Why exactly is it that there seems to be only the unicorn strategy? What happened to the investor who just wants to make a few x by investing in firms that are founded by experienced people with connections in their industry?
My suspicion is that a lot of agents, and that what they mostly are, simply don't know how to evaluate businesses. A unicorn strategy has some desirable properties:
- You don't have to win many times. You can go years without a hit, and this is crucial in managing expectations versus customers.
- You can forget all the investments that merely do OK. In fact, you can push them to try to unicorn themselves, that way when they either die or you get a unicorn.
- When you find a winner, you can push the founders to take more and more money, raising ambitions to stratospheric levels. Again something that goes back to expectations management. You want to be able to say you funded Facebook.
- There's a degree to which unicorn business plans depend only on risk taking. That's what you're there to do. What I mean is, there are business ideas that naturally require a huge amount of capital, and only a few groups in the world will be able to find it and try it. Other concerns are real but when capital is your main issue all the players who find it will do similar things: expand into other markets, spend heavily on tech, try to monopolize.
By contrast, just making some nice businesses with a good ROI has some issues:
- The fund that funds ordinary businesses needs to show results pretty soon. After all you're saying most of your shops will do fine.
- Businesses that aren't burning cash like a sailor on leave need to make industry specific decisions that require specific knowledge. Not just spend a bunch of money in the hope of getting a monopoly, but spend wisely.
- You need more staff to manage a bunch of businesses in a variety of industries
- Some mittelstand business that's doing just fine will be totally unknown to your investors. They won't be thinking of you as "that guy who helped build that new ball bearing factory".
I think it’s the Moneyball strategy - teams prefer home runs to base hits even if it means more strikeouts
Now baseball is shifting away from moneyball back to base hitters because they made their product super boring and stale. I think enshittification is a similar process in Silicon Valley, which might cause investors to have to look at more “base hitters” and not count on unicorn home runs
> What happened to the investor who just wants to make a few x by investing in firms that are founded by experienced people with connections in their industry?
There are plenty of those firms. They are called "Growth Equity" and "Private Equity."
Whereas the unicorn-strategy firms are called "Venture Capitalists."
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It's all math.
If you invest in a low-risk (established) companies, you don't require high returns.
If you invest in a high-risk (new) companies, you require high returns.
Maybe for many investors it is the more elitist and fashionable variant of common folks buying lottery tickets. But for the well-to-do. More sophisticated than being the hotshot player in the casino. Some expansive hobby / expertise to it, to talk about on parties. Real money on the line, tension, adventure, testoreron, prestige. I don't know, I am not in the group. May be totally off the mark.
> Why exactly is it that there seems to be only the unicorn strategy? What happened to the investor who just wants to make a few x by investing in firms that are founded by experienced people with connections in their industry?
That exists but then on average you'll be losing money due to the normally expected rate of failure. That can still be a valid strategy, but then you're just not in it for the money, but for the social impact. And some of these funds, once they get good at it do turn into serious moneymakers which in turn allows them to go for the evergreen strategy. This is the holy grail for social impact investing. A good example of such a fund is GIMV from Belgium, but there are many more.
> That exists but then on average you'll be losing money due to the normally expected rate of failure.
Only if you cannot actually deliver on the promise of being a good investor. If you knew how to pick businesses you'd get fewer failures and more winners.
I think it's less popular because it's harder to get rich, but it's possible to do debt-based funding instead of equity. Just agree to pay a high, fixed interest rate on investment and offer no equity. Once the debt is paid, there's no further obligation.
there's a "race to the bottom" problem too. if one VC starts pouring money into a sector they'll - temporarily - crowd out the small firms. hence all funds are incentivized to "go big or go home".
They also crowd out the small firms that were doing just fine before the VC funded startup entered the eco-system, spoils it for everybody and then goes bust leaving the market unserved. I hate it when that happens.
My suspicion is that a lot of agents, and that what they mostly are, simply don't know how to evaluate businesses. A unicorn strategy has some desirable properties:
- You don't have to win many times. You can go years without a hit, and this is crucial in managing expectations versus customers.
- You can forget all the investments that merely do OK. In fact, you can push them to try to unicorn themselves, that way when they either die or you get a unicorn.
- When you find a winner, you can push the founders to take more and more money, raising ambitions to stratospheric levels. Again something that goes back to expectations management. You want to be able to say you funded Facebook.
- There's a degree to which unicorn business plans depend only on risk taking. That's what you're there to do. What I mean is, there are business ideas that naturally require a huge amount of capital, and only a few groups in the world will be able to find it and try it. Other concerns are real but when capital is your main issue all the players who find it will do similar things: expand into other markets, spend heavily on tech, try to monopolize.
By contrast, just making some nice businesses with a good ROI has some issues:
- The fund that funds ordinary businesses needs to show results pretty soon. After all you're saying most of your shops will do fine.
- Businesses that aren't burning cash like a sailor on leave need to make industry specific decisions that require specific knowledge. Not just spend a bunch of money in the hope of getting a monopoly, but spend wisely.
- You need more staff to manage a bunch of businesses in a variety of industries
- Some mittelstand business that's doing just fine will be totally unknown to your investors. They won't be thinking of you as "that guy who helped build that new ball bearing factory".