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These eerily Madoffian times

Thursday, 21 April, 2016

To understand the magical world of the technology Unicorn (AirBNB, Slack, Snapchat, Uber), one has to speak the language of dizzying money. For example, Limited Partners (LPs) are large pools of capital, such as pension funds, endowments, foundations and high-net-worth individuals, that invest in Venture Capital (VC) firms, hedge funds and the like. And in these Unicorn times, LPs are increasingly being asked to participate in SPVs (Special Purpose Vehicles) especially created to feed the insatiable Unicorns. Well, that’s what Bill Gurley, a General Partner at Benchmark Capital, says.

Gurly has been keeping a close eye on the money flow and he’s noticed something disturbing: “investors have also broadened their SPV marketing to family offices and other pools of capital. The pitches typically involve phrases such as ‘you are invited to’ or ‘we will provide access to’ an opportunity to invest. This ‘you are so lucky to have this opportunity’ pitch is eerily Madoffian.”

That excellent coinage, Madoffian, is a play on the name of the fraudster Bernard Madoff, who scammed investors in a $65 billion Ponzi scheme that was exposed in 2008. The use of his name should alarm everyone and that’s what Bill Gurley seeks to do in a brilliant analysis titled Why The Unicorn Financing Market Became Dangerous… For All Involved. Snippet:

The main message for investors who are just now being approached is the following: it’s not the second inning or even the sixth, it’s the fourteenth inning in a five hour baseball game. You are not being invited to a special dance, you are being approached because you are the lender of last resort. And because of how we meandered to this place in time, parting with your dollars now would be an extremely risky move. Caveat emptor.

To avert disaster, Gurley is calling for “a dramatic increase in the real cost of capital and a return to an appreciation for sound business execution.” Note: What makes his analysis particularly valuable is that he singles out John Carreyrou’s October investigation of Theranos in the Wall Street Journal as “the seminal bubble-popping event.” A month prior to that, Fortune Magazine ran a fawning Theranos article titled “How Playing the Long Game Made Elizabeth Holmes a Billionaire.” That game is up.

The Unicorn


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