Venture Capital Bubble (2010 – Present)
According to most definitions, a venture capital bubble began in the early 2000s. Venture capital businesses invest in high-risk enterprises for stock. Rich people, pension funds, or sovereign wealth funds fund venture funds (called limited partners or LPs). The venture fund invests it in early-stage companies. Most portfolio companies fail. Diversified funds return money to LPs on the success of one or two portfolio firms. US venture capital is competitive. After the dot-com bubble, tech booms and crashes produced a liquid finance market. Early 2000s mobile app growth brought social media and cloud computing. Digital products offer minimal operations costs, low client acquisition costs, and parabolic returns. Venture capitalists could invest $100,000 in early firms and make millions. This exceptional rate of return has created a significant incentive to find “the next big thing” in IT. Some funds have seen parabolic returns, but it’s rare. Most venture funds require a threefold return on their initial investment to be successful. There aren’t enough new companies to fulfill all these investors’ appetite for fresh acquisitions, and even fewer high-growth, profitable ones. This creates idle capital (called dry powder). As the fund’s objective is to make new investments, high-quality firms are broadly defined. High-growth incentives dominate. Expansion is today’s goal. The 2010s saw fast-growing companies. WeWork and Uber exploited VC money to build lucrative near monopolies. Their greedy and unsustainable business practice led to controversies. WeWork and Uber went public, but neither company proved profitable nor is currently selling at a discount. A new breed of startups raises vast sums of money to solve non-problems, offering investors parabolic returns. Despite a money glut, many VCs invest. Theranos received $700 million at a $10 billion value for a blood-testing device with no income, no customers, and terrible research. Theranos illustrates the fraud triangle because venture capitalists didn’t do due research on the product and claims made by its 19-year-old creator. Juicero raised $118 million at a $449 million valuation, only to disclose its groundbreaking invention was an extremely complicated and worthless apparatus that squeezed a pre-blended bag of juice into a cup, which could be done better by hand. Google Ventures and Kleiner Perkins were among Juicero’s investors. Social media’s emergence spawned a spectacle-driven corporate paradigm. Billy McFarland launched a Bahamas music festival in 2017. He has minimal festival experience. Teenage partygoers found few bathrooms, food, and water on the island. McFarland promoted the festival on social media for months without mentioning organization. Both corporate employees and McFarland couldn’t separate social media from reality due to incompetence. Herd mentality investing contributes to the venture bubble’s lunacy. Due to a lack of transactions, venture capitalists typically give entrepreneurs enticing conditions to get into hot projects. These conditions often involve a fast capital call and lack of due diligence for fear of losing the position. This cutthroat setting creates a criminogenic and irrational milieu with pressure, opportunity, and reasoning. The Venture Bubble proves that investors of any IQ can act like lemmings.