4 ms·

As long as I keep hearing the BS line from VC's and similar communities that "we're investing in the TEAM, not the Product or idea," we will continue seeing WeW

As long as I keep hearing the BS line from VC's and similar communities that "we're investing in the TEAM, not the Product or idea," we will continue seeing WeWorks / Theranos(es) of the world, with little to learn. Rather than doing the fundamental analysis, investing without emotions, etc. - the market will keep rewarding "charismatic" and well-connected individuals with shitty-ideas and/or no business sense. It's easy to scapegoat Adam Neumann or Elizabeth Holmes, and say they were sociopathic liars or the like - but these cases read like a market inefficiency in venture capital, rather than one-offs.

mdoms 6y ago
I think you need to do some reading about Theranos because it wasn't a matter of investing in a charismatic leader. There was outright fraud.
- dralley 6y ago
  There was outright fraud, however, all the warnings were there, and they were ignored partially because of her charisma and the gravitas of the board she assembled. Walgreens straight up fired the investigator who was telling them it was hot air.
  - whatshisface 6y ago
    One of these days, people will realize that the only thing that you can do with gravitas that you can't do without it is sell a bad idea. When that happens, gravitas will cease to exist. Maybe in a couple millennia.
- 908B64B197 6y ago
  That's not new. Anyone remembers Nortel? Enron?
EGreg 6y ago
The BS line is just one part of it The VC and to some extent the Private Equity industry can subsidize money hemmoraging business models and fuel massive growth of bad unit economics until they dump them on the public. Uber and WeWork are just two high profile examples. In fact, then openly admit they stay away from sustainable and profitable businesses in favor of massive subsidized “traction”. That’s the loophole - same as colleges can jack up prices on liberal arts degrees and then student loans get bought by Freddie and Fannie.
- xyzzyz 6y ago
  > Uber and WeWork are just two high profile examples. Uber does not have bad unit economics in its core rides business. It makes profit on rides, and it loses it on trying to expand into food delivery. You can easily see it if you just look at their financial reports.
  - teachrdan 6y ago
    Obligatory "Not an accountant but": My understanding is that Uber assigns significant costs related to ride share to R&D, etc., to make it look like their rides business is profitable. Certainly some segment of their core business is profitable. But at the end of the day, if all they have is a glorified cab company that is profitable in a few big cities and loses money everywhere else, that's not a story that sounds good to investors.
    - xyzzyz 6y ago
      I doubt that: I think that would be serious securities fraud.
      - teachrdan 6y ago
        Not if they disclose their theory for why the salaries of those engineers should be going to general R&D rather than rideshare.
        hulahoof 6y ago
        Is implication here that they are logging rideshare hours as self driving training data?
goatinaboat 6y ago
It's easy to scapegoat Adam Neumann or Elizabeth Holmes, and say they were sociopathic liars or the like - but these cases read like a market inefficiency in venture capital, rather than one-offs. You misunderstood the business model here. The plan was to dump it on retail investors, cashing out and leaving them holding the bag. It was just a longer “pump” phase than usual. The sociopaths here are SoftBank.
- CalChris 6y ago
  The plan was to dump it on retail investors which Benchmark managed to do. https://news.crunchbase.com/news/report-adam-neumann-benchmark-unloaded-676-5m-in-wework-shares-before-failed-ipo/ https://news.crunchbase.com/news/report-adam-neumann-benchma...
yowlingcat 6y ago
I hear this critique a lot and I used to believe it more but now I think it's just too facile. It's true that VCs have a lot of room for improvement in essentially doing fraud detection. They do a disservice to their LPs and probably to society at large as a result of this. In fact, that's probably where the misaligned incentive emerges -- VCs have a strong incentive to play the greater fool game and ostensibly were doing that with WeWork before they got their hands caught in the cookie jar. Having said that, the idea that the solution is fundamental analysis, investing without emotions, or what have you -- that all strikes me as a bit naive and without much evidence. The market is a Keynesian beauty contest first which serves the needs of humans, hence the existence of Veblen goods et al. It also strikes me as a bit naive that there's anything wrong with "charismatic" and "well-connected individuals" being in positions of leadership. Recruiting is the most highly leveraged thing early stage company leaders can do and is the flip side of fundraising -- so it only makes sense to have firm's leader excel at that. I think we can critique Neumann and Holmes for being unethical fraudsters who deliberately misled their stakeholders without making a categorical error about corporate executives. I won't say that they're the exception and not the rule, but I will say they're not really the goal to aspire to.
bhupy 6y ago
> these cases read like a market inefficiency in venture capital, rather than one-offs. Considering that venture returns have historically out-performed public markets[1], they're probably just that: one-offs. I think there's an argument to be made that Fed QE policies and junk bond bailouts have perhaps over-incentivized risky investments, but in aggregate venture capital has been "efficient" in the economical sense. Consider that the total investment into Theranos and WeWork are a rounding error as far as the total pie is concerned. [1] https://cdn2.hubspot.net/hubfs/3925488/_Source%20of%20Truth%20Mirrored%20Folder/04%20White%20Papers/Venture%20Returns%20Outperform%20Public%20Markets-AVG.pdf https://cdn2.hubspot.net/hubfs/3925488/_Source%20of%20Truth%...
deleted 6y ago
[deleted]
ryanSrich 6y ago
> the market will keep rewarding "charismatic" and well-connected individuals with shitty-ideas and/or no business sense. VCs need to make money first and foremost. I doubt they care about one Theranos out of every 1000 or even 100 companies they invest in (I refuse to compare Theranos and WeWork). The idea that you invest in the team appears to be a winning strategy considering historical returns. So the question is, why would they change this?
- sgt101 6y ago
  Well, if you get a room full of people to flip coins they come up heads for someone for quite a while. Winning strategies can be an illusion, the smart money knows when to recognize luck.
indymike 6y ago
You are right. Investors, including VCs should look for an intersection of team, product and timing. A world changing product will not change the world without a team that can execute (part of executing is marketing and selling). A great team will fail without a product. And even the best team, and the perfect product can fail if the timing is too early or late. Business is hard.

mdoms 6y ago

I think you need to do some reading about Theranos because it wasn't a matter of investing in a charismatic leader. There was outright fraud.

dralley 6y ago
There was outright fraud, however, all the warnings were there, and they were ignored partially because of her charisma and the gravitas of the board she assembled. Walgreens straight up fired the investigator who was telling them it was hot air.
- whatshisface 6y ago
  One of these days, people will realize that the only thing that you can do with gravitas that you can't do without it is sell a bad idea. When that happens, gravitas will cease to exist. Maybe in a couple millennia.
908B64B197 6y ago
That's not new. Anyone remembers Nortel? Enron?

EGreg 6y ago

The BS line is just one part of it The VC and to some extent the Private Equity industry can subsidize money hemmoraging business models and fuel massive growth of bad unit economics until they dump them on the public. Uber and WeWork are just two high profile examples. In fact, then openly admit they stay away from sustainable and profitable businesses in favor of massive subsidized “traction”. That’s the loophole - same as colleges can jack up prices on liberal arts degrees and then student loans get bought by Freddie and Fannie.

xyzzyz 6y ago
> Uber and WeWork are just two high profile examples. Uber does not have bad unit economics in its core rides business. It makes profit on rides, and it loses it on trying to expand into food delivery. You can easily see it if you just look at their financial reports.
- teachrdan 6y ago
  Obligatory "Not an accountant but": My understanding is that Uber assigns significant costs related to ride share to R&D, etc., to make it look like their rides business is profitable. Certainly some segment of their core business is profitable. But at the end of the day, if all they have is a glorified cab company that is profitable in a few big cities and loses money everywhere else, that's not a story that sounds good to investors.
  - xyzzyz 6y ago
    I doubt that: I think that would be serious securities fraud.
    - teachrdan 6y ago
      Not if they disclose their theory for why the salaries of those engineers should be going to general R&D rather than rideshare.
      - hulahoof 6y ago
        Is implication here that they are logging rideshare hours as self driving training data?

goatinaboat 6y ago

It's easy to scapegoat Adam Neumann or Elizabeth Holmes, and say they were sociopathic liars or the like - but these cases read like a market inefficiency in venture capital, rather than one-offs. You misunderstood the business model here. The plan was to dump it on retail investors, cashing out and leaving them holding the bag. It was just a longer “pump” phase than usual. The sociopaths here are SoftBank.

CalChris 6y ago
The plan was to dump it on retail investors which Benchmark managed to do. https://news.crunchbase.com/news/report-adam-neumann-benchmark-unloaded-676-5m-in-wework-shares-before-failed-ipo/ https://news.crunchbase.com/news/report-adam-neumann-benchma...

yowlingcat 6y ago

I hear this critique a lot and I used to believe it more but now I think it's just too facile. It's true that VCs have a lot of room for improvement in essentially doing fraud detection. They do a disservice to their LPs and probably to society at large as a result of this. In fact, that's probably where the misaligned incentive emerges -- VCs have a strong incentive to play the greater fool game and ostensibly were doing that with WeWork before they got their hands caught in the cookie jar. Having said that, the idea that the solution is fundamental analysis, investing without emotions, or what have you -- that all strikes me as a bit naive and without much evidence. The market is a Keynesian beauty contest first which serves the needs of humans, hence the existence of Veblen goods et al. It also strikes me as a bit naive that there's anything wrong with "charismatic" and "well-connected individuals" being in positions of leadership. Recruiting is the most highly leveraged thing early stage company leaders can do and is the flip side of fundraising -- so it only makes sense to have firm's leader excel at that. I think we can critique Neumann and Holmes for being unethical fraudsters who deliberately misled their stakeholders without making a categorical error about corporate executives. I won't say that they're the exception and not the rule, but I will say they're not really the goal to aspire to.

bhupy 6y ago

> these cases read like a market inefficiency in venture capital, rather than one-offs. Considering that venture returns have historically out-performed public markets[1], they're probably just that: one-offs. I think there's an argument to be made that Fed QE policies and junk bond bailouts have perhaps over-incentivized risky investments, but in aggregate venture capital has been "efficient" in the economical sense. Consider that the total investment into Theranos and WeWork are a rounding error as far as the total pie is concerned. [1] https://cdn2.hubspot.net/hubfs/3925488/_Source%20of%20Truth%20Mirrored%20Folder/04%20White%20Papers/Venture%20Returns%20Outperform%20Public%20Markets-AVG.pdf https://cdn2.hubspot.net/hubfs/3925488/_Source%20of%20Truth%...

deleted 6y ago

[deleted]

ryanSrich 6y ago

> the market will keep rewarding "charismatic" and well-connected individuals with shitty-ideas and/or no business sense. VCs need to make money first and foremost. I doubt they care about one Theranos out of every 1000 or even 100 companies they invest in (I refuse to compare Theranos and WeWork). The idea that you invest in the team appears to be a winning strategy considering historical returns. So the question is, why would they change this?

sgt101 6y ago
Well, if you get a room full of people to flip coins they come up heads for someone for quite a while. Winning strategies can be an illusion, the smart money knows when to recognize luck.

indymike 6y ago

You are right. Investors, including VCs should look for an intersection of team, product and timing. A world changing product will not change the world without a team that can execute (part of executing is marketing and selling). A great team will fail without a product. And even the best team, and the perfect product can fail if the timing is too early or late. Business is hard.