No greater fool

Oct 07 2023 • 7 min read

When an adult who should know better puts their arm into an open flame and gets badly burnt, we don’t conclude that fire has no redeeming qualities. As such, when investors who should know better make bad bets and get badly burnt, we should not conclude instead that our nascent tech ecosystem is irredeemably fraudulent.

Our ecosystem is largely made up of upright founders using technology to solve hard, ambitious problems that will culminate in a future we can all look forward to. We must not entertain the attempt to extrapolate the failings of a few people as an ecosystem-wide malaise. Neither must we entertain that founders have consequences (less international funding, unnecessarily tedious due diligence, etc.) to bear, seeing as great founders & investors have never shied away from a metrics deep dive, oversight, audits, or sufficiently rigorous due diligence.

The recent spate of bad news is emblematic of a problem brewing for a while now — a non-trivial chunk of investors are no longer investing; they’re gambling (poorly).

Venture capital should be an accelerant for excellent ideas. VCs provide capital, operational expertise and support to great founders building enduring generational companies. Those companies usually have high growth potential, defensibility, sustainable unit economics, thoroughly satisfied customers and delightful products that can, in turn, deliver outsized returns.

Unfortunately, we’re seeing early-stage investors gambling on which company will get to a Series A/B and growth-stage investors gambling on which company will get to an IPO. Their bets are intended to quickly flip an early investment as they pass the baton to a later-stage investor and, ultimately, the public markets. There’s a term for this in crypto degeneracy — “passing the bag”. Degens knowingly invest in deeply flawed projects (known as shitcoins), hoping to pass the bag to a greater fool before the intrinsic lack of value is exposed, and it all comes crashing down.

Ordinarily, basing investment decisions on the ability of a company to raise future financing would not be an issue, especially if the company also met the bar of what a great company is. The problem arises when investors use poor proxies for assessing fundability. Proxies like charisma, exuberance, previous experience as a founder, Ivy-league education, and big-name existing investors. That, paired with FOMO about needing to invest really early (before the shitcoin crashes), means investors occasionally cut corners on essential due diligence.

What we see in the news is pedigreed charlatans taking advantage of investors who are cutting corners. It’s an easily avoidable failure — do a better job as an investor! There is an actual cost to silence and apathy in investors' role in these failures. Each bad actor that gets funded closes the door to a swathe of potentially game-changing founders and the improvements to our lives that funding them could have availed.

In crypto, when degens lose their money to a failed gamble on the latest dog coin, their losses don’t tarnish the rest of the good actors building a better future on a new money system with equal rules for all participants. Instead of casting doubt on the integrity of our ecosystem, we should isolate, shame, and defund the actors involved in each avoidable failure.