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So investors put $2.3M into the company and got back $3.3M. They essentially have a ROI of 1M over a span of four years. Am I crazy to think that this is a pretty good deal for the investors?! If someone gives me a ~40% return on a crapshoot investments (like how most start ups are), I would be pretty happy!

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You are thinking from the perspective of an individual investor. For VCs, this kind of return is abysmal since it won't cover the 7/10 companies that went completely bust. In order to VCs to take high risks on early stage companies, they need the winners to return 100x so the fund even makes financial sense. It's one of the main reasons why VCs constantly push startups for hyper growth.

This is certainly better than losing the investment completely but I can't imagine the investors being too thrilled about this outcome.

It means the three that have a liquidity event only need to cover 5/10 instead of 7/10.

Is that not a helpful result?

Ha, venture math is pretty hilarious. VCs basically need to give back their investors a 300% return in 10 years to make up for the risk they handle. Eg. For a $40M fund that's trying to grow to $120M, $1M here and there doesn't really move the needle.

The public NASDAQ has grown to 4x over the last 10 years. VC should do better or go home.

Not quite. People invest in VC funds exactly because these returns are not correlated to the market (well, they sort of still are).

It's diversification; people investing in these funds are generally NOT looking for similar returns to the public market.

VCs must aim high, but a medium-size win isn't the same as going bust. It's still better to get a return with strong linear growth than to get nothing.

Didn't the investors have the choice to take the cash-out? I am actually surprised they agreed. It seems logical Buffer is not going anywhere, and growing, and an acquisition is still very much possible which would represent much larger returns.

Who cares if it's bad for VCs. They already get paid over 200k+ in carry every year for over 10 years. They are also not investing their own personal money.

The point is that if all startups behave like that, thr VC business model doesn't work out, will vanish, we will all have to stop playing the startup game since there is no one providing that kind of funding anymore.

No it won't. One case in either direction means anything.

The game is that VCs will adjust, then founders. Then VCs. Then founders ad nauseam forever. This is just one small piece of a giant play being performed by many in different ways every day.

>> For VCs, this kind of return is abysmal since it won't cover the 7/10 companies that went completely bust.

Only very myopic VCs would think this way globally. If every business did this, it would be terrible. But each business is its own opportunity/set of circumstances, and forcing everyone to 10X+ is as equally stupid as cashing out $1MM on a four year term sheet on $2.5MM invested.

You must evaluate each opportunity individually to maximize profit and growth. The intentions can always be to shoot for hypergrowth, but if the probability drops below the profitability point, you shouldn't be forcing the issue. Terrible investors do this, and it happens fairly regularly, though it's slowing down as founders become a bit more intelligent with their options.

> Only very myopic VCs would think this way globally.

Might this be a (converse version of a) No True Scotsman fallacy?

Elsewhere in the thread, a comment [1] referenced an article [2] that details the return imperatives that VCs face. In particular, it details how small returns "don't move the needle".

OTOH, the article asserts that only 5% of VCs (misleading, if a percentage of number of firms instead of AUM) succeed in meeting this imperative, so I wonder how the other 95% still attract enough LP money.

[1] https://news.ycombinator.com/item?id=17872045

[2] https://news.ycombinator.com/item?id=17874278 https://techcrunch.com/2017/06/01/the-meeting-that-showed-me...

>> In particular, it details how small returns "don't move the needle".

You never want small returns. But when you can choose a small return over basically a near-zero chance of losing all your money, it isn't that difficult of a choice - or it shouldn't be.

The point is that, to a VC, a small return is indistinguishable from losing all the (not "your", since they rarely have much, if any of their own money in it) money.

Given their economics, VCs have a very strong incentive (or an imperative, according to that article) for "forcing everyone to 10X+" (and I would argue it's more like 20x+), no matter how small the likelihood of that outcome. Without at least one outsized exit, they're a failure.

Put another way, their LPs aren't paying them to, in any way, play it safe. Near-zero chance isn't the same as zero.

So, yes, the choice for a typical VC isn't difficult. It's just the opposite of what you're proposing.

If those investors had put their money into the S&P500 instead, they would have had a better return on their investment.

True, and the risk here would probably make this a "bad investment" in reality.

There’s no reason on earth why anyone would consider having their money returned plus a mil a “bad investment,” even if they are a VC looking for 100x unicorn returns.

The reason is called opportunity cost.

I would. The whole point of a risky investment like that would be to get a better return. 10% per year is something I can get almost risk free, if I'm starting with $2MM.

Tell me about this 10% per year risk free investment? Owning S&P historically has returned 8% annual, by no means is risk free.

Real estate. There are plenty of multi-unit dwellings in the country with a 10% IRR. If you have a few million cash to buy one, you'll get 10% a year on the rent fairly risk free, depending on the market.

Family for 30 years in rental property business.

Anything which involves rent is by far not risk free. Very cycle driven, heavy on litigation and management has to be perfect to make returns.

I’ve been doing real estate for about 25 years and haven’t seen much risk at all. Biggest risks have been vacancy and maintenance. Vacancy is solved by setting the right rent and maintenance is a 10% reserve fund.

Also I said “almost risk free”. :)

I don’t know what country you are talking about, but in many places there was a huge decline in real estate prices one decade ago. That would seem a big risk...

Real estate is also illiquid. Would you prefer 10% IRR in property, or 8% IRR in the public market? I would personally pick the second.

Use some moderate leverage I guess, i.e. 130% of capital.

Risk-adjusted return

there's also opportunity cost which you're missing. Average VC can invest limited number of startups. Instead of buffer They could invest some other startup which eventually exit with 100x

Only in this specific timeline. On average over a longer timeframe that is more representative of the market, they definitely would not have.

The average yearly S&P returns is 9.8%, to reach 40% in 4 years you'd need 8.7% yearly returns.

Yes, you are slightly crazy. The whole idea of VCs is that while most startups are indeed crapshoot investments, some will make returns in the 100x.

1.5x is sometimes "good enough" but it won't keep a VC afloat if all of its investments go like that. Even 2x means that you only get to invest twice and fail once. And forget about profits or a living wage.

see - https://techcrunch.com/2017/06/01/the-meeting-that-showed-me...

the math is pretty crazy... even $50m and $100m exits would doom a fund.

I wouldn't. That's a ~10% yearly return. You can do better with index funds, never mind growth stocks. This is hardly a home run for a VC.

I think when they invested, they expected more less like a triple-triple-double-double growth from 2014 to 2018.

In 2014 their ARR was $4.6M so investors probably expected their revenue to follow the $4.6M -> $13.8M -> $41.4M -> $82.8M -> $165.6M trajectory. Buffer's current ARR is $15M, which although is pretty good, is not enough for it to work well with the VC model.

Yes, you are crazy to think this. :-)

Buffer seems like a fairly successful startup relative to the average. A roughly 8% return per annum is not a good return for a VC given that many of their investments in a given round will go to zero.

There may be reasons for this going the way it did, but I doubt VCs would be all that happy with this.

It's fine for the VCs if they can recycle and re-invest that. Otherwise it's a 0.

Can you please elaborate what you mean? The money is only useful to the VC if they can re-invest it elsewhere?

If the VC has another investment on its radar that it can't make due to capital being locked up in a stable but not explosive company like buffer, it would be fine taking the money back with some interest.

If it doesn't have that, then taking buffer's money doesn't move the needle much.

accurate

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