The Great Competition to Give Away Money

The Wall Street Journal has deemed it the “golden era of venture,” and it’s not hard to understand why. By almost any metric, life in the venture capital industry looks better than ever. “We're in record territories for everything,” said Jeff Clavier, the founder and managing partner of Uncork Capital, a seed-stage venture firm. “The fear of missing out right now is extreme.” Money is pouring into venture firms, and those firms are doling out millions to inspired startups that are changing the world. Many investors and founders (and some employees) are becoming filthy rich in the process, as a continuous number of high-profile firms go public, turning theoretical stock options into cash.

“We all look smart right now,” Villi Iltchev, a partner at the early-stage firm Two Sigma Ventures, told Motherboard. “Anything we have done over the past few years is looking great.”

As a result, a feeling of limitless potential pervades much of the venture capital and technology space. “People are feeling everything is going to be successful,” said Jason Henrichs, a St. Paul–based angel investor and entrepreneur. Job van der Voort, the CEO and co-founder of the HR software company Remote, said that bounding sense of optimism is largely justified. Tech stocks have spent years going “up and to the right,” he noted. “It's almost like a safe investment.” 

The mindset has created a funding environment that van der Voort admits can feel “pretty absurd.” Anyone who’s paying attention can agree. Global venture funding had never passed $100 billion in a single quarter before this year. In 2021, it has surpassed that every three months, climaxing at a record $160 billion in the most recent period, according to the financial data service Crunchbase. Well north of $200 billion has been invested in the U.S. alone through the first nine months of 2021, already almost 50 percent more than last year’s previous high, according to PitchBook, a data and research company that follows the private markets. Startups of all sizes are benefiting. Colossal, a self-proclaimed “de-extinction company,” nabbed $15 million on a pitch to resurrect the woolly mammoth. A fast-delivery service called Gopuff pulled in $1 billion at a $15 billion valuation.  In a poetic moment, the startup Who Gives a Crap grabbed $31 million in venture funding this September. 

Almost by necessity, venture capitalists are an optimistic bunch. They bet millions on products and entrepreneurs they feel have the capacity to change the world, or at least earn an enormous return. Right now, many of them argue that the venture and tech industries are together in the middle of a transformative moment in economic history, creating enough value to justify even their biggest gambles. It’s hard to argue they’re wrong. Investors, founders, and employees have pulled in over $500 billion in liquid value from selling stakes in U.S. venture-backed companies this year alone, more than double the prior record, according to PitchBook.

But even with the half-trillion in so-called “exit value,” whispers of concern creep up in conversations with venture capitalists and entrepreneurs alike. “It’s insanity out there,” said Emily Best, the founder and CEO of Seed&Spark, a film-focused crowdfunding platform. The giant pot of funds and growing number of hedge funds, angel investors, and other power players has led to a situation unique to the upper tranches of society: a competition to give away money. 

This great competition has led to a “frenzied” pace of work that is creating a “fundamental shift” in how many venture capitalists operate, according to PitchBook (and people I spoke with). A small number of top firms mostly get their pick of top investments, which means all the more stress for everyone else. ​​Some venture capitalists say they are finding creative new ways to adapt to the new world. Others say there’s no magic trick, just a lot more ferocity. 

Iltchev summarized the new way of things this way: “People have to make quicker decisions. They have to do less diligence. They have to pay more.”

Many venture capitalists are finding it difficult to complete deals, just as many entrepreneurs are increasingly aware of the power they hold, demanding timelines that disadvantage the investors. There are some who worry that the new pace of work mostly benefits white men, former Google employees, and Stanford business school graduates, for whom the system has always worked. Others believe money is being misallocated to too many businesses with no chance of survival. Even the optimists have their concerns about the state of the industry. Greg Sands, the founder of Costanoa Ventures, a Palo Alto–based venture firm, said he sees certain fundraising rounds so large that he believes “there's no conceivable use for the capital.”

The word people are most comfortable using to describe the current moment right now is “froth.” But some people are willing to go further in describing what, to a cynic, can seem like irrational exuberance. “The VCs are reacting rationally to the environment that they're in,” said Martin Kenney, a UC Davis professor who studies the venture capital industry. “But the environment could be irrational.”

It’s hard to say with much certainty exactly who is right. Private companies need to disclose much less information about their businesses than their publicly owned competition. For a long time, that didn’t matter much. Only a restricted class of rich people could invest in private companies, and private companies were mostly scrappy startups.  But there are subtle signs a shift could be occurring: With seemingly limitless funding, private companies are reaching unprecedented sizes while remaining much more secretive, and there is growing political and social momentum to push more everyday investors into the venture madness. 

The question is whether the broader economy will greatly benefit from entering the mania, or greatly regret it. 

 When journalists Dan Primack and Erin Griffith popularized the current definition of a business “unicorn” back in 2015, they reserved the term for a special kind of company: the rare privately-owned firm worth $1 billion or more. 

At the time, they calculated that only 80 companies fit the bill. 

Venture capitalists traditionally make bets on young startups long before they go public, often focusing on tech firms and specializing on a certain sub-sector or size of company. In exchange for their money and mentorship, they often obtain potentially lucrative terms should the company prove a success. The industry comprises one fraction of the broader private equity markets, which have been undergoing a transformation over the last two decades. “Perhaps the single most significant development in securities markets in the new millennium has been the explosive growth of private markets,” Allison Herren Lee, a commissioner at the Securities and Exchange Commission, said this month. The government mostly restricts who can invest directly in private equity and venture capital to so-called accredited investors, considered sophisticated or wealthy enough to play in the big leagues. Nevertheless, private markets have gone from making up 2 percent of the world’s equity assets to 7 percent over the last 20 years. 

The bountiful environment is a result of complex forces, some of which have been at work for decades. The SEC hasn’t even updated the wealth and income thresholds for accredited investors to account for inflation since 1982, and the agency estimates the number of U.S. households that meet the criteria has risen to 13 percent by 2019 from just 1.6 percent in 1983. Recent technological innovation made it easier to start a tech company than ever before, and former President Barack Obama helped too, when, in 2012, he signed the Jumpstart Our Business Startups Act into law, which relaxed some regulations on startup investing.

But maybe more than anything else, two factors helped to make venture capital look like an appealing investment: the Federal Reserve’s decision to keep interest rates low and enact quantitative easing after the financial crisis, and the enormous growth of tech giants. A number of new upstarts have disrupted the world, and Amazon, Alphabet, Facebook, and Apple set a new precedent for how valuable a technology startup could become. 

“Money's just being squeezed towards this category,” said Howard Lindzon, who co-founded StockTwits, a social network for investors and traders, and the venture capital firm Social Leverage. “Everybody's being forced on the risk spectrum. 70-year-old people are doing venture capital. I have many 65-70-year-old LPs”—short for limited partners, the term for investors in venture funds—who “think they're gonna live till they're 90. And they're like, ‘I don't want to be in bonds,’” Lindzon said. 

Many colleges and universities have upped their stake in the venture space too, often to great financial benefit. The Yale endowment’s head of venture was even recently promoted to chief investment officer. 

On the whole, the rush of money into venture capital has been good for the business. The average fund size is now $195 million, up about $30 million from the previous record, and firms overall have pulled in $96 billion through nine months—already a record, according to PitchBook. Venture capitalists generally earn an annual fee relative to the total size of their fund on top of the giant payouts they receive if a bet turns out well. 

The string of recent massive IPOs of companies like DoorDash and Airbnb has provided an additional infusion of liquidity to the tech world. A new generation of wealthy young investors reinvested their money back into the private markets, as have many limited partners. “You make $10 million in Uber, first thing you do is not buy a Porsche; you invest in 10 of your friends’ companies,” Lindzon said. 

The enormous venture returns have drawn in almost everyone else who can get in too, including a powerful group of nontraditional investors like mutual funds, hedge funds, and investment firms. In particular, hedge funds, which handle the investments of wealthy clients, have shaken up the venture world with “rapid dealmaking cadence, large check sizes, and boilerplate term sheets,” according to PitchBook. Chief among them is the New York hedge fund Tiger Global Management, which is now the biggest U.S. fund and investing in startups at “10x the pace it did just a year ago,” according to Crunchbase. 

Despite the various restrictions, a slew of new companies have cropped up with innovative ways to help investors get into the private space. “You're seeing an explosion of dumb money entering venture capital,” said Josh Constine, a former TechCrunch editor who is now an early-stage investor at SignalFire. Increasingly, U.S. retirement savings are likely finding ways in as well, though it is difficult to determine just how often. “More and more of the capital in private markets comes from pension plans, mutual funds, and other institutions, a trend that will likely continue. Because these institutions are stewards for the savings and retirement assets of millions of Americans, the savings of everyday investors is increasingly exposed to the potential risks,” Lee, the SEC commissioner, has said. 

Last year, for a brief moment, things went dark. In March 2020, after a magical decade in Silicon Valley, the influential venture firm Sequoia Capital published a note on Medium that it had sent to founders and CEOs about the COVID-19 pandemic that was enveloping the globe. The memo labeled coronavirus “The Black Swan of 2020,” and warned of potentially catastrophic economic consequences on the horizon. 

But the memo was wrong. COVID-19 turbocharged an already flush industry. The government kept interest rates low and plowed the economy with even more stimulus, and internet users piled a decade of behavior change into a one-year window as people became comfortable using their laptops to buy groceries, socialize, and go to school, work, the doctor, and even therapy. “If you're building any kind of company that plays into those themes, you've got a huge tailwind,” said Albert Wenger, a managing partner at Union Square Ventures. Fintech, AI, blockchain, and crypto proved increasingly exciting places to invest as well. “It's one of the best times to be an entrepreneur,” said Wenger. 

A decade ago, in 2011, venture capitalists hit a 10-year high when they invested $30 billion in a single year. Now that looks quaint. In the last two quarters alone, more than 280 new companies have been named “unicorns,” or more than one a day, bringing the total number of private companies valued at $1 billion to over 1,000, according to Crunchbase. (Some estimates put the total a bit lower.) The speed of markups can seem staggering. The typical private company’s valuation is doubling each time they receive new funding, according to the Financial Times and PitchBook. After Pacaso, a second-home startup, reached unicorn status in March, CEO and co-founder Austin Allison said he expected the feat would take him five years, not six months. 

“Is it frothy?” he asked. “That term is probably up for debate. It's certainly a good time to be raising.” 

The giant pile of money has dramatically reduced startups’ need to go public, a somewhat obscure sea change with enormous potential ramifications for the U.S. economy. Going public is a pain, requiring companies to regularly open their books to the public. Historically, companies went public anyway, because they needed more capital or employees and investors wanted to cash out their options. But today, for the right startup, more funding always seems available, and players like the Japanese investing powerhouse SoftBank are increasingly willing to buy out employees and early investors to get in.

“Because of the vast capital available, relaxed legal restrictions, and greater opportunities for founders and early investors to cash out, companies can remain in the private markets nearly indefinitely,” Lee, the SEC commissioner, has stated. This development has led to the creation of the biggest and most powerful private companies in history.  “$1 billion just isn't that cool anymore,” Primack wrote in August. Epic Games is worth $28 billion now. Instacart is valued at almost $40 billion. Stripe, the payment processing company, was valued at $95 billion during a recent funding round. To better explain the moment, new terms have been employed, including “Decacorns,” which are companies worth north of $10 billion, and “Hectocorns,” worth more than $100 billion,” which Elon Musk’s privately owned SpaceX topped in September, eliciting glee within the venture community. 

“SpaceX has now replaced what NASA used to be,” said Bilal Zuberi, a partner at Lux Capital. The comment, while slightly dismissive of a governmental organization responsible for man’s first steps on the moon, said something larger about the potential future role of private companies.  

In the eyes of many entrepreneurs and investors, the desire to stay private is understandable. “It's really good to be a private company,” said Andy Boyd,  a former Fidelity Investments executive who oversaw the private investing team before starting his own venture firm. Boyd noted that private companies can pick their shareholders, avoid short sellers, and select who is on the board, effectively choosing their own bosses. Private companies can also better control information about them. “They are not required to file periodic reports or make the disclosures required in proxy statements. They are not even required to obtain, much less distribute, audited financial statements,” said Lee, noting that “large sophisticated investors have some ability to obtain disclosure” but “sometimes almost inexplicably fail to do so."

“The public only gets to see what they want them to see. So they can hide failures,” Boyd explained. “You can't do that when you're a public company.” 

The lack of disclosures can lead to embarrassment and worse. It’s not a coincidence that two of the most public failures of the last decade, Theranos and WeWork, were private. 

The trend toward staying private can hurt average investors either way. By the time large private companies do go public, they are doing so at such high valuations that “a lot of the proverbial juice has been squeezed out of the lemon” by the time the public markets have it, according to Josh Lerner, a professor at Harvard Business School who studies venture capital and private equity. Companies that look like successes while private are sometimes shown to be less valuable businesses once they hit the stock market, and regular investors are left holding the bag. 

That has led to an even greater incentive for those who can get into the private markets to do so. “If you want a chance to really multiply your money, that's when you have to get in,” Constine said. It’s created a self-perpetuating cycle: Private companies get bigger because of growing amounts of venture capital, and more venture capital flows into the companies to get in early enough to reap the rewards. 

The giant pile of money has, somewhat ironically, led to headaches for a number of the venture capitalists themselves. Once money has entered a firm, the venture capitalists have a responsibility to figure out a way to spend it. But because of the new pace and vast competition, figuring out where to put the money can be difficult. Top firms, like Sequoia Capital and Andreessen Horowitz, still often get their pick of the most promising. Everyone else is left fighting for the scraps. 

“It’s actually really, really hard to make new investments,” Iltchev said, who believes the funding conditions are a “double-edged sword.”  “Anything that is remotely working has many options, really high valuations. People are losing deals left and right.”

Because of the broader shifting financial dynamics, founders also have “a lot more leverage in the system than they've ever had,” said Frank Rotman, the ​​co-founder of QED Investors. And they’re using it. Occasionally, founders have “scrapped pitch decks” entirely and are “showing up to investor meetings empty-handed,” according to the Wall Street Journal. Boyd, the former Fidelity executive, said people are receiving term sheets the weekend after they kick off fundraising meetings. The day before we spoke, Body spoke to a company for the first time. “They want the deal signed by the end of next week. Not even just a term sheet by the end of next week,” he said then. “They want diligence done, term sheet negotiated, and documents done in a week and a half.” 

Even that might be slow. TX Zhou, a partner at Los Angeles–based Fika Ventures, has heard of funds needing to decide after a half-hour call with a founder. Rotman recently was given two hours to decide whether his fund wanted to invest in a round. It can feel like the investor equivalent of buying a home in an uber-hot housing market—uncomfortable and ripe for future buyer’s remorse. 

Zuberi said the new state of play can prove stressful when the firm has “three and a half days” to decide whether to invest millions of dollars. “I'm expected to make an investment in a business without even knowing who the co-founders are,” said Zuberi. 

The pace has been intensified by the pandemic. Meetings up and down Sand Hill Road and travel between San Francisco and New York were often largely replaced by marathon Zoom sessions with companies around the globe. “The pace of fundraising has picked up incredibly as a result,” Wenger said. Zhou estimates his firm’s pace of dealmaking has gone up 60 percent more deals over the last year.  “I've never seen anything like it,” said John Tough, a venture capitalist focused on the energy and sustainable industry, who described the pace in the “chat app” space as “rapid.” “You hear about a round being done a month after the last round, when that should usually take 18 to 24 months.”

Roshan Patel worked in venture capital for roughly four years before he decided to start his own company, Walnut, about a year ago. The company offers a “buy now, pay later” service for healthcare, allowing its customers to pay for large medical expenses in monthly installments without fees or interest. When he set out to raise a pre-seed round, he had so many venture capitalists reach out to him that he didn’t have to send any cold introductions. After he set up seven or eight Zoom meetings every day for a month, he estimates, he was surprised to receive some verbal commitments from venture capitalists on his first call.

Coming from the venture capital side, he realized just how much leverage he had early on. 

“Because there's so much competition from VCs to fund these startups, you have to move quicker to get in the round. And moving quicker means making decisions faster with less information,” Patel said. 

To survive, venture capitalists are learning to do more with less. “Perfect-match courtships” have been replaced by a “speed dating” version of what came before, Rotman has said. “Speed, quantity over quality, and FOMO are accelerating.” The dynamic can make it sound like these are gamblers plunking down bets at an Atlantic City craps table, but many venture capitalists insist they’re still figuring out a way to make informed decisions, doing as much research as possible ahead of meetings. Roseanne Wincek, the co-founder and managing director of Renegade Partners, said she has tried to learn to be more “ruthless” with herself, figuring out what information she needs to uncover and then quickly making a decision once she’s gotten it, echoing a sentiment shared by venture capitalists who spoke to me. 

Some, though, are more pessimistic. “There's no way you can do the same amount of diligence,” said Zuberi. The Wall Street Journal has reported some venture firms are completing fewer audits and “taking a startup’s word on profit and loss.” Rotman recently realized that an investor in one of his portfolio companies was still “working through primary diligence” as a round closed, he said. 

A few months ago, Iltchev stumbled upon a company with an exciting idea. As he was doing diligence on the opportunity, the founder told him that he had clearly done more research and work than any other investor he had spoken with. “I could not believe he was saying this. I had done very little work,” Iltchev said. “I made a handful of calls.”

Because of the competitive stakes, investors are “ascribing higher valuations to things where they can move quickly,” which means relying on “hero archetypes,” like established entrepreneurs and management teams that have experience together, Boyd said. “That doesn't mean that they're always the best companies to invest in. They're just easier to diligence.” By comparison, investing in a first-time founder from a nontraditional background is harder, said Boyd, whose firm tries to focus on companies that are difficult to diligence.

“It’s getting better for the people that it was already was pretty good for,” said Madison Campbell, the co-founder of Leda Health, which provides early-evidence kits to victims of sexual assault. 

Boyd’s and Campbell’s comments echo what the founders I spoke with said. During the first months of the year, startups run by “solely female founders” received only 2.2 percent of venture funding, the lowest percentage in previous five years, according to Crunchbase. Startups with Black or Latino founders pulled in 3.2 percent of U.S. venture funding. Meanwhile, times have arguably never been better for former Google employees, second-time founders, graduates of Harvard and Stanford business school, and white men in hot spaces. After van der Voort, the CEO and co-founder of Remote, raised $150 million at a $1 billion valuation this summer, he told CNBC that he felt he “could have named almost any number and we would be able to raise the amount of money.”

“If you match the pattern exactly, which I think is the case for me and my company, there's more money than ever available,” said van der Voort, who was critical of the trend. 

Among the people who fit the bill, the investor competition has led to a “market where the VCs are price takers, rather than price makers,” said Rotman. “Founders are just setting their own valuations,” agreed Patel, the venture capitalist turned entrepreneur, who ended up nabbing more than seven times what he’d hoped to get when fundraising. Some entrepreneurs and venture capitalists have gone so far as to say that valuations have been “completely disconnected” from their actual financials and “pricing discipline” has gone out the window. “It just amazes me what you can raise at what valuation,” Henrichs said. “I just don't know how we justify, in the private market, some of the valuations.” Henrichs said five investments he made last year have all raised subsequent rounds. 

“In 18 months, we're trading at 10x. It's just nuts. I love these companies. Don't get me wrong, but I'm like, who's paying these prices?” Henrichs said. 

Some venture capitalists argue that the potential scale of tech platforms and the proven financial success of 21st century tech companies mean that many of the bets could turn out to be financially lucrative, regardless of the price venture firms pay to get in early. “If you look at something as the next Airbnb, Uber, or Coinbase, then it doesn't fucking matter how much you pay,” Clavier said. The problem, Clavier added, “is that people sort of treat every investment as if it's the next Robinhood.”

I asked Boyd, the former Fidelity executive, how a venture capital firm can be sure of such a major financial decision when working at such an unprecedented pace and with so little information. “I think that's the $64,000 question,” he replied, referring to the mid-20th century American quiz show that became embroiled in an infamous scandal. Zuberi, of Lux Capital, said certain venture capitalists are struggling with the new normal. “Some VCs are saying, ‘I can't do this,’” Zuberi said. “It's causing stress.” He added that certain firms are struggling with a generational “culture clash.” Younger investors are saying that the firms need to adapt to the new normal and continue to make investments.

Then he added: “The older guys are like, ‘This doesn't end well.’”

More and more, Carey Smith finds himself perplexed by the startups he hears from. “It's amazing what people come in with and what they expect,” said Smith, the founder of the Austin-based Unorthodox Ventures. “Some of them, they don't even have business plans, and they expect to be funded. And a lot of them are.” He keeps hearing about new startups pitching “really screwy ideas” that “make no sense at all,” he told me recently. “We see an awful lot of just—it's just truly garbage.”  

Most startups fail, and venture firms bake that fact into their model, making a large number of bets in the hopes one company will become the next Facebook and make up for the others. Even still, Smith is concerned by the sheer number of companies he sees raising money that “simply do not have a viable product.” Before Smith was a venture capitalist, he founded and ran a successful fan business, growing it an average of 30 percent a year before eventually selling for $500 million. Shortly before we spoke, Smith was at his office talking about a new tech company that purports to print 3D houses, including for life on Mars. “It's the dumbest thing ever,” Smith said. “But these guys, they had raised 200-plus million dollars.” Smith recently met an entrepreneur who was making electric motors without a plan or a product to put them in. Smith liked the young man but suggested he pursue another idea.  

“And I'll be damned if I read last week that he had raised $55 million,” Smith told me when we spoke. “He's got to think I'm the absolute dumbest guy in the world.” 

After WeWork’s fall from grace in 2019, some people expected to hear a pop. “Stuff like that is usually the end of a cycle,” Lindzon said. Instead, some founders have instead adopted something that looks like WeWork co-founder Adam Neumann’s playbook. Rotman has said he’s seen “an acceleration of ‘Keeping up with the Joneses’ behaviors” among both founders and venture capitalists. Raising lots of capital allows founders to “grow crazy-fast” and “issue press releases,” said Rotman, which allows them to attract talent. Investors get to look like they are “winning,” which attracts more money and catches the eye of hot startups.   

“It's hard to resist, if your closest competitor just raised a ton of cash,” said Martina Lauchengco, a partner at Costanoa Ventures. The day we spoke, Lauchengco’s colleague at Costanoa, Greg Sands, had been at a board meeting where a competitor had raised a large amount of money at a high price. They wondered if they should go out to raise as well. 

“The answer universally was: We can't spend all the money that we already have,” he said. 

Massive amounts of funding can mask over or even create issues at private companies, numerous people told me, which is why so many of them advocate for a “lean startup” approach early on, and why some of them are starting to express concern about the current market. “We don't see the natural attrition rate or natural death rate that we should,” Wincek said. 

That can give companies more chances to get it right. But Wincek said a “common refrain” she hears from founders is that things move so fast now that entrepreneurs use funding to “throw bodies at the problem instead of really fixing the tech or really building systems.” As a result, she said, startup CEOs are sometimes finding themselves working with the actual product less. 

 “When we look back, we're gonna see companies that are casualties of having raised so much money or having such easy capital,” Wincek added.  

Regardless of their level of optimism about the future of technology, most people I spoke with expressed concern for the amount of funding some startups have received. Because of the economics of the venture model, that funding can place intense pressure on them to grow beyond what might be reasonable. One former venture capitalist told me about a “pre-revenue startup” raising money at a $500 million valuation. “If they don't absolutely crush it over the next 12 months, the company's dead,” the venture capitalist added.

Financial trickery (or innovation, depending on your perspective) has made it at least a bit easier for early investors in WeWork-like companies to cash out in the end. The recent rise of special purpose acquisition vehicles, or SPACs, have provided such private companies with an easier way to go public than a traditional IPO. A SPAC is a shell company that raises money to buy a private firm, then rebrands under its name, which allows the purchased company to more quickly bypass a lot of traditional due diligence and underwriting.  Just this month, Donald Trump launched a media company using a SPAC. The next day, WeWork went public thanks to one.

There are valid reasons for the great optimism inside the venture capital space. Recent history has proven Silicon Valley’s ability to create some of the world’s greatest firms, and tomorrow’s Google could very well be getting built in New York City or Austin or São Paulo today. Venture firms are searching for the next Steve Jobs and sitting on a record amount of unallocated capital, according to PitchBook. The sheer number of brilliant entrepreneurs iterating and tweaking and building away is immeasurable. “I truly think there's hundreds of great companies a year being started,” said Lindzon. 

“It could be that we are in an environment where too much money is chasing too many good deals,” Fred Wilson, the co-founder of Union Square Ventures, wrote this month in his blog, citing, in part, “the dramatic increase in the number of people who are choosing to work in or form new startups.”

For years, onlookers have waited for the party to stop. And so far, such cynics have looked foolish. “I’ve said the valuations are too high for 10 years now, and I've basically been wrong every single time,” Wenger said. Even a global pandemic couldn’t bring down the venture capital industry, and many don’t seem particularly concerned should the other shoe drop. “It doesn't matter to me that much if we're in a bubble or not,” said Roy Bahat, the head of Bloomberg Beta, an early-stage venture firm. “Because the very best founders are still going to create things that are extraordinary.”

And yet, the level of frothiness has become so high as to make a growing number sweat. “The idea that we could just collectively achieve that much growth across all these sectors to pay back all this money. It's like, OK, sure. Somebody showed me that math,’” said Best, the Seed&Spark CEO, who was preparing to launch her Series A fundraiser when we spoke.

Campbell, the co-founder of Leda Health, said she’s been telling founders to load up on funding now, “because we've seen what this has done before, and there's no way that this is going to last.” 

“There’s a massive, massive bubble,” said Lindzon. “We know that there's something bad that's gonna happen. But it's different than the last time, so we don't know when. 

There have long been doubts about how much the going-ons of the private markets matter. If a few rich people lose their money, who cares? But because of the massive returns in venture-backed companies, and the lack of incentive to go public and open the books, there is reason to believe the private markets could grow much larger. Some politicians and regulators are fighting to allow less wealthy investors into the space, arguing (rightly) that they are missing out on major returns as a result of waiting for these startup darlings to reach the public markets. In 2020, the Labor Department issued guidance that could pave the way for more private equity investment in 401(k) plans, and the SEC decided that investors with enough knowledge or experience could invest in private startups regardless of their income and wealth. In September, an SEC committee said the agency should open up even more non-wealthy retail investors to private investments.  

New platforms are doing what they can to help everyday investors sneak into the market as well. Angel Squad, launched in May, hopes to democratize angel investing by recruiting people with investments as low as $1,000. The founder of a separate platform for angel investors recently told the New York Times that startup investing is “absolutely going mainstream,” bragging that their own mother had already invested in dozens of startups. She is a retired schoolteacher. 

In her comments this October, Lee, the SEC commissioner, expressed her concerns about the growing private markets, and the enormous startups that “dwarf” their publicly owned competition with increasing frequency. Chastising the commission for having helped “fostered” the environment, Lee questioned whether enough incentive remained for companies to go public, where they must be more transparent, and worried about business increasingly taking place within secretive companies like Theranos.

“The fact that more capital is now being raised in private markets means that a burgeoning portion of the U.S. economy itself is going dark,” Lee has said. “This has consequences for investors and policymakers alike, which in turn may have consequences for the broader economy.”

Under current rules, Lee added, policymakers and the general public alike do not know enough about how “the growing lack of transparency is affecting ordinary investors such as retirees invested through mutual and pension funds, and employees who may become overinvested in a company’s shares without the ability to assess their true value.”

Lee said it was time to consider whether the current trends will lead to the same “misallocation of capital” that the country experienced before it enacted the federal securities laws. The laws, which required public companies to file registration statements, regular follow-up reports, and audited financial statements, are one of the primary reasons it’s so good to stay private today. 

At the time the U.S. Congress enacted the laws, it was attempting to make the financial markets more transparent in order to regain the public trust. The decision made sense. Though only a “relatively small segment of the U.S. population” had invested their money in the market at the time, a financial crash had shaken the world a few years earlier, in 1929.