I'm just curious how this works. Here are the two possible scenarios I came up with.
Scenario 1: Fund managers are altruistic and not particularly interested in making money. So they give money to people they know personally.
Scenario 2: Fund managers are greedy, but success is essentially random. So they are indifferent to their investments, so they invest in friends and people they know personally
Is there some scenario in which fund managers are both greedy but also invest in relatively crappy ideas just due to happenstance of having a personal relationship with a founder?
Scenario 3: Fund Managers are very interested in making money, and also realize that (1) advancing the culture of and maintaining their position in elite backscratching networks has payoffs for that outside of portfolio returns, and.(2) the same networking and nepotism factors are at play for many of the other business deals besides venture capital that a new business will need, so just from an investment perspective weighing those factors heavily makes sense.
The fund can spare losing investments, as well as have investments where they sell all the shares at a greater price even if the business doesnt do anything revenue-positive
So the fund is basically a charity where it invests according to merit and uses those gains to subsidize the investments in their buddies funds. But at least some decisions are made on merit
> have investments where they sell all the shares at a greater price even if the business doesnt do anything revenue-positive
Who are they selling to at a higher price? Do the other investors have to have a relationship with the investor as well since they're investing in sub-par companies?
Instead of answering your specific questions, let's address the fundamentals here: the entire private equity sector is based on relationships. There is little to nothing that occurs organically. You'll basically never land an investor at a startup conference or pitch contest or any "my idea/execution is going to be more lucrative than other people that you also don't know" scenario.
private equity funds "subsidize" all their losing equity investments with the winning ones, as well as additional investor capital - subsidize only being a useful term if they participate in an additional financing round for one of their poorly performing companies. The rest just fade away into nonexistence. It is not uncommon, unheard of, or odd that the founders of some of those companies has a personal relationship with a fund manager. And more likely the founders at all the companies have a personal connection to one of the private equity firms that invested in the funding round, who then convinced other firms to invest. One triggers the other, but the first one was a relationship.
Most ideas work with infinite money invested, and infinite budget to convince people to purchase or otherwise buy into that idea. Typically ideas work long enough for the same organization to pivot to another idea, or have enough money to buy the better executed version of the idea they originally wanted to do. It doesn't matter. The only thing that is a waste of time is being extremely good at a discipline and hoping that translates into financial investment. It is not an important part of the puzzle.
> You'll basically never land an investor at a startup conference or pitch contest or any "my idea/execution is going to be more lucrative than other people that you also don't know" scenario
Every startup I know or have worked at went through a pitch contest that was pretty boring and not at all based on relationships. You often speak to multiple funds, they kick the tires, interview the team, size out the market opportunity, look at revenue or users, or growth or whatever you have, and they choose to invest. My wife's company also had a PE firm invest in her company and they did the same process and are focused on growth. No one is doing favors for anyone else.
What are you basing your answer on? No offense, but it sounds like you're just going off a caricature of how a very young inexperienced person thinks business happens.
> The only thing that is a waste of time is being extremely good at a discipline and hoping that translates into financial investment. It is not an important part of the puzzle.
I guarantee you if you build a product w/ a high growth rate or engagement, VC will be kicking down your door to give you money.
> I guarantee you if you build a product w/ a high growth rate or engagement, VC will be kicking down your door to give you money.
Why I need a VC then? Did you understand why the Venture Capital industry was created in the first place on the United States in the 60's? If I have a working product with high rate and cashflow, I just use the private debt markets and keep going and expanding. We are not talking about that.
I'm just curious how this works. Here are the two possible scenarios I came up with.
Scenario 1: Fund managers are altruistic and not particularly interested in making money. So they give money to people they know personally.
Scenario 2: Fund managers are greedy, but success is essentially random. So they are indifferent to their investments, so they invest in friends and people they know personally
Is there some scenario in which fund managers are both greedy but also invest in relatively crappy ideas just due to happenstance of having a personal relationship with a founder?