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The VC Problem
Fundraising continues at breakneck speed. Unicorns are no longer rare, and the size of VC rounds keeps swelling. Deep-pocketed private equity players are also wading in. It seems to me that instead of spending millions, or billions, in the pursuit of unicorns that could emulate the "winner-takes-all" technology platform near-monopolies of Apple and Facebook and the massive capital gains that resulted, VC investors and their LP backers could instead be buying a bunch of empty matryoshka dolls. Bloated by overvaluation, and likely to disappear, leaving just a smile and big losses, since many software-focused tech startups have no tangible assets.
The problem is that this cycle has been marked by easy capital and a fetishization of the early-to-middle parts of the tech startup lifecycle. Lots of incubators and accelerators. "Shark Tank" on television. "Silicon Valley" on HBO. Never before has it been this easy and cheap to start or expand a venture. Yet on the other end of the lifecycle, exit times have lengthened, as late-series deal sizes swell, reducing the impetus to IPO (in search of public market capital) or sell before growth capital runs out.
This is a huge problem in my opinion. The VC industry lacks discipline and real competence, seeking disruption and market share dominance without a clear path to profitability. You see, VC-fueled startups aren't held to the same standard as existing publicly traded competitors who must answer to investors worried about cash flows and operating earnings every three months. Or of past VC cycles where money was tighter, and thus, the time to exit was shorter.
For example, Look at Uber, the world's most valuable VC-backed company, with an estimated valuation of $62 billion. It's burning through cash, losing between $500 million and $1.5 billion per quarter on a run-rate basis since early 2017. Yet the company still raised a $1.25 billion Series G led by SoftBank in 2018. Its valuation is holding above $60 billion, a level first crossed in 2016, despite years of scandal, intensifying foreign competition, and the maturation of its core business.
Compare that to Tesla, which is pursuing a similar strategy of breakneck growth, burning cash to achieve scale and capture market share. Profitability is also an over-the-horizon goal. But the burdens of being publicly traded are clear, from aggressive short sellers to CEO Elon Musk's post-earning calls with analysts.
Imagine VCs and their unicorns were held to the same standard. If Uber had to publicly explain the reasoning behind its recent M&A activity (bikes from Jump, but only scooters from Lime?) or why HR woes have suddenly returned, or when profitability will be achieved. Moreover, imagine what the company’s valuation would be if investors could place active bets against its success.
The uneven playing field and the influx of capital into the VC ecosystem create a situation where money-losing firms can continue operating and undercutting incumbents for far longer than previously, as their VC backers reward growth metrics with higher valuations.
Arguably, these firms are destroying economic value.