Venture Games

I used to be jealous of my friends who had raised more VC money than me. Now I am grateful to have raised less than most of my peers.

Just when I felt that I was finally starting to understand the “VC game” - the entire playing field was re-arranged.

A few things always bugged me about venture capital. The first was that the VCs get a portfolio of bets, but I only get one. (see: “Ergodic Entrepreneurship”). The second was that VCs were getting rich on companies that were absolute garbage (as long as they could be marketed properly). (ie - someone making their wealth on a company that IPO’d and then went bankrupt 18 months later, or a company that was acquired only to be shelved after discovering the “damaged goods”.)

I have mostly overcome these concerns. I appreciate them as part of “the venture game”. In the end, you can’t fool all of the people all the time. Value is perceived. Some people get lucky. Many of these problems can be addressed with skin in the game.

What is happening now is that the entire market context has changed. Most of the people playing the venture game don’t have any experience operating in this type of environment. I certainly don’t. Most of the entrepreneurs and investors that I know were still in school during the first “cleantech bubble” burst of 2008. Almost none of them are old enough to have weathered the “dotcom bubble” of 2000. The smart ones can do the math, and it is scary:

I don’t envy VCs right now. It is a tough game to play.

It is not my intention to focus on the “entrepreneurs vs. investors” aspects of the situation. While there are certainly many investors who are using the current market conditions to get good deals, that’s kind of their job.

As usual, Nassim Taleb captures all of these dynamics better than I can. As he recently shared on The Tim Ferriss Show:

“Companies [were] operating on a following modus…go to the market as a cash machine, so [they] don’t even have to generate cash. [I]t has Ponzi characteristics. Someone else will buy our company or we’re packaging a company to sell it to someone else. Now, that started before the great financial crisis, but it was very moderate. Of course it took place during the crazy period of the internet bubble and then died. So we had had episodes of that effect, but now it’s ingrained. And people had now for 15 years of low interest rates. You have people in their forties who’ve never seen interest rates. And they don’t know how to behave, they don’t know how to invest. So I think the most fragile part today is not the banks of course, as we said. And it’s not hedge fund because it’s sort of like mature adults typically. It is those startups and the VCs, the venture capitalists. Venture capitalists actually played quite a nasty game because they cashed out. All of them are rich on companies that never made a penny. You see? I know there’s a lot of — take how many billionaires you have from Silicon Valley, [whose companies] never made a penny.”

For myself, the biggest learning has been to focus on cash flow. This sounds like “Business 101” - and it is - it’s just that my entire entrepreneurial career to date has been in an environment that has mostly incentivized growth at all costs.

Now all of that has changed, and it is an important opportunity for entrepreneurs and investors alike to take the time to reflect on the new rules of the game. In my own business, I’ve been trying to heed Jason Friedman’s advice:

“Of course you compete in a market with multiple options, but that’s not your real competition. Your real competition are your costs. Yours, not theirs. You, not them.”