Comment by jjeaff
5 months ago
Returns are no longer the actual goal. The actual goal is the perception of far reaching future returns. The perception of those returns is much more valuable than the actual returns. Because the wealthy don't want profits and dividends that get taxed. They want ever increasing stock prices so they can continuously grow their asset base to borrow against so they can never sell said assets this triggering capital gains taxes.
I think you're almost right
I suspect its more a structural issue
e.g. because of Big VC (a16z, other firms with dozens or hundreds of investing staff), VCs don't stick around firms long enough for real returns (cash distributed) to matter. If you're at a place and your stuff is marked up 10x after 4 years, you just hop to become a GP and try to ride the next markup wave. Even if these people exit VC after 10 years that is still 10 years of deals that all flopped.
This might not even be the individual VC's fault -- there may just be too many venture dollars chasing too few power law returns, so you get a surge of startups circa 2019-2022 that all disappear
> This might not even be the individual VC's fault -- there may just be too many venture dollars chasing too few power law returns, so you get a surge of startups circa 2019-2022 that all disappear
This feels right to me: the common trend between the dotcom bubble, mortgage bubble, tech bubble, blockchain bubble, and now the AI bubble has been big investors very high returns to make up for previous losses, like a gambler trying to win back, and it’s destroyed a lot of companies which had an idea which could have been a sustainable medium-size business but were funded and tried to grow as the next Google/Facebook without apparent recognition of how unusual advertising is for the ability to grow profits rapidly without scaling costs at the same rate.
Investing for distant future returns is not bad and favours long-term thinking over short-term profit. It is closer to the best (though abstract) metric, net positive value created, which naturally translates to ROI in an ideal world.
The problem is that in this non-ideal world value creation can become completely detached from returns: when instead of investing into people creating value, or distant future returns, or even medium term returns, it becomes about investing into other people investing in it—not too different from a pyramid scheme and various pump-and-dumps.
Companies with actual profits can, and do, simply buy back their own stock. Inflating market expectation of future cashflows is not the only way to realize asset appreciation.
This reasonably explains ghost jobs by companies willing to make themselves show like they're constantly growing for positive signal.
The 10% interest they would have to pay on the loans is almost as much as the capital gains would be.
An ordinary person with decent credit would not pay 10% on a loan.
A reasonably rich person with good credit is paying nowhere near that.
And a very rich person with great credit and who will put their assets up as collateral is paying low single digits in interest, if even.
The feds interest rate is still 4.5% right now. And a lot of companies are preparing for a headwind (which also means very rich people don't want to put assets up). Despite people trying to pretend otherwise, we're not in a very flowing economy right now.
But yes. If you're very ambitious and very rich, you can probably find a decent loan for your idea. This odd economic situation is ripe for uncontested disruption, but has an extremely high cost of entry (hence, being unconstested).
If capital gains tax is 15% that 5% on let’s say $1mil is $50k that is not „almost as much” if you can pay 10%.
You are not getting rich by throwing $50k to trash.
10% compounded which means it gets much closer to 15%
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Too bad that business model ended with the collapse of ZIRP economy...