Becoming the greatest venture capitalist, unicorn capital needs, fake it

The future of innovation is global. We discuss it here.

With Dall-E: an expressive oil painting of a venture capitalist handing a term sheet to an entrepreneur depicted as an explosion of a nebula

How to be the greatest venture capitalist?

Venture capital is a highly competitive field that takes a lot of skill, knowledge, and dedication to succeed.

In his book, "How to Invest: Masters on the Craft," David Rubenstein interviewed some of the world’s leading investors and asked them to share practical lessons about what it takes to pursue a successful career in investing and build firms that endure over the long term. The list is long and distinguished, including Larry Fink (Blackrock), Seth Klarman (Baupost), Ray Dalio (Bridgewater), Jim Simmons (Renaissance), Marc Andreessen (Andreessen Horowitz), Michael Moritz (Sequoia Capital), and David Blood (Generation) – and of course David himself is the founder of the venerable private equity firm Carlyle.

For my Forbes column, I had the opportunity to sit down with David and dive into what his book means for venture capital and startup innovation.

—> Here are five key take-aways.

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Unicorn capital needs

Over 400 unicorns have not raised capital since 2021. A wave of down rounds is coming. “Founders assiduously avoid down rounds because they signal that a company’s to-the-moon trajectory has been derailed, battering morale and wiping out millions, and sometimes billions, of paper wealth for startup founders and employees. They also represent a loss for venture capitalists and their investors, called limited partners, and can result in legal headaches. Yet ask most tech industry professionals and they will grimly confirm that such deals are becoming inevitable.” 

Unicorn exits would help solve this. But this has dried up. “Since 2021, the value of American startups has cratered and how: total exit value last year was only around 10% of 2021’s total, according to a recent PitchBook report. Thus far in 2023, exit value is even more in the dirt. If we annualize the startup exit value of Q1 2023, the total value of M&A and IPOs of American private tech companies would be around 68% less than the already-depressed numbers of 2022.” When will unicorn exits manifest themselves?

That’s why growth-at-all-costs is out. Capital efficiency is in. In 2021 “It didn’t matter whether you were burning money left and right: As long as you had chubby growth numbers, a strong story and charisma, your round was pretty much guaranteed. But as cash becomes more expensive, investors are giving more and more attention to resource-focused, shrewd founders who can handle the hard times ahead. In 2023, most VC meetings focus on whether a business can deliver sustainable, efficient growth during the downturn. And, as far as our anecdotal evidence is concerned, most founders haven’t quite adjusted to the change.”

And with this coming capital crunch, the other thing that should be in is Founder Mental Health. “Behind the glamor and front-page interviews and features, the life of a founder can often cause severe issues such as depression, burnout, panic attacks and imposter syndrome that take a toll on one’s mental health — and, if not treated, their startups and the productivity of those within it — employees, operators and executives alike — can suffer. In 2019, a report showed that 72% of surveyed entrepreneurs self-reported mental health issues, according to Forbes...it is very likely that they would’ve increased significantly in light of the pandemic, the uncertainty caused by the SVB and FTX collapse, and the widespread impact of the economic downturn that has resulted in a severe cash crunch and massive layoffs.”

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Interesting discussions

An open network for ecommerce promises to level the playing field for smaller players in India. India's commerce minister, Piyush Goyal, has called on e-commerce giants such as Amazon and Flipkart to join the Open Network for Digital Commerce (ONDC), a zero-commission platform that allows buyers and sellers to do business regardless of the service they use.

I recently wrote (with chat GPT) about the future of fintech according to AI. One of the areas I’m fascinated by is how large language models and new artifical intelligence applications more broadly will affect financial services delivery and back end infrastructure.

Good piece diving into some the prescient areas. “This ability to train LLMs on vast amounts of unstructured data, combined with essentially unlimited computational power, could yield the largest transformation the financial services market has seen in decades. Unlike other platform shifts—internet, mobile, cloud—where the financial services industry lagged in adoption, here we expect to see the best new companies and incumbents embrace generative AI, now.” But who will win? Incumbents or startups? “incumbents will have an initial advantage when using AI to launch new products and improve operations, given their access to proprietary financial data, but they will ultimately be hampered by their high thresholds for accuracy and privacy. New entrants, on the other hand, may initially have to use public financial data to train their models, but they will quickly start generating their own data and grow into using AI as a wedge for new product distribution.”

QR codes are driving inclusion in Indonesia. “From food carts lining Jakarta’s raucous streets to wet markets in Indonesia’s most remote villages, one type of barcode is becoming ubiquitous. The quick-response code, or QR, lets customers make payments by scanning it with their mobile phones. It’s fast, easy and cheap for merchants — applying for your own QR code costs less than $2 — helping it find widespread adoption among satay stalls and roadside sellers known as warung. Cash is making less of an appearance, and some shops won’t accept it at all.” Over 22 million merchants have signed up, and this number is set to double this year, making it easier for Indonesia to capture the billions of dollars of informal economic activity overlooked in taxation and even statistics due to small businesses’ reliance on cash.

Fake it till you make it was a well repeated adage and romantisized road to success in Silicon Valley. No longer. “Charlie Javice, the founder of the financial aid start-up Frank, was arrested, accused of falsifying customer data. A jury found Rishi Shah, a co-founder of the advertising software start-up Outcome Health, guilty of defrauding customers and investors. And a judge ordered Elizabeth Holmes, the founder who defrauded investors at her blood testing start-up Theranos, to begin an 11-year prison sentence on April 27.” This of course follows “the February arrests of Carlos Watson, the founder of Ozy Media, and Christopher Kirchner, the founder of software company Slync.” And let’s not forget FTX.

I’m a big believer that the leaders of startups should have personal knowledge of the front lines of the business. Excellent long-form piece covering what Dara Khosrowshahi uncovered doing Uber deliveries and rides. This is an important step towards creating a better work environment for Uber drivers, and it will be interesting to see what other changes the company makes as a result of this experience.

We knew it already but fascinating to read academic literature validating the role of Twitter in causing the unprecedented bankrun at SVB. Often, bank runs result in a blame game between regulators and bank management. “Although it may sound clichéd, this time is different. Both parties agree that there’s something new to blame: social media…But despite the claims, there was little in terms of concrete data to point to as evidence of the effects of social media on SVB. Now though, professors…teamed up to dissect roughly 5.4 million tweets from the start of the year through March 14 about publicly traded banking stocks… The study also confirmed the role of venture capitalists and startup founders in bank runs by looking at the tweets of hundreds of members of the startup community. Banks that were tied to the startup community had an increased risk of a bank run, especially when depositors were uninsured.”

I’m just getting back from Singapore and Korea. I had a great time on Money FM discussing Out-Innovate’s lessons in South East Asia.

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Book of the month

This month’s book of the month was "How to Invest: Masters on the Craft," David Rubenstein (per top section).

But I’m excited to start two new ones written by friends:

• From Pitch To Close: What Founders and CEOs Need to Know and Do Before An Investor Meeting by Chris Foloyan (Founder of Mall For Africa, and Out-Innovator)

• Breakfast With Pops: A Venture Capital Handbook by Adam Draper and Bill Draper. Bill is one of the earliest venture capitalists and a longtime mentor. I loved his first book The Startup Game, which I consider essential reading for new venture capitalists.