After taking a look forward at how the funding landscape is posed to change this year in our recent program, 2024 Investor Outlook: Forecasting the Year Ahead, we thought it would be apropos to look back on how the current market conditions came to be, the mistakes that were made, and the lessons learned along the way.
Sharing his thoughts in a recent LinkedIn post, AgeTech Collaborative participant and co-founder of QED Investors Frank Rotman outlines four key investing themes or mistakes that were made during the “peak madness” that culminated in 2021 and what can be learned from each.
Read Frank’s full post below and share your thoughts in the comments!
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Right now, "mistakes were made" is a hot topic.
Here are a few common learnings I'm hearing from Investors who don't want to repeat the mistakes they made during "peak madness".
Theme 1
Paying crazy prices was just playing the game on the field. It was market at the time and the alternative was to sit out the cycle.
Learning 1
An entire vintage of VC funds are going to underperform as a result of everyone "playing the game on the field".
And an entire vintage of startups will have LOWER odds of success due to their messed up cap tables, sloppy deployment of capital and mis-aligned incentives (existing investors vs. new investors vs. the team).
Raising the bar and pacing the deployment of capital would have been better than sitting out and better than fully leaning in.
Theme 2
The deals were moving so quickly that conducting proper diligence was impossible. Credible teams with tangible momentum, a cap table with Tier 1 Investors and 3X+ growth projections were almost rubber stamped.
Learning 2
The speed dating that took place between Investors and Founders during peak madness is frequently ending in tears. Most first Board meetings post-investment were "oh sh*t" Board meetings because Investors finally had the time to dig in and understand what they invested in.
Many Investors feel "fooled" by the highly sanitized views of the startups they invested in when timelines were compressed which has led them to feel low/no attachment to these companies if they need help or money.
Theme 3
It was very difficult to win a deal without offering an uncomfortably large amount of capital and being OK with the “use of proceeds” going to unproven initiatives.
Learning 3
Abundant capital led to Founders biting off too many new initiatives and hiring too many people too quickly. And the environment led to Investors giving bad advice on what startups needed to accomplish with the capital they were raising.
The combination has created a class of companies that burned a lot of cash without a lot to show for it which has made them incredibly difficult to fund. Wasted money hurts Investor returns and wasted money dilutes Founders which has led to many “why bother” situations.
Theme 4
The distortion caused by the combination of an abnormally low interest rate environment and pandemic trends made many startups look better than they actually were.
Learning 4
One of the most important questions to answer when funding a startup is “why now” and unfortunately the “why now” for many startups funded during peak madness was fueled by temporal market conditions.
Most of the historically greatest startups were built on top of new S-Curves that represented permanent change (i.e. – internet, mobile, cloud, etc). But during the ZIRP era, many startups were scaling products that only worked in a low rate environment with free flowing capital. When these conditions “normalized”, many startups found they no longer had product market fit.