Hacker News Reader

Comment by motti_s | Hacker News Reader

I have a question: is this good or bad for the Series B investors? I'm not sure the answer is as obvious as it seems.

2X return overnight is great for angels, but is it good for VCs? From what I understand (correct me if I'm wrong), once VCs have an exit, they can't reuse the proceedings for a subsequent investment. Thus, since VCs like Sequoia are probably looking for 10X returns, they just ended up with a chunk of their fund that underperformed. True or false?

View on HN

> From what I understand (correct me if I'm wrong), once VCs have an exit, they can't reuse the proceedings for a subsequent investment.

Why wouldn't they be able to use the funds for a later investment? Isn't that what VCs do in general? (Genuine question; not being snarky.)

I believe that most funds are structured in a way that the VCs have to pass the proceedings (minus their cut of course) to their LPs (investors).

Correct. However many funds do not distribute returns that are less than a certain amount (1.5x is typical, I think)

So in you opinion, assuming that Sequoia had to distribute the "overnight" 2X to their LPs, was that a good investment for them?

I think VCs are looking to provide bigger returns than this.

Thanks. I wasn't aware of that.

No, VCs generally don't recycle their wins. A VC fund is at it's heart a company that is expected to live for ten years; first raising capital, then investing the capital, and then spending it's final years collecting the proceeds of the exits, as the successful investments get acquired or IPO.

Note: VC firms will have many different funds, each with different origination years, so while the fund might last a very long time, the individual funds are not supposed to remain illiquid forever.

They are often able to recycle low returns. I think 1.5x and lower is typical.

Am I correct to think it's 1.5x, and within the investment period (first few years of the fund)?

I'd think this would be great for their IRR, because this means they had a capital call a month or two ago, and will be returning double the capital very, very shortly thereafter.

I have trouble seeing how it'll hurt their IRR.

If you invest $20 million and get $40 Million a week later you are extremely happy.

If you invest $15K and get $30K, meh...cause you were probably hoping for life-changing money. So context is everything. Not to mention that Instagram was more than an idea or a famous founder at the time of investment so there was less rick of losing everything.

Reply on news.ycombinator.com