A VCs risk profile does not look like yours, due to the fact that they're diversified and you're not. Imagine your company is doing well and there are two ways to proceed:
option 1: your company can be sold today for $75m.
option 2: you can try for $1,000m or zero, with an 85% chance that you'll fail.
The VC is likely to prefer option 2, whereas if you aren't already rich, you'd likely prefer option 1.
Many a VC funded company has died because the VCs needed you to make a ton of money very quickly, or die trying, in order for their model to work. When considering VC investment, one really needs to be certain that their business needs align closely with your own (and are likely to continue in alignment) if you want to avoid heartbreak.
VCs are (primarily) investing other people's money. The basic overview is this:
VC raises a $100m fund that is expected to last for 10 years. They charge a 2%/yr management fee, for their work as investors. Then, they also keep 20% of the gains from their investments.
So if the fund operates for 10 years and exits for $400m, my understanding is that they'd take $20m for managing the fund, plus $60m "carried interest", and return the rest to the limited parters (the investors whose money was actually at risk).
If the fund operates for 10 years and the companies sell for a combined total of $50m, they still charge the $20m management fee, and the investors have $30m returned to them.
That seems insane. Why would a wealthy (and presumably intelligent) investor hand over 20% of gains to someone with no skin in the game?
I guess if the VC had a track record from which to estimate expected returns, it could be a big deal, but no one has a track record, because these business cycles are so short.
If were a multi-millionaire, why wouldn't I say "Hey Mr. VC, if you think you can turn $100M into $400M, why don't you borrow it from me and pay 10% interest?"
You can usually get a 10% annual return by investing in regular stocks. The kind of investors who put their money in VC firms are looking for higher returns.
Let’s say I invest a million bucks in my local VC fund, and its investments earn back an annualized 15%/year over ten years. My million bucks has turned in to a little over four million. After paying the fees, I would still be about a million dollars ahead of someone who got a 10% return from a regular mutual fund.
It's not really 20%. It's 20% of whatever is left after the limited partner clears their hurdle rate. And to a degree, it is a bit insane, especially when you look at the historical returns of venture capital. But you'll find similar structures throughout the finance world - hedge funds, real estate, leveraged buyouts, etc.
I'm never a fan of advertorials, despite their occasional efficacy, because I think they devalue their surroundings. I'm particularly bothered by then when substantial effort is made to make it difficult for even keen-eyed observers to recognize their existence.
Running a small but ambitious company forces a serious, motivated founder to think about every business function. I don't see any meaningful downside for the founders who choose to spend some time on this task, and I see a lot of upside.
Parker's complaints strike me as absurd. If he really believes they can have more impact at FaceBook, he should find a way to create special purpose vehicles within FB that allow founders to get equity in the work of a small team, rather than just getting .00005% of the sum of FaceBook.
It's not a class issue. A more accurate appraisal would be that one is paid highest for strategic work, next highest for tactical, and the least for operational work.
If you're great at operational work, but are no good with tactics or strategy, you won't ever get a huge salary, in the office or in sports.
After all, look at pro-sports salaries and you'll see that the highest paid players are the ones who are put in situations where they have the ability to make potentially critical decisions, and who have a history of being relatively good with those calls.
As a customer, I'd feel a lot more comfortable if you worked solely as a technology vendor to my bank.
This isn't a knock on the team you're putting together, or your ability to build a great company. It's caused by the realities associated with venture capital.
Now that you took VC money, there's countdown to an exit, and I have to think about likely buyers. If you're successful, one of the top possibilities is a strategic acquisition from a major bank. This basically means that if I buy into the vision and support it, I'm likely to end up right where I started.
I want to like this idea, because I want to see more great, customer-service oriented banks. But I just can't quite bring myself to like it, because of the guaranteed change in ownership that is pending and the lineup of probable buyers.
I was the first investor in Simple. I can't speak for all the investors, but for me this was an investment in making the world a better place.
When Josh proposed the idea to me I asked a few people about their experiences with their banks. One of my friends told me how she had accidentally double-booked an airline ticket. This overdrew her account and--since she uses her debit card for everything--she started incurring overdraft fees on everything she purchased. She ran up several hundred dollars of overdraft fees before she even realized she was overdrafted. When she called Bank of America to explain, she was given the runaround. They eventually refunded half the fees (their standard offer) but refused to refund the rest without her jumping through hoops.
My friend is a single mom with two kids and a full-time job. She did not have time to constantly monitor her bank, nor the time to jump through the bank's hoops. Paying the fees caused her significant hardship.
The big banks in this country make their living by preying on those least able to protect themselves. They are evil. Again, I can't speak for the other investors, but I am not interested in selling out to a big bank. Success for me is either beating the other banks or forcing them to compete on Simple's terms: by treating their customers like people.
I agree that many retail banks wouldn't be missed by anybody if they disappeared tomorrow; and I applaud and support efforts to improve competition in the sector. I think that we share a vision of what should be in the retail banking sector.
That said, I can't help but think about the capital required to scale the business due to the high customer acquisition costs in the sector. This large capital requirement seems likely to reduce the ability of Simple to have meaningful control over their exit, as it won't all come from impact investors.
I hope the Simple team makes a mark on the market, but I still fear that success means that a large bank purchases them, increases the cross-sells, adds incremental fees, and "streamlines" customer service. I hope my concern is misplaced.
Either way, I'm excited to see what develops, and I think you made a great investment.
There's a ton about when and how and if we exit that's out of our control, and I wouldn't presume to predict exactly what's going to happen. But, please know that our goal is not to sell out to a big bank. We're building this because we want to use it, and part of what we want to use is a banking service that's provided by people who are acting in the best interests of their customers.
Unfortunately, I'm not sure that going with a smaller or local bank provides a more solid guarantee that you won't be banking with a giant down the road. The economic crisis of the past few years has seen a ton of consolidation in retail banking, and I think there's even more to come.
I don't understand who I call when a problem arises. Do I call you, the anonymous partner bank, or is it simply impossible to call somebody if I have an issue?
You call us if you have a problem or question. We'll let you know what bank your funds reside at, but you should never need to contact them. We have our own in-house customer relations staff.
Okay, so let's take a real situation that happened to me: an ATM debited my account $600, but only dispensed $300. In that situation, I call you, and what happens from there?
Thank you for taking the time to answer some of our questions on what is surely a busy day.
Does this mean you only find out where your funds are if you call and ask, or is there some page (probably hidden under an 'advanced options' panel I suppose) showing the underlying accounts and their balances, internal transfer transaction logs, etc?
It's a fair point. You can move domains. Mint isn't an example of that though. Patzer bought mymint.com but didn't launch with it. He got mint.com before any press/traction.
option 1: your company can be sold today for $75m.
option 2: you can try for $1,000m or zero, with an 85% chance that you'll fail.
The VC is likely to prefer option 2, whereas if you aren't already rich, you'd likely prefer option 1.
Many a VC funded company has died because the VCs needed you to make a ton of money very quickly, or die trying, in order for their model to work. When considering VC investment, one really needs to be certain that their business needs align closely with your own (and are likely to continue in alignment) if you want to avoid heartbreak.