In almost every loss-making unicorn’s pitch to prospective investors, there has to be an Amazon comparison — how long they took to become profitable and how they became the most valuable company in the world.
But how many of them are really similar to Amazon? Are we even comparing apples to apples or is it just a convenient excuse that founders use to justify their investment?
Or, is it a case of the blind leading the blind, where VCs themselves do not know how to accurately identify value generating companies or are blinded by their presumed knowledge and understanding of the market?
Is it a game of luck or pure skills in selecting the right company to back?
Many thought that they might have acquired the right company, but with the lack of data points and tangible research, there seems to be little to prove that VCs have gotten the right formula.
There are definitely tell-tale signs on what a successful company would look like, but humans are one of the most complex beings on earth.
How can one make an accurate assessment of them in such a short period of time and place such a huge bet on the story they are selling?
Being in the VC industry, it felt like a massive echo chamber where a school of thought is being advocated by a small group of highly regarded VCs, and suddenly — the whole industry is advocating for it.
This is evident in the Valley and less oblivious in other geographical areas.
It’s common knowledge that past performance do not reflect future performance, yet these VCs are held in high regard due to their past performances.
Their ideas are widely touted by new/wannabe VCs or entrants into the industry where people are quoting or name dropping these thoughts in an effort to show how learned or connected they are in the industry.
Venture capital industry is maturing
The industry itself is maturing, with new service providers setting up shop such as venture builders, or professional fundraisers/financiers, lawyers advising on VC topics, etc.
It’s questionable if they do add any actual value to a company that would eventually make a meaningful impact on the community. Companies are setting up venture arms, professionals are adding the word venture into their corporate profile, and services are sprouting out to serve the venture community.
It’s all being built upon the idea that entrepreneurs would need to raise venture capital money to change the world. This is a severely flawed mindset that ought to be changed.
Having a couple of days off recently, I set up a full day assessment interview conducted by a venture builder in an effort to better understand the venture industry in Singapore from a different perspective and was shocked by the culture within.
Employees were obsessed with books read by VCs in Silicon Valley and were trying extremely hard to emulate the culture in the US. Was that at all necessary?
During a presentation, I was asked what I would do if there was a lack of capital for a moonshot idea that I was passionate about. The very thought that you need capital to get your idea out is flawed and it shouldn’t be the case at all.
The assumption that great ideas need VC funding isn’t going to be sustainable and only a small amount of companies or business models require it during the life of the company.
An entrepreneur should not be deterred by the lack of capital in pursuing their idea, execution and being resourceful is of utmost importance and capital is the least of all concerns.
To actually place capital as the first concern just shows how the industry has gone obsessed over Venture Capital funding.
Value investing?
The notion that VCs are creating value through the backing of revolutionary early stage companies and impacting the community is an overly emphasized story.
Isn’t the point of starting a company to generate profits for its shareholders? Yet, this isn’t happening for a decent majority of companies since the turn of the millennia.
Rather it seems like wealth is being transferred from one fool to the other, based on a well-crafted story.
New forms of valuation techniques were formed to justify the high valuation that these companies command, and it’s more like a self-fulfilling prophecy than anything else.
Isn’t that what capitalism is all about? Profit maximisation?
However, in today’s day and age, companies are going public with a huge market cap yet its PnL is on an insane amount of net loss. (E.g. Lyft, Snap, Twitter)
The whole idea of venture capital is built upon the value of networks that venture capitalists possess.
The access to “hot” deals can be seen as a status symbol and they are hyped up with an overly high valuation. This creates artificial demand for its stocks in the market, thereby generating outsized returns for these VCs, despite it being a loss-making company.
A vicious cycle ensues and uninformed money is constantly poured into the industry in the pursuit of the next unicorn — and the fear of missing out.
New to market investors try to build their networks relentlessly to gain access to those covert companies. This further reflects how interconnected VCs are.
Silicon Valley is the epicentre of the action.
Other cities are trying to replicate the SV model — for better or for worst is anybody’s guess. But, is this genuinely value creation where monies are invested into a hyped up company and exited through a public listing? Or is this a trade sale where profitable or sometimes non-profitable companies will bail them out?
The lack of data points for one to evaluate an early stage company prior to investing in them, creating so much more ambiguity.
Yet, investors are rushing to invest their LPs monies (many of whom are pension funds, banks, sovereign funds, etc) with lax due diligence and pure reliance on reputation or judgment on the founding team.
There is some truth towards investing in talent and given that a startup has little to no data points to measure about from the founding team, can talent be the major evaluating factor?
To dive deeper into the topic, the presence of talent may not be measured effectively as every individual displays their strengths differently, along with the underlying motivation towards working on a selected project differs.
Are investors’ interests genuinely aligned with the founding team? Or are certain founders merely opportunistic actors, leveraging on their perceived talent to extract value from investors?
There are various narratives on how these loss-making companies change and improve our lives, impacting us in many intangible ways. However, a strong and clear indication is that not enough people are willing to pay for such services, leading them to remain unprofitable.
If these are the criteria one measures to determine the value of the company — despite its unprofitability — should a new platform be created for all non-profit organization where they are measured against the value they provide to the community instead?
An exchange where shares/tokens are traded based on the social impact that is created, rather than its perceived future profit, would be a better measure for these companies. And, ultimately save investors from losing their monies.
The VC industry isn’t all fluff — there are genuine cases of truly revolutionary companies formed through the support of well-planned venture capital money. Google, Facebook, Amazon, PayPal are all such companies that make a significant impact on our lives in their own ways.
But how can we identify the good from the bad?
The dotcom bust eliminated bad actors in the market for the first wave of the web revolution, do we need another correction to do so?
As more VC backed companies are choosing to stay private, would a market correction work this time around?
Research has shown that everyone has that innate tendency to believe people when startups come about to pitch an inspirational story, feel-good story, regardless of how experienced — the urge to help these well-meaning founders realize their dreams is there.
However the reality may not be as rosy as what the picture is painted out to be, it could come down to execution challenges — the disparity between the envisioned technology vs actual functionalities.
These could be seen as founder risks, company risks, market risks or merely misrepresentation of facts.
Regardless, startup investing is a complex task and as the industry narrative goes, VCs are doing their best to make an impact on the community and create life-changing companies.