This reminds me of a quote I heard during the dot.com bubble. "If I can't expect 1000% return I'm not investing in a company". It's such a high level of expectation that you just know a correction is coming.
People say this a lot but it's worth questioning, because the "unrealistic expectations" also make the portfolio math work, and if the math doesn't work, not liking the expectations doesn't turn a broken investment into a viable one. You can do a really superficial analysis in 5 minutes of Google Sheets to work this out for yourself, and at least crystallize your implicit expectations about the number of companies in your portfolio you expect to be profitable in N years as opposed to dead and gone.
Do the investors care? If they're not making 100x return on an investment, will they truly care about 0.5x return? My feeling is that most would just say "OK, you have a good team, you have money in the bank, pivot and go wild".
Basically, people are expected to be more discerning about what they'll yeet money at. Remember, wealth tends overtime to trickle up, so good or bad investment, the people at the top'll probably make it back eventually anyway.
The big diff is now founders need to measure up to "can you make it back at least X% in Y% time?) Where X% is now non zero.
Once past a certain size and far enough in the hole, being marginally profitable isn't going to help. It's go big or go home that counts. Investors aren't interested in a +-3% annual return, they want 1000% or nothing.
Interesting. One way you just made me think of this is considering what a 'great' investment return is. Let's say it's 20%.
If you're getting 20% already, you might as well expand your base looking for more 1000x returns, and not cry too much about bad placements; this investing business has a significant opportunity cost risk which means you probably want to err on the side of putting some money in. If you're over 'great' returns, you can afford to do that, and should.
On the flip side, if you're under 'great' you probably want to figure out how to prune your choices away a bit first.
If there's a 10% chance that your business is forever upended, and if you don't react you'll be left in the dust is the right decision "90% chance we'll be good, no need to change plans" or "Hey we're making too much money to take any risks here, lets adapt to the 10% chance, and if the 90% comes to pass we'll just go back to the way it was"? I think it's pretty clear that tech CEOs made the right choice from investors perspective. I don't see how you can come to the conclusion that they failed to predict market conditions when you don't know what odds they came up with.
"This is the future, and we are building the platform that will make it happen."
Yeah, keep telling yourself that. I know investors like to see confidence, but if you seriously believe your own hype, you'll be unprepared for failure. Chances are, you'll fail. Nothing to do with talent or how good your product is. Just luck. Learn humility. It will keep you from letting your guard down, and getting trampled on. And it will come in handy in case you fail.
I just don't see how that invalidates the anecdote. Because if you're investing "$100 million in a $1 billion company" you're probably aren't expecting a 20x return, not to mention a greater one. So that would suggest that there is something else going on, which is the greater point of the NYT article.
I am starting to get sick of every argument that tries to defend these rediculous investment decisions these days. Currently everyone doing that is citing network effects, potential growth, the next big thing.. And for sure, if someone wants to invest his or her money, I will not judge that decision or the person itself.
But looking at the situation as a whole, so many decisions are made based on highly flawed expectations. A nice designed marketing page and multiple years without revenue? Here take some $m because <insert overestimation in here>.
Consider Airbnb.. I use it myself, but I am by no means locked in as a customer. Maybe it will crumble due to new/old regulation. Maybe too many weird people will start offering their spare-rooms, and it won't feel cool and hip anymore. Maybe hotel-chains react by offering better prices... There are so many maybes in that company alone.. simply believing in the network effect should not be the basis of a meaningful valuation.
I am highly sceptical about the current behavior of this part of the investment market. My concern lies not in the companies or the investors themself. They probably did hedge their risks. I just feel that the next bursting bubble will stretch far beyond the whatsapps and airbnbs out there.
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