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.