VC Hype and its 5 disastrous long-tail consequences

Public relations, i.e. hype, is important for venture capital investments to improve the value of the company and create a market for future rounds, after what the investment banks want to take the company public, or the strategic acquirers want to buy the company before it takes off. The hype of huge valuations at every turn is duly reported in the business press to make the company a 'unicorn' (please note that any company can become a VC unicorn and I have written on Forbes about the method to do so .< /p>

So what's wrong with this hype? It has a long tail that often has unintended consequences.

The destruction of prices in the stock market

Companies that come to market with a lot of hype from venture capitalists, investment banks, or the business press often end up with high stock prices - unsupported prices by the fundamentals. This hype may be partly responsible for the destruction of wealth in the stock market (price as of 11/14/22):

· Carvana went from around $360 to around $8.

Affirm went from $164 to around $10.

· Redfin went from $96 to around $8. And now a financial analyst tells us the company's model is "flawed." If so, should a professional financial analyst have disclosed it before it fell? Or before it reaches a market cap of $10 billion? Did the hype affect the judging?

The destruction of prices in the crypto market

Sam Bankman-Fried was funded by venture capitalists and promoted by the press - until his Icarus-style fall from grace caused much pain among many investors who found themselves with the bag. But the hype was in full swing. Now gurus like Elon Musk tell us they could see through the hype. Why didn't they say anything sooner?

Value destruction in corporate mergers and acquisitions

The percentage of business acquisitions that fail is said to be between 70% and 90%. Some of these are likely to be corporate acquisitions of hot VC-funded companies heavily touted by the business press so that VCs can exit at an attractive valuation. And possibly destroy the value of the business. Caveat emptor?

The dilution and brainwashing of entrepreneurs seeking early venture capital

Venture capitalists get high returns by finding a big chunk of the companies they fund, then hoping for a few hits and home runs. Considering the risk they take, and the few potential unicorns, the dilution seems justified. But when the business press endlessly promotes unicorns that have received VC, they are playing into the VC game. The reality is that 94% of unicorn entrepreneurs took off without a VC, and 76% never had one. So early VC and the capital...