If You Think VCs Create Bubbles, Meet ICOs

In When A Business Is VC Funded, VC Is The Business, we saw how VCs – though not the startups in their portfolio of investments – are driven by traditional business metrics like profitability and ROI.

Contrary to common wisdom, the VC industry has a stellar track record on these conventional KPIs. In this post, I’ll explain why I say that.

First, let’s take profitability.

SoftBank is adequate testimony of the VC industry’s profitability. It’s no secret that many portfolio companies of the leading Japanese VC / PE company are running at a huge loss.


Despite that, SoftBank itself is the 19th most profitable company in the world (Source: 2017 FORTUNE GLOBAL 500).

Now let’s come to ROI.

In a traditional business, an investor earns steady returns on most of their investments. Whereas, in a VC business, 50% of investments are written off on startups that fail to scale. VCs recover 30% of their investments and, unlike in a traditional business, they make multibagger returns on the remaining 20% of their investments. As a result, a VC fund delivers an overall return of ~20% per year (Source: Steve Blank). This well exceeds the hurdle rate of hardnose investors like hedge funds and pension funds who have pumped in record sums of money into VC funds last year.

Given below are a few examples of the multibagger returns earned by VCs:

  • SAIF Partners’ $70M seed investment in PayTM, India’s #1 mobile wallet company, is now worth $2B  – despite the thousands of crores of losses made by PayTM (Source: Economic Times)
  • Leading Silicon Valley VC Sequoia made 50X return from its $60M investment in WhatsApp when the latter was acquired by Facebook for $19B – despite the fact that WhatsApp had measly revenues of $36M at the time (Source: Techcrunch)
  • For all the blame that Tiger Global Management gets for causing the cash burn in Indian ecommerce, the New York VC’s $1B investment in Flipkart is currently worth $3B (Source: Economic Times)
  • Altimeter Capital, General Atlantic, and the remaining Series F investors took only 15 months to double their investments in AppDynamics. When Cisco acquired AppDynamics for $3.7B, the Silicon Valley application monitoring startup had posted whopping losses on sales of $130M (Source: CNBC)
  • And, in what is perhaps the mother of all investments at any stage of the VC investment model, angel investors earned 250X of their seed investment in Oyo Rooms (Source: Economic Times).

As you can see, multibagger returns span all stages of VC investments viz. Seed, Angel, Venture Capital (Series A, B and C), and Private Equity (Series D and E through to IPO). From this, it would appear that the critical success factor of the VC investment model lies in its ability to constanly pump up valuations over time and encash from the higher valuations from time to time. Wags call this approach “pump and dump”.

As Geoffrey Moore says in his article titled A Quantum Theory of Venture Capital Valuations, “The purpose of a round of venture funding is to get your company from one valuation state to the next.” When they see how the VC investment model pours money to drive up valuation, the man on the street tends to believe that it creates bubbles waiting to burst. While that belief is not misplaced, fact is:

  1. Valuations of VC-funded startups have remained fairly stable so far
  2. After doing down-rounds in the past, Flipkart and Zomato have enjoyed an uptick in their valuations in recent times
  3. Once a startup does an IPO, the parcel is passed on to the common man
  4. Even if the music stops eventually, lots of people in the VC ecosystem will have made tons of money by then.

Not surprisingly, the VC investment model has stood the test of time and attracted a record amount of investment from Limited Partners in recent times.

Not just globally but also in India. According to Times of India, “nearly $15 billion of funds is lying as dry powder, the highest amount of free cash to date sitting and waiting to be invested in Indian ventures.”

If you’re still skeptical about the VC model, meet Initial Coin Offering.

This new kid on the blockchain allows startups to raise funds without even a product, let alone pageviews, installs, bookings and other vanity metrics. Investors plonk down millions to buy digital tokens sold by a startup on the basis of a white paper that explains its vision of a futuristic product.

If you thought VC was speculative, ICOs take speculation to the next level.


When I titled the first post in this series “When A Business Is VC Funded, VC Is The Business”, I paraphrased the famous saying “When a product is free, the user is the product” to the VC world.

You may ask, “What happens to the startup in this world?”

Well, the startup becomes an asset class.

This was implicit in the VC world. ICO makes it obvious.

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