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- Hacker News
- Bezos has something to say about this - which unfortunately has skipped over the whole industry.
you only raise money to grow "cash flows". if you can turn $1 into $3 do it. otherwise don't.
unfortunately SV tends to do the opposite - turn $3 into $1.
by dzonga - Why post a link that people have to pay to read?
Same article:
https://www.businesstimes.com.sg/opinion-features/zombie-uni...
by EagnaIonat - Follow-up question: why upvote an article that you probably can't read?
- It's simple really. If the VC's don't move the money, then it's dead money to them. These are calculated risks that they absorb under the premise of regret minimization. They don't really have a choice but to take occasional losses. It's nearly intentional.by griffinJH23
- We need to stop pretending the VC valuations are meaningful.
It's like asking someone playing roulette to value "13 black", after they bet on it.
There valuations are always based on expectations of huge growth, not current value. Growth predictions with an extremely low confidence level. VCs make up for it by making a lot of bets.
The companies NEVER have current profits (The actual measure of value) that would justify their valuation.
So, it's comparing gambling payouts to corporate valuations, aka "apples to oranges", which are not related.
When the predicted growth doesn't occur, the companies valuation becomes based on its actual value (profits).
by ____tom____ - This is not the whole story. While there may be some value in terms of marketing to claim a higher valuation there are also many downsides to a higher valuation which in turn for example leads to a higher fair market value that makes executing stock options on a private company extraordinarily costly from a tax perspective. Admittedly the holders of the preferred stock like investors might not have the same incentives as the people who are given stock options but their interests are largely aligned in that they're both interester in retaining great talent and making the company successful (eg valuation higher) but laterby redwood
- This is why, all these people are called founders and never entrepreneurs an almost dirty word in VC circles...
- current profits (The actual measure of value) that would justify their valuation
That's...not how value works at all. If it was, all of these rapidly growing companies that haven't made a profit yet would be worth zero. Would you pay $1 for any of the big AI labs? I sure as fuck would.
Value is more about the present value of future cashflows. And it turns out that estimating future cashflows of extremely fast growing companies is really hard.
by senordevnyc - >Their valuations are always based on expectations of huge growth, not current value. Growth predictions with an extremely low confidence level. VCs make up for it by making a lot of bets.
all valuations are based on expectations of the future, that's what the stock market is. Except VC valuations which are based on how much money was invested, extended to cover all the equity rather than just what was purchased. However, the amount of money invested was calculated based on expectations for the future.
the definition of the term "asset" is "something expected to have a value in the future"
by fsckboy - > It's like asking someone playing roulette to value "13 black", after they bet on it.
Even worse, because you don't get better odds or payouts by persuading others to bet on 13 black, but you do when they invest in the company you've backed.
by waterhouse - I have a few friends who have gone into VC either starting their own or an existing. Hearing about some of the companies they are invested in makes me realize that half of these show HN posts are legit multi billion companies already with 2-5 person teams. As you’ve said, low to zero profit, and seemingly no corner on the market.
It’s like coin collecting, without the currency part - just hoping someone one day sees it, and wants to put them on their coin on their shelf. I can’t make sense of it, maybe that’s the point. I miss when VCs cared about helping people change the world, better or worse (ideally better).
- It's indeed not that black and white. Growth and revenue can happen quite early and they are usually seen as signs that a company might eventually become profitable. The whole point of VC funding is to put all available resources in growth, not in profit. Investments in profitable companies aren't really venture capital investments. Different class of investors that do that, generally.
Where the whole thing starts looking like gambling is when companies get huge rounds based on essentially no proof whatsoever that the thing will ever grow or have revenue. And when the idea is basically "we'll pay famous people to send greetings to people" we're in obviously stupid money territory. That was never going to have the revenues to back up the inflated valuation. And somebody still sank a few tens of millions in that to find that out the hard way. That company had a paper valuation of a billion. But it doesn't necessarily mean all those tens of millions were spent and lost. Investors might commit the money but it's usually conditional on growth targets and milestones. When shit goes south, they'll pull the brakes and the money stops flowing. Good investors wouldn't wait until all the money is gone to do that.
The reason these investments happen is that VCs mostly aren't investing their own cash. They are being paid to make investments and to inflate their portfolios. By the time the shit hits the fan, they'll have gotten their payoff. It all looks great until it doesn't. And inflated valuations make them look shit hot even when they are clearly not. This attracts more capital for them to invest.
Of course at some point the shit does hit the fan and the money evaporates. That's when you get acqui-hires and other constructions that are usually portrayed as a successful exit that, again, makes the VCs look like they know what they are doing. This is all about damage control that is about both financials and reputations. Never mind that it's effectively a fire sale at that point. But investors get to swap their bad shares for good shares, and founders get to work in somebody else's company for stock options. And the "buying" company gets some nice people and they stay best buddies with the investors they just bailed out who might typically also be investors in those companies. In the end the madness gets written off against the overall fund performance. It only takes a few good gambles to work out for everybody to come out smelling like roses.
- > There valuations are always based on expectations of huge growth, not current value.
They're primarily a function of fund size. Everything else that can be fudged is fudged in order to make it look sane.
Funds make their money by taking a cut of AUM. Thus, they're incentivized to make bigger funds. They also can't spread out their portfolio over hundreds of tiny investments without losing control, so they need to write big checks. When you write a big check, the founders need a big post-money number to maintain a reasonable percentage of the cap table. It doesn't hurt that big valuations make everyone look better.
As money flooded into VC, the funds got bigger, the checks got larger, and the number of unicorns shot up in direct proportion to the number of large funds competing for their equity. The revenue projections used to justify this charade were never really important, and couldn't be proven in any case.
by timr - by flancian
- thanks
- lol I work for one of these still. It was an auto ML product, so the company is desperately trying to pivot to Genai and agents. Trying to catch the wave. I don’t know how well it’s working though. Churn keeps happening in the core business, processes meant for a large corporation are slowing progress in developing the new platform, and leadership has churned till only west coast AI pilled Amazon alums are left.by androiddrew
- I was an early employee (#20-something) at a company that peaked at just over a billion dollar valuation during Covid and that now sits at somewhere between 1/2 and 1/3 of that depending on who you talk to.
I'm still really close with a lot of early employees and while I was lucky enough to have a liquidity event happen shortly after I left that allowed me to cash out for a decent, but not life changing, return, many of my friends were not.
One of the things I think a lot of people may not realize is how badly this zombiecorn state fucks employees with stock options. A lot of startups will give you a limited amount of time after you leave to exercise your stock options (90 or 180 days is common based on my experience). If you don't exercise your stock options and buy your stock within that time period the options expire and you get nothing. The problem is that if you buy the stock, you won't be able to sell until there's a liquidity event (usually a new funding round or IPO) and current investors don't want to take investment at a lower price unless they absolutely have to.
I know some other early employees who were laid off who had to make the choice between dropping $75k or $100k to buy stock that is worth 10x that on paper (even at the current valuation) and praying for a liquidity event that will probably never arrive or letting go of shares that just a few years before seemed like they would be a life changing amount of money. I know people who've done both and neither route leaves people feeling good about their decision.
I know common wisdom is that you should treat that stock like it's worth nothing until they day you sell, but when you've worked at somewhere for 5-10 years and seen the on-paper value of your stock rise to a life changing amount of money, I think it's hard not to assume that you'll be able to cash that out one day.
by superfrank - If this is your situation consider asking for an ISO to NSO conversion. Many companies these days will allow you to do this, as they’ve realized it’s in their best interest to not retain checked out employeesby dalyons
- Worse is if you paid taxes on that $100k valuation but it is only worth $25k now.by aurareturn
- >By May 2026, 332 of the 1,900 unicorns in a database maintained by Ilya Strebulaev of Stanford University had raised money at a valuation at or below their peak (see chart). Of those, 212 were valued at under $1bn. As many as 383 had disclosed no new funding in the previous three years; 41 of these had lost unicorn status
332 out of 1900 isn't that bad?
Even the further 338 if confirmed would still be less a minority of the overall 1900
by v5v3 - Down-rounds are very undesirable though. So those 332 likely have not had other options. True number of companies that wouldn't really be valued as high as their peak raise is probably higher, but some of them have been able to find enough revenue or other sources of funding in order not to raise and be valued down.by Maakuth
- Zero interest rates kept many weak companies alive but they also have give great companies time to find product market fit, and the hard part is to separate the two in hind sightby latentframe
- I'd be interested in any examples where a "zombie" company in the US was sloshing around for a few years and then finally found product market fit. I think it's probably incredibly rare, and I don't think it's really that hard to identify weak companies that have been treading water for years as you appear to think.
- Companies being devalued is not news. It happens on the stock market everyday.
For companies that rely on outside investment to survive however it can become a slide to oblivion.
If the company itself is profitable, then typically it can continue. There's no interest rate on VC investment, and if profitable it can run forever. Customers, employees, users and so on are all fine. Investors? Well, they're potentially getting some returns through dividends, but its minor and not what they were chasing.
Of course the VC investment model is high risk. That's kinda the point. It's a bet on IPO or (valuable) acquisition. Most companies end up as neither.
Will this affect new VC funds in the future? Maybe in the short term. But there are still enough IPOs (like SpaceX now) and still enough greedy people willing to play the lottery. Sure the absolute amount of VC money may come down, but I don't think the model is going away.
Indeed it may start to lead to saner valuations along the way.
by bruce511 - Agreed. It's gonna be space, then robotics, then quantum robotics, then quantum solar nuclear robotics.
I think it depends way more on where and how much the wealth is concentrated than anything else
- > If the company itself is profitable, then typically it can continue.
I only wish, but rarely. This is one of the great tragedies of the grow at all cost system. There have been so many great profitable companies, where the product is great, customers love it, employees love it, everyone is happy.. except it's not growing fast enough to satisfy the leeches so it gets destroyed.
As a society we should be supportive of small companies that make a great product that everyone loves, pays good salaries and makes a profit. The more of those, the merrier. But no, unless growth is on the hockeystick curve, private equity will destroy it sooner or later.
by jjav - Even if a company is profitable, depending on voting interest and board control the investors may be able to force a sale.by nradov
- > Of course the VC investment model is high risk. That's kinda the point. It's a bet on IPO or (valuable) acquisition. Most companies end up as neither.
Cynically, I wonder how much of the insane (even in the moment) valuations were driven by VC firms trying to commit capital so they could collect management fees?
by tqi - > Indeed it may start to lead to saner valuations along the way.
SpaceX’s valuation + “data centers in space” being taken as a serious pitch leads me to think it’s only getting worse.
by Forgeties79 - > Companies being devalued is not news. It happens on the stock market everyday
TFA points specifically at "recent funds" that have underperformed public markets.
> Of course the VC investment model is high risk.More recently launched funds have been returning markedly less money to investors than those of earlier vintages, according to the World Economic Forum. They have also underperformed the S&P 500 by a wide mark, particularly those that did not invest in a small club of artificial-intelligence superstars, says Mr Cohan.Power law at play, apparently: High risk with high rewards only for the top 5%.
... already, just 5% of them produce 90% of its profits.by ignoramous