VC Hype and Its 5 Disastrous Long-Term Consequences


PR, also known as hype, is important for VC investments to increase the value of the company and create a market for later rounds of capital, after which investment banks want to take the company public, or strategic acquirers buy the company before it rises on. The hype of huge valuations at each round is duly reported in the business press to turn the company into a “unicorn” (keep in mind that any company can become a VC unicorn and I’ve written on about the method to to do this.

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

The price destruction in the stock market

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

· Carvana is down from about $360 to about $8.

· Affirm is down from $164 to about $10.

· Redfin is down from $96 to about $8. And now a financial analyst is telling us that the business model is “flawed.”If so, should a professional financial analyst have revealed it before it fell? Or before it reached a $10 billion market cap? Has the hype influenced the judgment?

The price destruction in the crypto market

Sam Bankman-Fried was funded by VCs and promoted by the press – until his Icarus-esque fall from grace caused much pain to many investors who were left with the bag. But the hype was in full swing. Now gurus like Elon Musk tell us they could see through the hype. Why didn’t they say something sooner?

The destruction of value in corporate mergers and acquisitions

The percentage of business takeovers that fail is said to be between 70 and 90 percent. Some of these are likely corporate takeovers of the hot ventures funded by VCs and heavily touted by the corporate press so that the VCs can exit at an attractive valuation. And maybe destroy the company value. Caveat emptor?

The dilution and brainwashing of entrepreneurs seeking early VC

VCs earn their high returns by seeking out a significant portion of the ventures they fund and then hoping for a few successes and home runs. Given the risk they take, and the few potential unicorns, the dilution seems justified. But when the corporate press endlessly praises the unicorns hype that VCs have received, they play into the hands of VCs. The reality is that 94% of unicorn entrepreneurs started without a VC, and 76% never got it. So early VC and the capital-intensive angel capital-venture capital model rarely succeed. Is the constant hype from the business press influencing business schools and incubators to focus on the VC model, which helps about 20/100,000 companies after Aha, instead of focusing on the Skill Model that can help any entrepreneur?

The destruction of credibility in the corporate press

Many in the corporate press like to parrot the VC community. Here is the most egregious example, and a mea culpa, from a Fortune magazine writer on the alleged scam of Sam Bankman-Fried. Should Fortune magazine know better than to repeat “facts” handed to them and assume a company has high credibility because a “reputable” VC funded it? Would Elizabeth Holmes (Theranos) have achieved such fame without having to prove her technology, and without academic qualifications, if it had not been for the complicity of the business press that 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 corporate press. There are good reasons for VCs to hit the hype button. VC funds have a limited lifespan (usually 10 years) and they must earn 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 offset the 80% failure rate in their portfolio. Hype helps.

But why should the press destroy its credibility to benefit the VC industry? And why do academics imitate the VC model?

Fortune CryptoHow everyone fell for SBF, including me

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

MORE FROM FORBESHow you too can make a billion dollar unicorn
Fortune CryptoHow everyone fell for SBF, including me

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

MORE FROM FORBESHow you too can make a billion dollar unicorn