Getting off the ‘flywheel of hype’ in tech: putting outcomes over outputs
Our definition of success in emerging technology ecosystems needs to be recalibrated around substance to create value and support innovation.
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Note: I started Sandbox to explore products in emerging tech ecosystems. Before I begin publishing, I wanted to share my thoughts on a topic I have found over my years working with early-stage technology companies to be detrimental to founders, investors, and the wider tech ecosystem. Many stakeholders have acknowledged this problem in conversations with me behind closed doors. I hope that by addressing the issues out loud, we can move away from some of the behaviors that have led us to prioritize hubris over substance.
Someone recently asked me how I would define a ‘successful’ startup. After six years of experience in two venture funds and working at Uber’s largest acquisition to date in some of the most challenging markets in the world, you would think that I’d have an immediate answer. But I don’t. I know, I know. Strip me of my Patagonia vest.
Taking a step back and looking at the past three years it is undeniable that we are in a bubble. I’m not describing the more obvious valuation bubble that consultants with “Innovation Expert” in their LinkedIn headers rush to post about en masse the minute they sense Paul Graham scratching his temple. No, I’d describe this as a collective indulgence in vanity metrics so entrenched in the current social paradigm that it drives poor business and (occasionally) questionable ethics decisions. It’s causing us to lose touch with the fundamental principles surrounding tech entrepreneurship and we’re finding ourselves caught in what I refer to as a never-ending “flywheel of hype.”
Due-Diligence: Buying What Founders are Selling
Our innocuous-looking flywheel cycle begins with investors at due diligence– specifically, founder due diligence. Founders set the tone from the top: they hire the team, craft the culture, build the product, and drive business decisions. Over the past three years, deals driven by FOMO (fear of missing out) have moved so quickly that inexperienced investors often skip reference calls altogether, and in worst-case scenarios, they may only consider criteria centered around founders’ professional pedigree, their alma maters, whether they were nominated for Forbes’ 30 under 30 award or my favorite litmus test: the number of Twitter followers they’ve amassed.
One story comes to mind of a founder who shared a story with me about pitching his startup to an investor. This investor came off as apathetic and dismissive of the problem the founder sought to address. The investor’s indifference was palpable - until he learned that the founder’s alma mater was Harvard University and immediately backtracked to offer terms on the spot. The founder left the conversation feeling empty and undervalued, despite the attractive deal on the table.
These sorts of status-driven standards have led some founders and investors to indulge in this type of hollow behavior. As such, they prioritize on-stage panels, conferences, and LinkedIn posturing over heads-down building. I’ve even heard of instances where founders will actually pay for an award in the hopes of building their public profile and persona. “Building in public” has come to be defined by a heavy emphasis on the latter as a facade for deficiencies in the former.
Venture capitalists, you’re not innocent either. You have an entire Twitter parody account dedicated to your peacocking but we’ll return to this topic another time.
I’ll Take Fundraising for $10,000,000
If we characterize the period of 2012 to 2019 as the period of unsustainable venture-subsidized growth, you could characterize 2020 onwards as the era of vanity investing. Fundraising has moved from being one of many functions driving growth at young tech companies and emerging funds to becoming the featured product. The actual problems that companies are attempting to address ultimately take a back seat. Thankfully, 2022 tempered our thirst for capital but not nearly enough as it needed to. Many in tech and VC have come to believe that the more a company raises, the greater the outcome.
This mischaracterization around funding permeates both founder and investor thinking and often leads to clouded judgment and inflated valuations. Here’s some free advice: fundraising success alone does not guarantee a successful outcome for the business. Look no further than Adam Neumann’s WeWork, valued at a whopping $47B at its peak in 2019. Today the company’s market cap sits at a paltry $3B - a 94% fall. In a less dramatic example, FinTech CommonBond is winding-down in the US after ten years of operating and $1.4B raised across debt and equity. In the Middle East and Pakistan tech ecosystem, we have Airlift, a Pakistani on-demand bus turned quick commerce startup which managed to raise over $110M in total and shut down four months after announcing a raise of $85M. Egyptian B2B e-commerce platform Capiter raised $33M in September 2021 and is being liquidated a year later after allegations of fraud against the founders. SWVL. Awok. Fetchr. More companies will follow, some under more dubious circumstances than others.
Conversely, you can find many examples in the public domain of companies that have bootstrapped their way to noteworthy exits or the development of meaningful technologies. Take Shutterstock for one (IPO at $2.3B), Mailchimp (acquired est. $12B), and GitHub (acquired $7.5B). Bootstrapping your way to an exit without brand-name investors on your cap table is just as respectable.
Hype Media Announcements
Onto our next step on our flywheel of hype: the media tour. Once a company receives funding, the hype mentality begins to proliferate across media channels. Scan through your LinkedIn, TechCrunch, Magnitt, and email newsletters and you’ll quickly recognize a pattern:
“_____ raises at $155M valuation to expand into the US”
“______ raises $7M Seed”
“______ Raises $25M In Egypt’s Largest Series A Round”
“______ raises $110 million led by Kleiner Perkins”
Understandably, it’s not always possible in competitive environments to share detailed metrics of a company’s performance. However; contrary to what funding announcements may lead you to believe, the amount raised, lead investor, and even valuation are not the benchmarks of success. Furthermore, as MENABytes.com founder Zubair Paracha points out, these headlines and articles are often written by the companies as self-promotion and aren’t always fact-checked. Much like how on Instagram or TikTok the images we see are curated, filtered to perfection, and show us living our best lives, so too are these splashy headlines. I’m not discounting the fact that there are reputational, commercial, and fundraising-related reasons to make these sorts of announcements, but quite often, while reading these publications you’d think the cold hard cash is all there is to startups. Put it this way: imagine only receiving positive, glowing feedback on one aspect of your job; how would you grow?
As a venture capitalist, my fund and I urged founders not to fall into this sticky money trap. For one, we suggested founders instead share fundraising announcements through their own company's channels to fully take ownership of their news. We also pushed founders to provide quotes in published articles that highlighted the impact of their company’s work as experienced by a real customer or other external stakeholders in place of a self-serving quote from investors or those leading the round.
This hype is dangerous for three reasons. Firstly, funding announcements can influence funding trends and inexperienced investors will follow market or global leaders in sector or sub-sector investments in what's known as the ‘social proof bias’, the belief that the majority knows best. This creates a concentration of capital with multiple companies raising venture capital in the same space, competing for the same investors at higher valuations in oversubscribed rounds. Founders, with abundant access to capital, think less of spending more to acquire talent and customers and drive-up market costs.
Secondly, capital concentration stymies diversity and forces investors to over-index on popular sectors. This, in turn, short-changes less explored sectors from feedback loops of investors, experienced employees, and mentors. Look at the near absence of homegrown B2B SaaS companies and talent in the Middle East; this is partially because the majority of regional funding goes to fintech and e-commerce.
Thirdly, social proof bias is also dangerous because it creates unrealistic expectations for LPs, venture investors, and founders. Groupthink indicates that a specific opportunity or sector is a certainty or that recent traction justifies higher valuations. Disappointment is an all too familiar feeling when it comes to venture and sectors can be stigmatized when one company fails to meet expectations.
Funding announcements are the tip of the iceberg. I’ve seen vanity media awards, market entries, product launches and exits all treated with the same degree of hype as space shuttle launches. And sure, while it is expected for founders to promote their businesses, the onus is also on these same founders and media outlets to ensure accurate and holistic coverage, not just perpetuating exaggerated pieces that drive the flywheel of hype.
Suboptimal Venture Outcomes
Finally, our final destination on our wheel of wonders: liquidity events. Let’s define a ‘successful’ exit as one which generates outsized financial returns to align with investors. We might imagine Scrooge McDuck-like scenes with founders and investors diving into pools brimming with cash as they bid adieu to their teams and products, like the trusty old Toyota Corolla you sold after its solid tour of duty throughout your nostalgic high school years.
According to a study by Crunchbase, the average startup has raised $41M in venture capital and has exited for $242.9M. Assuming a fair seed valuation and healthy dilution levels, this would deliver average returns to investors for their risk but hardly enough to find themselves polishing irons on a golf course with Bill Gates. To make matters worse, according to HBR, more than two-thirds of startups never deliver a positive return to investors. But you rarely hear of them (let’s call this “quiet failure”). Why? Well, the way one investor put it to me, founders are “playing the game.” The optics game, of course. Failure is always difficult to contend with publicly, but it is especially challenging in places like the Middle East where companies and investors in these ecosystems are more sensitive to stigmatization and ultimately hampering their chances of attracting interest and cash in their next venture (or fund). Ironically, this suppresses the culture of embracing failure that has defined decades of success for Silicon Valley.
If this is the game, who is really winning?
So whats the point?
The point of this conversation is not to disparage or diminish the success of founders or their companies – it’s that our definitions of success are harmful to our tech ecosystem and hinder its growth. From a purely capitalistic lens, this leads to an inefficient allocation of capital to entrepreneurs who are incapable of generating returns that match the risk-reward profile of the venture asset class. By that same token, more capable entrepreneurs solving real problems with innovative solutions go unfunded. Maybe they end up working at Stripe or Careem, maybe some of them are sitting on the roof of Hooli, resting and vesting. If we subscribe to a more altruistic view, we’re creating a business culture that rewards vanity and overlooks substance. It’s a de facto endorsement of the mindsets that created “community-adjusted EBITDA” and Theranos’ fake blood test results.
I’m not pointing fingers here without acknowledging everyone’s part in this sticky mess; venture capitalists, founders, and the media all have hype honey on their hands. We’ve forgotten that when it comes to venture-backed startups, there is no guarantee of success. In fact, failure is the most likely outcome. And that’s ok. Assuming there’s no unethical behavior or criminal intent, entrepreneurship is just about making mistakes and learning.
As any good product manager will tell you outcomes are more important than outputs. Every stakeholder in venture will have their own definition of success but it should be objective, outcome-driven, and most importantly, truthful. Metrics such as revenue per employee, capital efficiency ratios, and customer retention are not perfect but are far more indicative of a young company’s success than dollars raised. Recalibrating our definitions of success around substantive criteria, doing away with vanity metrics, and embracing failure will break the flywheel of hype and offer better outcomes for founders, investors, and the wider ecosystem.