More investors than operators in Silicon Valley?

Recently, Brian Armstrong (Co-founder and CEO of Coinbase) did a tweetstorm on how there are way too many investors, vs builders/ operators, in Silicon Valley. And how founders in their prime-age are opting to become full-time investors, rather than starting-up again, even after a relatively small exit.

Brian makes some good points about a trend, though short-term in my view, that even I am seeing in the Valley. Here are my thoughts on why this is happening and how it will eventually get corrected (I did my own tweetstorm with these views).

I think this is a side-effect of the last decade of over-liquidity across markets. Companies got over-funded, assets got over-paid for, specific skillsets (mostly engineers) have gotten astronomical salaries relative to their skills & experience. Also, there is no inherent entry-barrier to becoming an angel/ seed investor, provided you have “some” liquidity, especially as cost of starting businesses has come down a lot and early rounds have gotten increasingly syndicated/ fragmented across multiple small investors.

Given excess liquidity, a person who ordinarily would have been an individual angel, is now getting a shot at raising a small fund. While institutions would still keep a high bar, there are enough friends/ colleagues/ relatives willing to commit funds to ride the tech gravy train.

So am not surprised that many are jumping on the professional investing bandwagon, instead of starting-up/ operating companies. What many wouldn’t realize is:

  1. This asset class has a 10 year feedback loop. You might end up concluding after a decade, that you aren’t really that good as an investor.
  2. While raising a “small” first fund from personal well-wishers is relatively easy, scaling up to 2nd fund and beyond, esp. getting institutions to buy-in, is much harder.
  3. Once you raise other people’s money, you are locked-in for many, many years. Not easy to switch career tracks.
  4. Unlike a startup, it’s really hard to “pivot” or “reset” a fund. If your thesis/ strategy turns out to be faulty, or your Partner team chemistry doesn’t work out for some reason, you are still going to be stuck with these mistakes for a relatively long period of time.
  5. In professional investing, showing commitment & consistency over a long period of time is critical. Yet, this is really hard to do, especially when you have decades of your career ahead of you.

In the end, market forces will weed out short-term players and restore balance. This could start once the current boom cycle turns around and liquidity becomes tight.

My personal philosophy — the world is shaped by “Builders”, not “Investors”. Why would you want to be a full-time cheerleader, when you can play the actual game?