Raise your hand if you reject foie gras. Force-feeding an animal through a tube, then killing it and removing its diseased liver, is no treat. Not for me, anyway. According to a recent article in The New York Times , many entrepreneurs seem to have come to the same conclusion about what’s called the “foie gras effect”—hypergrowth abetted by multiple rounds of venture capital funding. VC firms pour millions of dollars into start-ups, forcing “faster pussycat kill, kill” growth until the profits can be “harvested” through an acquisition or IPO.
Venture capitalists love start-ups because the potential for returns are limitless. Homeruns like Facebook, Uber and Google reward initial investors many, many times over. For start-ups, interest from VCs means no longer having to make tough personal sacrifices to grow the business, as well as insta-cash in their pockets. But there’s no free lunch…
These days, venture capitalists eagerly throw millions at any business that is tech or tech-adjacent. That could be a coffee shop or a cat sitting app. Once an entrepreneur takes the money, she will find herself on a wild ride. Think of Facebook’s mantra: “Move fast and break things”. Presumably that includes giving a big platform to neo-Nazis and Russian agents, and undermining democracy in the Free World. Well played, Facebook.
A growing number of fledging companies want to experience success on their own terms, even if that means taking things slower and with a more diversified workforce. They’re stepping away from the binary model of winner-take-all by redefining “winning” as building a sustainable business and developing good careers for people over the long-term. They call themselves zebras, not unicorns. (Personally, I’m waiting for the Standard Poodles.)
Could we be at an inflection point, where the current model of success feels old? And, is there a lesson here for regular investors?
Here’s a little anecdote from my own career. During the last tech boom in the ‘90s, I joined a software company that was about to go public. (I didn’t know it when I signed on.) The head office was in a former chocolate factory in downtown Toronto with a staff of around 75, mostly weedy-looking R&D guys. Business was good, large automobile manufacturers in Detroit (who paid well) and Hollywood studios (who didn’t).
Once the company launched an IPO, things changed fast. Higher-ups seemed to always be on the Concorde, a supersonic jet that traveled twice the speed of sound. You could have two business lunches in one day! Staff doubled and doubled again. Everyone worked insane machismo hours and people who had never glanced at a stock table suddenly took a great interest in the firm’s daily price gyrations. Questionable acquisitions were made and, along with them, international offices. Everything exploded— until it imploded. Would the company have survived, possibly even thrived without the high-octane capital injections? We’ll never know but the insta-money certainly made some of the founders’ nuts.
As investors, some of us may be tempted to act like VC firms—making a few big bets and hoping to shoot the lights out. But who can pick the winners on a consistent basis or stomach the extreme volatility— on the both the up and down sides?
Perhaps a better investment approach for the longer term is less foie gras and more, I don’t know, kale? Something nourishing and reliable but not too sexy. When it comes to investing, the motto “move fast and break stuff” already feels old. For 2019, try: “Move slowly and don’t break anything.”