The 2010s have been the decade of the venture capitalists – again. Just like in the 1990s Silicon Valley has minted new millionaires and billionaires on a monthly basis. Many of these entrepreneurs have created viable businesses that have changed our lives, but others have been selling snake oil to unsuspecting investors (Looking at you Adam Neumann). As the total money invested in private equity has surpassed the total assets of hedge funds for the first time in 2019, according to Preqin, it is worthwhile thinking about the possibility of a private equity (PE) or venture cap (VC) bubble. I am not sure there is a bubble and I am not predicting a correction or a crash, but as the chart below shows, the amount invested in venture cap deals has grown by 180% over the last decade.
If you want to spot a bad investment or a potential bubble in venture capital it can be helpful to think like an entrepreneur to spot the weaknesses of a proposed venture. On the other hand, if you want to become a billionaire, then it is helpful to know how to maximise the value of your business venture. Thus, here is my guide on how to create a VC bubble in five easy steps:
Have a valid business idea. Think about a product or a service that can make life better for customers and that you sell profitably. If you have a science or engineering background you might be able to design and develop such a product yourself, but if you have a humanities degree or no degree at all, you might not. Don’t worry. You can easily become a futurist and thought leader whose creativity is valued by venture capitalists and nascent growth companies. It doesn’t matter that you have no clue what you are talking about, just use a lot of big words and fuzzy concepts that cannot be defined. Also, in some cases, a business idea needs no qualifications at all. Look at Gwyneth Paltrow and Mari Kondo. The former made a fortune by selling things nobody needs while the latter made a fortune out of throwing these things away.
Make it woke. It isn’t enough to build something that works and is easy to use anymore. This is the 21st century and you and your product need to be “woke”. I don’t know what that means but neither does anyone else. The important thing is that your product or service is much more than it seems to be on the surface. Adam Neumann and WeWork didn’t just create shared office spaces. Anybody can do that. WeWork created a lifestyle product. Here is a quote from their current website (I swear, I am not making this up): “When we started WeWork in 2010, we wanted to build more than beautiful, shared office spaces. We wanted to build a community. A place you join as an individual, ‘me’, but where you become part of a greater ‘we’. A place where we’re redefining success measured by personal fulfillment, not just the bottom line. Community is our catalyst.” I am surprised, they didn’t manage to include the word “disrupt” in that statement, but I guess you can’t have it all.
Multiply it with a large number. Your product or service is just a niche product that doesn’t have mass appeal? Don’t despair. Just redefine your target market. 1% market share of a $1 trillion market means your company has a revenue potential of $10 billion per year. Just look at Uber. Uber started out as a woke taxi company. But the taxi market in the US isn’t too big, so they aspired to become the world’s leading ride-hailing company. And when that wasn’t enough, then they re-defined themselves as a company that will disrupt the global logistics market. And the global logistics market apparently was a $4.73 trillion market in 2018. You are growing weed on your balcony? No problem. Cannabis is the miracle drug that will revolutionise the global pharmaceutical market and that market is god knows how big. You are able to code a few lines of software that doesn’t crash every five minutes? Great. You can create your own cryptocurrency that will replace the US Dollar as the world’s reserve currency. If you have a dream, dream big.
Be confident, be very confident. Every entrepreneur and venture capitalist is overconfident in their ability to be successful. If they weren’t, they wouldn’t even start their business given the high failure rates for new ventures. But your overconfidence is the key ingredient to creating a valuation bubble in your business. If you think you can walk on water, people will eventually start to believe you. If you have doubts, your investors will sooner or later have doubts as well. The fewer doubts you have about your ability to beat your competition and grow your company to a 90% market share, the higher the valuation of your company will be. Always remember that your investors are really bad at predicting future growth and profitability of your company so they take their hints from the one guy who knows most about the industry: you.
Create a following. This is the 21st century and anyone who is somebody is an influencer. So spread the gospel not only to venture capitalists and investment bankers but also to retail investors and the wider public. The better you are at creating a following, the more the valuation of your company will rise because more investors want to have a piece of the cake. Of course, the better you are at creating a following, the more you will attract other entrepreneurs to your industry who are backed by other venture capitalists. In a normal economic setting, increased competition means a lower market share for your company and lower profit margins. But you know that you are better than all your competitors and will drive them all into bankruptcy. So these new entrants aren’t competitors, they are multipliers of your message and should be embraced as long as they are useful.
If you follow all these steps, you should be able to create a business that will never be profitable but is valued at several billion dollars in the private market. Once you get there, make sure you head for an IPO as soon as possible and cash in your shares as soon as the lockup period is over. If you are concerned about the prospects of the listed market or your own business, you might even be able to get a heavily discounted loan against your illiquid shares. Better to get away with 40 cents on the dollar than wait until you can sell the shares and they are worth 20 cents on the dollar. Just look at Adam Neumann. He did well for himself.
Deal volume for venture capital and private equity capital raise