Ask HN: When a VC loses money, how does that affect the rest of its portfolio?
21 comments
These large funds are pretty diverse, check out the letter Sequoia sent out to their LPs regarding FTX [1]. Sequoia's 150M cost basis for their FTX investment only accounts for 3% of the committed capital of the fund.
[1] https://twitter.com/sequoia/status/1590522718650499073
[1] https://twitter.com/sequoia/status/1590522718650499073
The point of being able to start a startup in the US is to protect founders from the kind of bad behavior you’re (indirectly) worried about.
Russia comes to mind as a place where you really don’t want to lose investors $200M.
In the US, there’s no way for investors to pressure founders, beyond the dynamics of a startup. Investor pressure is a known quantity. YC spends a lot of time preparing founders for it, and pg has several essays on it.
Sequoia will be just fine. But even if they weren’t, they can’t react in a way that indirectly affects you.
Put another way, if your founders allowed themselves to be in a situation where a single investor controlled the fate of your company, they were already in a bad bet.
Russia comes to mind as a place where you really don’t want to lose investors $200M.
In the US, there’s no way for investors to pressure founders, beyond the dynamics of a startup. Investor pressure is a known quantity. YC spends a lot of time preparing founders for it, and pg has several essays on it.
Sequoia will be just fine. But even if they weren’t, they can’t react in a way that indirectly affects you.
Put another way, if your founders allowed themselves to be in a situation where a single investor controlled the fate of your company, they were already in a bad bet.
Side question I've been wondering: what was Sequoia, a well-respected VC, doing investing in companies that do nothing but enable people to trade speculative assets with no track record? I'm not so worried about Fundrise or Robinhood because those assets are at least useful or Masterworks because art has a track record. Maybe it's because prospective LPs had the same crypto fomo as retail speculators, but don't GPs also have skin in the game?
Sequoia is well respected because they invest and generate returns for their investors, not for displaying any kind of morals.
It's not the morals I'm wondering about; it's the viability of the businesses. Investing in one of these companies is hoping you can cash out before the bubble pops. At least if you invest in a boring SaaS company, when the bubble pops, you might still have a boring SaaS company on the road to profitability.
If an exchange isn't misappropriating customer funds, it doesn't matter if the bubble pops. They facilitate transactions and take a fee in return. As long as they have customers and don't blow money all over the place, they should be profitable.
Risk management for traditional derivatives is hard, risk management for crypto derivatives is almost impossible.
Even if "exchange" doesn't misappropriating customer funds, the customers themselves can easily become insolvent in a moment, and then it will cascade to every other market participant.
Even if "exchange" doesn't misappropriating customer funds, the customers themselves can easily become insolvent in a moment, and then it will cascade to every other market participant.
If crypto stops appreciating, won't transaction volume collapse? I guess the question is how much crypto use is real (I'm sure there's a better word) and how much is speculative.
In a VC portfolio there is little difference between a 0x or a 3x return. Virtually all the returns come from the handful of 100x returns that make the entire fund. All the other companies combined have little impact
Side note that the 3x return companies are the biggest headache to manage (founder feuds, recruiting another vp of sales, etc). The 0x and 100x companies are much easier
Side note that the 3x return companies are the biggest headache to manage (founder feuds, recruiting another vp of sales, etc). The 0x and 100x companies are much easier
yep this is what sam altman calls the power law, your most successful investment is greater than your 2nd and rest combined, keeps going on like that.
Purely on intuition and no facts at all: my intuition is that it’s already baked into their risk profile. They don’t need to “make up for it.”
The VC fund doesn't "need" to "make up for it" in the risk sense, but the limited partners can and do put pressure on the VC when a portfolio company takes a big hit. Whether that trickles down to the other portfolio companies is a separate question.
"Purely on intuition and no facts at all"
Sounds like you're ready for VC!
Sounds like you're ready for VC!
I don't think the $213M loss on FTX is going to impact anything. It's not a strategic amount of money to funds of that size.
I might refine the question along the lines of, do losses in a given fund put pressure on the GP's appointed board members in their other companies in the same vintage or with the same participating LP's - to cause the CEOs to align their strategies toward nearer term exits - and if that strategy shifts, how does it affect staff in those companies?
Though it's true that "companies aren't sold, they are bought," I could tell you how companies under different kinds of market pressures and investment structures tend to make product and engineering decisions and what those incentives do to the culture, but that's outside the scope of whether this particular loss creates enough systemic risk that it could ripple out into their other portfolio companies.
I might refine the question along the lines of, do losses in a given fund put pressure on the GP's appointed board members in their other companies in the same vintage or with the same participating LP's - to cause the CEOs to align their strategies toward nearer term exits - and if that strategy shifts, how does it affect staff in those companies?
Though it's true that "companies aren't sold, they are bought," I could tell you how companies under different kinds of market pressures and investment structures tend to make product and engineering decisions and what those incentives do to the culture, but that's outside the scope of whether this particular loss creates enough systemic risk that it could ripple out into their other portfolio companies.
Perhaps they didn't lose any money at all?
https://www.theinformation.com/articles/ftxs-bankman-fried-i...
I'd expect the main impact to be a re-evaluation of risk/reward for the remainder of the portfolio, so any other investments (or opportunities) will be reviewed to see if they have a different risk profile than previously assumed.
The losses (and the profits!) will be picked up by the investors in the fund, not by the fund itself. The impact of a lower return from the fund will impact the ability of the VC fund to attract further investment.
The losses (and the profits!) will be picked up by the investors in the fund, not by the fund itself. The impact of a lower return from the fund will impact the ability of the VC fund to attract further investment.
There's going to be a lot more scrutiny of crypto startups, so if yours is in that space you can look forward to a lot of urgent meetings. Otherwise, raises are going to be more difficult in the future so it seems like everybody is trying to get profitable as soon as possible. At the very least, extending the runway as far as possible because nobody knows if VCs will be there next round.
[deleted]
The thing you're thinking about may be whether they can pull the funding they've already sent to the businesses in their portfolio. I doubt they can do that, but they can apply pressure to get those remaining companies to grow more aggressively or IPO etc.
If a stock in your portfolio tanks, do you start making all kinds of panicked moves? The answer should be no, because you had the risk assessment built into your investment strategy to begin with.
In this case, the loss of reputation is likely to do more damage.
I suspect that they are going to proceed a bit differently when doing due diligence on this type of investment going forward.
I suspect that they are going to proceed a bit differently when doing due diligence on this type of investment going forward.
I'm working for a VC backed startup, so I'm wondering how these sorts of situations may indirectly affect me.