March 23, 2024

Let me start off with something that might sound a bit cynical: Venture Capital firms are in the business of making money for their clients and they don’t give a hoot about your startup’s idea, narrative, or cause – those are just packaging.

The only thing early-stage investors care about is whether you will grow quickly enough to be attractive for another round of funding and increase the value of their initial investment.

Much like Ponzi schemes, the gains of previous investors are paid for by the new entrants, who are wooed by friends, promises, half-truths, and strategically crafted narratives. The reality matters less than the pitch.

For instance, a startup with a sizable war chest can afford today’s exorbitant user acquisition costs and appear to be the next big thing on paper by throwing money at (somewhat) vacuous growth. As long as your new board member has a triple-digit success story to share, that might be all that’s needed to secure more funds for sustaining the invest-grow-invest cycle. Even if LTVs are in the gutter and long-term prospects are grim.

Of course, I’m simplifying things and this doesn’t hold true for all VC funds. And it’s not like anyone is intentionally scamming or that there’s an actual Ponzi scheme in play. These fund dynamics are the inevitable product of the VC environment.

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