Eat when the food is passed: The Silicon Valley binge

Gordon Gekko: Greed is good

Gordon Gekko: Greed is good

I couldn’t get over the recent announcement. Quora, a start-up that first raised more than 60 million, just announced it had raised an additional 80 million from Benchmark, Matrix Partners, North Bridge Venture Partners and Peter Thiel. Quora is a company that to my knowledge has no revenue. Its business model is as follows: Build the product and think about monetization later on. How does a company with that type of business model attract venture capitalist money? I understand the desire to remain independent and not get bought out from the likes of Google or Facebook. But don’t the VCs want their money back at some point? And how is it VCs have so much money to give away “for free” until it’s time for Quora to cough it back up? In a story on NY Times’s Dealbook, Nirav Tolia, chief executive of Nextdoor, which back in 2013 accepted 60 million in additional venture funding despite already having plenty of money in their coffers, said “there’s a Silicon Valley expression: Eat when the food is passed.” Mr. Tolia said that while Nextdoor had no pressing need for the cash, taking the investment gave his company added security and decreased the likelihood that it would simply go up in smoke. When you think about it, Quora’s best opportunity for earning revenue is via advertising. Options include:

  • Display text or banner ads based on the content of a question
  • Display sponsored answers to a question
  • Use referrals links to e-commerce websites for products mentioned on the site (books being a notable example)

One thing that has changed in recent years is the sheer amount of capital available for investment in Silicon Valley start-ups. Many big venture capital firms have recently raised big rounds, meaning the traditional backers of tech firms are well positioned to write big checks. Don’t anyone be fooled, Silicon Valley is not about looking for and funding the best and the brightest. It is a tightly knit club that passes money back and forth among themselves. It’s a story in Silicon Valley that keeps getting repeated over and over again. You meet an “entrepreneur” on their fourth “successful” start up. What were the previous three that did so well?  Often, businesses that are long gone. In what way were they “successful”? They were funded, and funded, and funded again. How did they get funded? They had a connection. I understand why Quora’s founders would want to remain independent for as long as possible. But to know there is a lot of “idle money” at the top, just waiting to be handed out, it boggles the mind. It should come as no surprise that the VCs, Hedge Funds, and private equity firms are passing it back and forth only among themselves. Heaven forbid that some of that money be used to solve serious global problems, or help real small business start-ups. As Warren Buffet said, “Be Fearful When Others are Greedy.”

Eat when the food is passed
Article Name
Eat when the food is passed
How and why venture capitalists invest in start-ups that make no money.
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