Forget IB: The big bucks are made in Real Estate

I'm a VC at the moment, and couldn't agree more. I've been saying for a while that there is a massive, massive over-allocation to venture deals at the moment. The history of venture capital is short and predicated on a small number of scrappy technologists exploiting US government R&D dollars (either through the military or through universities that get the preponderance of their grants from the government) to take risks that traditional financiers wouldn't take.

That is not the current state of affairs. What made the field viable and what would perpetuate the field is an influx of money and talent into principal research that actually changed lives. I know more people at high-end start ups than almost anyone, and a lot of the country managers at major VC-backed unicorns were the same people that got annoyed with me being a boring cunt talking about the markets or macro issues a dozen years ago when I was in graduate school. They are now the same people--uninterested at their core in global macro trends--who are running large swaths of the tech start-up ecosystem. Things like Lime, for instance, aren't transformational. They're unnecessary. And a lot of the people that run Lime were never interested in global markets. I know them well.

Or if you take the example of something like Medici Living Group in the real estate sector. It's a co-living platform. They're the largest co-living platform (basically a shared housing arrangement for 20 somethings). They're masquerading as a tech company. They're raising money at SaaS valuation when they're clearly a real estate company. While their TAM, SAM, and SOM are all high, their capital needs are intense, their valuation is bloated, and they should probably be a REIT.

There are hundreds and hundreds of examples of these sorts of companies which--for one reason or another--are raising funds from the VC world which really shouldn't. Beyond that, basic bitches like my own mother are willing to place money into IPOs for loss-making entities like Uber. My mother has never taken an Uber, but she likes talking about (what she considers) interesting investments with her friends at dinner parties or over cocktails. This is the exact same thing that happened before the dot.com bubble burst in the early 2000s. Valuations got silly. Normal people got silly. Professional investors kept putting money to work because, you know, what else would they do--that's their job. And then the bottom fell out. The difference this time is that the majority of the money flowing into these venture originate from private capital sources (endowments, foundation, pension funds, family offices, etc) so the bubble will grow larger than last time. But that's where we are right now. We are at peak bubble.

The more McKinsey and GS types that jump ship into a VC role, the more I worry about the space. It is ill-suited to large inflows of capital from allocators. It is best handled by a small number of tech gurus who disdain finance. Finance is a necessary evil to sustain business operations so a true venture can scale quickly enough to become cash flow positive. We now have moron consultants coming into the business who understand nothing about actual risk-taking manipulating the numbers and messaging the story to convince other investors that growth is the only thing that matters. But that has never and will never be true in finance. The bottom line matters, but we've seemed to forgotten that.

And yet, money still pours into the space because there are few alternatives. I just had drinks (pardon my rambling) with the CIO of a large endowment. His hospital system is forcing him to allocate money to a corporate VC, and he's pissed. It makes little sense, but the CEO and CFO want to have something interesting to talk about at cocktail parties. This is an insufficient reason for creating a fund. They don't really intend to make money from the fund. They just want the PR exposure that comes from making these sorts of investments. And among their C-suite friends, they want to be able to talk about it.

I can't convince anyone that it's a bubble if you can't see this sort of evidence and come to that conclusion on your own. We each make our own choices, but don't be the guy that chases sexy money at the most-ballooned portion of a bubble because you're unwilling to put in the hard work of sticking with a high-paying corporate role for a few more years while the bubble bursts. Patience is a virtue.