Since then, we have been in the grip of a supposed tech wreck, where higher interest rates have caused investors to turn Jekyll and Hyde on start-up growth spending, and keep their wallets closed for cash burning endeavours.
Valuations have fallen across VC portfolios, and start-ups have jettisoned staff in distressing numbers to try to show that they can live within their means.
While these founders have had to show their contrition for job losses in groveling messages to the staff they are firing, acknowledging their folly in hiring more people than they could afford and promising to be more sensible in future, plenty of VC operators have simply changed their scripts and carried on.
VC’s were ‘the market’
The very same people who created the bubble by writing outsized cheques on unsustainable valuations, now lament the fact that “the market” got overheated.
“It was intense,” AirTree Ventures partner Jackie Vullinghs said at the Summit of the start-up funding environment in 2021. “We had two days to do due diligence on a deal. We had international funds coming and competing with us here in a way that we haven’t had before.”
Square Peg Capital co-founder Tony Holt was similarly minded, offering the explanation that the business drivers dominating the market today, just didn’t apply in a lower interest rate world.
“When you’ve got a cost of capital that is so small, the horizons can be so long that you don’t need to think about [profitability] in the near term,” he offered.
Our conference critic had hoped they would be pushed to acknowledge that – – “No, you felt the pressure of a competitive market and made bad investment decisions as a result.”
Criticism ‘overblown’
Blackbird Ventures partner Nick Crocker was perhaps the most forgiving of the sector’s missteps, telling the Summit he thought talk of the market being crazy was overblown.
“The problem was there were a large number of investors lining up to fund companies that were growing really fast. So, the rational thing for a founder to do was to grow really fast because growing really fast got you the reward of the incremental round,” Crocker said.
“So I look at it as though that was the rational choice in 2021.
“So anyone who’s saying, ‘Oh I was very cautious in 2021 … and I said slow down and be efficient,’ well, that’s dumb because no one was rewarding efficiency in 2021.”
Crocker went on to lament that founders suffered because the “world flipped” on them in the space of a couple of quarters, and that the market was no longer rewarding the growth-at-all-costs approach.
″I don’t buy into the sort of ‘it was crazy and then it wasn’t’ and ‘everyone was crazy,’ talk. It’s like no, we were all the same people reacting to a set of incentives, mostly rationally,” he concluded.
It was enough to make one well-respected investor, watching events unfold remotely via the online livestream, spit out their coffee.
In a candid chat the following day, in which the investor said the Summit overall had been fantastic, a withering assessment was offered up of some peers’ performances.
“Who exactly forced them to do two days due diligence and invest at crazy valuations 18 months ago? If they knew they were investing in a bubble with little due diligence, then why did they do that?” the investor asked.
“And what of the investors who are invested in 2020 era funds, which probably have an over allocation to crazy valuations? Where is the responsibility to this group?”
‘Ludicrous’ suggestion
The investor, a prominent figure in the local industry who requested anonymity, said it was ludicrous for Crocker to suggest a VC pulling back from badly priced deals in 2021 was somehow in the wrong.
“What Nick fails to take on board are the long-term ramifications of the period of irrational investing,” the figure said.
“This is not some intellectual discussion. If your fund was heavily invested in 2021 valuations, then it is highly likely this will be a dramatically underperforming fund, and that your investors in that fund are a bit f–ked.”
VC professionals at large firms, can afford to be sanguine about the missteps of 2021, because of the strong performance of previous funds.
Such professionals are also justified in observing that company failures are always a highly likely outcome of start-up investments, but that should not mean a lack of self reflection.
The experienced investor thought it was not good enough for VCs to just use herd mentality and fear of missing out as an excuse for doing deals without proper diligence.
“As long as the VC firm, that has a – now f–ked – 2020 fund can raise again in 2024, they will continue to roll on,” the investor said.
“The key should be that, when an investment fails like MilkRun or many others do, the investors should surgically unpack why the decision to invest turned out to be a bad one.
“Usually this means that something changed in terms of the unit economics or product/market fit, but the answer is not to just forget the loss and shrug because some other investments are doing well … That just stops the VC taking responsibility for stupid decisions.”
