Social Capital's Ceo On Silicon Valley: Startup Nail A “Dangerous, High-Stakes Ponzi Scheme”

An interesting await at the Valley via Wolf Street, Nov 7: 

“Startups pass almost twoscore cents of every VC dollar on Google, Facebook, together with Amazon.”

Chamath Palihapitiya, CEO of Palo Alto-based Social Capital – a “technology belongings company” – together with an early on Facebook executive responsible for increasing its userbase (he left inwards 2011 to works life Social Capital), has been defendant of beingness outspoken before. And later his fantabulous but, well, outspoken commentary inwards his firm’s 15-page first annual letter, he volition sure live hence defendant again.

As he lays bare how the startup together with venture-capital ecosystem works – who ends upwards every bit “bag holders” is “not who you lot think,” he says – he steps on toes together with says out loud what everyone is trying to choke on quiet. Of course, these dynamics cannot last, together with he says “It’s fourth dimension to hold off patiently every bit the air is slow allow out of this bizarre Ponzi balloon created yesteryear the venture majuscule industry.”

Below are the most salient excerpts on this topic from Social Capital’s get-go annual letter:
“Big Tech [‘the Googles together with Amazons of the world’] volition teach bigger together with volition travel out less room for obvious companies doing obvious things. The demands of invention are going up, together with the character of the ideas together with teams working on those ideas affair straight off to a greater extent than than always inwards this David v. Goliath landscape.”

“Of course, 1 would intend that investors should choke to a greater extent than circumspect close the utility of their majuscule during times similar these. Curiously, the contrary is currently truthful together with is setting upwards for a massive rude awakening.”

“Since the neat fiscal crisis, the quantity of majuscule that has made its agency into the tech ecosystem seeking to fund the adjacent generation of successful businesses has steadily increased. We don’t only receive got large companies anymore. We too receive got large funds [such every bit the Softbank Vision Fund, ‘which has a minimum depository fiscal establishment check size of $100 1000000 together with a target of $50 billion per yr of investment.’]”

“However, these mega-funds exclusively grade one-half the story: at that spot has too been a continuous surge of seed majuscule flowing into the manufacture every bit successful founders, builders, together with fund managers reinvest their ain coin into the earliest stages of engineering startups. They invest non exclusively inwards pursuit of hereafter returns, but too for the social cachet associated amongst claiming, ‘I’ve backed the adjacent large thing.’”
“Whether modest or big, everyone wants into the party.”

“The collective returns reverberate the novel reality that venture majuscule does non deliver a premium for its investors. In fact, the VC manufacture reliably trails the S&P.”

Today inwards VC investing, “The hardest thing for most startups today is the path to market: get-go finding product-market check together with a agency to accomplish customers, together with and hence edifice a ruthless car to acquire, monetize, together with retain them. Because of this, when the VC manufacture invests majuscule into fast-growing startups today, the plurality, if non the majority, of invested majuscule volition choke into user acquisition together with advertizing spending, for improve or worse (usually worse).”

“Startups pass almost twoscore cents of every VC dollar on Google, Facebook, together with Amazon. We don’t necessarily know which channels they volition select or the particularities of how they volition pass coin on user acquisition, but nosotros create know to a greater extent than or less what’s going to happen.”
“Advertising pass inwards tech has choke an arms race: fresh tactics choke stale inwards months, together with client acquisition costs choke on rising.”

“Unfortunately, today’s massive venture-backed advertising, sales, together with user acquisition playbook has morphed into 1 that champions growth at whatever cost.”
“And it is creating a large neb that volition shortly come upwards due.”

“One of import argue why ‘growth for its ain sake’ has come upwards to dominate the tech manufacture is because of the powerful network effects that come upwards from size (again, the byproduct of living inwards a ground dominated yesteryear Big Tech).”

“In an internet-connected world, several kinds of businesses – platforms, marketplaces, aggregators, together with social networks, to shout out a few – stand upwards to choke enormously valuable together with profitable should they accomplish a sure critical mass. There’s a reflexivity to these network-based businesses. They reason, ‘as nosotros choke large, our production volition choke improve together with our employment concern to a greater extent than valuable. Therefore, nosotros should pass coin to choke large. We’ll obtain that coin yesteryear raising equity at a high valuation, which is justified yesteryear how large together with valuable nosotros volition choke in 1 lawsuit nosotros pass the money.’”

“In a ground where exclusively 1 fellowship thinks this way, or where 1 employment concern is executing at a degree to a higher house everyone else – similar Facebook inwards its fourth dimension – this tactic is extremely effective. However, when everyone is acting this way, the manufacture collectively becomes an accelerating treadmill.”

“Ad impressions together with click-throughs teach bid upwards to outrageous prices yesteryear startups even out amongst venture money, together with prospective users need to a greater extent than together with to a greater extent than subsidized products to hit their initial attention.”

“Such is the ground of user acquisition inwards tech today: every bit growth becomes increasingly expensive, individual must live basis the neb for all of this wasteful spending. But who?”
“It’s non who you lot think, together with the dynamics we’ve entered is, inwards many ways, creating a dangerous, high stakes Ponzi scheme.”...MUCH MORE

Earlier  today:
Unicorns Backing Their Own VCs? Welcome to Peak Tech