I once interviewed a VC who said they avoided every hype cycle as a matter of principle. They told me that they’re only looking for startups with basic unit economics and social proofs because it helped them remain “honest.”
And sure, they’d missed out on [REDACTED DECACORN], but all things considered, they’d been extremely successful by any measure.
Hype cycles can spur world-changing innovations like social media and generative AI, but they also build fanfare and ballyhoo for flopped fads like VR goggles, digital scent technology and instant grocery delivery.
Investors are open to bandwagon jumpers, but they’re looking for startups with defensible moats and qualified teams that can become market leaders. So, when should founders ignore the hype, and when should they follow the crowd?
To get answers to these and other questions, I interviewed three early-stage investors at TechCrunch Disrupt 2023:
- Sophia Amoruso, founder and general partner, Trust Fund
- Katelin Holloway, founding partner, 776
- Sarah Kunst, managing director, Cleo Capital
How investors select founders during hype cycles
“The chances of your success building in a very, very concentrated market is going to be a lot lower,” Holloway said. “Building something that you’re deeply passionate about, solving a problem that you’re deeply passionate about: Solving will always outweigh whatever the hype cycle is.”
She said entrepreneurs should study every trend, but founders who look like dilettantes won’t get far.
It’s OK for a founder to jump into an emerging hype cycle, but only if they have a genuine interest in that area that reaches back in time.
“For example, ‘I was trying to build something in crypto because it was this hot thing, and then all of a sudden the bottom fell out, and now I’m going to be an AI founder.’ That doesn’t really work,” Holloway said. “And for me as an investor . . . that is definitely a flag.”
Each panelist agreed that it’s OK for founders to jump into an emerging hype cycle, but only if they have a genuine interest in that area that reaches back in time.
“I’ve really, really, really leaned on expertise,” Kunst added. “If I can’t go to your LinkedIn and understand why you specifically or your team is credible to build — especially in something like AI — you’re probably not gonna get a meeting.”
Amoruso said founders pitching AI-related companies need to demonstrate “founder-product fit” to prove that they’re not just trying to catch a wave. “Everyone’s kind of bolting AI on to everything and has like a little sparkly thing in the corner that you can do stuff with, but that’s not it,” she said. “If the underlying technology is something that benefits the product . . . and the founder’s qualified, then I feel like there’s a kind of full stack there that I can feel comfortable with.”
When it comes to hype cycles, Amoruso said she’s only interested in founders who “have domain expertise, a really solid co-founder who has domain expertise, or they need to be a second-time founder who’s built something amazing and knows how to assemble a team with the level of expertise that they need to build whatever bandwagon it is that they’re building on.”
Holloway said her firm rates each company in its portfolio from 1 to 5 on a “disruption indicator” that helps startups find new efficiencies and get ahead of hiring trends.
“Basically, it’s a risk assessment for our entire portfolio,” she said. “This is not a mark of their performance, but how we read [their] potential disruption. My menopause health tech company did not need an NFT, but they sure as heck might need a help chatbot.”
Do VCs expect higher returns during a platform shift?
Before our discussion, I thought most investors who participated in hype cycles were expecting higher returns, but that’s purely a pre-downturn perspective, Amoruso said. “People are being rated now on what they’re actually achieving instead of an idea in a deck they’ve thrown out into the ether and took secondary in 2021 when they had no product — that’s just not happening anymore.”
How to gather social proof for emerging technology
In 2021, social audio app Clubhouse raised a Series C that valued the company at $4 billion. In April 2023, the company laid off half of its staff as part of what its founders called a “resetting” effort.
Much of the buzz around Clubhouse’s early days was driven by its invitation-only access and the celebrities who joined and participated. This generated a lot of press coverage and investor interest, but that’s a world away from mass adoption.
“Social proof isn’t, you gave it to your best friend and then told your best friend to wear it when you know your best friend is having lunch with an investor,” said Kunst, referring to a fashion startup. “We can generally smell bullshit.”
“Even if it’s behind the scenes and it’s not something that people are sharing on Twitter yet, if you’re still in beta, every user interaction is an opportunity to collect a testimonial from somebody,” Amoruso said. “I will spray a product to everybody I know and be like, ‘What do you think about this?’”
Any hype cycle regrets to share?
Last year, 776 helped generative NFT startup Doodles raise $54 million at a $740 million valuation, but since the bottom fell out of the market, the company has rebranded itself as “a leading media franchise.”
I asked Holloway whether 776 would still have led that round if Doodles had pitched itself then as a media company. “I did invest in it because I did not believe it was an NFT project,” she said. “I invested in it because I spent a significant amount of my early career at Pixar Animation Studios, and I know exactly what a great media franchise looks like. I know exactly the value of IP.”
Amoruso wouldn’t name names, but “there’s one company I can point to that was very hyped that I should have stayed away from and I’m pretty sure before they had any revenue the founder was like buying lattes with the secondary he took from my $150,000,” she said. “I asked for a refund.”
Kunst said she gave virtual reality a hard pass. “I never did VR because putting on a VR headset makes me nauseous,” she said. “I don’t like being nauseous.”