Podcast highlights: VC Problems and Post-Exit Blues

A couple of interesting podcasts appeared in the past few days, both echoing topics covered in Low Risk Rules. Consider this week’s instalment a two-parter.

Part 1: How bad is it in VC Land?

I’ve been critical of the marketing tactics of Chamath Palihapitiya in the past, and so you might be surprised to hear that I was listening to his “All In” podcast this past week. I do like to use it to gauge the pulse of the tech/VC investing community, and this week’s discussion was decidedly negative on that topic. (Relevant discussion begins around the 47 minute mark.)

To summarize, after spending years pumping early stage shitcos to the general public, now, with some sober second thought, it seems, that we can all agree that early stage investing is hard. <Insert eye roll here.>

Some of the relevant quotes from the three hosts:

Over 40% of 2018 vintage funds have not made a single distribution yet. And it's getting to the point, year five, six or seven, where you probably should have had some distributions occur.

We used to be in a world where by year five, six or seven, you could return money. You just can't do that anymore, unless you get extraordinarily lucky… and so the problem with that is that at some point, you have these paper marks that say you're winning, and things are working, but there's no path to liquidity.

Chamath takes this opportunity to advertise the returns in his funds (conveniently glossing over the terrible returns experienced by the bag-holders in the SPACs he sponsored.) But his angle is instructive to the person getting sold VC funds by their investment advisor or multi-family office.

The primary obsession of the earliest investors is getting out: “liquidity” in the common lingo. Chamath talks about the challenge of selling into secondary markets, and hints at “tactics” used to sell in order to return capital to his investors. “Managing liquidity is impossible,” he says. “I would have been in real trouble without reasonably liquid secondary markets. I mean, my numbers would be a quarter of what they are.”

Responded co-host Jason Calacanis, “Yeah. And I took advantage of almost every time I had one of those opportunities to sell some shares, pare some positions.” 

The lesson here is that these investors rely on speculative bubbles to get the liquidity they so desperately need. Without it, they don’t make their billions. And so they use their public platforms - their podcast, their Twitter accounts with millions of followers, and financial media - to fuel the bubble. Their interests are not your own. They are selling to you because they need “liquidity.” They are not on your side.

Is the model broken? They seem to be saying that it is. It worked very well during the Covid years when markets were flooded with cheap capital. It’s working less well today without a constant flow of almost-free money.

But that doesn’t mean they are just going to give up. We are at the beginning of another huge opportunity here… right? Of course!

The good news is that we now have maybe the most exciting tech wave ever, which is AI, definitely the most exciting tech wave since the which is AI, definitely the most exciting tech wave since the internet came along in the mid to late 90s. So the hope is we're finally going to have like really exciting things to invest in again. 

They’re not going to be able to shove this crap into SPACs again, as that ship has sailed. However, don't count them out.

There's going to be another turn on what happens on the IPO markets, because you can't have so many companies waiting with very, very few ways of accessing public market capital and exposure. I just think that is fundamentally broken and we're gonna have to reinvent. We tried once with SPACs, we're gonna have to go back to the drawing board and try again. Direct listings, secondary markets that are more fluid. I don't know what it is, but we need to do something because the status quo doesn't work.

Mass market VC investors should get ready. Chamath made it clear that the returns for investors in 2021 vintage funds are going to be garbage. If you buy what they’re pumping the next time around, your returns will be equally bad.

And yet… investors in public markets can obtain similar returns with far less risk, while maintaining the ability to turn their investment into cash at any time. It’s only because I’ve seen this play out over a few cycles that I have come to the conclusion that it’s just not worth it.

Part 2: The Post-Exit Crash is real

I spent some time exploring the difficulty faced by so many entrepreneurs after the sale of a business, including interviewing many people about their post-exit experience. I was struck by the emotions expressed by so many, and in particular how they were overtaken by a sort of post-exit depression.

Listening to Shane Parrish’s Knowledge Project interview with Erin Wade, founder of Homeroom Mac & Cheese, her comments about how she felt after the sale of her business echoed so much of what I had heard from others. (The relevant discussion starts around 50 minutes in).

“We don’t talk that much about what happens when you actually get to achieve your dream.”

Shane asks her if she went through any depression after the sale.

“Oh my God, yeah,” she says. “That was a a dark moment in my life. Honestly, you know, for me it felt like raising this child until they're like 10 years old and then giving it up for adoption to another family where I still get to visit it, talk to them, but I don't get to be responsible for what happens to them. It's really emotionally painful. It was also a time when I think if the world had been normal (since I sold when it was, you know, during the pandemic), I would have traveled a lot, I would have just totally distracted myself, but there was nothing. You know, the world was a bleak, dark place in general and I couldn't travel. I couldn't distract myself, so it was really this moment of, like, oh my God who am I without my company, my work, have I made a mistake. It was a really a sad hard time.”

So much in her commentary rings universal to everyone I spoke with - in particular feeling a loss of identity and a very common comparison to a separation from a child.

I focus on this because so many people come to investing after the sale of a business, and they have yet to settle into what their new life will look like. Making big decisions about investment strategy, in a field they may be completely unfamiliar with, puts them at risk of making mistakes that could cause permanent damage to their future lifestyle. Your mental state is intertwined with the quality of decisions you make.