What to you (and pretty much anyone else) looks like a business that just needs adjustments to reach profitability, to the VCs it's profile maintenance work for little relative benefit in the long-term. The chances of that company turning 10-20x profits in the next few years is basically zero and they just cut their losses (in their view).
In essence, if the startup is slowing down and perhaps not going anywhere, then the standard existing deal with founders where the founders can cash out only if they enable to VCs cash out at a profit (for example, if they manage to pull out all the stops to make a failing startup look attractive to some bigger fool) is exactly what VCs want, and in such a situation the founders have no leverage to extract a compromise that's worse for VCs.
I can easily imagine an alternate reality where VCs invest more thoughtfully based on more careful analysis of companies and they would have a much higher success rate and end up with even higher returns without creating unsustainable wealth inequality.
Unlikely. The problem of that view is that, when you're handling large uncertainty, you don't know which projects are the ones you should cancel and which ones to nurture. Past performance is a terrible indicator for lucky shots.
See the Talent-Luck simulation for instance.[1] You measure a population of projects affected affected by random events and profiting proportionally to talent, and the projects that end better off are the ones that chain multiple beneficial lucky strikes, with talent having little influence past a minimum level.
And the way to maximise gains over the whole population is setting a small flat subsidy for all, allowing everybody to explore their talent even after a wrong turn.
1 https://www.inc.com/chris-matyszczyk/so-youre-smart-but-your...
I don't think that's what VCs did. It looks more like they dumped millions of funding on a tiny number of hand-picked companies and used short term traction as the main metric and they equated profitability as anti-growth, failing to realize that, without demanding profits, growth could be produced artificially using money/advertising and that it doesn't mean that users actually want to use the product in the long run.
Profitability is how you know that users want to use a product; otherwise a company could just 'launder' investment money to their users somehow and of course nobody will refuse free surplus value and hence they will attract users... Until the investment money runs out and the surplus value stops being handed out to users.
Just think of Uber investors subsidizing rides as an example, as soon as that subsidy goes away, there's a good chance it will start declining. Uber is still unprofitable.
TIL a new term :-)
That's not a major component of venture backed startups. For a company that has already been written off as a failure, often the board members that represent the VC would rather not have to stay involved and keep showing up for meetings -- they could be elsewhere; there's an opportunity cost.
If a VC had truly written off the company, and board meetings are not worth their time anymore, they can just resign their seat.
To you and I, this is patently obvious. This is not true however for VCs. In a lot of them, they'd prefer you fail entirely rather than limp along making 1x, 1.5x their investment. Zeroing out is preferable sometimes, weirdly.
I get preferring (10x or 0x) to (1.5x). I don’t get preferring a near-certainty of 0x to some recovery of their capital with a pivot to selling a smaller-but-sustainable business.
Is it something like they’re measured by LP’s (or someone?) on only non-zeroed investments?
Investors in these funds are diversified - they invest in VCs to take the high risk bets. They invest elsewhere for the steadier, lower risk returns.
But carry doesn't kick in until you start exiting - for a typical VC fund it takes many years. (I left a year ago, and we were 6 years in when I left; I retained a portion of my carry rights, but still won't know for a couple more years how much I get if I get anything at all)
And surviving on the management fees after the initial phace of placing the investment requires being lean and not putting effort into your low performers.
Meanwhile while a 1.5x is better than nothing, a company that sells at 1.5x is likely to be near 0x for you, because odds are high that to get there there'll be one or more funding events along the way to help that happen at/triggering terms that will dilute you massively. And odds of failure remains high.
And you need the 10x or 100x's, but the low ones means little - most successful funds pay back the entire initial investment from just a couple of investments, and make their return on a couple more. Quite often a single "fund returner" carries the entire fund.
A small recovery here and there at makes almost no difference.
So even a 1% chance of salvaging a "moonshot" is better - most cases where you get back less than 1x is going to be a rounding error of your funds overall performance.
A VC is not where to get capital of you want to pull back and pivot when things get tough.
(And yes, you should keep that in mind if taking a job at a VC backed company as well, and it's part of why stock/options should be on top of your normal salary, not compensating for a low one, unless you get founder-level stock amounts, and even then, think it through; I once almost torpedoed a VC deal as a founder because I demanded a commitment to raising salary levels after the next raise, and I don't regret it for a moment because life would have sucked without it)
It's not even weird. A "live" project requires effort, and that has opportunity cost.
Tech companies want to disrupt and destroy everything in their market segment or die trying.
I wish there were more companies that would focus on stability, sustainability and longevity. But in my experience lack of rapid growth is a mark of failure for most companies.
However, certainly at some point while they were burning through that $36 million it became evident that "moon" was no longer a viable destination. Why wouldn't everyone be aligned with making the adjustments needed to get back to default alive? Something is clearly better than nothing.
Now if it got to the stage where the CEO no longer wanted to operate at the reduced scale (and nobody else would take the role) or the product couldn't support itself at the reduced scale, then closure may have been the only option. It's just that the "moon or bust" mentality doesn't seem like something that should be set in stone for the life of the company.