Thread by @dunkhippo33

As someone who interned at a startup in HS in the summer of '00 & started building her own startup in '08, frothy times make me very nervous.

Everyone looks like a genius during the best times, but here are some sobering thoughts.

Read on >>

1) This is fascinating - the top quartile of VCs in 2007 had a 2.54x paper multiple. But the actual paid (IN CASH) is only 2.38x -- 14 years later!

Actual cash != paper markups.

https://twitter.com/robgo/status/1437782524810469386?s=20

2) Another data point. About 6-7 years ago, my friend was telling me about how he had passed on investing in some fund. He had seen that that fund didn't have a great multiple 3 years in.

Today, that fund is a 5x fund, 2x+ realized.

3) Both of these data points are on opposite sides of the same coin and drive home a larger point.

Big exits take a long time and anything can happen in between (for better or worse).

4) Specifically, what drives returns are how big your actual largest winners are. You won't know that for years.

Sometimes, the paper markup gets ahead of what the startup could realize in cash.

Sometimes, startups w no markup at all do much higher revenue than their valuation

5) To some extent there is some convergence of paper markups and liquidity.

You see some VCs successfully selling their portfolios:
forbes.com/sites/alexkonr…

6) And shares in individual companies can now be sold more easily on secondary platforms for actual cash.

But because venture is a game of seeing who are your largest winners, inherently, that means waiting though.

7) You don't want to sell too early. But it also means you can't count your chickens too early, because anything can happen while you're waiting.

8) This is especially true for companies pre-product market fit. These days, I'm seeing companies hit $50-$100m valuations pre-product market fit.

I may look smart if I can get a 10-20x markup here. But, honestly, ANY pre-product market fit can go to 0 if they can't find PM fit

9) This sort of environment makes me nervous because I've seen this play out twice in my life.

Frothiness means everyone wants a piece. But then you start to see money thrown around recklessly.

10) By recklessness, here are the things I worry about in frothy times:
-investors *borrowing money* that they won't be able to pay back if assets go to zero
-pretty much zero due diligence (everything goes up right?)
-*overindexing* in risky assets

11) Not to sound all doom and gloom -- I actually don't see any macro conditions on the horizon that will stop the party.

But corrections do have a way of sneaking up on us, and we'll see what happens in 7 years. And that makes me a bit nervous.

12) That's why it's so impt to have an eye on the long term and not the short term.

The ups and downs in the middle are just a distraction and actually don't matter.