Asshole Density as a measure of Bubbles

Fascinating article on Pando Daily about how the VC community has moved from funding high potential people to funding Assholes:

Here’s the problem. Every venture capitalist, in every interview they’ve ever done will tell you the same casual lie: That they invest in people first and ideas second. They’ll tell you they invest only in people they’d want to work with. They’ll tell you that they have the luxury to say no to companies that don’t do things in line with the way they like to work, the way they like to treat people.

You don’t have to look too far into this year’s frenzied pace of dealmaking, and at the price tags of those deals to know that’s complete bullshit. In all too many cases, what venture capitalists are investing in is assholes.

It’s weighing on those who’ve been in the business for decades, and I’ve been having conversations about it all summer. A senior partner at a top firm recounted a partner meeting at breakfast recently.

“Why are we backing this guy?” he said to a younger rainmaker at the firm. “He’s an asshole.”

His partner replied: “Hey, you gotta get over it. It’s no longer about whether someone is an asshole it’s about can he make money.”

That conversation happened a year ago. Said this multi-decade veteran of the business: “It didn’t use to be that way.”

Possibly, but looking back at the dotcom era one can argue that it gets that way as the cycle moves up to Maximum Froth, in my experience the Asshole count and valuations both went up exponentially as the froth rose in the dotcom era. At its height anything and everything was funded, and some of those people were very definitely many cards short of a deck. To me it's more a sign we are starting to see the Froth appear in the current "Tech" bubble (though, to be pedantic, most of these companies are not in fact "Tech" per se, in that its not their technology that is critical, they are mainly digital versions of long established services with some form of networking function overlayed on them to simplify the transaction between buyer and seller. It's the attraction of eyeballs - sorry, their traction - that is critical, as there is only space for a few winners)

The other very telling comment made in the article is this one:

At some point this business became about funding a founder, not a company. This has coincided with three other theories of venture capital portfolio management that have become prevalent of late. The first is an obsession with a VC’s “social game”—to steal the parlance of reality TV. Since 75% of venturebacked startups are destined to fail, VCs today assume they’ll do less damage overall by writing off a bad performer than doing the hard work to fix it. Even if they oust an ineffective founder, a company may be too damaged to salvage, meantime, the VC has ruined his rep of being “entrepreneur friendly” for nothing.

The second theory is the new valuation math: Given basic liquidation preferences and soft landings at bigger Valley companies, the risk to losing all your money is somewhat protected. Likewise, companies like Facebook and Google have thrown traditional valuation math out the window too, caring only if someone might disrupt them in another ten years.

So the only thing anyone cares about is the upside. VCs—in this point in the cycle—are smart to worry less about erring on the side of paying up too much for a deal than erring on balking at a seemingly high valuation. Especially when the next day Mark Zuckerberg could rewrite every rule by paying $2 billion for a hardware company that doesn’t even have a product on the market. As Bill Gurley of Benchmark says, “You can only lose your money once” if you invest. If you don’t, you can effectively lose that would-be appreciation many times over.

Is it the mantra of a bubble? Maybe.

I love how even the Valley pundits who insist they are "telling it like it is" shy away from the "Bubble" word - these above two point perfectly express the "game theory" of a Bubble dynamic. Anyway, on with the point:

The third change that rules venture decision making is an acceptance that no one has any clue of what works.

.....

The determiners of success in the Valley are no longer CIOs deciding on huge iron boxes that cost millions a pop. It’s not even whether geeky early adopters will like Twitter or FriendFeed more. It’s what teens around the world want to do on their phones. A hot mobile app has more in common with a movie premiere than a classic Silicon Valley tech company. And increasingly, VCs know they have no clue what’s a good idea and what’s a bad idea. Better to back all the apps showing “hockey stick growth” on college campuses.

This also is a descriptor of the beginning of the Frothy phase of the dotcom era - no VC knew what would work then either, so they invested in a huge range of patently daft ideas, praying for a few nuggest, because to not do so was job-risking. If one VC made a big play in a sector then the others piled into every other player in that sector (and by the end, even manufactured their own plays like pop svengalis manufacture boy-bands). Now to be fair, the sort of person who can set up and build a billion dollar company is seldom going to win the "person most admired for being nice and honourable" awards, and as Pando points out, the process of getting a company off the ground can make someone into an asshole - but Pando thinks This Time it is DIfferent:

The other sad reality is the continual erosion of what Silicon Valley—as a place—stands for, if anything. This used to be a place of misfits and changing the world. Even the legendary assholes had a cause beyond themselves and checks and balances on their board. It just may take another economic collapse to get back to that.

Pando also argues that the reduced cost of setting up a company has changed the power dynamic, but while that's true in the down-cycle and early up-cycle, by the time the Froth appears money is not the issue anymore. To me, this looks very cyclical. At the top of the dotcom bubble it wasn't about changing the world either, it was about get rich quick. Bubbles attract assholes, and they disappear again when times get hard. If you want to find a low asshole industry sector, look for ones in trouble - the mid 'noughties Valley was just that, and was arguably more asshole free than average.

And we are enetring the Frothy time, so expect the asshole count to increase. Then there will be a crash, a collapse, and things will go back to being more asshole free again - until the next bubble starts to froth.

(Update - a friend of mine pointed out that what I reallyw as saying is that asshole density is a measure of bubbletime, so I have changed the title to that ffrom my original)