VENTURE CAPITAL: What Goldman-Backed Circle, VaynerMedia and Social Capital have in common

There's a feeling brewing out there, up in the atmosphere. Symptoms are starting to coalesce. And the feeling is: cash is king, venture capital is mis-configured. Maybe something about endless growth in the economy, or maybe a 10 year bull run in the financial markets makes people pause about the current environment. Here are 3 examples: (1) an interview with former Facebook exec and Social Capital billionaire Chamath Palihapitiya, (2) a video by media entrepreneur and centa-millionaire Gary Vaynerchuk, and (3) Goldman's crypto investment Circle. Let's start with the personalities.

Chamath talks about his increasing disillusionment with the VC world, pointing to the current model: encouraging founders to take highly niche bets, then overlevering them with equity capital, forcing unprofitable growth in order to create the narrative of growth, and leading to wild paper gains that subsidize the success of the money manager. Looking at the fintech IPO market, the fall from grace of the American digital lenders comes to mind. Or the private valuations of Robinhood or Acorns. His advice instead is to grow slow but consistently, instead of trying to grow fast.

Gary is not as down on the venture industry, but he does discuss why he is building a media agency rather than a tech company. VaynerMedia runs at several hundred million of revenue, which would be valued much higher at a tech multiple. But his plan is to capture market share in the coming downturn in the cashflow business, and then use that cash to go on an acquisition spree for assets that are now private and over-priced, but will desperately need cash and exits in a drought. A tech garage sale if you will.

Which brings us finally to Circle. We think that historically Fintech has been pretty disadvantaged: cash-cow incumbents were incented not to innovate, disruptors had no cashflow and were highly targeted bets at remaking particular products, mostly pivoting into partnerships. Non-incumbents could not afford to go full stack and remake the industry. Crypto has changed that by making some businesses -- like OTC trading, derivatives, exchanges, media -- incredible cash-cows with billion dollar revenue lines. These revenues won't stick, because they rely either on inefficiently high prices, or unusually high demand spikes. But the risk assets that smart operators -- like Circle and Coinbase -- buy with that cash, really matter. Circle has just bought SeedInvest, an equity crowdfunding platform that it will mash up with its other acquisition, crypto exchange Poloniex, to beef up its STO prospects. Cash is king! Maybe that's why Circle is also pushing that stablecoin with Coinbase. 


Source: Youtube (Chamath PalihapitiyaGary Vaynerchuk), Bloomberg (Circle), Websites (Circle, SeedInvest)