Tech VC Investing looks increasingly like a Ponzi scheme

Partha Chakraborty-


Quest for a solid business plan in a Technology startup world is derided on both sides of the table.  This is enabled and amplified by a VC model that is a Ponzi scheme by another name.


Partha Chakraborty

Not so long ago new technology solutions truly made us more efficient. Nobody will question how consumer facing tech solutions fundamentally changed, mostly for the better, how we search, socialize and communicate, among everything else.  I was not there when I would have been forced to write this piece long-hand on yellow paper; I am just choosing to do today, at a serious cost to my productivity.


Some of that exalted status is still justified for a few new kids on the block. For the most part, I am seeing one of two things.


First, fueled by VC money, companies are, in effect, buying clients, users and eyeballs. In some circles, it is laughably easy to enjoy luxuries of life at little expense by switching from one provider to the next, all of whom are offering sign-up bonuses of some kind. In a flipped version, businesses and individuals are lured to sign on to a platform in return of a promise of secure regular payments that soon proves to be a mirage. Required upfront cost drives businesses into a debt trap nigh impossible to get out of, but platform owners still can count on one additional member they are no longer paying for.


Second, we have unhealthy fascination for growth by any means – even if that growth is rarely about revenue, much less net income. Capturing market share at a loss for each unit booked was the root cause of WeWork drama, and We is the not only culprit.


It goes both ways. If you insist on a solid business plan that will produce profitable growth, you are derided at both sides of the table. VC’s laugh at you for leaving money on the table, folks at Silicon Valley pooh pooh your devotion to “old-fashioned” business principles.


I wish I could call VC largesse irrational money, so far it has proven not to be the case. VC’s look for better valuation at the next valuation event, no wonder they are too happy to mumble the happy-talk, and act a believer. Large number of VC investments exit in a private acquisition or equivalent valuation itself supported by an even bigger jug of Kool-Aid. There are rumors of a favor done to a fellow VC by buying at a fictitious multiple which in turn helps the executives at the buyer as they can command bigger management fee.


So long as it does not get to public markets, where solid metrics, in theory, rule decision making, and where information asymmetry is lowered by design, this game of kicking cans can continue. Recent examples of cases where this game continued too long, and the illusion became too large for private markets, we have seen cracks emerge. Embarrassingly so, at times.


Most of tech VC investing is nothing but hoping their chicanery is not caught by the next on the line, at least that the next one will assume risk of passing the hot potato down one more time before someone drops it.


I have another name for this game – Ponzi scheme. Breakthrough new tech has been lacking for almost a decade, and we are reduced to a Ponzi in our search of a Unicorn under the couch..


Caveat Emptor. It ain’t gonna look pretty when the dam breaks. And I told you so.


[Partha Chakraborty, Ph.D., CFA is an entrepreneur in Blockchain and Wealth Management in US and India. Dr. Chakraborty spent two decades in all parts of the Investment Management value chain globally; he lives in Southern California with his family. All opinions are of the Author alone, and do not necessarily represent that of any organization he may be part of. The author alone is responsible for any error or omission.]