Citation needed. Every portfolio I've looked at outside of the top firms has had multiple investments (approved by partners) that to my mind look mind bogglingly dumb. Not Theranos level of dumb, where they'd have to have a little knowledge of blood based diagnostics and the statistical significance of results from finger pricks to know its a fraud, but "we didn't do due diligence and found out that this is a perpetual motion machine/founder doesn't own critical IP/financials don't make sense in any universe" levels of dumb. The former slip through the cracks at even the best firms, but the latter is like watching a slow motion train wreck.
With the benefit of hindsight, the entire industry looks like thousands of monkeys with typewriters (especially when biotech gets frothy).
No but thanks for putting words in my mouth. They were dumb because they clearly didn’t even bother to do basic due diligence. The fact that there were no other marquee VCs in on a $10b valuation should have raised some flags. It did not. And they weren’t taking a $100k punt. These were investments of tens of millions of dollars so you think that there would have been some basic technical due diligence. This is what I call dumb money.
When a VC sees a huge valuation and the only other investors on the captable beyond the Seed/A rounds are celebrities, pension funds, SWFs, family offices and hedge funds they say: “we’re worried that this is the next theranos”
The article makes the point that valuations are high, not necessarily because of accurate valuations, but because 'dumb money' wants to get in on the deal. It then goes on to describe dumb money excoriatingly, covering a lot of rich people:
Dumb money is a hedge-funder who’s jealous of a V.C. Dumb money is sovereign wealth. Dumb money is an Emirati home office. Dumb money is a Facebook millionaire in a Maserati who wants to look like a player. Dumb money wants to get in on tech because it’s a box to check off. Dumb money isn’t in it for the long run. Dumb money doesn’t actually care about the technology. Dumb money doesn’t create value.
> This is a tired trope, that “business people” are brainless and gullible. Almost as tired as the “VCs are so dumb they’ll throw money at anything-AI” idea repeated in the article.
> Maybe, just maybe, the people running multi-billion-dollar companies, and multi-billion-dollar investment funds, are not stupid?
> It would be much more interesting and productive to discuss what they see in AI and why they feel so much urgency, rather than dismissing them as fools falling for magic.
VCs only need one big winner out of every ten investments. You are looking at their nine failures and calling them stupid and naive.
I'm not sure that's the right metric for "dumb" money. Say, as a gedankenexperiment, that you're a very bright, very successful person interested for whatever reason in investing in a tech startup. But you don't know technology. Do you (A) spend hours trying to understand the technology before carefully investing your cash or (B) hop on the coat tails of a proven winner?
That said: this has all the smell of Yet Another F'ing Bubble. PG and company should be very careful not to let this get out of hand. A big high profile wreck or two (YC-funded startup that takes 20M and bombs inside two years, say) would destroy the brand they've created.
That kind of money should be investing in cutting edge stuff. Real cutting edge stuff. Computational biology, heteromorphic computer chips of various kinds, automation of the construction industry, post-capitalistic economic experiments, and a million other things I can't even think of.
Instead they have tried to play it "safe" and they all propped up the same kind of investment: "the uber of ___" or the "airbnb of ___".
The gains are illusory, because they've all been bidding up each other's bets, and these companies haven't created any real productivity gain.
Sadly, I suspect the "dumb money" is largely your average Joe's retirement money, and it's not "dumb", there's just a lot of it, so it can't be moved out quickly without collapsing the market. Joe's going to take another big hit, but his fund manager is going to get his bonus either way. And it will keep happening, because IRAs and 401ks artificially limit what can be invested in, and because Joe doesn't have enough savings on his own to bother to manage it himself.
Careful. That kind of logical hiccup is exactly what investors #2 through the last thought. And like you say, few to none in that line come from from biomedical or biotech backgrounds. The emperor might have been sold an invisible set of clothing.
A meta reply to several of the commentors here is that we're not talking about JoeBob's Angel Investing who got lucky with his bait shack and has a few hundred thousand more than he knows what to do with to throw around. These are nominally the top tech investors in the world, along with lots of other people who should know what they are doing. Investing in a business in a KNOWN risky and volatile area calls for MORE due diligence, not less. If they didn't do it, we are certainly in the position of trying to figure out the exact distribution between stupid and evil. "Oh, poor us, we asked him to show us the books and he said 'no' and we just couldn't help but throw tens of millions of dollars at him" is bullshit. This isn't hopskotch at the local elementary school. The only even remotely sane conclusion to come to in that circumstance is not only "no", but a NO! yelled back over your shoulder as you flee as fast as your feet will take you.
This is failure so profound that your brain is having trouble wrapping itself around it and you are thinking to yourself, surely they knew what they were doing and I'm just not seeing it? No. Have more confidence in yourself and less in others of supposed authority.
This is a tired trope, that “business people” are brainless and gullible. Almost as tired as the “VCs are so dumb they’ll throw money at anything-AI” idea repeated in the article.
Maybe, just maybe, the people running multi-billion-dollar companies, and multi-billion-dollar investment funds, are not stupid?
It would be much more interesting and productive to discuss what they see in AI and why they feel so much urgency, rather than dismissing them as fools falling for magic.
I would say that a lot of investors are not the brightest. They just as receptacle to emotion manipulation and social engineering tactics as most people
Theranos is a great example. Good number of rich jumped into the tech while those in the industry knew a drop of blood does not contain the proper sample size for testing multiple markers.
Dr. Varun Sivaram's book "Taming the Sun" even talks about Elon Musk's solar panel grifting tactics to seek and exploit investors.
How is this any different than investors going for the world changing technology such as blockchains and NFTs?
Colloquially lots of successful technologies have been referred to as "AI" and so it doesn't seem that unreasonable that investors could look into that kind of stuff. On the other hand, if somebody's investing strategy assumes, like, artificial general intelligence is coming soon -- investing involves risk and investing while stupid involves disproportionate risk I guess.
They have 'real tech' - the issue is how marketable and productizable it is.
This is an old, old issue in tech investing.
Sometimes companies have amazing demos - but the ability to make a product is limited, or the market potential is limited.
That this money is coming from far-away, is not a good sign. If they were truly hot, then the 'good firms' would be lining up. I loathe to use the term 'dumb money' but there is a lot of it flooding into the US as of late - a similar thing was happening during the 2000 bubble, but this might be more sustainable as before it was regular money from overseas, or from big-boston firms - but now - the money coming in from Asia is sustainable. All that money we send for cheap stuff has to come back and find a home somewhere.
And 'dumb' is a relative/unfair term as well - for some investors, it makes much more sense to take on higher risk than others as their personal needs and opportunity are different. If you have $1B sitting in a fund and nowhere to put it, and your local government can come along and snatch it up at any time either through currency dilution or appropriation - well - all of a sudden a slightly-risky investment in Magic Leap makes much more sense than it would to say, Anderseen Horowitz.
Investors are not necessarily people with a grasp of technical knowledge. Without help, they have a hard time distinguishing PowerPoint bullshit from technically conceivable, viable ideas.
We tend to think investors love to chase clouds. These ideas have existed for a long time, and making them a reality - of course - isn't easy. I tend to believe an investor is looking at how good a company can sell the idea to consumers, even if the tech isn't there yet. The company tricks the consumer - not the investor. People buy the half-finished tech, the company appreciates in value, and the investor very likely planned for this. Maybe the investor is more interested in snake oil than full self-driving automation.
There are stupid investors out there, but they won't be investors for long.
The entire article is about how "dumb money" is distorting things. The distinction between dumb and smart money is irrelevant - VC money is distorting the economy in a way which benefits a handful of large investment firms and destroys many viable businesses.
Agreed. Most tech investors are not savvy enough to make informed decisions when it comes to high-tech ventures. A lot of investors rely on other investors' opinions as a barometer for quality/value because they don't understand what they're doing.
When you have too many empty suits at the top making all the decisions, then you get into a situation of the blind leading the blind. It is shocking that it can happen at such a scale.
It's frustrating for intelligent, motivated founders who do the hard work to watch vaporware competitors getting billion dollar valuations and taking all the market share right in front of them.
Too many investors don't have a clue about what real innovation/value looks like because they've never actually seen it - Most of them probably got into their position through a combination of hard hustling and luck instead of through hard work and critical thinking.
Unfortunately, hustling doesn't advance science or human knowledge.
Citation needed. Every portfolio I've looked at outside of the top firms has had multiple investments (approved by partners) that to my mind look mind bogglingly dumb. Not Theranos level of dumb, where they'd have to have a little knowledge of blood based diagnostics and the statistical significance of results from finger pricks to know its a fraud, but "we didn't do due diligence and found out that this is a perpetual motion machine/founder doesn't own critical IP/financials don't make sense in any universe" levels of dumb. The former slip through the cracks at even the best firms, but the latter is like watching a slow motion train wreck.
With the benefit of hindsight, the entire industry looks like thousands of monkeys with typewriters (especially when biotech gets frothy).
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