest rates from the fed are making it easier for investors to get money? If so, we may expect this trend to continue for a few years, as the fed has committed to keeping rates low for some time.

I felt this pain when looking for debt so I put together a curated list of non-dilutive capital providers [0].

Capital is abundant, but it's also pretty easy to dilute yourself into single digit ownership.

0 - https://www.trypaper.io/

I think your link has been truncated.

What happened when you clicked?

Sorry, my confusion!

I expected your link to take me to a page that contained a simple list.

I also assumed that trypaper.io was the domain for a note-taking app called Paper, and that you were intending to link to one of your pages on that service. :)


Please forgive me for leveraging my confusion, for which I take full responsiblity, into a critique of your page design, but in the hopes that something here might be constructive...

I would have been less confused if the page headline was static instead of rotating/frequently incomplete due to animation/"difficult" to read. Something like "Financing your SaaS" would seem to cover all cases, maybe with a rotating subtitle without the backspacing animation so that the full content of each entry could be read in a glance?

Also the background of white with a pattern of pale blue dots made me think "note paper/note-taking app". The domain name makes sense for this also, but it was the background that forced the idea to front of mind.

Again, I'm sure this is a me thing and not a you thing -- but if others exhibit similar confusion, that's my best guess as to the cause.

...Now I will read the content on the site. Thanks for humoring me.

read all of Venture Hacks, seriously. Trust me, you won't be disappointed: https://venturehacks.com/archives

[edit] It's a bit dated, but the points and lessons are timeless. The 'norm' has changed (SAFEs are more common over convertible notes now, for example), but the rest is still accurate.

Awesome, going through it right now and learning a ton. Dated? Sure, but How To Win Friends And Influence People is still bang-on, and it was written almost a century ago. I really appreciate the recommendation!

Yup, exactly. Some lessons are timeless.

To add another nuance here - the other issue to consider is the power-law nature of VC returns (meaning a small number of investments disproportionately contribute to returns). Given that dynamic, funds are eager not to miss out on those big winners. The supply of companies that look like they have that potential is less than the available capital can fund, so to those companies, capital looks very abundant. Companies that do not appear to have that potential may not experience the same abundance of capital. The challenge for funds is identifying the signifiers of potential outperformance, and it seems to me that a lot of funds are looking at the same indicators (whether or not they are the right ones) which makes for a feeding frenzy on those companies.

From a fund perspective doesn't this eventually lead to the softbank model? where winners are made through overwhelming capital.

It can, but that implies capital is the only thing required for good execution, and we know that's not true (as we saw with some of the Softbank failures).

However, if you need to make a bet, you make a bet, because for a VC fund, the small chance of an outsized return (that can return your fund) is better than a more likely chance of a 'decent' return, so you often make a bet and double down while it still seems viable.

There's a reason Lyft kept getting funded even when Uber raised significantly more.

Completely agree. Capital is used to make Kings. Companies like Uber, Lyft, WeWork - won't exist without this. As for quality of the founders, I think, with enough money (and loss appetite), a mediocre team can execute well on an decent opportunity.

It is hard for an incredible team to execute well on a decent opportunity, even with ample capital; the 'it is trivial once you have money' trope is just that, a trope. Money does not make a company successful; financing helps along the route, and helps allow the founders to take bigger risks (with hopefully similarly outsized rewards), but it does not execute for the founders. That part is still on the founders, and is still the most important part of any startup bet; 'can they raise future capital' is certainly a factor in the decision, too.

> Founders should approach every fundraising as an auction.

I agree. So what's the auction marketplace of startup fundraising - a place where every deal can be posted publicly, or as close to that as possible?

Carta is building a private exchange, and their CEO alluded to the possibility of using it to raise money in his blog post announcing the trial run.


Once we have a liquid and active market for our shares, (in our case we have enough liquidity to support ~ $100M of volume per quarter), when we want to raise primary capital we simply sell common shares out of treasury.

This is powerful for a couple of reasons. First, we get better price discovery on CartaX than going door-to-door on Sand Hill Road. Second, all shares bought on CartaX are common stock. There is no preferred stock, board seat, or covenants to deal with in a primary.

But perhaps most importantly, CEOs and CFOs don’t have to spend months raising money, doing roadshows, meeting with investors, and negotiating termsheets.

Demo Day does this for YC companies. Angel List does it, to some extent.

Other than that, it doesn't exist. Got some thoughts on this part of the dynamic in the works.

This, while seemingly a natural extension, is a bad idea, imho. Investing in startups is inherently one of the riskiest investments you can make, and having deals be public is a problem, as 'normal' investors will be swayed by charismatic founders into losing their homes.

That said, 'auctions' for accredited investors already exist, if the company choose to take advantage of it. There are seed funding sites as well as AngelList, etc., to publicize deals.

Some founders also choose not to publicize a raise (except among the VC/angel networks) so as to remain under the radar until they are ready to launch.

> 'normal' investors will be swayed by charismatic founders into losing their homes.

You mean their second or third homes, right? There's a minimum net-worth requirement before you're able to invest in a startup so a failed investment is not going to bankrupt any investors. The founders are much more likely to end up in the poorhouse if things don't work out than investors are.

You missed my point; I specifically mentioned accredited investors vs 'normal' investors.

I agree with you; it is a good thing that there are accreditation requirements to invest in as risky an investment as a startup. Getting rid of that would be an awful idea. That was the point of my comment.

Or hey, let's just go full circle to the biggest public market out there and direct list on NYSE!

Somewhat related to the discussion: Why do start-up's need so much money?

We live in a world where a software start-up needs basically $0 in cap ex.

If the founders don't have existing financial obligations and can live in a place that isn't the BA or NYC or Seattle then they can make a lot of progress for peanuts.

Venture Capital is essentially paying for 1. The founders existing financial obligations, and 2. The ability for them to live in an extremely expensive part of the world.

The only other thing that a VC provides is a financial reason not to work for a large tech company that's going to pay the founder hundreds of thousands of dollars a year.

To compete with rival overfunded startups.

I mean, yeah, sure. But if solving a problem is your goal, not "being number 1" or whatever then who cares about your competition. You are (hopefully) in competition against problems and reality, not other companies.

Sure, but if you're solving the same(or at least somewhat similar) problem to another company, the one with more resources absolute has an advantage and will probably in the long term edge you out by having more features or sniping your prospects with better marketing or any of the other things you can do when you have a large war chest.

A well funded competitor could simply acquire your company if it truly has a superior product.

> ...whenever a company has a signifier of quality - a YC demo day slot, a high quality angel, pedigreed founders, or, even better, strong growth. In these cases, there are investor feeding frenzies...

And therein lies the fundamental problem of Silicon Valley today. Most of what matters in early stage startups is not anything remotely objective about the startup's prospects. What matters most at this stage is connections and perceived pedigree.

All that should matter, in an efficient market, is the real potential of the startup itself.

"YC demo day slot" = someone spent 10 minutes interviewing some people and decided they were a good culture fit.

"High quality angel" = Someone's friend knows a well known rich person and hooked them up.

"Pedigreed founders" = Someone's rich parents bought them credentials by gaming the system.

It's not reasonable to expect every early stage startup to have "strong growth" because big successes most did not have this attribute.

But what could be improved is the process of finding startups with high potential. YC was, when it launched, an innovative attempt at solving this. But it hasn't evolved or scaled enough to address the market.

Some kind of early stage crowdfunding solution seems the most likely answer, but no one has managed to crack this nut yet. And so the Silicon Valley investors continue to feed in the same small pond.

The most likely outcome is that a new system will develop that totally bypasses traditional Silicon Valley investors. They may have an abundance of capital compared to the small number of startups they care to look at, but they have nowhere near the money (or intelligence) that the public at large has.

This is what people call "luck" when talking about successful startups. Unfortunately some people are just more "lucky" than others :)

If you're new enough to computerworld that you've never been through a downturn (and it's been a long time!), then take note: this is what a crazy asset bubble looks like. This is what 1998 felt like.

So we’ve got years of bubble left

Yeah. If only we knew which years, though!

> [3] When a company IPOs, it opens ownership up to anyone who can afford a share. Imagine, for a second, an investor arguing that this is a sign of low quality.

I thought this note was important, this is precisely what investors signalled when startups started being able to crowdfund equity under Regulation CF.

It's tautological but worth noting: capital is abundant for projects which VCs as a class are already eager to fund. If you have an idea which does not appeal to VCs, capital is not abundant for you.

When I saw the headline of this article on HN, I assumed Aaron Harris was starting a new venture capital fund called "Abundant Capital" after leaving YC. How ironic that the article is about how "new funds... seem to launch on a daily basis"!

I don't know about abundance. Maybe Aaron has confirmation bias being around the industry so closely. Or maybe other founders here can tell me otherwise. From my side, I can't vouch for an over abundance of capital.

It's been a year we're trying to close our round, missing 350k from the $1M round and yet still growing 30% MoM. Yes covid fucked our business in a sense, and we got hit since March - but we remain ever so bullish esp given our sustaining growth.

I made a comment further down that your comment jives with. It’s the idea that abundant capital doesn’t necessarily mean it’s evenly distributed through the various stages. In particular, seed stage seems not to have seen the effect yet.

Hard data on aggregate seed funding through the years would be interesting.

Also - hang in there! 30% MoM is no joke, sounds like you’ve done one the hardest things (made something people want).

That is the access problem he talks about in the notes. He is right. All the number that we see from the industry shows that there is a fuckton of capital. But it is really badly distributed. That is probably a far bigger problem right now and one that need to be solved if this industry want to maximise impact.

There are interesting things happening in that space, but they are still at the fringe.

Why do you need VC having such growth rate? Get a loan. If you're at least 95% sure that your business will work out (and the growth rate strongly indicates that) why would you want to pay with equity?

I honestly don't know why debt for growing companies is vilified. People will literally give you their money. From the perspective of the borrower the lender is absolutely insane because he could have spent that money in a way that would yield superior returns compared to giving you a loan. Instead you get to extract that value yourself.

From the title of the post, I thought he launched his own VC firm. FWIW It's a good name.

Another thing is it seems people want to move into VC rather than keep building products. Investing is inherently lazy, it requires decision making but not much work if you are the person who has the connections to raise the fund. You can hire other people to do the effort of managing investments because you can’t be dethroned from having the money connections.

So people who actually make successful products get valued more and more. The unfortunate part is you actually have to work for a living, but luckily you keep getting more of the lazy people’s money.

The US is $26.7 trillion in the hole, and you're about to add another three trillion to that. An not one VC is going to pay off any of it.

I don't think capital is your problem.

Agreed on most points. I’d add that some investors such as a16z or YC add way more value by acting as partners so there is such a thing as more ‘valuable’ capital.

Prominent VCs like to spread this message. I'd take it with a healthy pinch of "remember who's bringing the news". Obviously the people offering less money are trying to sell the idea that less money is somehow more valuable.

Honestly, as a founder...it is. Dumb money is, in effect, pretty useless, whereas 'smart money' comes with additional benefits (provided you and the partner get along, etc.). It isn't guaranteed, but we leaned heavily on our investors for advice and help, especially in those times when we were either at a crossroads or dealing with a situation we had never seen before (b2b enterprise contracts when all our customers were SMB, etc.).

Some of them were also helpful just as the equivalent of 'executive coaches.' Being in the weeds constantly means it's hard to be objective sometimes. Good VCs and good angels are usually experienced and helpful, even if the incentives aren't perfectly aligned. They mostly are though; growth helps both the VC and the founder, so in that sense they're aligned.

But when deciding how big your option pool should be, your incentives are no longer directly aligned. :)

Nobody cares if payroll came out of dumb money or smart money. Same for AWS bills, office rent, etc. Having started a few companies, I'd much rather take a long runway than more coaches.

You seem to be equating "smart money" with "less money" which isn't true. It may be equivalent, or even more money, possibly with less favorable terms, due to the outsized advantage they provide in other ways.

It's nice that you'd prefer a longer runway to more coaches. I prefer a longer runway and more coaches I trust to help me execute; they are not mutually exclusive and you've presented a false choice, particularly in this market which is so founder-driven.

Isn't that the case for most reputable VCs? Marketing your product, identifying synergies in portfolio companies, recruiting opportunities and so forth? Or are a16z & YC in a class of their own in that regard?

It's true for any of the tier 1 VCs. YC and a16z (and others, like SV Angel) have some of the highest reputations in this regard, though.

This conversation is a bit misguided in its premises. There is not that much excess capital compared to yesteryears when one considers the real value vs the nominal amount. If anything, sure capital will flow more freely and be doled out more freely in ever increasing nominal amounts.

However, let's stop and ponder, how much more will this capital buy? Will it buy more actual assets? Will salaries go up? Then you will get the same amount of engineers for the capital. This is quite a decaying state, not that different to how despite, more food being produced, and salaries "going upz and increasing" the average person in the US can afford, worse quality food and housing despite having "muh iphones".

Long term this trend will further bitcoin's position as a more useful nominal quantity. When will the salaries in fixed BTC begin? Right now it is a bit unstable, sure "muh transaction costs". But imagine schemes where pay is paid out yearly, reducing the number of transactions, or where it is held in escrow.

Another signal we are in a bubble top. He is screaming there is too much money. If there is that much excess money everywhere, this paper isn’t worth what we think it is. The rich are running out of places to jam it in.

For every dollar there's a new cryptocurrency!!

If you listen to Alfred Lin on Acquired he actually says that abundant capital has always been a problem, so it definitely feels like this isn't a new problem necessarily

With all the noise around NFTs right now, my immediate thought was "Hmm so treat companies like NFTs, where investors bid on price"

my question after reading this essay is,

1. why are there no startups building VC investing as a platform akin to what carta has done for equity.

2. are there any ways to shore up the cost of the transaction such that they benefit both parties as a service (eg. shore up lawyer fees which are currently passed onto the fundraiser)

Do the equity crowdfunding platforms fit here?

Wefunder, Republic, Startengine, etc...? They'll be able to run non-accredited investor crowdfunding rounds up to $5MM per year soon.

Would be nice to see some of this excess money thrown at open source projects.

What goes up,

> As a thought experiment, assume that the abundance model is here to stay

this is a dangerous assumption. The feds are poised to raise interest rates this year and it will have ripple effects, in particular the abundance period of capital is slowly being reigned in to avoid a loss of faith in the dollar and slow down inflation.

Not sure where you're getting this, but the Fed has already signalled ZIRP through 2023, and there is little to no inflation showing up in headline measures. Medium to long term rates will likely rise this year, but historically cheap capital is likely here for a few years at least.

> and slow down inflation

What inflation? CPI has been absurdly flat for years, despite all the QE and pandemic relief funds. Inflation is only showing up in property and securities.

I can't believe you actually think CPI is flat when the cost of goods are rising across the board.

I guess this is why its so easy to control the markets. People don't even practice critical thinking and check for real world data.

Whatever we are told is what we hold!

CPI is objectively flat, you can look it up on the bls site. You might think CPI isn't well correlated to price inflation, but you'd be wrong there too.

Yeah, people on HN are kind of cranks about this sort of thing

It's not HN, it's everywhere. The housing as an investment mantra doesn't help. Yes, house prices are going up but for all we know it's a bubble right now. If CPI inflation does pick up in the future it may turn out to be correct. It would be helpful if people actually did the right thing and built more housing, though.

This is horrifically BAD advice. Shopping a TS to a few folks is not an unwise thing to do, but running a full-blown auction absolutely is!

Founders: If you want to ONLY optimize for max price + max check size, the “partners” you bring into your business are bankers.

You missed the point; Aaron wasn't saying to always optimize for price and take "dumb money." His point was that founders today have a choice, and that choice is important, and worth recognizing. Because of the (present) imbalance of power, founders can be more aggressive with their fundraising. That isn't always true, though.

I hear you... but this "run an auction" narrative he's proposing is very dangerous if implemented in any way close to actual auctions.

Sure, I agree; I do not think it was intended as a pure price auction. That would be ridiculous, imho.

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