I did a business plan competition at one point in College. And I didn't do well, and I realized later the reason I lost, was I was focusing too much on the product, and not enough on the business plan.
The group that won third place beat us out by... not building a product that anyone could use (Their proposal was a DJ jukebox app for going to the club. Where you could pay money to have a chance to hear the song you want played at the club). I will eat my shorts if anyone has actually coded any part of that app since the competition (2016). But it didn't matter cause 3rd place walked away with like $5k, and that was the point of the competition.
I also got suckered into a business plan competition in College with the same mindset you had but I suspect they are actually recruiting events for consulting firms -- it's not the answer they are looking for, but the ability to make convincing slides and passion for the same :)
The idea is that the product itself will be judged by the market. A business plan is something that you present to investors (and the jury) to show them how you are going to reach that market in the first place.
Investors only want to make a return on their investment, and thus do not really care what the product is, as long as they are convinced that there is a market of appropriate size and that you can reach that market.
> Investors only want to make a return on their investment, and thus do not really care what the product is...
Here, in a nutshell, is the entire problem of misaligned incentives in modern business. The product becomes the the shares of stock. Larian's success with Baldur's Gate 3 is because they obsessed about the product and their customer. Apple's success is because Steve Jobs obsessed about the product and the customer (despite being publicly traded) and Apple continues to do so.
So many other companies are all about maximizing short-term extraction of shareholder value. They're not about the product or the customer anymore. This breaks the market mechanism, so few arguments of how the market will generate winners or fix the problem still make sense. The market is Wall Street, the stock market, not the market where customers buy goods.
How do we incentivize good product and customer service in a VC / activist investor / private equity world?
Yes, if you can provide a good return on investment, you can attract many investors.
But eg ESG investment is a thing. And so is Elon Musk fans essentially buying some entertainment with their shares. (The same might apply to Game Stop and cryptocurrencies.)
Apparently it was a business plan competition and not a product competition...which a product person should know--know your customer. Your product is a business plan.
We educate our children to participate in greater fool games.
Go to college, regardless of tuition.
Put your money in the stock market, regardless of its health and structure.
Buy bonds, regardless of the interest rate.
Own a house, regardless of market conditions.
---
Most people don't think critically about their money, which makes them easy prey for greater-fool games built on top of institions they were educated to trust.
> Most people don't think critically about their money
This is a bit of a naive viewpoint. Take your example of putting money in the stock market, regardless of its health and structure:
So I'll follow your advice and I'll think critically about it. I'm not an economist, but I'm technically and mathematically quite literate. And what I see is that historically, it's generally been a good idea to put money in the stock market. But of course that doesn't mean that will apply to the future.
Except, how can I tell whether the stock market is in good health? Even as an academic researcher, that is a really hard problem. The best I can do is look at the past, and then take a risk.
It's not my lack of critical thinking that is the problem. It's that it is a genuinely very hard problem.
The problem is that the stock market is moving in an increasingly greater-fool direction. Companies that don't ever pay dividends, companies that don't yield control rights, companies that have extensive protections for the founders, etc.
The problem with the stock market is not that its hard to tell whether you should be in or out. Its that there's so much pressure on the general population to own stock that the stock issuers can now get away with releasing essentially worthless stock (see Snapchat for an example) and still expect it to sell anyway.
Most of my family is shocked that I haven't vested in a 401k account. The fact that I haven't decided to funnel upwards of 5% of my income straight into the big craps table elicits an almost medical concern from them. They come to me in hushed tones and ask why I'm making such an obvious mistake, so I ask them why they expect their portfolios to perform well, and of course they can't answer.
I think that's what GP is talking about. I don't think it's unreasonable to put your money into stocks, but there are a ton of people in America that put a ton of money into the stock market without even getting to the point of doing some of the reasoning you do in your post.
>And what I see is that historically, it's generally been a good idea to put money in the stock market.
I've been following the stock market since 1995 and have come to precisely the opposite conclusion
Why?
You have zero ability to predict the state of the market at the point that you need liquidity. So it doesn't matter if your portfolio increases for 20 years, if you need your liquidity during a crash, welp you're fucked.
I don't think it's that hard. Just ask - is the S&P500 lower now than it was three months ago? If the answer is "yes" then maybe stay in cash and put that money in when the answer is "no".
Alternatively, if you want to get "fancy", you can use the 50/200 SMA crossover to determine entry and exit points. It's a much safer bet than "buy and hold" since it avoids massive drawdowns.
Using your example of the stock market, thinking critically about money also entails understanding how the stock market works. Most people don't understand how it's built in the first place. When buying a "stock", one is actually buying a derivative of a derivative.
Extending the idea of thinking critically about money, it's a safe bet that a majority of the population have no idea how money itself is issued or who issues it.
"Most investors when they buy a publicly traded stock believe that they own a part of some company. They think that somewhere there is a stock certificate or some indication of ownership that has their name on it, but this is not the case. When you buy a “stock” you are actually purchasing a security that affords certain entitlement rights related to registered stock which actual owners hold. The registered shares of a private company are directly owned by shareholders. In contrast, the registered shares of nearly all publicly traded equities are owned by Cede & Co., which is the nominee of the Depository Trust Company (DTC). (A nominee is a company whose name is given as having title to a stock, but does not receive the financial benefits of ownership.) Cede is a subsidiary of the Depository Trust Company (DTC) which is a subsidiary of the Depository Trust and Clearing Corporation (DTCC) and the DTCC is a private company owned by elite Wall Street firms and money center banks. If you need background or a refresher on DTC and DTCC, click on this link. Effectively, elite Wall Street firms and money center banks, not institutions and individual investors, own almost all of the registered shares of publicly traded companies in the US... Effectively, you are buying a financial derivative from brokers of a financial derivative they hold from Cede that is just a digital entry in your DTC account." [0]
Wait wait what's wrong about stock market? At least as long as we buy in gradually (from spare cash we have) over a time that's longer than a business cycle, ideally longer than 2 business cycles (which is the case with any normal retirement planning)?
Also, no one suggests buying bonds for the sake of it. It makes no sense and never did. Bonds are little but a balancing component for stocks.
There was a lot of investment advice to buy bonds even when interest rates were zero as this "balancing component" as you say. That was pretty much "buy bonds for the sake of it." One reason is because it decreases volatility and most people freak out when their nest egg loses 40% of its value in a market downturn, but I do think a lot of it was just laziness and carrying over advice from before the zero interest rate days.
Just by virtue of being a stock market, it's not guaranteed to always keep going up (e.g. look at other stock markets like, let's say, Japan).
In fact, the US stock market has been largely unique in the amount of long term growth it's seen.
This means that the default advice of "put your money in the stock market because, long term, it will go up" is wrong. It is wrong in the sense that _even if_ the bet is positive EV, the reason for the advice is wrong.
Instead, you'd have to argue about why the US market is special, what mechanism has allowed it to go up, and why that mechanism will persist in the future.
Moreover they're a safer vehicle as you approach retirement when your liquidity preference has a due date (the market might recover but you probably don't want to or can't delay 4 years waiting for it).
There’s also the possibility of the market going 1917 Russian collapse or 1949 Chinese collapse, in which case you’d be left with literally nothing over night.
And not that dramatic, there’s also the chance of the Western market going October 1929, and not everyone is Lord Keynes in order to afford to ride that event out for the following 10-15 years (and I think Keynes was lucky there).
A "greater fool" game doesn't just require fools. In fact it doesn't require any fool at all, and by fool I mean people who really believe into what they are investing on. Only belief in that such fools exist matters.
For people playing the game, the actual value is not the important part, what is important is that they think the hype will continue and that the price will continue to go up. Their intention is to sell just before the hype ends, to profit off the supposed "greater fools". You lose if the "greater fools" you expected are not here.
Scammers trying to outscam each others if you want, not much trust here.
Separate apples and oranges. I think you are right that we are all participating in the greater fool game so educate your kids to think about the real game! It is an epistemological problem.
When you buy US bonds at a low interest rate you are lowering your risk because those bonds are supported by F-35s, nuclear bombs, and aircraft carriers, while, in general, other countries bonds don't have that shield. This is not an investment advice but if you have money bonds should be taken into account.
Stock market? Technology advances are accelerating, that is a reality, so buying ETFs does not seem bad to have some participation. The story doesn't end in software startups.
Go to college? Well, the tuition could be insignificant if the diploma gives you the signal and network to scale after graduating. If it is not, you can study in another place with zero or minimum tuitions or skip college.
> Put your money in the stock market, regardless of its health and structure.
I’m not convinced that this is a bad thing. The basic reason is due to broad market ETFs like VT/VTI/VXUS and similar.
The problem an individual investor has is primarily an issue of information density and information asymmetry. They don’t have the time to be an expert at the same level as institutional/professional investors, and institutional/professional investors have better sources of information.
So what can you do? Observe the behavior of institutional/professional investors as a proxy for your own analysis. What you see on even relatively short timescales is that as some investors leave the market pulling prices down, the lower prices convince other investors to enter the market (more deeply). Individual companies/stocks may flounder, but the market as a whole on a long enough timescale appreciates in equivalence to inflation + new value.
This is inclusive of crashes, which are historically the /best/ times to invest. If you aren’t trying to pick stocks you completely change the risk calculation (and the reward, you won’t get 100x multiples). There’s nothing stupid about consistently investing in a broad market fund, but I’m open to evidence to the contrary.
Kahneman and Tversky identified several cognitive shortcuts (heuristics) that people use to make judgments and decisions, which can lead to systematic errors (biases)... often leading to irrational decision-making. Their research explains several irrational decision-making processes that we demonstrate while investing (either in private or public markets.)
The average student loan debt per student is around 30k, which is easily negated by the college wage premium, and also a much lower unemployment rate for college grads. it is not even close. This holds even for low-ROI majors and low-ranking colleges.
Put your money in the stock market, regardless of its health and structure.
after factoring in dividends , S&P 500 has pretty much outperformed everything and has a 10 % annual return, which solidly beats inflation.
Own a house, regardless of market conditions.
same as above. even someone who bought a home in 2004-2008 would be ahead now. home ownership easily beats renting.
market timing has generally been shown to be futile. the best time to buy stocks is always now.
always get downvoted when i make this type of post but no one has a good counterargument to the points. all this stuff is tracked and backed by many studies going back half a century or longer.
Where do the startups burn all that cash? The first one mentioned burned $20 million without even finding a product-market fit, the second one burned a BILLION in a year.
A decent programmer costs you maybe $250/y in wages, tools, office rent etc. Not counting equity grants as those don’t affect cashflow.
$20 million gets you some 80 man-years of solid senior-level programming. Where does all of that effort go? Just endless rewrites in different microservice frameworks?
Or is the money burned on something else? Google ads? AWS bills?
Assuming you have some saas product with a bit of traction, you raise $100M.
Why raise 100M? So you can DOMINATE growth within your vertical by hiring everyone away from their existing jobs, creating FOMO with marketing and then being acquired or doing some pump and dump like a SPAC - or maybe you can buy enough growth with other people's money to convince a friend of your Father (who is a banker) to underwrite your IPO cause your financials are slightly better than some shitcoin scam.
You can get to $1M/mo pretty easily if you get a fancy workplace with all the perks, hire 20-30 people for 250k+ each and spend $100-200k a month on ads and rent.
Remember, the whole goal of Venture and PE is to create a vehicle to dump a stock onto the public stock market at the highest delta between the IPO open price and their per-share common stock purchase price. That's it.
Doesn't matter what you make or why, or if it's fully legal, or good or bad or whatever - makes literally no difference as long as you can convince a banker that they will make 10-1000X on that specific transaction as soon as possible.
Predatory pricing. The startup business model is to lock customers and suppliers into one another through your platform and then boil the frog with price increases and cost reductions. If you don't successfully lock people in you fail. If you do, you have a nearly unbreakable monopoly and your investors can suck money out of the business basically forever.
Amazon, Google, and Apple are probably the most successful examples of this.
This seems like another variant on "tech is a bubble/ponzi scheme", but founders and VCs are evil because they know and are taking advantage of poor investors! Honestly I find it hard to care when bozos invest in a meme asset without understanding what they bought.
I feel like Thiel's point about stagnation is fundamental to this problems. A lot of these startups aren't providing real value, they are repackaging existing value with an undeserved markup. They can get away with it because there really isn't a lot of innovation anymore.
> How can investors believe a company that went from $20M to $100M ARR in 8 months could eventually get to $2.3B in revenue? They probably didn't! They just had to believe that someone ELSE could believe that something like that was possible. This is literally an academic representation of "passing the bag."
Right, and not just that -- by buying those shares at that price, they played a big part in fooling others into thinking it was possible.
Anyway, great article. I think it describes exactly how the economy functioned until very recently.
Put $X in. Wrap it in some emotionally-driven frenzy. Get some fraction of $X out. This pattern feels closer to a Ponzi scheme than investing. That said, it's hardly exclusive to VC. Some certainly win from such scenarios. It would be interesting to know who they are.
An interesting question is whether technology can ever change the greater fool calculus. Collective behaviors of this type are building on top of information flows (actually the lack thereof) and, at least in principle, digital technologies can enable radically different information landscapes.
This applies far beyond tech VC, which is a niche within a niche: The capital markets architecture and the financing of commercial activity is predicated on information disclosures that became common practice between ~1500-1600 AD and haven't changed much since.
While information technology will never tell the future, it can certainly change the distribution of who knows what and when about the past and present.
Readit News
The group that won third place beat us out by... not building a product that anyone could use (Their proposal was a DJ jukebox app for going to the club. Where you could pay money to have a chance to hear the song you want played at the club). I will eat my shorts if anyone has actually coded any part of that app since the competition (2016). But it didn't matter cause 3rd place walked away with like $5k, and that was the point of the competition.
Investors only want to make a return on their investment, and thus do not really care what the product is, as long as they are convinced that there is a market of appropriate size and that you can reach that market.
Here, in a nutshell, is the entire problem of misaligned incentives in modern business. The product becomes the the shares of stock. Larian's success with Baldur's Gate 3 is because they obsessed about the product and their customer. Apple's success is because Steve Jobs obsessed about the product and the customer (despite being publicly traded) and Apple continues to do so.
So many other companies are all about maximizing short-term extraction of shareholder value. They're not about the product or the customer anymore. This breaks the market mechanism, so few arguments of how the market will generate winners or fix the problem still make sense. The market is Wall Street, the stock market, not the market where customers buy goods.
How do we incentivize good product and customer service in a VC / activist investor / private equity world?
Yes, if you can provide a good return on investment, you can attract many investors.
But eg ESG investment is a thing. And so is Elon Musk fans essentially buying some entertainment with their shares. (The same might apply to Game Stop and cryptocurrencies.)
Deleted Comment
Dead Comment
Go to college, regardless of tuition.
Put your money in the stock market, regardless of its health and structure.
Buy bonds, regardless of the interest rate.
Own a house, regardless of market conditions.
---
Most people don't think critically about their money, which makes them easy prey for greater-fool games built on top of institions they were educated to trust.
This is a bit of a naive viewpoint. Take your example of putting money in the stock market, regardless of its health and structure:
So I'll follow your advice and I'll think critically about it. I'm not an economist, but I'm technically and mathematically quite literate. And what I see is that historically, it's generally been a good idea to put money in the stock market. But of course that doesn't mean that will apply to the future.
Except, how can I tell whether the stock market is in good health? Even as an academic researcher, that is a really hard problem. The best I can do is look at the past, and then take a risk.
It's not my lack of critical thinking that is the problem. It's that it is a genuinely very hard problem.
The problem with the stock market is not that its hard to tell whether you should be in or out. Its that there's so much pressure on the general population to own stock that the stock issuers can now get away with releasing essentially worthless stock (see Snapchat for an example) and still expect it to sell anyway.
Deleted Comment
I think that's what GP is talking about. I don't think it's unreasonable to put your money into stocks, but there are a ton of people in America that put a ton of money into the stock market without even getting to the point of doing some of the reasoning you do in your post.
I've been following the stock market since 1995 and have come to precisely the opposite conclusion
Why?
You have zero ability to predict the state of the market at the point that you need liquidity. So it doesn't matter if your portfolio increases for 20 years, if you need your liquidity during a crash, welp you're fucked.
Alternatively, if you want to get "fancy", you can use the 50/200 SMA crossover to determine entry and exit points. It's a much safer bet than "buy and hold" since it avoids massive drawdowns.
Extending the idea of thinking critically about money, it's a safe bet that a majority of the population have no idea how money itself is issued or who issues it.
"Most investors when they buy a publicly traded stock believe that they own a part of some company. They think that somewhere there is a stock certificate or some indication of ownership that has their name on it, but this is not the case. When you buy a “stock” you are actually purchasing a security that affords certain entitlement rights related to registered stock which actual owners hold. The registered shares of a private company are directly owned by shareholders. In contrast, the registered shares of nearly all publicly traded equities are owned by Cede & Co., which is the nominee of the Depository Trust Company (DTC). (A nominee is a company whose name is given as having title to a stock, but does not receive the financial benefits of ownership.) Cede is a subsidiary of the Depository Trust Company (DTC) which is a subsidiary of the Depository Trust and Clearing Corporation (DTCC) and the DTCC is a private company owned by elite Wall Street firms and money center banks. If you need background or a refresher on DTC and DTCC, click on this link. Effectively, elite Wall Street firms and money center banks, not institutions and individual investors, own almost all of the registered shares of publicly traded companies in the US... Effectively, you are buying a financial derivative from brokers of a financial derivative they hold from Cede that is just a digital entry in your DTC account." [0]
[0] https://smithonstocks.com/part-8-illegal-naked-shorting-seri...
Also, no one suggests buying bonds for the sake of it. It makes no sense and never did. Bonds are little but a balancing component for stocks.
Just by virtue of being a stock market, it's not guaranteed to always keep going up (e.g. look at other stock markets like, let's say, Japan).
In fact, the US stock market has been largely unique in the amount of long term growth it's seen.
This means that the default advice of "put your money in the stock market because, long term, it will go up" is wrong. It is wrong in the sense that _even if_ the bet is positive EV, the reason for the advice is wrong.
Instead, you'd have to argue about why the US market is special, what mechanism has allowed it to go up, and why that mechanism will persist in the future.
The same is largely true for housing btw.
There’s also the possibility of the market going 1917 Russian collapse or 1949 Chinese collapse, in which case you’d be left with literally nothing over night.
And not that dramatic, there’s also the chance of the Western market going October 1929, and not everyone is Lord Keynes in order to afford to ride that event out for the following 10-15 years (and I think Keynes was lucky there).
For people playing the game, the actual value is not the important part, what is important is that they think the hype will continue and that the price will continue to go up. Their intention is to sell just before the hype ends, to profit off the supposed "greater fools". You lose if the "greater fools" you expected are not here.
Scammers trying to outscam each others if you want, not much trust here.
When you buy US bonds at a low interest rate you are lowering your risk because those bonds are supported by F-35s, nuclear bombs, and aircraft carriers, while, in general, other countries bonds don't have that shield. This is not an investment advice but if you have money bonds should be taken into account.
Stock market? Technology advances are accelerating, that is a reality, so buying ETFs does not seem bad to have some participation. The story doesn't end in software startups.
Go to college? Well, the tuition could be insignificant if the diploma gives you the signal and network to scale after graduating. If it is not, you can study in another place with zero or minimum tuitions or skip college.
I’m not convinced that this is a bad thing. The basic reason is due to broad market ETFs like VT/VTI/VXUS and similar.
The problem an individual investor has is primarily an issue of information density and information asymmetry. They don’t have the time to be an expert at the same level as institutional/professional investors, and institutional/professional investors have better sources of information.
So what can you do? Observe the behavior of institutional/professional investors as a proxy for your own analysis. What you see on even relatively short timescales is that as some investors leave the market pulling prices down, the lower prices convince other investors to enter the market (more deeply). Individual companies/stocks may flounder, but the market as a whole on a long enough timescale appreciates in equivalence to inflation + new value.
This is inclusive of crashes, which are historically the /best/ times to invest. If you aren’t trying to pick stocks you completely change the risk calculation (and the reward, you won’t get 100x multiples). There’s nothing stupid about consistently investing in a broad market fund, but I’m open to evidence to the contrary.
Kahneman and Tversky identified several cognitive shortcuts (heuristics) that people use to make judgments and decisions, which can lead to systematic errors (biases)... often leading to irrational decision-making. Their research explains several irrational decision-making processes that we demonstrate while investing (either in private or public markets.)
Thinking Fast and Slow is such a great book…
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Dead Comment
The average student loan debt per student is around 30k, which is easily negated by the college wage premium, and also a much lower unemployment rate for college grads. it is not even close. This holds even for low-ROI majors and low-ranking colleges.
Put your money in the stock market, regardless of its health and structure.
after factoring in dividends , S&P 500 has pretty much outperformed everything and has a 10 % annual return, which solidly beats inflation.
Own a house, regardless of market conditions.
same as above. even someone who bought a home in 2004-2008 would be ahead now. home ownership easily beats renting.
market timing has generally been shown to be futile. the best time to buy stocks is always now.
We once thought there would be such premium. Wages held stagnant as people started going to college, though, and have continued to.
A decent programmer costs you maybe $250/y in wages, tools, office rent etc. Not counting equity grants as those don’t affect cashflow.
$20 million gets you some 80 man-years of solid senior-level programming. Where does all of that effort go? Just endless rewrites in different microservice frameworks?
Or is the money burned on something else? Google ads? AWS bills?
Assuming you have some saas product with a bit of traction, you raise $100M.
Why raise 100M? So you can DOMINATE growth within your vertical by hiring everyone away from their existing jobs, creating FOMO with marketing and then being acquired or doing some pump and dump like a SPAC - or maybe you can buy enough growth with other people's money to convince a friend of your Father (who is a banker) to underwrite your IPO cause your financials are slightly better than some shitcoin scam.
You can get to $1M/mo pretty easily if you get a fancy workplace with all the perks, hire 20-30 people for 250k+ each and spend $100-200k a month on ads and rent.
Remember, the whole goal of Venture and PE is to create a vehicle to dump a stock onto the public stock market at the highest delta between the IPO open price and their per-share common stock purchase price. That's it.
Doesn't matter what you make or why, or if it's fully legal, or good or bad or whatever - makes literally no difference as long as you can convince a banker that they will make 10-1000X on that specific transaction as soon as possible.
Amazon, Google, and Apple are probably the most successful examples of this.
I feel like Thiel's point about stagnation is fundamental to this problems. A lot of these startups aren't providing real value, they are repackaging existing value with an undeserved markup. They can get away with it because there really isn't a lot of innovation anymore.
Right, and not just that -- by buying those shares at that price, they played a big part in fooling others into thinking it was possible.
Anyway, great article. I think it describes exactly how the economy functioned until very recently.
This applies far beyond tech VC, which is a niche within a niche: The capital markets architecture and the financing of commercial activity is predicated on information disclosures that became common practice between ~1500-1600 AD and haven't changed much since.
While information technology will never tell the future, it can certainly change the distribution of who knows what and when about the past and present.