Ask HN: What startups are highly profitible but VCs won't touch?

https://news.ycombinator.com/item?id=4647701

by calbear81 • 14 years ago

34 31 14 years ago

news.ycombinator.com

In particular, what are some taboo areas that VCs in the valley tend not touch with a ten foot pole even though there may be a highly profitable business model and/or mass audience appeal?

Turing_Machine• 14 years ago

Sheer speculation: porn and gambling.

calbear814• 14 years ago

Gambling seems like a no go because of legalities in the US, but there's a huge gambling technology sector in the EU and UK where it's legal.

rolandal2• 14 years ago

What about APIs/SDKs like Betable? I know it's a UK based company, but does this allow others outside of UK to legally use it (ex. in the US?)

pg2• 14 years ago

VCs are often forbidden by their agreements with their LPs to invest in certain types of business. I forget what they are exactly, but it's not simply a matter of taboos.

calbear814• 14 years ago

Thanks for the quick response pg, would you say in addition to being bound legally, there is a cultural bias against certain types of businesses (assume fully legal)?

beagle32• 14 years ago

If your target market is government / army / municipal, most VCs won't touch it. Those that will touch it, tend to deal exclusively with that kind of stuff, and don't hang out with the rest of the VC crowd.

The reason is, sale cycles are so long and so different from anything else, that it doesn't fit with their view of the world. (And if you try to sell to governments without being aware of that, you are going to fail).

pg2• 14 years ago

Maybe. I can't be sure because I can't remember exactly what the LPs forbid.

There have been startups we didn't fund because they seemed like they'd be bad for the world.

soneill• 14 years ago

I've encountered a couple VCs that are forbidden to invest in any S-corp, regardless of how attractive an investment candidate they may be.

10011001• 14 years ago

Gambling, Drugs, Prostitution, Porn. In general, any business already controlled by the mob or blue collar criminals.

geoka9• 14 years ago

Porn is controlled by criminals?

calbear814• 14 years ago

Seems to be a sweeping generalization but it does seem like the porn industry attracts a certain "seedier" element of folks. These same folk also happen to be amazing marketers and I can point to many techniques on landing pages, SEO, etc. that were first leveraged by the adult industry.

rolandal2• 14 years ago

There is a grey area that also exists for "dating" applications (ex. Grindr) etc that could be used for other purposes.

pmarca• 14 years ago

There's a subtle reason why VCs will avoid certain kinds of businesses that is not clear until you are inside the sausage factory, which is that your LPs (investors) are sensitive to bad perception and publicity. Specifically your sponsor within an LP such as an endowment or foundation reports to an Investment Committee which is typically extremely conservative. In the worst case, you could put your sponsor's career at risk in their own profession.

daniel_levine• 14 years ago

pg and pmarca (so cool that you comment on HN, looking forward to your first submission) hit it on the head.

Regulatory uncertainty can cause difficulties investing in certain sectors that might prove quite profitable.

Lastly, I would note that profitability as an isolated metric is not a perfect indicator of future success. I can find a link if people are interested, but in his latest book Robert Shiller discusses firms that created some special financial products in the late 90s. The products were effectively betting on black swan events happening at a certain time. They ensured a high annual IRR but then if the event didn't occur their investors were left holding the bag. What made the idea profitable for the firms was that LPs that invested in years 4-6 did so based on IRR, without examining things in detail and effectively overpaid for a piece.

jborden13• 14 years ago

They tend to avoid business models without perceived $100M potential - oft regardless of your margin.

OldSchool• 14 years ago

I always sensed top-line revenue was a lot more impressive to money people than profits. You could be making $3M/yr net profit on $6M/yr revenue and not be given a serious look (you're just a small business...), while the $100M/yr business that's never turned a profit and loses $10M/yr because they have only a 5% gross profit margin somehow gets a look. Zero seems to be an exception: what has always impressed me the most are the guys who can talk their way into an 8-figure buyout without ever having a customer.

mvkel• 14 years ago

Beyond what was already said, it's a simple numbers game. I can have a 5 person company and yield an 80% margin. Sounds like a win, right?

What if my total revenue was $1mm, with a total market size representing about $10mm? Technically profitable, but a terrible investment for a VC.

Ultimately VCs want to see a clear path to $50-100mm, or they'll be reluctant to invest.

adrianwaj• 14 years ago

Powerplants - not sure they're a startup, though.

TimSchumann• 14 years ago

I'd say currencies. It's highly profitable to control your own currency, just ask the Rothschilds.

But, PG and YC seem to have already touched that...at least tangentially with Coinbase.

Ask HN: What startups are highly profitible but VCs won't touch?

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