20th April 2017
Whenever I meet family offices or HNWIs interested in joining U-Start Club, I am always challenged by a rather basic, but truly thoughtful question: Where does the value lie in VC investments?
Whenever struck by the question, my answer has more or less been the same, the gist of which lies in putting yourself in the shoes of a non-professional investor, while zooming out to see the bigger picture. To realize the true value of VC investments one has to realize, that, in the words of the super angel Fabrice Grinda, given historic round valuations and exit values “we are not in a bubble, but we are in a boom for investing”. This answer would usually be followed by eye-grabbing industry data on trading multiples and performance of tier-1 VC funds (IRR in excess of 30%), to be concluded by an illustrative example of how counter-intuitive the core business logic of VC can be. To my mind the most illustrative example to this question is a story about Mark Zuckerberg being persuaded by the likes of Andreessen to sell Facebook to Yahoo at a valuation of one billion dollars. Contrary to the prevalent sentiment, Zuckerberg refused to sell, only to build Facebook into the digital juggernaut it is today.
However looking at the industry in this perspective only tells you part of the story.
The answer to the other part of the story lies in looking back in time. Sometimes the past is not only an important element to understand the future, but it is also one of the main drivers to anticipate its path. At the very end, our job of VC investments advisor is trying to get there before the others even see it.
Recently, I had the chance to travel back to my high-school years of studying classics by reading, yet again, ‘The Histories’ by Polybius, where he introduces a concept of Anacyclosis. For those ones who have been bad students like me or for those that simply did not know anything about Polybius, let me try to explain the concept: it is the idea that the order in the world goes through different and disruptive changes over time and that these reflect themselves into various forms of government. Anacyclosis states that the three basic forms of "benign" government (monarchy, aristocracy, and democracy) are so weak and unstable that degenerate into the three forms of "malignant" government (tyranny, oligarchy, and ochlocracy – a kind of mob rule).
Now the question would be: “How the hell do you relate this Anacyclo-thing with VC and its value creation?!”. Well, I admit the answer is not immediate: few political analysts say the world is now heading to the ultimate phase of democracy that may collapse into disorder and chaos (the latest democratic elections seem to strengthen this point somehow).
For more than 50 years, we have been under solid and central democratic powers that granted peace and prosperity in most of the developed world. If this system start failing, who can take the leadership and be a positive factor for a better change thus avoiding the degeneration into ochlocracy?
My answer is: Anacyclosis can be avoided only if technology companies and their founders step into the scene. These companies and their founders have such a strong political influence and a global presence that could themselves drive the change and bring the world back to the aristocratic rule (which is the government of the best, not of the few).
The Google, the Facebook and all those rising startups are having an unprecedented impact on our day-to-day life.
They are educating millions of people to communicate at no costs, they are inventing multiple solutions to make consumption of scares resources more efficient, they are developing food processing innovations that will make this world sustainable, they are proposing their success and their behavior as a positive benchmarking for any man of this world.
Wrapping up: the answer to the “value question” lies in realizing the wisdom of unconventional truth from Peter Thiel: “If you want to create and capture lasting value, look to build a monopoly”. All these founders have built up so many great monopolies that, should the Anacyclosis rule be true, they can then replace the future corrupted central government and lead the world to a different and improved future. Is there enough value in this scenario, for you to make your next investment?
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