I don't think VC is at all like a Ponzi scheme, even thought most VCs depend on there being a "next investor in line." That dependency is not because we're looking for a sucker to shift a bad investment onto, but because most companies' capital needs grow dramatically. So you end up having lots of investors of all sizes, and that works more like checks and balances than a Ponzi scheme.
investors.gov defines a Ponzi scheme as "an investment fraud that pays existing investors with funds collected from new investors. Ponzi scheme organizers often promise to invest your money and generate high returns with little or no risk. But in many Ponzi schemes, the fraudsters do not invest the money."
A few thoughts here:
- the money is actually invested.
- the founders are the ones that decide how to use the money, not the investors. (And generally no one suggests that founders as a group are complicit in a Ponzi scheme.)
- the next investment round is not required -- some companies get to profitability or have a good exit without further funding.
- the next investment round is far from guaranteed. Most stats I've seen suggest that ~30% of seed stage companies raise a Series A. So if it's a Ponzi scheme, then it's a poorly executed one ;)
- the outcomes generated by founders who get VC funding are high impact. See: https://twitter.com/emollick/status/1546109494228402176 (quote: This paper argues that 20% of the largest three hundred US public firms & 75% of the largest VC-backed ones “would not have existed or achieved their current scale without an active VC industry.")
- the next stage investor is generally unaffiliated with the earlier investor AND evaluates a company on its merits. I.e. if our seed company can't get to a stage where they can convince at least one Series A investor to invest -- and as mentioned above, many cannot -- then it goes out of business and we lose our investment. And fwiw, if the later stage fund does a poor job picking companies, it will itself go out of business.
- 99% of the time, our investors are not paid back when another investor invests, they are paid when a company exits. That means either the public market or an individual company thought the startup was a good enough business to invest their money into.
- returns are not promised to our investors -- if anything, it's well known that VC is especially risky and that most VC funds don't have good returns.
> So much value is absorbed in the VC pipe than by the time a company IPOs the chance of retail investors seeing returns is minimal to none.
My understanding is that this is largely regulation related. Companies used to go public much earlier, but because there's an increasingly high burden and cost to being public, lots of companies choose to wait for as long as possible. And there is now enough funding out there that companies are able to stay private for a long time.
investors.gov defines a Ponzi scheme as "an investment fraud that pays existing investors with funds collected from new investors. Ponzi scheme organizers often promise to invest your money and generate high returns with little or no risk. But in many Ponzi schemes, the fraudsters do not invest the money."
A few thoughts here:
- the money is actually invested.
- the founders are the ones that decide how to use the money, not the investors. (And generally no one suggests that founders as a group are complicit in a Ponzi scheme.)
- the next investment round is not required -- some companies get to profitability or have a good exit without further funding.
- the next investment round is far from guaranteed. Most stats I've seen suggest that ~30% of seed stage companies raise a Series A. So if it's a Ponzi scheme, then it's a poorly executed one ;)
- the outcomes generated by founders who get VC funding are high impact. See: https://twitter.com/emollick/status/1546109494228402176 (quote: This paper argues that 20% of the largest three hundred US public firms & 75% of the largest VC-backed ones “would not have existed or achieved their current scale without an active VC industry.")
- the next stage investor is generally unaffiliated with the earlier investor AND evaluates a company on its merits. I.e. if our seed company can't get to a stage where they can convince at least one Series A investor to invest -- and as mentioned above, many cannot -- then it goes out of business and we lose our investment. And fwiw, if the later stage fund does a poor job picking companies, it will itself go out of business.
- 99% of the time, our investors are not paid back when another investor invests, they are paid when a company exits. That means either the public market or an individual company thought the startup was a good enough business to invest their money into.
- returns are not promised to our investors -- if anything, it's well known that VC is especially risky and that most VC funds don't have good returns.
> So much value is absorbed in the VC pipe than by the time a company IPOs the chance of retail investors seeing returns is minimal to none.
My understanding is that this is largely regulation related. Companies used to go public much earlier, but because there's an increasingly high burden and cost to being public, lots of companies choose to wait for as long as possible. And there is now enough funding out there that companies are able to stay private for a long time.