Some Thoughts on Private Tech Markets
The most efficient private markets in history were designed and constructed so that private interests leveraging disparate pieces of information worked over time to reveal continuously-evolving prices largely reflective of real value. “Real value” is essentially a collective best guess based on obvious and non-obvious demand, supply, technology, and company performance signals resulting in a changing price. Given a critical mass of individuals and a system that is structured to incentivize a healthy sort of fighting, the twins of information and personal interest act as a check against inflated prices and unrealistic growth and revenue goals. With some exceptions, the informational good-and-bad cancels out in the end to reveal a moderately realistic price. Even the exceptions end up meeting reality; just at a later date (e.g. bubbles).
Based on what I’m seeing in tech right now from the nose-bleed section, it appears that the structure of VC creates incentives for founders and investors to work together in a kind of darkroom dance to place high valuations on companies, whether or not those valuations accurately reflect realistic growth potential or market demand. The same dance is responsibile for the guidelines and metrics for growth that are supposed to underpin and measure progress against the valuations internally. In a market like this one, what’s preventing founders from selling their own inflated private shares in later rounds to get rich quick before the market eventually realizes their companies aren’t going to be worth 50 billion in five years? What incentives are there- solid ones besides altruism- to keep founders’ eyes on the prize: the long-term success and growth of their companies? I’m not being rhetorical here. I really don’t know the answer.
Why does this matter to me? As someone who works in tech and is dedicated to entrepreneurship, I want a private market that is structured to incentivize a sustainable growth of solid technology companies. If startups are producing solutions for people, I want to see them be able to sell them. I want to see innovators have a sporting chance to fulfill a market demand. Remember the kids and marshmallows experiment? There are way too many marshmallows on our plates right now. And everybody’s hungry.
The current environment is focused on the rockstar hares instead of the sturdy tortoises. Here’s the clear-as-day market signal to tortoises right now: eschew VC altogether. It’s not in your best interest. You’ll finish the race one way or the other; go ahead and avoid the pre-game party and all of the doping.
Markets are fundamentally fueled by information. The more information the better. Private markets are, of course, private: investors with access take risks because they believe that they have solid insights into the potential value of companies that not everyone else has. But the health of this particular system right now in tech seems to be demanding a larger clutch of players armed with information in order to work better.
So my outstanding question becomes this: How do we improve the structure of current private markets in tech so that the natural dynamics result in a large, motley group of lasting, strong companies? My hunch is that whatever the answer is, it will begin with getting more players involved in the investing arena in later rounds, letting more information get some needed oxygen, and improving firm transparency on growth, revenues, and proprietary technologies themselves.