Karam Hinduja is the Founder and CEO of Timeless Media and Karma, a digital platform that curates leading alternative investment perspectives. As a spokesperson for impact investment and innovation in the media industry, Karam provides us with detailed insight into the venture capital bubble.
With the unstoppable growth and advancement technology has experienced in recent times, other industries and sectors have grown quickly as well, venture capital has ballooned, tripling in size.
Sums of capital exceeding those poured into companies during the dot com bubble have made their way to thousands of U.S. firms, with deal count doubling in the past twelve months.
It is not surprising, given the fact that venture capital as a sector has gained popularity, with a large number of investors looking to get in early on the next superstar company, however, due to the increased entry of inexperienced investors a very visible bubble has formed where lack of holistic understanding of underlying business models by a great deal of amateur investors with the hopes of finding success as venture capitalists is effectively damaging the general landscape.
As Karam Hinduja accurately explains:
“The circle of tech founders and venture capital firms, meanwhile, has become an echo chamber, one fueling the other with claims that they have found the next big thing. Of the $130 billion invested last year, a full $100 billion went towards technology. Advanced robotics or artificial intelligence may certainly make great headlines, but proper financial models rarely factor into the equation—indeed, an unsophisticated investor probably could not even read one.
This crucial lack of understanding has contributed to a toxic cycle in venture capital. Venture capitalists get on board at valuation X, and then attempt to jack up the perceived value of the company to X+10 for the next investor so that the first investor can make a return. The founders and CEOs of the companies play into this. Instead of building sound businesses, they focus on “positioning” their companies for the next funding round—effectively, playing branding and marketing roles in order to court the next group of investors, or to get bought by a bigger firm, instead of properly managing their revenues, costs, and operations.” –the expert affirms.
By definition, venture capital is of course about betting on early concepts. But there is surely a line between the core aim of the industry—to place strategic, informed bets on businesses with foreseeable growth potential—and what is actually going on in the industry today. It is ultimately unsustainable. Without a change soon, we could see the bubble burst.
So what can bring venture capital back on track? First, we need a change of mindset from founders and investors, who must fundamentally understand that there is a difference between a product or concept, and a business. They should ensure that the companies they are buying into offer a sound business case, rather than just ideas and sound bites. VCs should also foster the business acumen to help founders build businesses around their ideas and products.
We cannot let the unfounded ambitions of unsophisticated investors to continue fueling the money-driven echo chambers. At the end of the day, it is only the well-intentioned, if naive young founders—some of whom should never be CEOs in the first place—who will suffer. We owe it to the next generation of budding entrepreneurs and business owners to give them enough structure and a dose of reality.