8 ms·

Institutionalized Belief in the Greater Fool

85 points by Palmik 3y ago

archo 3y ago
Reff: "Startups Are Dying, and Venture Investors Aren’t Saving Them." : https://archive.is/p76li https://archive.is/p76li
nikanj 3y ago
Where do the startups burn all that cash? The first one mentioned burned $20 million without even finding a product-market fit, the second one burned a BILLION in a year. A decent programmer costs you maybe $250/y in wages, tools, office rent etc. Not counting equity grants as those don’t affect cashflow. $20 million gets you some 80 man-years of solid senior-level programming. Where does all of that effort go? Just endless rewrites in different microservice frameworks? Or is the money burned on something else? Google ads? AWS bills?
- anovikov 3y ago
  Usually it's simply siphoned away. Sometimes by investors themselves in "advisory fees".
  - ignoramous 3y ago
    In that case, the greater fools are LPs?
    - anovikov 3y ago
      Absolutely! LPs are the greatest fools ever! If stuff got to the IPO, it is usually not a complete bullshit. Very occasionally it is, but that's an exception, and someone who puts a big chunk of their nest egg into a single public stock can only blame themselves anyway. If stuff got acquired, usually the acquiring company more or less knows what they are doing too. But LPs are the royal bagholders indeed.
- AndrewKemendo 3y ago
  Advertising, Hiring and Rent Assuming you have some saas product with a bit of traction, you raise $100M. Why raise 100M? So you can DOMINATE growth within your vertical by hiring everyone away from their existing jobs, creating FOMO with marketing and then being acquired or doing some pump and dump like a SPAC - or maybe you can buy enough growth with other people's money to convince a friend of your Father (who is a banker) to underwrite your IPO cause your financials are slightly better than some shitcoin scam. You can get to $1M/mo pretty easily if you get a fancy workplace with all the perks, hire 20-30 people for 250k+ each and spend $100-200k a month on ads and rent. Remember, the whole goal of Venture and PE is to create a vehicle to dump a stock onto the public stock market at the highest delta between the IPO open price and their per-share common stock purchase price. That's it. Doesn't matter what you make or why, or if it's fully legal, or good or bad or whatever - makes literally no difference as long as you can convince a banker that they will make 10-1000X on that specific transaction as soon as possible.
- kmeisthax 3y ago
  Predatory pricing. The startup business model is to lock customers and suppliers into one another through your platform and then boil the frog with price increases and cost reductions. If you don't successfully lock people in you fail. If you do, you have a nearly unbreakable monopoly and your investors can suck money out of the business basically forever. Amazon, Google, and Apple are probably the most successful examples of this.
  - nikanj 3y ago
    Which Apple product had this predatory pricing?
chiefalchemist 3y ago
Put $X in. Wrap it in some emotionally-driven frenzy. Get some fraction of $X out. This pattern feels closer to a Ponzi scheme than investing. That said, it's hardly exclusive to VC. Some certainly win from such scenarios. It would be interesting to know who they are.
Taek 3y ago
We educate our children to participate in greater fool games. Go to college, regardless of tuition. Put your money in the stock market, regardless of its health and structure. Buy bonds, regardless of the interest rate. Own a house, regardless of market conditions. --- Most people don't think critically about their money, which makes them easy prey for greater-fool games built on top of institions they were educated to trust.
- anovikov 3y ago
  Wait wait what's wrong about stock market? At least as long as we buy in gradually (from spare cash we have) over a time that's longer than a business cycle, ideally longer than 2 business cycles (which is the case with any normal retirement planning)? Also, no one suggests buying bonds for the sake of it. It makes no sense and never did. Bonds are little but a balancing component for stocks.
  - XorNot 3y ago
    Moreover they're a safer vehicle as you approach retirement when your liquidity preference has a due date (the market might recover but you probably don't want to or can't delay 4 years waiting for it).
  - fullshark 3y ago
    There was a lot of investment advice to buy bonds even when interest rates were zero as this "balancing component" as you say. That was pretty much "buy bonds for the sake of it." One reason is because it decreases volatility and most people freak out when their nest egg loses 40% of its value in a market downturn, but I do think a lot of it was just laziness and carrying over advice from before the zero interest rate days.
    - zeroCalories 3y ago
      I think you're mixing up suggestions to buy bonds with the suggestions to buy US treasuries. There are plenty of other bonds that are safe and provide steady returns.
zeroCalories 3y ago
This seems like another variant on "tech is a bubble/ponzi scheme", but founders and VCs are evil because they know and are taking advantage of poor investors! Honestly I find it hard to care when bozos invest in a meme asset without understanding what they bought. I feel like Thiel's point about stagnation is fundamental to this problems. A lot of these startups aren't providing real value, they are repackaging existing value with an undeserved markup. They can get away with it because there really isn't a lot of innovation anymore.
JW_00000 3y ago
The article is talking about VC in tech specifically, but I wonder how much applies to the stock market as a whole. The US was in a bull market from 2009 to (start of) 2020, so many "young" investors never experienced a recession until 2020.
Michelangelo11 3y ago
> How can investors believe a company that went from $20M to $100M ARR in 8 months could eventually get to $2.3B in revenue? They probably didn't! They just had to believe that someone ELSE could believe that something like that was possible. This is literally an academic representation of "passing the bag." Right, and not just that -- by buying those shares at that price, they played a big part in fooling others into thinking it was possible. Anyway, great article. I think it describes exactly how the economy functioned until very recently.
xracy 3y ago
I did a business plan competition at one point in College. And I didn't do well, and I realized later the reason I lost, was I was focusing too much on the product, and not enough on the business plan. The group that won third place beat us out by... not building a product that anyone could use (Their proposal was a DJ jukebox app for going to the club. Where you could pay money to have a chance to hear the song you want played at the club). I will eat my shorts if anyone has actually coded any part of that app since the competition (2016). But it didn't matter cause 3rd place walked away with like $5k, and that was the point of the competition.
- MarcoZavala 3y ago
  [dead]
- deleted 3y ago
  [deleted]
- blackbear_ 3y ago
  The idea is that the product itself will be judged by the market. A business plan is something that you present to investors (and the jury) to show them how you are going to reach that market in the first place. Investors only want to make a return on their investment, and thus do not really care what the product is, as long as they are convinced that there is a market of appropriate size and that you can reach that market.
  - slowmovintarget 3y ago
    > Investors only want to make a return on their investment, and thus do not really care what the product is... Here, in a nutshell, is the entire problem of misaligned incentives in modern business. The product becomes the the shares of stock. Larian's success with Baldur's Gate 3 is because they obsessed about the product and their customer. Apple's success is because Steve Jobs obsessed about the product and the customer (despite being publicly traded) and Apple continues to do so. So many other companies are all about maximizing short-term extraction of shareholder value. They're not about the product or the customer anymore. This breaks the market mechanism, so few arguments of how the market will generate winners or fix the problem still make sense. The market is Wall Street, the stock market, not the market where customers buy goods. How do we incentivize good product and customer service in a VC / activist investor / private equity world?
vxxzy 3y ago
Sounds like we each got our very own built-in FPGA!
air7 3y ago
Everything looks so simple clear and obvious in hind-sight... It's very easy to forget that things could have happened differently: COVID hysteria could have been around for many years, crypto currencies could have become a major player in the world's economics, the Germans could have won... One way to appreciate this fact is to try and predict the near future. Which of the current "hot" trends will fizzle out into (rightful) nothingness, and which will change the world? Area such as A(g)I, Quantum Computing, Self driving Cars, VR/AR/metaverse, Nuclear Fisson, Carbon Capture, etc etc. And what percentage of your portfolio are you willing to bet on it?
- paulpauper 3y ago
  crypto currencies could have become a major player in the world's economics unlike covid hysteria, which was/is a real thing, this had no chance of ever happening . crypto is mostly just a tool for gambling still, always was
  - aCoreyJ 3y ago
    This is backwards to me. Pandemics literally can't go on forever, a vaccine was in sight pretty early on. It was actually worse than it had to be and lasted longer than if people had behaved in rational ways.
momirlan 3y ago
it's interesting how "capital destruction" works the same in our private lives. we work hard to earn $$, then spend them on on useless "things". looking back, i wish i had those millions i spent in my life.
paulpauper 3y ago
this article overlooks or ignores that despite these huge outliers, that if anything, funding has shrunk on a median per-company basis compared to 20-30 years ago. ycombinator funding for example is so small. good luck starting a tech company with only half a million dollars when advertising and salaries are so expensive and apps are so hard to and expensive to code and bring to market. An app is way harder to code compared to an html website in 1994. online ad costs have surged in terms of CPM and CPC over past 14 years , hence lots of $ needed for promotion. if anything, there is not enough funding to keep up with inflation, salaries, complexity, and promotional costs.
- kwharrison13 3y ago
  Hey! Author of the article here. If you've seen good data on the funding per company shrinking, I'd love to see it. That wouldn't have been my intuition but I haven't studied it. In terms of cost of starting a business, I think things like AWS, Stripe, Vercel, etc. have made the cost of starting a business much cheaper vs. when you were racking your own servers. I've seen lots of data indicating that the cost to START a business has gone down dramatically. But maybe you're right that the overall cost to build a business has gone up (salaries, etc.) But my guess would be, adjusted for inflation, companies are raising more money because marketing is more expensive (your point on CPM) and the overall landscape is noisier, more competitive. But that would lead me to believe that has driven companies to raise MORE capital rather than less.
thatcherthorn 3y ago
> Venture capital enables the perpetuation of unsustainable models in favor of eventual scale. This isn’t necessarily a bad thing. The runway to experiment has been critical for any number of businesses. But any good thing taken to excess can become problematic. The same is true with capital
nologic01 3y ago
An interesting question is whether technology can ever change the greater fool calculus. Collective behaviors of this type are building on top of information flows (actually the lack thereof) and, at least in principle, digital technologies can enable radically different information landscapes. This applies far beyond tech VC, which is a niche within a niche: The capital markets architecture and the financing of commercial activity is predicated on information disclosures that became common practice between ~1500-1600 AD and haven't changed much since. While information technology will never tell the future, it can certainly change the distribution of who knows what and when about the past and present.
ultrasaurus 3y ago
All startups are leveraged bets on a trend line -- one goal being you see the trend line better and sooner than anyone else. Sometime the fundamentals don't make sense (I don't understand how WeWork planned on software style profits or any significant moat around them) and often you get out executed, but getting the timing wrong is a real threat too: - Self driving cars could come too late to save Uber - Some companies have too high a burn rate for this interest environment -- but some cautious companies went under because their competitor out-raised & out spent them - Lots of Dotcom bubble companies failed, only to have similar business models work in 2023 (Pets.com/Chewy, Streaming audio, even Cuecat style QR codes are everywhere) In 2020 many people thought a vaccine was 5+ years away (wrong) and Covid was a permanent shift in how we worked (partially true!) and interest rates will have to be low for years because of the impending recession. If that's your worldview, what would you invest in to hedge that risk?
archo 3y ago
Greater Fool Theory : https://en.wikipedia.org/wiki/Greater_fool_theory https://en.wikipedia.org/wiki/Greater_fool_theory

85 points by Palmik 3y ago

Reff: "Startups Are Dying, and Venture Investors Aren’t Saving Them." : https://archive.is/p76li https://archive.is/p76li

nikanj 3y ago

Where do the startups burn all that cash? The first one mentioned burned $20 million without even finding a product-market fit, the second one burned a BILLION in a year. A decent programmer costs you maybe $250/y in wages, tools, office rent etc. Not counting equity grants as those don’t affect cashflow. $20 million gets you some 80 man-years of solid senior-level programming. Where does all of that effort go? Just endless rewrites in different microservice frameworks? Or is the money burned on something else? Google ads? AWS bills?

anovikov 3y ago
Usually it's simply siphoned away. Sometimes by investors themselves in "advisory fees".
- ignoramous 3y ago
  In that case, the greater fools are LPs?
  - anovikov 3y ago
    Absolutely! LPs are the greatest fools ever! If stuff got to the IPO, it is usually not a complete bullshit. Very occasionally it is, but that's an exception, and someone who puts a big chunk of their nest egg into a single public stock can only blame themselves anyway. If stuff got acquired, usually the acquiring company more or less knows what they are doing too. But LPs are the royal bagholders indeed.
AndrewKemendo 3y ago
Advertising, Hiring and Rent Assuming you have some saas product with a bit of traction, you raise $100M. Why raise 100M? So you can DOMINATE growth within your vertical by hiring everyone away from their existing jobs, creating FOMO with marketing and then being acquired or doing some pump and dump like a SPAC - or maybe you can buy enough growth with other people's money to convince a friend of your Father (who is a banker) to underwrite your IPO cause your financials are slightly better than some shitcoin scam. You can get to $1M/mo pretty easily if you get a fancy workplace with all the perks, hire 20-30 people for 250k+ each and spend $100-200k a month on ads and rent. Remember, the whole goal of Venture and PE is to create a vehicle to dump a stock onto the public stock market at the highest delta between the IPO open price and their per-share common stock purchase price. That's it. Doesn't matter what you make or why, or if it's fully legal, or good or bad or whatever - makes literally no difference as long as you can convince a banker that they will make 10-1000X on that specific transaction as soon as possible.
kmeisthax 3y ago
Predatory pricing. The startup business model is to lock customers and suppliers into one another through your platform and then boil the frog with price increases and cost reductions. If you don't successfully lock people in you fail. If you do, you have a nearly unbreakable monopoly and your investors can suck money out of the business basically forever. Amazon, Google, and Apple are probably the most successful examples of this.
- nikanj 3y ago
  Which Apple product had this predatory pricing?

chiefalchemist 3y ago

Put $X in. Wrap it in some emotionally-driven frenzy. Get some fraction of $X out. This pattern feels closer to a Ponzi scheme than investing. That said, it's hardly exclusive to VC. Some certainly win from such scenarios. It would be interesting to know who they are.

Taek 3y ago

We educate our children to participate in greater fool games. Go to college, regardless of tuition. Put your money in the stock market, regardless of its health and structure. Buy bonds, regardless of the interest rate. Own a house, regardless of market conditions. --- Most people don't think critically about their money, which makes them easy prey for greater-fool games built on top of institions they were educated to trust.

anovikov 3y ago
Wait wait what's wrong about stock market? At least as long as we buy in gradually (from spare cash we have) over a time that's longer than a business cycle, ideally longer than 2 business cycles (which is the case with any normal retirement planning)? Also, no one suggests buying bonds for the sake of it. It makes no sense and never did. Bonds are little but a balancing component for stocks.
- XorNot 3y ago
  Moreover they're a safer vehicle as you approach retirement when your liquidity preference has a due date (the market might recover but you probably don't want to or can't delay 4 years waiting for it).
- fullshark 3y ago
  There was a lot of investment advice to buy bonds even when interest rates were zero as this "balancing component" as you say. That was pretty much "buy bonds for the sake of it." One reason is because it decreases volatility and most people freak out when their nest egg loses 40% of its value in a market downturn, but I do think a lot of it was just laziness and carrying over advice from before the zero interest rate days.
  - zeroCalories 3y ago
    I think you're mixing up suggestions to buy bonds with the suggestions to buy US treasuries. There are plenty of other bonds that are safe and provide steady returns.

zeroCalories 3y ago

This seems like another variant on "tech is a bubble/ponzi scheme", but founders and VCs are evil because they know and are taking advantage of poor investors! Honestly I find it hard to care when bozos invest in a meme asset without understanding what they bought. I feel like Thiel's point about stagnation is fundamental to this problems. A lot of these startups aren't providing real value, they are repackaging existing value with an undeserved markup. They can get away with it because there really isn't a lot of innovation anymore.

JW_00000 3y ago

The article is talking about VC in tech specifically, but I wonder how much applies to the stock market as a whole. The US was in a bull market from 2009 to (start of) 2020, so many "young" investors never experienced a recession until 2020.

Michelangelo11 3y ago

> How can investors believe a company that went from $20M to $100M ARR in 8 months could eventually get to $2.3B in revenue? They probably didn't! They just had to believe that someone ELSE could believe that something like that was possible. This is literally an academic representation of "passing the bag." Right, and not just that -- by buying those shares at that price, they played a big part in fooling others into thinking it was possible. Anyway, great article. I think it describes exactly how the economy functioned until very recently.

xracy 3y ago

I did a business plan competition at one point in College. And I didn't do well, and I realized later the reason I lost, was I was focusing too much on the product, and not enough on the business plan. The group that won third place beat us out by... not building a product that anyone could use (Their proposal was a DJ jukebox app for going to the club. Where you could pay money to have a chance to hear the song you want played at the club). I will eat my shorts if anyone has actually coded any part of that app since the competition (2016). But it didn't matter cause 3rd place walked away with like $5k, and that was the point of the competition.

MarcoZavala 3y ago
[dead]
deleted 3y ago
[deleted]
blackbear_ 3y ago
The idea is that the product itself will be judged by the market. A business plan is something that you present to investors (and the jury) to show them how you are going to reach that market in the first place. Investors only want to make a return on their investment, and thus do not really care what the product is, as long as they are convinced that there is a market of appropriate size and that you can reach that market.
- slowmovintarget 3y ago
  > Investors only want to make a return on their investment, and thus do not really care what the product is... Here, in a nutshell, is the entire problem of misaligned incentives in modern business. The product becomes the the shares of stock. Larian's success with Baldur's Gate 3 is because they obsessed about the product and their customer. Apple's success is because Steve Jobs obsessed about the product and the customer (despite being publicly traded) and Apple continues to do so. So many other companies are all about maximizing short-term extraction of shareholder value. They're not about the product or the customer anymore. This breaks the market mechanism, so few arguments of how the market will generate winners or fix the problem still make sense. The market is Wall Street, the stock market, not the market where customers buy goods. How do we incentivize good product and customer service in a VC / activist investor / private equity world?

vxxzy 3y ago

Sounds like we each got our very own built-in FPGA!

air7 3y ago

Everything looks so simple clear and obvious in hind-sight... It's very easy to forget that things could have happened differently: COVID hysteria could have been around for many years, crypto currencies could have become a major player in the world's economics, the Germans could have won... One way to appreciate this fact is to try and predict the near future. Which of the current "hot" trends will fizzle out into (rightful) nothingness, and which will change the world? Area such as A(g)I, Quantum Computing, Self driving Cars, VR/AR/metaverse, Nuclear Fisson, Carbon Capture, etc etc. And what percentage of your portfolio are you willing to bet on it?

paulpauper 3y ago
crypto currencies could have become a major player in the world's economics unlike covid hysteria, which was/is a real thing, this had no chance of ever happening . crypto is mostly just a tool for gambling still, always was
- aCoreyJ 3y ago
  This is backwards to me. Pandemics literally can't go on forever, a vaccine was in sight pretty early on. It was actually worse than it had to be and lasted longer than if people had behaved in rational ways.

momirlan 3y ago

it's interesting how "capital destruction" works the same in our private lives. we work hard to earn $$, then spend them on on useless "things". looking back, i wish i had those millions i spent in my life.

paulpauper 3y ago

this article overlooks or ignores that despite these huge outliers, that if anything, funding has shrunk on a median per-company basis compared to 20-30 years ago. ycombinator funding for example is so small. good luck starting a tech company with only half a million dollars when advertising and salaries are so expensive and apps are so hard to and expensive to code and bring to market. An app is way harder to code compared to an html website in 1994. online ad costs have surged in terms of CPM and CPC over past 14 years , hence lots of $ needed for promotion. if anything, there is not enough funding to keep up with inflation, salaries, complexity, and promotional costs.

kwharrison13 3y ago
Hey! Author of the article here. If you've seen good data on the funding per company shrinking, I'd love to see it. That wouldn't have been my intuition but I haven't studied it. In terms of cost of starting a business, I think things like AWS, Stripe, Vercel, etc. have made the cost of starting a business much cheaper vs. when you were racking your own servers. I've seen lots of data indicating that the cost to START a business has gone down dramatically. But maybe you're right that the overall cost to build a business has gone up (salaries, etc.) But my guess would be, adjusted for inflation, companies are raising more money because marketing is more expensive (your point on CPM) and the overall landscape is noisier, more competitive. But that would lead me to believe that has driven companies to raise MORE capital rather than less.

thatcherthorn 3y ago

> Venture capital enables the perpetuation of unsustainable models in favor of eventual scale. This isn’t necessarily a bad thing. The runway to experiment has been critical for any number of businesses. But any good thing taken to excess can become problematic. The same is true with capital

nologic01 3y ago

An interesting question is whether technology can ever change the greater fool calculus. Collective behaviors of this type are building on top of information flows (actually the lack thereof) and, at least in principle, digital technologies can enable radically different information landscapes. This applies far beyond tech VC, which is a niche within a niche: The capital markets architecture and the financing of commercial activity is predicated on information disclosures that became common practice between ~1500-1600 AD and haven't changed much since. While information technology will never tell the future, it can certainly change the distribution of who knows what and when about the past and present.

ultrasaurus 3y ago

All startups are leveraged bets on a trend line -- one goal being you see the trend line better and sooner than anyone else. Sometime the fundamentals don't make sense (I don't understand how WeWork planned on software style profits or any significant moat around them) and often you get out executed, but getting the timing wrong is a real threat too: - Self driving cars could come too late to save Uber - Some companies have too high a burn rate for this interest environment -- but some cautious companies went under because their competitor out-raised & out spent them - Lots of Dotcom bubble companies failed, only to have similar business models work in 2023 (Pets.com/Chewy, Streaming audio, even Cuecat style QR codes are everywhere) In 2020 many people thought a vaccine was 5+ years away (wrong) and Covid was a permanent shift in how we worked (partially true!) and interest rates will have to be low for years because of the impending recession. If that's your worldview, what would you invest in to hedge that risk?

archo 3y ago

Greater Fool Theory : https://en.wikipedia.org/wiki/Greater_fool_theory https://en.wikipedia.org/wiki/Greater_fool_theory