One of Silicon Valley's Most Esteemed VCs Says Startups Are 'Mostly Crap' (vanityfair.com)

An anonymous reader cites an article on VanityFair: Former Facebook employee Chamath Palihapitiya won't pull punches when it comes to lame tech companies. Palihapitiya's firm, Social Capital, has backed numerous tech companies with valuations in the billions, such as Slack, Box, and SurveyMonkey. But that doesn't mean that he is bullish on unicorn culture. He says "Most of those businesses are fundamentally not good, they're poorly run, and they never should have been invested in in the first place. But the capital came in because the person who had control of the capital was able to justify it intellectually to themselves versus something else that could have become the next Facebook or Google. [...] The reality is, great companies can go public in any market. When we talk about the I.P.O. slowdowns what we're really saying is that there really just aren't that many good companies being built. We need to divorce ourselves from venture capital as an occupation and focus on using capital as a way to take really big bets on things that just seem totally audacious. Right now we haven't done enough of that, and the result is that most of the things we've funded are mostly crap and largely worthless."

Comments

It's normal for a bubble

[BarbaraHudson]

It's a bubble, and now it's deflating because, like the mortgage-backed certificates, the underlying assets are crap.

No kidding?

[amRadioHed]

Didn't Sturgeon already tell us this 75 years ago? Ninety percent of everything is crap, including VC's.

Re:No kidding?

[amRadioHed]

Meh, I meant to say startups, not VCs. But still true either way.

Let me get this right

[damn_registrars]

Someone who made a ton of money from investing in something worthless is telling the rest of us we shouldn't invest in things that are worthless? Sure thing.

Re:Let me get this right

[Actually, I do RTFA]

He's making a ton of money, while saying that people are overpaying him for crap he bought earlier for less. Of course, he's still selling it to them.

I consider it the equivalent of the poker pro telling everyone he makes a living at this and (some standing backing that up) when he sits down at the table. Just fair warning that someone is going to lose money, and he has the skills for it not to be him.

They are ALWAYS mostly crap.

[gurps_npc]

Look, the numbers for new businesses are always crap - that's why you get the high returns.

For every 10 businesses you start, seven go out of business in the first year. One more squeaks along till the 2nd year, another becomes a 'viable loss' (i.e. they make money, but less than their owner could earn if they got a job working for a major corporation), and only the last one makes any money. But that last one will make so much money that the owner becomes wealthy

That show VC works - they invest in 10 start ups, one of them gives them a return on their investment that is 20x, or 100x how much they gave it, and they go away happy. The other 9 they invested in are just the cost of doing business.

Re:Welcome to the 1990s, part 2:

[frank_adrian314159]

Has anyone done any studies as to what percentage of VC-funded startups actually eke out enough money (somehow) to provide a decent ROI to anyone investing in them?

Yes, there have been studies. But you don't need a study - it's enough that there seem to always be VC firms about - proof by existence. The game's no different from what the record industry does (except multiply the numbers on the bets the firms are making by about 50-100x) - you bet on a number of artists/companies; some pay out small, some pay out big, and some you lose money on. It's just about finding that next Adele/Facebook that pays off enough to support the other dogs you picked. It's a model that works, as long as you can tolerate the risks and can pick winners well enough. Plus, if you have enough money to start with, you need put only small portions of your actual wealth into these ventures, mitigating a lot of the personal risk by having your main investments in more secure vehicles and loading the VC fund with more risky investments.

Re:Too many nebuloud "social" companies.

[Nidi62]

...But the capital came in because the person who had control of the capital was able to justify it intellectually to themselves versus something else that could have become the next Facebook or Google.

The problem is many of these companies only get big because of a fad and not for any concrete business reason. Social media companies have no real source of revenue except advertising and data-mining their users. But revenue from that is going to be highly dependent on how popular they (may) become.

How accurate does that data end up being anyway? With all the supposed "targeting advertising" companies do nowadays with their advertising, how well does it actually work? I look at some computer parts to upgrade my computer on newegg, I buy them, then for the next month I'm plastered with ads for computer parts. It seems like in most cases targeted ads are either out of date (ie for something you already purchased days if not weeks ago) or totally irrelevant anyway. And yet "targeted advertising", "data mining", and "data monetization" are all you hear from startups.