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Logic is slipping away in the venture world but it doesn’t seem to matter

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In a recent interview, Jess Lee, a partner at Sequoia Capital, the venture capital firm, recalled how two of its top executives dressed up as Toy Story characters to offer her a job.

One played the part of Buzz Lightyear. The other was Woody. The two of them knew she was a fan of performance art. As soon as they look off their headgear to make her an offer, she could not refuse. “It meant I could bring my whole self” to work, she said.

The story is in tune with our times, where the use of the right image, at the right time, matters as much to the success of venture capital initiatives as their underlying cash flow 

When a venture capitalist needs money, they often resort to another funding round. Then another. And another. The process ends up with a stock market flotation, which does not need to promise future profits either, as long as the idea looks good. 

WeWork, the office servicing business, has been through the familiar sequence, ending up with an IPO prospectus which is not precise on how the company can turn hefty losses into profits but makes it clear that success, in large measure, will be achieved by founder Adam Neumann’s global ambition. 

To underline his importance Neumann is mentioned in the prospectus no less than 169 times. In mid-August, data provider PitchBook brought news that a company called Museum of Ice Cream had been valued at $200 million thanks to the success of pop-up interactive events hosted by Maryellis Bunn and Manish Vora.

A corporate carpooling service called Scoop won backing from several companies to take its valuation to $250 million. TuSimple raised money for automated trucking. Boatsetter has developed boat rentals.  Internet service provider Cloudfare is planning an IPO.  SmileDirectClub, the at-home teeth-straightening service, backed up by images, has filed for one.  It goes on. 

Each of these businesses displays the same inner confidence as the founders of WeWork and the Museum of Ice Cream. Or, going further back, Amazon and Facebook. 

Backers are still keeping the ball rolling by continually raising large sums of money itching to find a home. Established firms like Sequoia and newcomers, like tennis player Serena Williams, are among their number, adding a little fairy dust to the causes they choose to back. Private-equity firms are also getting sucked in. Family offices are providing some of venture capital firepower, although long-established businesses have tended to be more cautious.

The growing number of unicorn companies in the US, worth more than $1 billion apiece, now total $600 billion in value. And, according to surveys, entrepreneurs who succeed are apparently worth backing again.

In a blog Andrew Vasylyk, co-founder of StartupSoft, says he was told by a corporate founder: “If you’re a founder that previously had an exit, raising capital is almost laughingly easy and a phone call away.”  He added: “It is not uncommon for investors to almost blindly back previously exited founders.”

Recruitment consultants are eternally searching for executives capable of achieving perfection, known as purple squirrels in the trade. Employers are increasingly worried they will fail to hold onto executives desperate to forge their own destiny, while the funding window is open. Pay demands are escalating. 

Mercer’s 2019 Talent Trends survey showed corporate executives were 25% more likely to view human talent migration as a disruptive force than in 2018. Around 73% expected significant disruption for their sectors over the next three years, against 26% a year ago. This sharp shift was most pronounced in life sciences, consumer goods and energy, but common elsewhere.

In this age of wonder, it is hard to know when, and whether, venture capital will peak. But quality issues do appear to be in shorter supply than a year ago.  And tech stocks can prey off each other, as established companies, which is when operational excellence really matters.

As well as the WeWork IPO, August brought news that Tumblr, a former blogging behemoth has been rescued by Automattic for a fraction of the $1.1 billion paid for the business by Yahoo six years ago, and a smaller fraction of the $18 billion Tumblr was once worth as a listed company  

Even in the current environment, what goes up, can easily come down. We may relearn that lesson on a broader front, sooner than we might like. 

 

 

 

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