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Pump and Dump

• Startups are becoming unprofitable due to cashing-out shell operations
• Huge investments by Softbank have impacted Silicon Valley
• "Pump and dump" practices disrupt natural industry evolution, creating artificial and inaccurate growth patterns

Who Pays for This?

• Unprofitable companies often use pension fund money
• Pension funds contribute 65% of capital to US venture capital (VC) markets
• 90% of VCs fail to keep pace with stock market returns since 2000
• Institutional investors typically acquire 90% of initial public offering (IPO) shares

Unicorns

• Unicorns are startups valued at $1 billion USD
• 90% of unicorns experience substantial cash losses
• Unicorns are essentially subsidized monopolies funded by pension funds

Who is Winning Here?

• Venture capitalists (VCs) benefit from "fee streams" (2% and 20% fees)
• Startup founders and employees bear the majority of the risk
• Professional fund managers generally gain from the system

Term Sheets Matter

• Unicorn startups may undergo several rounds of VC funding, but valuation subsequently decreases
• VC-funded companies often achieve large sell-offs with seemingly great accomplishments for the company, but founders/employees may gain little
• The reason for this phenomenon lies in "liquidation preference"

Liquidation Preference

• Investors often initially invest a specific amount in a company (e.g., 100,000 Euros) in return for a percentage of the company's shares
• If the company is sold for a higher value than the initial investment, the investor profits from the difference (e.g., selling price - investment cost).
• This initial investment is protected, meaning investors get their initial investment first, even if the founders have received a lesser profit from the proceeds after paying investors.
• Essentially, investors are prioritized in a liquidate scenario.

Multiples + Participation

• VCs frequently seek "multiples" of liquidation preference due to risk
• Investors contribute capital to acquire a percentage of the company (e.g., 50% for 100,000 Euros).
• A company's sale price will determine how much the investors receive.
• VCs often prioritize themselves to receive greater profit from multiple funding rounds

Preference Stacks

• "Preference stacks" are used in multiple investment rounds across various startups and companies.
• An initial round (e.g. FFF at 100k Euros) and subsequent rounds (e.g., B rounds with millions USD) may involve different levels of priority for investors.
• Often, later investors are prioritized and early investors might not receive any profit if the company's sales are not profitable.

Why Founders Accept This

• VCs often employ aggressive tactics to acquire investments in startups
• Founders may have no better alternatives
• Startup incubators may fail to disclose these practices to new startup founders