VC Hype And Its 5 Disastrous Long-Tail Consequences

PR, aka hype, is important to VC investments in order to enhance the value of the venture and to create a market for later rounds of capital, after which investment banks want to take the company public, or strategic acquirers want to buy the venture before it takes off. The hype of huge valuations at each round is duly reported in the business press to make the venture into a “unicorn” (please note that any venture can become a VC-unicorn and I have written on Forbes about the method to do it.

So, what’s wrong with this hype? It has a long tail that often has unintended consequences.

The Price Destruction in the Stock Market

Ventures that come to market with a lot of hype from the VCs, investment banks or business press often end up with high prices for the stock – prices not supported by fundamentals. This hype may be partially responsible for destroying wealth in the stock market (prices as of 11/14/22):

· Carvana has fallen from about $360 to about $8.

· Affirm has fallen from $164 to about $10.

· Redfin has fallen from $96 to about $8. And now a financial analyst tells us that the company’s model is “flawed.” If so, should a professional financial analyst have disclosed it before it fell? Or before it reached a market cap of $10 billion? Did the hype affect judgment?

The Price Destruction in the Crypto Market

Sam Bankman-Fried was funded by VCs and promoted by the press – until his Icarus-like fall from grace caused a lot of pain among many investors who were left holding the bag. But the hype was on full blast. Now gurus like Elon Musk tell us that they could see through the hype. Why didn’t they say anything earlier?

The Value Destruction in Corporate Mergers & Acquisitions

The percent of corporate acquisitions that fail is supposed to range from 70 percent – 90 percent. Some of these are likely to be corporate acquisitions of the hot ventures funded by VCs and heavily touted by the business press so that the VCs can exit at an attractive valuation. And perhaps destroy corporate value. Caveat emptor?

The Dilution and Brainwashing of Entrepreneurs Seeking Early VC

VCs earn their high returns by seeking a significant share of the ventures they finance, and then hoping for a few successes and homeruns. Given the risk they are taking, and the few potential unicorns, the dilution seems justified. But when the business press endlessly hypes the unicorns that received VC, they are playing into the hands of the VCs. The reality is that 94% of unicorn-entrepreneurs took off without VC, and 76% never got it. So early VC and the capital-intensive angel capital-venture capital model rarely succeeds. Is the constant hype from the business press influencing business schools and incubators to focus on the VC Model, that helps about 20/ 100,000 ventures after Aha, instead of focusing on the Skills-Model that can help every entrepreneur?

The Credibility Destruction in the Business Press

Many in the business press like to parrot the VC community. Here is the most egregious example, and a mea culpa, by a Fortune magazine writer about the alleged con pulled by Sam Bankman-Fried. Should Fortune magazine know better than to repeat “facts” that are handed to them and assume that a venture has high credibility because a “reputable” VC financed it? Would Elizabeth Holmes (Theranos) have gained such prominence without having to prove her technology, and with no academic credentials if it weren’t the complicity of the business press who accepted her word and the “credibility” of her investors as gospel?

MY TAKE: The fact that VCs have their own interests should come as no surprise to the business press. There are good reasons for VCs to push the hype button. VC funds have a limited life (usually 10 years), and they have to get a high annual return (usually 20%+) to compensate investors for the high risk. So, VCs need inflated exits, and they need it fast, especially to compensate for the 80% of failures in their portfolio. Hype helps.

But why does the press have to destroy its credibility to benefit the VC industry? And why do academics ape the VC model?

Fortune CryptoHow everyone fell for SBF-including me

Yahoo NewsElon Musk and Mark Cuban are letting loose on FTX’s Sam Bankman-Fried: ‘Bulls**t meter was redlining’

MORE FROM FORBESHow You Too Can Create A Billion-Dollar UnicornBy Dileep Rao
Fortune CryptoHow everyone fell for SBF-including me

Yahoo NewsElon Musk and Mark Cuban are letting loose on FTX’s Sam Bankman-Fried: ‘Bulls**t meter was redlining’

MORE FROM FORBESHow You Too Can Create A Billion-Dollar UnicornBy Dileep Rao