It’s easy to blame the founders, but should VCs have been better informed?
The Nasdaq drops 20% in a month and people start losing it. Are they wrong? The past 24 months have been some of the most exciting in modern memory.
Never in the history of tech finance have so many people earned so much – doing so little. Crypto, growth, venture capital, day-trading public stocks. Fast and loose money flowed from central banks to markets to LPs to funds to corporate pockets.
But this brief era seems to be coming to an end. When it does, there will be a lot of explaining to do – and with that will come a fair share of finger-pointing.
Look no further than European company darling Hopin to see the start of the blame game. Once valued at $7.8 billion, the virtual events platform has seen demand for its stock at almost every price point evaporate and has had to make major layoffs as in-person events return to power. fashion.
Is the CEO responsible for not building a more sustainable company? Yes. In the end, it’s your job in the top chair. Is it After responsible for this failure because he took more than $200 million in secondaries – selling part of his stake in the company – to hungry investors during the rally? Absolutely not.
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He didn’t force anyone to buy those shares. He didn’t force anyone to invest in the company at such a high valuation – investors could have said no. But many decided to participate because they were trapped in a self-imposed prisoner’s dilemma fueled by FOMO.
It is an investor’s responsibility to capitalize a business, build its position and manage that position. How you do this is your responsibility and yours, both when things are going well and when things are going badly.
The era of “growth at all costs” is over
This public rollout might be one of the first for this generation of tech founders, but it certainly won’t be the last.
Over the past 24 months, many investors have pushed a “grow at all costs” agenda on corporate boards around the world. This made sense when money was cheap and every 50% increase added to your growth rate resulted in 15 more spins for your valuation multiple.
I’ll be the first to admit it: I was part of it. “The best way to increase your streak is to start acting like you already have” was a strategy I put together like gospel.
Increase burn. Acquire customers. To hell with CAC/LTV (a measure of a customer’s lifetime value versus the cost of acquiring that customer): overall growth was king.
“Companies elevated to higher multiples fueled by biblical levels of cash burn”
Many investors drank from the same well and forgot that these times would not and could not last forever. LP expectations rose, prices rose, and suddenly everyone needed every company to get to the moon as quickly as possible.
Many have forgotten that the best way to raise an A-series is to build a great product, have adoring customers, and tell a great story.
As the rounds progressed, it seemed irresponsible not to take money at higher and higher valuations. Companies rose to higher multiples fueled by biblical levels of cash burn. Fund managers rejoiced in paper gains, selling them to LPs like cash in the bank, and even continuing to keep those paper gains in public markets to extract every last drop of carry.
Hear the words of investors at the start of revaluations. Another golden child of VCInstacart, recently repriced $39 billion to $24 billion because they could not justify to new employees their stock-based compensation at this level. There’s a cost to all those earlier decisions when the music starts to slow down.
It’s easy to blame the founders, but don’t forget where they got the money
So, as these flat rides, price reviews, and layoffs start to get announced, we’ll see more stories like Instacart, Fast, and Hopin. Stories where the founders could have their fair share of responsibility.
But we all build idols only to bring them down. Transferring our guilt to their failures.
Of course, there are founders who have done crazy things. But where did they find the capital to do this? When the blame games start, watch who throws the first rocks. There’s a little blood on everyone’s hands.
“Of course, there are founders who have done crazy things. But where did they find the capital to do this?
This will also happen on the fund side – you just won’t see it as publicly. But over the past 10 years, you could count on one hand the number of GPs fired for poor performance and bad decisions. Expect this number to increase if things get worse.
Ultimately, these moments should remind us that being a founder is not easy. It’s also not easy to generate consistently excellent returns on investment over a long-term horizon. When these things “seem” easy, that’s when something in the air is wrong.
Finn Murphy is a partner at Frontline Ventures.