Most stories about startups are about how much money they have arised, and at what valuations. These are usually press releases , issued by the startup, or the investors. The entrepreneur is pleased to be pictured as the hard working hero, because the funding is treated as validation that his idea has merit; angel investor networks issue these to sign up new investors to their network; and VCs do this on a large scale, to prove to their GPs that they are working hard at deploying their money.
The truth is these press releases are Financial Porn.
They are misleading, just like porn is, and cause wannabe entrepreneurs. to chase funding. What’s worse, is that this nudges investors into playing copycat, and invest in me-too startups, because this area now seems “hot ” – after all, isn’t the fact that the press has covered this means it must be worth exploring !
It’s actually a pointless game, where the participants are trying to prove –
‘Mine is bigger than yours’. It’s great for PR agencies , who now can justify the fat fees they charge.
The numbers are really meaningless, because the fine print is hidden. A lot of these shares which the investors buy come laded with onerous terms and conditions, in the form of preferences at the time of liquidation, which most founders are clueless about, and startups refuse to divulge these details.
These stories are distractions. They often create envy and resentment, but don’t help me to improve the startup ecosystem.
The justification is they give hope to founders that they can also raise money ! Isn’t this valuable ? The reality is very different, because they sell a mirage.
And what’s worse is they teach the wrong lessons – the encourage the founder to focus on investors, and not on customers
There are plenty of highly funded startups which have imploded spectacularly, such as Theranos and Juicero
The tragedy is that news expands to fill the space available – and for digital publications, there are no space constraints at all ! These stories are full of rubbish – mostly noise, with very little signal
Good founders should not depend on external validation – this can be misleading and harmful. This causes them to believe that revenue and growth is the only metric of success – an idea which is completely flawed.
And the problem with high valuations during frothy times is they may create lots of hype, but they often end badly for the entrepreneur, when the next round is a down round.