Flock Theory #24
In most cases, excess capital does not improve the chances of success, yet the practice continues. I’m in good company, c10yrs and c$50bn ago, Marc Andreessen shared the very same view as Bill
A thought:
Bill Gurley tweeted this in reply to this, which is a concise summary of the distortion you can feel in seed stage markets - in short, big funds deploy seed capital in size as call options to ensure they can deploy much bigger capital in winners later. No new news here. And fear not, this isn’t a moan about how its harder to compete or a complaint that these mega funds are attracting all the LP dollars. That is the game today, either you play that game or you play a different one. I’m more interested what excess capital means for founders and the companies they build.
Now excess capital in other markets can cause distortions, but the impacts are very different. Excess capital in public markets might cause valuations to rise beyond historically “normal” levels, the same in credit markets where companies might borrow more cheaply than perhaps they ought to. The same I would argue in leveraged buyouts, excess capital [to deploy] might increase competition such that PE firms bid up to win deals. If you stack rank these markets from “least to most impacted by excess capital”, it’s probably in the order I set out - public companies rarely fail because they’re overvalued, issuers rarely default because they’ve borrowed more cheaply and I would say for the most part, LBOs don’t fail because they were expensive (this is more tenuous but bear with me)*. In all these markets, the price clearing more richly doesn’t generally cause companies to fail. It might not make financial sense, but it doesn’t have such a profoundly adverse effect on the outcome of the underlying company.
If we extend this thinking to early stage companies, despite this becoming an increasingly unfashionable view, it’s my continued belief that excess capital does have a profoundly adverse effect on early-stage companies. Early abundance allows for parallel attempts at too much too soon, which brings with it the associated over-hiring and communication issues. Nimble teams become bloated with misguided feelings of success; the paper wealth creation, the publicity of a funding round and the inevitable new office. Even at the growth stages, a single ambitiously sized and priced round can cause all manner of equity value destruction later on. And yet, the narrative today is that of “king-making winners by flooding them with capital” and “the AI talent war” as a justification for raising $5m+ pre-product. In most cases, excess capital does not improve the chances of success, yet the practice continues. At least I’m in good company, c10yrs and c$50bn ago, Marc Andreessen shared the very same view as Bill.
*yes I am oversimplifying for effect, we all know that over-leverage for issuers and LBOs can end badly too
A read:
A quote:
“I would rather be vaguely right, than precisely wrong” John Maynard Keynes
A meme:
