If you ask the average entrepreneur what his wet dream is, he would answer; "Being qualified for a triple A Silicon Valley VC firm". Little does he know, that's literally like wishing for a coffin for his idea and creativity. VC firms are based upon "The Bigger Fool's Theory".
This theory implies you buy junk, knowing it's junk, but you don't care, because regardless of how much you pay for the junk, there will come a bigger idiot behind you willingly buying your junk, for even more money than whatever money you paid for the junk originally.
Don't believe this is an actual thing? Please explain why this painting is worth $105.7 million!
Facts are, the entire modern art scene is entirely based upon "buy junk expensive, sell it even more expensive". Both for art and for venture capitalism, the point is to pay as much as possible, since this creates the illusion of intrinsic value, where no value actually exists.
This is why a VC firm will often give you MORE than what you ask for, telling you "You do want to scale as fast as possible, right?"
At which point the ignorant entrepreneur of course accepts, thinking
Ohh my God, what couldn't I do with twice as much? π€ͺ
The Idiot Economy
The idiot economy again is based upon "Ohh my God, somebody paid 100 million dollars for that thing. It must be extremely valuable" - Not realizing they could have bought it for 50 million, but they wanted to give 100 million for it, because 50% increase in evaluation of 100 million is a lot more money that 50% increase in evaluation of 50 million.
It's the "industrialization of bubbles", similar to NFTs in nature. Zero actual value, besides the belief in value, which artificially inflates the evaluation, such that profits becomes possible. Venture Capitalism is in its entirety based upon these mechanisms.
Manufacturing Faith
First of all, once you've got VC funding, everybody will automatically flock to you, congratulating you, affirming you scored, believing that whatever you've got going must be good if you were able to convince some VC firm to give you money.
And of course, the more money you got, the more valuable your shit must be, right?
The investment itself becomes a self fulfilling prophecy of future earnings. However, why do you think 90% of all startups fail? Even those being backed by VC firms? It's because the VC firm literally doesn't give a shit. Typically they've made their money indirectly, even on failed startups, by forcing deals unto the entrepreneur with other companies in their portfolio, or by funneling money out from your startup somehow, to some "invisible 3rd party".
And if you should somehow manage to do an IPO, the VC firm sells 50% of their stock for 100x what they gave you in the first place, at which point the sheeptards takes over the responsibility for the losses, while they've already cashed in their earnings. When the company goes belly up, they have protection for themselves by being able to say; "We lost money too on this. It was a shame it didn't work" - Not telling the other losers they actually cashed in 100x during the IPO.
The Value of an Employee
One employee is worth $250,000
True story. The above are actual figures from a VC firm. Each employee further strenghtens the illusion of actual value in your company by $250,000. This is the industry average. BTW, before you run of an hire 500 Ukrainians, please realize that the average Ukrainian is (only) worth $100,000. The above $250.000 figure is for North/West Europe and North America. I don't know the figures for India, but I suspect they're at the level of Ukraine, possibly lower.
I want to emphasize this isn't something I am making up, these are figures given to me by a VC firm. When my developers quit in AISTA, The Schmuck (Mister Investor) was screaming at me for having lost him a million dollars because I lost 3 employees in a day. He didn't even care what they did, or if they did anything at all. From his point of view, I had lost him somewhere between 300,000 dollars and 750,000 dollars. The reason is because the more employees you've got, the stronger the illusion of that your company must be worth a lot becomes.
In theory you could literally hire a cemetary to inflate your company's perceived evaluation
Industrialized Bubbles
The VC firm doesn't give a shit about your company's value, it only cares about perceived value. If it can somehow convince a bunch of idiots that your company is worth a billion dollars, your company is worth a billion dollars - Regardless of whether or not your only production literally is used toilet paper! And the more employees with fancy titles, good diplomas, and higher education you've got - The easier this illusion becomes to create ...
Maybe you think that this is just "some few VC firms", certainly my VC firm is different. Believe whatever you want, but if you've got VC money, there is a 98% statistical probability your product is literally crap, and that you're an idiot!
Crap in, crap out - Similary to NFTs and the above 105 million dollar painting ...
How the Illusion is Sustained
Once you get an A-level VC firm, they'll contact Wired, TechCrunch, YCombinator, and all the other corrupt media organizations, who's purpose it is to hype up your product. Then they'll have parts of their portfolio actually spend their money buying your product, to inflate the growth, allowing them to create growth curves, apparently leading into the 7th Heaven.
Everything is of course carefully orchestrated, and all the participants are of course in the VC firms pockets, and paid to write garbage about your garbage, such that the illusion of value becomes stronger.
Then they'll convince other idiots to join in with more money, B rounds, C round, then maybe an IPO or an Exit - At which point they will have spent 100 million dollars, cashes in 500 million dollars, leaving some idiots to pick up the bill. All while zero actual value was produced, exclusively using the mechanics of "The Bigger Fool's Theory".
100 years ago we had a name for such a thing, we used to call these things "Ponzi Schemes". Today we call them VC firms. Same garbage. This is why the psychological makeup of entrepreneurs being qualified for VC rounds are often similar to the psychological makeup of evangelic preachers and cult leaders. Their primary job is to "keep the bullshit running" for a few years, such that when the bubble bursts, both the entrepreneur and the VC firm have made mountains of money.
Dead Cat Bounce
The above is an actual economic term, and it is recognised by something that apparently seems to be "a miraculous save". A last minute miracle, saving something from going bankrupt. ChatGPT and AI was that thing for A-level VC firms from Silicon Valley. Every single VC firm threw money at AI as if it was "The VC Jesus of the 21st Century, coming to save them from themselves, absorbe their sins, allowing them to enter Paradise".
They basically fell for their own bullshit π€£
There will be no save, sorry - Haven't you heard? The Boom is Over. Burn in hell zuckers!
How to build a company in a post-VC world
Actually, it will be much easier. Once all the bullshit is gone, it will be easier for real companies to be noticed, being talked about, and find people to test their stuff, help them build real value. How do I know? Because I'm doing it. And in case you still haven't understood my relationship to this, let me explain it with the most colorful analogy I possibly can imagine ...
If you're from a VC firm and you come to my home offering me money, I've got a baseball bat under my bed, and it's got your name on it π
Top comments (15)
Amazing post & very helpfull.
i want to build my software startup. but idk how do i start n get funds & feeling lost. if u cn tell me wt 2 do will b greatful. Thanks.
You don't need funding, you need a roof over your head, and food for yourself and your family, until you're making money from your startup.
I went that route with OST (Mountainview). Banks refused to let us bank with them because we didn't have an "approved" owner or investors they knew, including that one that recently collapsed (SVB). Who you know is now far more important than what you can do in Silly cons Valley.
π
Do something that does not require "approval" would be my advice ...
We did, even had a building for awhile on Hope near Castro street...seemed fitting. Got plenty of death threats for "not" doing things the VC "way", too.
Might be controversial in some circles, but having full ownership and getting to focus on the things you want to (for example quality) is definitely worth struggling a bit more with funds at the start
Indeed, it is pointless to even try to do anything new in the US now. I find it far easier to raise capital as a foreigner in Europe (highly recommend Norway) or Latin American.
US is infested with these ideas, due to thousands of VC firms having made mountains of money following these ideas ...
That is what the bunko squad and prisons should be for...
Hehehehe :D
What a great post man. Learned some things. For instance I always had the question why some startups are hiring so much and why do they even need so many people... I know the answer nowπ
Hehe, I'm glad you like it. Please share it, and maybe at-reply YCombinator as you do ...? π
I've got "an itch to scratch" ... π
This very much tracks with my own experiences.
You completely miss the point of the new platform economy of tech companies, where the winner gets all.
That you call bullshit indicators (virtual measurements like growth/users/etc) - are things invented to measure the success of the new reality of platform-tech companies.
Tech companies - do not sell physical goods, but a virtual good that is completely detached from the physical reality and is very hard to measure / reason about (how do put a dollar-price tag on a thought? or some lines of code?)
Tech companies - scale incredible well with nearly zero cost (1-10 developer salaries are nothing if you get 10-100 millions in revenue). This is very new and counter-intuitive compared to how traditional manufacturing works, where more workers + more/bigger factories -> more production.
VC-based investors (very smartly) found out, that investing in tech startups that grow big and get to be a monopoly is a very lucrative business.
VC 15 years ago was a completely different thing than VC today. And yes, there do exist legitimate VC firms that do their due diligence, and actually study the technology, and invests in real companies. However, if you find 100 random companies that are currently going through their A or B rounds I can guarantee you that at least 95 of these have rubbish value propositions exclusively based upon hype.
I suspect the reasons for this is that it's simply too hard to study technology for people not having a technological background, so at some point they realised it's easier to earn money selling hype than to earn money selling real product ...
I created a unicorn in 24 months, with 750,000 in VC. Once the VC firm realised there was actual value in it though, the manager of the firm tried to steal the whole company, something that resulted in that I got a 6 month setback, and I ended up with everything of value, while my old Unicorn slowly died. It's now a shadow company being used for "dubious and shady business deals" - The Schmuck thought he could run it without me π
You can see the new stuff here. It's 4 months since the split happened. Today the old company would have been worth 240 million dollars. Before the end of the year it would have been worth a billion. These figures are from extrapolating the existing revenue growth, that was real revenue, and not hyped up revenue artificially created by having friends, fools, and family pay for services - For then to apply a 1,000 PE, which is usual for companies in hyper growth. So yes, I do have some experiences here ... π
I never called this bullshit indicators, I just insinuated that most are increasing these figures using "dubious methods". If you've got 100,000 real users, that's obviously worth a lot. Most don't have 100,000 real users, they've got 100,000 Indian students whom they bribed to like their GitHub profile ... π
Psst, here's an example of how a trillion dollar company is delivering useless tech next to a zero funding startup - If funding and VC is such a great idea, feel free to explain the difference in quality ... π