One of my most vivid memories of investment banking occurred in my first week in the business.
It was a lesson about perception.
I was fresh out of college and clueless about my new environment, but ecstatic to be finally on track to becoming the next Gordon Gekko. It didn’t last long, though. An associate of the M&A team made me take the red pill.
“You have to understand that this business is all about perception. You don’t actually need to be a top-performer to be top-ranked. You need to convey confidence, to be the go-to guy, to be friends with Managing Directors. That way you’ll always have support during ranking committees. You are nothing but a brand here. It will take you time to build your brand, but remember: you can destroy it in no time.”
At the time I had no idea this truth about perception also held true for other sectors, particularly the startup industry.
A startup is a socially-accepted gamble
The startup industry is now as attractive as a career choice as investment banking or strategy consulting once were. As a result, when transitioning from an “attention to details” to a “get shit done” industry, I drank the Kool-Aid as anybody would have. Competing on the number of stickers on your laptop and how creative you were in terms of clothing was indeed way more attractive than bragging about the number of consecutive all-nighters you pulled over the last month.
The most striking difference however was the strength of the signal emanating from this ecosystem.
I knew about a lot of people making shit-loads of money in the PE and hedge fund industries worrying about remaining under the radar. I had many examples of successful PE investors taking millions in carried interests, or executives getting crazy management packages — all of them with a low-key attitude, only bent on cashing in while not being revealed to the outside world.
In the startup industry, on the other hand, every stakeholder, entrepreneur or venture capitalist gets its fifteen tweets of fame, regardless of how much cash they’ve made. Pretty weird, right?
There might be a reason for this discrepancy, though. When I think about it, this is quite similar to Poker where you have to look strong when you are weak and appear weak when you have a monster hand.
In the startup game, you are weak by definition. You are most presumably product-less (hello Magic Leap), looking for a model (hello Snapchat), burning like hell (hello Uber), or worried that you’ll get so much attention that a big player will replicate your product before you get off the ground (hello everyone).
In other words, you have to give your clients confidence and have to look bigger than you are. You have to pretend to be well organized, say and believe that you have a development track for your new hires, attend every single conference, be everywhere and demonstrate traction even though you have nothing tangible to show. Signal again and again.
Launching a startup is actually nothing more than a socially-accepted gamble. When I tell my wife I made some money betting on sports or exploiting suckers at a poker table, I get a bad look (followed by some gift ideas). When I launched a startup, that would ultimately fail, I was such a brave and driven person. My chances were, however, way better in betting or poker… go figure.
All about perception and signal once again.
Is there a unique growth path?
With the odds stacked against them, most entrepreneurs consider partnering with a VC fund as being the best way to keep their business afloat. The reality, however, seems different.
According to Fred Wilson, the majority of expected gains made from a VC portfolio will come from just 30% of the companies in it. Being a successful VC, therefore, involves being able to spot and invest in the moonshots that will generate those massive cash-on-cash returns.
As a result, every investment decision is based on implementing some devilish and disruptive industry play that will create the next unicorn.
As a naïve non-insider, I have the feeling that there isn’t enough room for all these unicorns in book value. My fear is that, as smart and visionary as VCs could be, all these well-thought plays won’t necessarily end up as winning bets. More importantly, I’m wondering about these 70% portfolio companies that flew too close to the sun. Did they fail for organic reasons or did they blindly follow a VC-constructed industry formula for success?
Furthermore, if the industry was rational, VCs should have, by now, returned more money than they raised thanks to these moonshots. However, this hasn’t been the case to date. Between 2001 and 2013, US VC funds raised $100bn more than they returned — that is total nonsense. Money oversupply, increased competition and tough public market conditions are often being pointed at, but something is truly broken here.
The aggressive growth route has ended up having an impact on entrepreneurs. When the amount you raised is a social marker and when the cash you are burning defines how visionary you are, it questions the whole industry. Do VCs consistently need to aim for homeruns? Is aggressive and unprofitable growth the only possible play?
As a matter of fact, some of the most successful French entrepreneurs weren’t fueled by VC money (OVH, Vente-privee, Free or Ebay)… They are, however, the most active business angels today.
Launching a startup has never been this cool. I regularly see people quitting their job to embark on a more entrepreneurial project while huge numbers of people look to get into the startup game straight after graduation. Software is still eating the world and everybody is trying to jump on the bandwagon.
This ongoing hysteria around startups makes me think our collective level of confidence in the startup industry might be related to our lack of experience.
And by being overconfident, you widely broadcast signals which in turn end up being relayed by pretty much everyone. This is akin to a self-fulfilling prophecy; we are all bullish so prices should go up but who cares about prices going up on illiquid-markets?
Perception about startups has never been this wrong. Launching a startup is not cool at all. It’s actually one of the hardest thing ever.
The pattern we are seeing in the current startup hype is quite similar to what happened during the Gold Rush or any other industry boom. First the spark then the rush and ultimately the support system racking up most of the profits.
Schools, incubators, VCs, Google Adwords, advisors, headhunters, media, banks (just to name a few) are the ones supporting the system. Who’s digging then?