Thread by @pushkar_g_singh

Dead money in Venture Capital

In his interview with McKinsey, Bill Gurley makes an interesting point about dead money.

What’s this dead money and who’s paying for it?

In the past few years when money was available in plenty because of low-interest rates and quantitative easing (central banks printing money), numerous startups raised hundreds of millions, sometimes billion+ dollars of #venturecapital.

Late-stage VCs who write big cheques get a return on their capital either through an IPO or a massive acquisition like Adobe buying out Figma.

Funds like Softbank have invested billions in big #startups like Oyo in the hope that they will make money through the IPO.

Interestingly, these massive startups have burnt billions of dollars to build big businesses with substantial revenue. That's fine because it was private capital.

But many of these startups can't justify the capital they have used to build their businesses. You might have used $10 B to create a business that's worth maybe only $5 B.

Eventually public markets will realise this, and your correct value will reflect in your stock price.

This is dead capital. Someone is going to pay for it. It will be either VCs if they continue to hold the shares or new investors including individuals and mutual funds who bought these overpriced shares.

If the VCs manage to sell their shares before the prices rationalise, the individuals and mutual funds pay for this dead capital. They will be left with something that's worth much lower than what they paid.