By Jackie Luo, TCV Growth Partner -
Lately, we have seen many bad businesses finally exploding, after years of hypes and crowd admiration.
FTX, the crypto currency derivatives exchanges, founded by the boy wonder Sam Bankman-Fried, filed for bankruptcy. $32 billions in FTX valuation vanished, and investors collectively lost billions. Among them, there are celebrities like Tom Brady, and famous silicon venture funds like Sequoia.
Theranos, the “revolutionary” blood testing company, raised billions of dollars from famous venture funds like Partner Fund Management and Fortress Investment Group, and individuals like Rupert Murdoch and Larry Ellison. As it turned out, the company never developed the technology as it promised the investors. But none of these famous investors questioned the legitimacy of the business or the passionate belief of Theranos’ wonder female founder, Elizabeth Holmes, another Stanford University dropout. The company dissolved in 2018, and Elizabeth Holmes, after a lengthy trial periods, was just sentenced to 11 years in jail.
Meta, the holding firm of Facebook and Instagram, lost $800 billion in valuation because Mark Zuckerberg’s venture into the Metaverse, despite billions of investments, has met with little enthusiasm in the marketplace. In the past decade, the name of Mark Zuckerberg is synonymous to the Silicon Valley get rich dream. With his reputation, he was able to maintain tight control of Meta, formerly Facebook, with the implicit support of the Board of Directors. The Board let Mark Zuckerberg’s company collect data from consumers without much respect for privacy, and invest billions of dollars in creating the metaverse without much evidence of customer adoption. Why? Because he is Mark Zuckerberg, the Harvard dropout who can predict our collective future.
All these businesses and their founders were once adored and admired by the society and the media. They attracted heavy weight investment from venture firms and individuals who themselves have built billion-dollar businesses, commanded our troops to win wars, and triumphed over complex geopolitical negotiations. However, they didn’t see the gigantic holes in these businesses. Why?
There is a fundamental human vulnerability called “FOMO”: fear of missing out. Once we see many other people buying something or supporting something, we tend to believe that something must be so good that we should get on board as well. In doing so, we de facto place a high value on the adoption by other people, especially highly reputable people. We trust these highly reputable people know more than we do, so we release our own responsibility of thinking critically and independently.
FOMO is a human vulnerability, because sometimes people stop thinking independently for themselves and simply following the crowd. When enough critical mass is exhibiting FOMO behavior, we often see irrational outcomes, such as “how could a person be lying to so many people for so long?”, “how could this company have so high stock prices while losing money quarter after quarter?”.
This human vulnerability has manifested again and again in history. Most recent examples include the 2001 bust of technology companies, the 2008-2009 great recessions, and the 2022 stock price crash of some pandemic induced crazy valuation of money losing businesses like Carvana and Roku.
In 2001, during the telecom boom, billions of dollars were poured into start up technology companies that have no revenue. During 2008-2009 subprime crisis, banks loaned billions of dollars of mortgages to people without much income history and with a poor credit history. Last year, the online used car buying and selling business Carvana, once dubbed as “Amazon of used cars”, was valued at $376 per share in July 2021, and now it is worth around $8, a decline of 98%. The business has never been profitable.
So what do we learn from these FOMO lessons? We must be aware of our own human vulnerability in our journey of building businesses. Here is how I apply these lessons:
As an angel investor, I include “avoiding FOMO” as my checklist. Last year, I came across a NFT startup raising series A funding, at $50M valuation. The business had a lot of momentum and celebrity support, but in the end, I passed the opportunity because I just didn’t know too much about how the valuation for NFTs work. I reminded myself not to blindly follow the crowd. In hindsight, it was probably a good decision, and I am glad that I followed my checklist.
As an advisor to startup founders, I encourage independent thinking all the time. We must assess our capabilities and the market needs to determine whether to play in this market and how to play. Sometimes other people, with good intention of course, offer suggestions for market entry strategies, and we see others succeed in using these strategies. It could be tempting for us just to “jump in”, but we must be aware of the FOMO tendency. We must do the hard work to test the customer pain points, and the value proposition rigorously.
History has again and again showed us that FOMO is a human vulnerability. We have seen it manifesting in the past, in the present, and I am sure we will see it in the future. We may not be fully immune to it, but at least we can become more aware of it.