Crypto exchange Coinbase went public in April 2021 and briefly traded at a $100 billion valuation. Its owners soon piled into real estate. Last December, CEO Brian Armstrong bought a $133 million Los Angeles estate, while his venture backers bought up swaths of Malibu. Post-IPO shares are usually locked up for six months, so assuming they all sold Coinbase shares, that was a smart move. Coinbase now is barely worth $10 billion.
I’m a huge fan of venture capitalists, who put risk capital from investors with long time horizons (like foundations and endowments) into companies that invent the future. Corporations usually don’t have the risk tolerance. I’ve invested venture capital. You really do have to think ahead of everyone else. But I’ve noticed that most of the returns from venture investing, mine included, came when everyone got too excited about future possibilities, deep into the hype cycle of new technology. That’s when the toxic cocktail of greed, stupidity and hubris takes over.
In 1983 an IPO boom emerged from the recession raising funds for Compaq and other computer companies. In 1995 Netscape investor John Doerr said, “It’s possible that the Internet in fact has been underhyped.” On its first day of trading that August, Netscape was valued higher than General Dynamics at nearly $3 billion (I know, how quaint). Dot-com mania took hold until early 2000. America Online milked the hype long enough to merge with Time Warner on Jan. 10, 2000, before spiraling down as reality set in.
Don’t get me wrong. The hype cycle is a great time to fund future technology. Electric-truck maker Rivian says the company is funded through 2025. Many great winners have emerged from a hype cycle—Compaq, Google, Amazon, Salesforce, Facebook. But many multiples of those winners try and fail. That’s OK, but overenthusiastic public investors almost always end up holding the bag stuffed with losers after venture capitalists sell or distribute unlocked shares to their limited partners at puffed-up prices.
The 2014-21 cloud-computing hype cycle, helped by near-zero interest rates, was a barn burner that lasted way too long. Some great companies went public: ServiceNow, Snowflake, Uber. But it also brought huge dreams of autonomous cars and electric vehicles, pumping Nikola and others and burning investors. Remember QuantumScape, funded by Bill Gates? With its vision for a better battery, it peaked at $114 in December 2020 and is now under $8. QuantumScape went public via a special-purpose acquisition company, taking advantage of quirky rules that almost ensure sponsors don’t lose money while making whatever future projections they want without investor lawsuits. A license to hype.
Social Capital’s Chamath Palihapitiya became known as the SPAC king after promoting and then burying investors in companies such as Clover Health, SoFi, Opendoor and Virgin Galactic, which are down 49% to 86% from their $10 offering price.
