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Everything you thought you knew about investing in startups is wrong

These five VC truisms that defined the last 15 years in tech have not aged well—and explain the mindset that produced WeWork.

Everything you thought you knew about investing in startups is wrong
[Illustration: Simon Prades]

“Founders first”

Date codified: 2005

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Primary evangelist: Sean Parker

Thesis: Young founder-CEOs should not be replaced by professional managers or lose board control, because they’re uniquely suited to run companies in the internet and mobile era.

Inherent flaw: This setup overcorrects the previous norm of replacing founders after raising a series A funding round. Subsequent “innovations” gave founders super-voting control as a matter of course and let them sell shares during funding rounds with no effect on their power.

“Software is eating the world”

Date codified: 2011

Primary evangelist: Marc Andreessen

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Thesis: Businesses and industries are increasingly being run on software delivered via the internet.

Inherent flaw: Markets such as real estate have different economics than, say, media and communications; having an app does not mean that you can produce high margins like a software company or deserve a tech-company valuation.

“Startup = growth”

Date codified: 2012

Primary evangelist: Paul Graham

Thesis: “A startup is a company designed to grow fast. . . . The only essential thing is growth.”

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Inherent flaw: Public-market investors ultimately care about profits, too, and every sacrifice made for growth at the expense of profitability—from taking on debt to entering new markets for the sake of a story for private investors—creates a lack of discipline within a company.

“Monopoly is the condition of every successful business”

Date codified: 2014

Primary evangelist: Peter Thiel

Thesis: Founders need to seek out markets they can monopolize, because it’s harder to capture value created in competitive industries. Ultimately, companies with no competition are more competitive.

Inherent flaw: This monopoly-seeking ethos has been misapplied to global sectors impossible to dominate, from transportation to food to real estate. It’s also anti-democratic and increasingly the focus of regulators.

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“Blitzscaling”

Date codified: 2015

Primary evangelist: Reid Hoffman

Thesis: To become the first major player in a large global market, one needs to build out a company very rapidly.

Inherent flaw: Even Hoffman has admitted that this approach wastes money and produces a win-big, lose-big mentality, which is great for venture capitalists and founders—but no one else.

A version of this article appeared in the Winter 2019/2020 issue of Fast Company magazine.

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