The Critters Strike Back: An Open Letter From a Founder to VCs

Dear Founders and Investors,

Some of you may remember me from February 2022, where I issued a warning to all startups: Batten Down The Hatches

In retrospect, that call turned out to be rather prescient, and much of what was warned has come to pass. At my startup, I laid off 60% of our team two months after making that post. We are still iterating towards product market fit. The bubble in venture land has most definitely popped, and euphoria has been replaced with fear.

Well, I’m back one year later to tell you that the pendulum has swung too far.

Things in venture land have gotten far too bearish, and the lemmings, aka beta-chasing VCs who bought at the top, are now likely to sit on their hands at the bottom. Don’t be that guy/gal.

Exhibit A:

The Venn diagram of people investing in startups at 100x ARR in 2021 and now calling for “extinction events” is a circle (checks notes: he did invest in Coinbase).

Exhibit B:

What recent startup might he have passed on had he been looking at their Income Statement for the first four years of their existence? Figma.

VC stands for Venture Capital, not Private Equity.

Biased here as a VC-backed founder, but Venture Capitalists evaluating Seed and Series A companies solely based on their Income Statements is patently absurd. Apparently, many VCs need a founder to remind them that they are in the business of taking RISK. Your mandate is to find portfolio-defining companies i.e., the 100 and 1000x baggers. Companies that return 100-1000x typically do not have 'income statements' or "conventional business plans" in their early years because they are usually building something new. That takes time (typically 2-3 years*). More so, most great companies are born either out of genius, desperation (hail marys) or luck. There is simply no way to evaluate that in the early years based on conventional metrics.

Sure, you could only invest in companies that have "real business models" and "real revenue" but don't blame Cassandra when you wake up three years from now and realize that your entire portfolio consists of e-commerce brands and 'tech-enabled' services i.e., companies that have 0 shot of returning your fund.

What will happen to the platform plays, the moonshots, and the insane ideas that you pass on today? Most of them will die, but a few of them will return somebody else's fund and then some.  

But, but rates are at 5%! ZIRP isn't coming back!! It was all just a dream!!!

Come take a seat on mommy Cassandra's lap and let me explain some things to you, again.

In my Feb 2022 post, I outlined two important concepts in investing: Reflexivity and Lag

Reflexivity:

Markets are reflexive. Investors don't base their decisions on reality, but rather on their perceptions of reality instead. The actions that result from these perceptions have an impact on reality, or fundamentals, which then affects investors' perceptions and thus prices.

The economy may be strong today but the mere fact that investors view the future as being bleak makes the future bleak.

Lag:

What happens in the public markets typically shows up in private markets i.e. VC with a 6-12 month lag.

I hate to break it to you, but the time to go max levered long in the public markets was three months ago.

Exhibit C:

TL;DR We are in the early stages of a bull market; get jiggy with it.

So repeat after me: I am a venture capitalist, not a private equity investor.

Now repeat it, write it down, and put it under your pillow when you go to sleep tonight, dear VCs, because I can guarantee you that your LPs know sure as hell know the difference.

Yes, rates are at 5%. We're also on the cusp of having self-driving cars, 40% of the code at my startup is now written by AI (for free!), peace could break out in Ukraine, and crypto might even finally find a legitimate use case (lol).

Or maybe rates go to 10%. Anything can happen, and nobody knows anything.  

One thing has been true since the dawn of time, however: pessimists sound smart, and optimists make money. Choose wisely.

— Startup Cassandra

**No, your Google and Facebook counter-examples aren't really valid. Both those companies were built in an era where customer expectations for products were far lower than where they are now.