Is much of venture capital just hype/a self-fulfilling prophecy?
I am 23 and new to the venture capital world, working at one of the midsize VC firms.
I’m somewhat astonished at how many startups with a mediocre product, barely any revenue, and/or questionable business plans I have seen blow up in terms of valuation.
It seems to me that funding and valuation out here is almost a game. You hype up your product as groundbreaking, get series A funding from one of the big names (Andreessen Horowitz, Sequoia, etc) and a headline comes out that _____ firm invested millions in your Series A. Then, simply because the big names gave you money, in the next round other firms and institutions give you even more money because they don’t want to miss out on the next big thing. Valuation continues to skyrocket even though revenue and customer base size has remained the same.
In the media, you have seen some of these CEO’s be exposed as frauds and a few indicted. Theranos, Nikola Motors, WeWork etc.
Those CEO’s were fired and/or indicted because they kept the train rolling until they were billionaires. But I know several dozen founders who have done the same thing at a smaller scale, were acquired, and cashed out at $10-50m knowing damn well that they made out like a bandit.
I’m not saying all startups operate this way, there are many that have a great product or idea. But you’d be surprised at how many do. And I can’t say I blame them; think about it—Nikola and Theranos raised BILLIONS with no one taking the time to verify that they had a working product. Adam Neumann and WeWork used “community adjusted EBITDA” in their financial statements. Part of Elizabeth Holmes’s defense at trial is literally going to be that everyone in Silicon Valley exaggerates and/or makes misleading statements to investors. It’s crazy to me.
A lot of it. We've played it by going the hot potato route. Invest and flip equity via secondary transactions ASAP. That way min capital at risk when it blows up.
the sooner you learned everything is a rigged game, the better.
Username checks out
Rolling a truck down a hill isn’t a working product?
I've been in the industry for about 6 years. It's an ugly truth to the business, I notice it, and agree with everything you've said, but the game has been played this way since the beginning of the capital markets and it will never change. Investors are people and the fastest way to separate them from their cash is to get them excited about what a company does. Business Owners/Financial Professionals stay up at night thinking about how to get investors excited about a business (sometimes stretching the truth intentionally or unintentionally about its capabilities), which is why a good investor needs to keep their own objective opinions of the business outside of what the industry and marketing excitement says. Watch any talk from Warren Buffet and Charlie Munger and they will almost always stress "objectivity" and not getting caught up in the excitement of an industry. That is because high valuations are only real if investors make them real, and just because they are real does not make them correct.
It's a tricky game, but it is also what makes the deal industry so fun in my view. Is it the obligation of the business owner to be forthright, or is it the obligation of the investor to be intelligent? In an ideal world, it would be a little of both, however, in reality, only the latter will protect you.
Fortunately, we all have the benefit of hindsight in the many historical cases of overvaluation, fraudulence, or bad business planning that you brought up. However, for the person in the seat making the investment decision, there were so many more unknowns that factored into their decision.