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).

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. QED.

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.

> 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.

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).

[dead]

> 17 black

Let it ride !