Regarding the multi-stage venture capital example: If only a small subset of VC companies recognize the value of a company due to a weird signalling equilibrium, and refuse to fund the valuable companies in successive rounds, that should make the market more exploitable, not less! It means they will have exclusive access to fund future rounds of the company if the company is successful. This argument seems to only fail if there is insufficient capital among the doubters to fund companies through to profitability (minding the variance involved). It seems like there is a ton of capital floating around, though, so I would be surprised if this was the case for anything but the most niche examples.
Elon Musk likely wouldn’t have been able to fund SpaceX or Tesla if he wouldn’t have been wealthy to begin with.
But the problem isn’t as bad as EY makes it out to be. Chamath Palihapitiya’s Social Capital hedge fund for example doesn’t have this problem as it’s willing to fund startups through all stages. Glooko might otherwise not have been successful.
YCombinator also tries to reduce this problem by instituting their growth fund.
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To be complete, many series A investor don’t do series B financing is because this creates bad signals in the market for companies where the inve does the series A but doesn’t do the series B.
It’s right that people can self-fund the startup to completion. But notice that this necessarily reduces the value of the startup, because you are missing some option value (the ability to sell off pieces of it before IPO for additional capital for growth). And the opportunity cost for that money is likely buying into other startups.
If what really matters is having 5% of all the startups, say, rather than 100% of the 5% most promising startups, then having to self-fund them all the way is bad. (Especially so since money goes much further in the earlier rounds, meaning that if you have sharper eyes than other funds, a thing you’re hoping to do is buy the equity when it’s cheap and trust in the followers to buy the equity when it’s expensive.)
Regarding the multi-stage venture capital example: If only a small subset of VC companies recognize the value of a company due to a weird signalling equilibrium, and refuse to fund the valuable companies in successive rounds, that should make the market more exploitable, not less! It means they will have exclusive access to fund future rounds of the company if the company is successful. This argument seems to only fail if there is insufficient capital among the doubters to fund companies through to profitability (minding the variance involved). It seems like there is a ton of capital floating around, though, so I would be surprised if this was the case for anything but the most niche examples.
Am I wrong about this?
Elon Musk likely wouldn’t have been able to fund SpaceX or Tesla if he wouldn’t have been wealthy to begin with.
But the problem isn’t as bad as EY makes it out to be. Chamath Palihapitiya’s Social Capital hedge fund for example doesn’t have this problem as it’s willing to fund startups through all stages. Glooko might otherwise not have been successful.
YCombinator also tries to reduce this problem by instituting their growth fund.
____
To be complete, many series A investor don’t do series B financing is because this creates bad signals in the market for companies where the inve does the series A but doesn’t do the series B.
It’s right that people can self-fund the startup to completion. But notice that this necessarily reduces the value of the startup, because you are missing some option value (the ability to sell off pieces of it before IPO for additional capital for growth). And the opportunity cost for that money is likely buying into other startups.
If what really matters is having 5% of all the startups, say, rather than 100% of the 5% most promising startups, then having to self-fund them all the way is bad. (Especially so since money goes much further in the earlier rounds, meaning that if you have sharper eyes than other funds, a thing you’re hoping to do is buy the equity when it’s cheap and trust in the followers to buy the equity when it’s expensive.)