But even with the half-trillion in so-called “exit value,” whispers of concern creep up in conversations with venture capitalists and entrepreneurs alike. “It’s insanity out there,” said Emily Best, the founder and CEO of Seed&Spark, a film-focused crowdfunding platform. The giant pot of funds and growing number of hedge funds, angel investors, and other power players has led to a situation unique to the upper tranches of society: a competition to give away money.“People have to make quicker decisions. They have to do less diligence. They have to pay more.”
It’s hard to say with much certainty exactly who is right. Private companies need to disclose much less information about their businesses than their publicly owned competition. For a long time, that didn’t matter much. Only a restricted class of rich people could invest in private companies, and private companies were mostly scrappy startups. But there are subtle signs a shift could be occurring: With seemingly limitless funding, private companies are reaching unprecedented sizes while remaining much more secretive, and there is growing political and social momentum to push more everyday investors into the venture madness. The question is whether the broader economy will greatly benefit from entering the mania, or greatly regret it.Are you a venture capitalist, entrepreneur, or startup employee with information for the reporter of this article? Using a non-work phone or computer, you can contact Maxwell Strachan securely on Signal at 310-614-3752 or email maxwell.strachan@vice.com.
The giant pile of money
Many colleges and universities have upped their stake in the venture space too, often to great financial benefit. The Yale endowment’s head of venture was even recently promoted to chief investment officer.“Everybody's being forced on the risk spectrum. 70-year-old people are doing venture capital.”
‘SpaceX has now replaced what NASA used to be’
“It's really good to be a private company. The public only gets to see what they want them to see. So they can hide failures. You can't do that when you're a public company.”
‘Founders are just setting their own valuations’
Even that might be slow. TX Zhou, a partner at Los Angeles–based Fika Ventures, has heard of funds needing to decide after a half-hour call with a founder. Rotman recently was given two hours to decide whether his fund wanted to invest in a round. It can feel like the investor equivalent of buying a home in an uber-hot housing market—uncomfortable and ripe for future buyer’s remorse.“I'm expected to make an investment in a business without even knowing who the co-founders are.”
Coming from the venture capital side, he realized just how much leverage he had early on. “Because there's so much competition from VCs to fund these startups, you have to move quicker to get in the round. And moving quicker means making decisions faster with less information,” Patel said. To survive, venture capitalists are learning to do more with less. “Perfect-match courtships” have been replaced by a “speed dating” version of what came before, Rotman has said. “Speed, quantity over quality, and FOMO are accelerating.” The dynamic can make it sound like these are gamblers plunking down bets at an Atlantic City craps table, but many venture capitalists insist they’re still figuring out a way to make informed decisions, doing as much research as possible ahead of meetings. Roseanne Wincek, the co-founder and managing director of Renegade Partners, said she has tried to learn to be more “ruthless” with herself, figuring out what information she needs to uncover and then quickly making a decision once she’s gotten it, echoing a sentiment shared by venture capitalists who spoke to me. Some, though, are more pessimistic. “There's no way you can do the same amount of diligence,” said Zuberi. The Wall Street Journal has reported some venture firms are completing fewer audits and “taking a startup’s word on profit and loss.” Rotman recently realized that an investor in one of his portfolio companies was still “working through primary diligence” as a round closed, he said.“Anything that is remotely working has many options, really high valuations. People are losing deals left and right.”
More WeWorks ahead
“And I'll be damned if I read last week that he had raised $55 million,” Smith told me when we spoke. “He's got to think I'm the absolute dumbest guy in the world.” After WeWork’s fall from grace in 2019, some people expected to hear a pop. “Stuff like that is usually the end of a cycle,” Lindzon said. Instead, some founders have instead adopted something that looks like WeWork co-founder Adam Neumann’s playbook. Rotman has said he’s seen “an acceleration of ‘Keeping up with the Joneses’ behaviors” among both founders and venture capitalists. Raising lots of capital allows founders to “grow crazy-fast” and “issue press releases,” said Rotman, which allows them to attract talent. Investors get to look like they are “winning,” which attracts more money and catches the eye of hot startups.“Some of them, they don't even have business plans, and they expect to be funded. And a lot of them are.”
That can give companies more chances to get it right. But Wincek said a “common refrain” she hears from founders is that things move so fast now that entrepreneurs use funding to “throw bodies at the problem instead of really fixing the tech or really building systems.” As a result, she said, startup CEOs are sometimes finding themselves working with the actual product less. “When we look back, we're gonna see companies that are casualties of having raised so much money or having such easy capital,” Wincek added. Regardless of their level of optimism about the future of technology, most people I spoke with expressed concern for the amount of funding some startups have received. Because of the economics of the venture model, that funding can place intense pressure on them to grow beyond what might be reasonable. One former venture capitalist told me about a “pre-revenue startup” raising money at a $500 million valuation. “If they don't absolutely crush it over the next 12 months, the company's dead,” the venture capitalist added.Financial trickery (or innovation, depending on your perspective) has made it at least a bit easier for early investors in WeWork-like companies to cash out in the end. The recent rise of special purpose acquisition vehicles, or SPACs, have provided such private companies with an easier way to go public than a traditional IPO. A SPAC is a shell company that raises money to buy a private firm, then rebrands under its name, which allows the purchased company to more quickly bypass a lot of traditional due diligence and underwriting. Just this month, Donald Trump launched a media company using a SPAC. The next day, WeWork went public thanks to one.“When we look back, we're gonna see companies that are casualties of having raised so much money or having such easy capital.”