> I’m sitting backstage at TechCrunch Disrupt. I’m introduced to (let’s call her) Mary, a 22 year old recent college grad. She spends ten minutes setting up a science experiment on my desk. There are jokes about how she managed to get this thing through airport security. She then performs the closest thing to magic I’ve seen in a long time.
> Stuff like that is what makes my job so much fun. In a year or so when this thing is productized you’ll be hearing a lot more about Mary.
> She spends ten minutes setting up a science experiment on my desk. There are jokes about how she managed to get this thing through airport security. She then performs the closest thing to magic I’ve seen in a long time.
Maybe he should go to Las Vegas instead of making decisions about technological investments.
VCs are usually not as smart as they and others think, they're very susceptible to emotional presentations and hype, and portfolio theory means that serious due diligence isn't worth the effort.
VCs have an investment fund that is divided amongst X startups. A small percentage will break even, and a very tiny percentage will return more than the entire fund (this is where profits come from). The vast majority of companies will lose money, and in this scenario it's better to move quickly to get into the startups that will succeed rather than do the proper due diligence for every investment.
Basically, speed and quantity is better than deep investigation. It's just how the numbers work out, but it's also why you'll see some crazy startups get funded even if others have more solid financials.
In addition, people are much better at disqualifying then qualifying. It's easier to say "no" then to say "yes" to something, so it could be argued that you should say no very quickly to these kind of startups. But history shows that wilder ideas are more likely to lead to the outsized returns so VCs will say yes to the things that other investment classes would always say no to. Then again, it's called "venture capital" for a reason.
so due diligence for infotech startups maybe doesn't make sense but wouldn't at least a "first pass no phebotonium" filter mean better likelihood of returns for hard sciences?
I have been closely watching indie bio do their accelerator and I'd say a full 60% of their startups are phlebotonium, or at least "this is not a crazy idea, but the choices you have made are totally crazy".
Let's say fund of size X divided by N companies = Z amount invested per startup. 0.1% of them will return 5X.
So while you might disqualify some poor companies in the 99%, what are the odds you don't just get another poor company? The odds that the money you didn't spend will now go to a successful company doesn't really change since the hyped companies would already have the money and the rest are a complete crapshoot.
Meanwhile, how much does that diligence cost? If it's more than Z across your portfolio then you're actually down a shot and have lowered odds for the whole fund. If 99% are going to fail anyway, why spend more money just investing in a different 99%? Remember the entire fund has to be invested, you can't return or rollover the money so this is actually the optimal strategy. It's strange math but it works.
Wall Street Journal has a series in CIO Journal about how to talk the board. It hinged on not presenting data but instead creating and appealing to feelings. This is probably good advice for pitching VCs.
Yes, all people like a good story. That's why so much of formal presentation skills is all about "storytelling" and appealing to your audience in various ways. Facts can help, but that's not what people really remember.
Unfortunate perhaps that VCs are so susceptible to this, but it is what it is.
I remember going to a StartupGrind event, and the VC they were interviewing flat-out said "VC's are dumb and stupid". I'm not kidding. Initially, I was glad that he was upfront about the situation. But the more I thought about it, I realized VC's have so much money they can literally afford to be uneducated. They can afford to "spray and pray" with their investments.
It's not complete snake oil, it does work it just isn't practical. I'd guess those investors were betting that they could over come the issues of practicality.
You can't overcome basic physics. And this chick is a nutter. Her TEDx was cringey as hell, spending the majority of the time claiming she'd figured out solutions to problems in minutes that PhDs spent years on.
The fact that you'd need a power plant to charge a room full of people's phones isn't some practicality issue. This was absolute nonsense from day 1.
Imagine you are a Dutchman in 1636. You know perfectly well that tulip bulbs are worthless. But you also know that any tulip bulbs you can buy now you can sell at a vast profit later. What do you do?
This is a false dichotomy. Unlike tulips or public company equity, startup equity is highly illiquid. It's hard or impossible to sell it an attractive price as an investor. Sure, later investors may invest at a higher valuation thus increasing the value of your holdings on paper but it's exceedingly rare for later investors to purchase equity from earlier ones.
In order to get liquidity, you need to have your portfolio company have an exit, either by IPOing or being acquired. Good luck having either of those two events with an entirely worthless company. Even if you do, it's fraud and people will sue you and government investigators will kick down your door.
I think most of the other commenters here are on the right track. VCs just don't do that much diligence for early stage companies, especially if they have a compelling emotional pitch. Hell, I wouldn't be surprised if someone flagged that their technology was impossible and a partner pushed ahead with the deal just in case of a miracle. There's so much money chasing returns now that $10MM is a pittance for venture funding.
Right. You just don’t want to be holding the bag when the wheels come off. It was the same with CDS’s in 2007. People who got out at the right time made fortunes. Theranos was another example of experienced investors hoping the bubble would last just a little longer than it actually did.
how were these people so easily bamboozled? this is some pretty dubious tech straight from the get go.