In a wood-paneled auditorium in central London, entrepreneurs explain to more than 100 investors how they will change the world. You only need a few million pounds.
One promises to solve hair loss with a device in a cap; another will be made out of CO2. All are armed with doctoral theses, clever presentations and swearwords.
Depending on what you think, this is either a sign of the thriving tech scene in Europe or further evidence of the investment bubble that fueled the bloated valuations of Uber and WeWork are about to burst ̵
The founders, who recently gathered in King's Cross, all went through the six-month Entrepreneur First (EF) program, which brings together ambitious individuals in the hope that they will band together and build the next Google.
Investors are Venture Capitalists (VCs) who are ready to bet on early-stage companies that are little more than a founding couple with a big idea.
Dr. Hira Singh Virdee, for such a company, enters the stage and explains how his company will solve the problem of missing satellite power by shooting lasers at them.
Betting on these companies is a high-risk strategy. EF co-founder Matt Clifford says, "You're probably losing money at seven out of ten, you're doing a bit better than breaking even at two and the last you need to get out of the park."
A Ten years ago, most investors shunned the VC market and left it to the professionals. Then, central banks around the world lowered interest rates to drive recovery after the financial crash. This made it difficult for investors to generate returns and pushed them into areas previously considered too risky.
The funds flowed into VC, where assets under management between 2008 and 2016, according to data to $ 524 billion (414 billion GBP) almost doubled Preqin provider. With billions in their pockets, investors started looking for capital-hungry startups.
With so much money spilling around in the system, the rounds of financing got bigger and bigger. Critics say that startups have money to burn and no longer have to show how they will ever make a profit.
Martin Kenney and John Zysman of the University of California say this has fundamentally changed the rules of the game. In a paper on corporate finance, they argue that deep pocket investors are now making large bets on loss-making businesses and can continue to finance them until they destroy the competition.
Kenney and Zysman say the current system not only encourages but encourages them to demand a breakneck expansion. "In fact, a startup that is not growing as fast as possible will soon be overburdened by the startup with more capital and more ruthless investment." Quantities of VC that allow them to undercut their competitors.
Uber, for example, can charge less for rides and pay more for its drivers because it has raised more than $ 22 billion in VC.
Prof. John Colley, Associate Dean of The Warwick Business School, says, "The minute you charge market rates and drivers have to pay for the normal fare, you have a problem." Although many taxi companies have moved in, the barriers to entry are so low that the competition strikes quickly reappear when the financing is used up and the prices are back to normal.
Consumers, for their part, either have to pay for or save taxis, takeaways and other services that are made artificially cheap with VC money. Colley expects more from the latter. "If you have to pay the full amount to bring your Subway sandwich to your home, you would not do that." That's the reality. "
This will have an impact on jobs." These home delivery industries and very cheap taxis are likely to shrink significantly – they are both incredibly large employers. "
When does the bubble burst? Many refer to the implosion of WeWork – once a figurehead for the VC investment boom – as the beginning of the end.
Deals are already shrinking in size and number. Since January, the amount invested by VCs has fallen by 23% compared to the same period of the previous year. In the UK, according to Preqin, the number of transactions has fallen by 15%, although the investment totals are still high.
Alice Bentinck, co-founder of Entrepreneur First, says, "It's relatively new that the WeWork and Uber stories are coming through, and maybe we'll see a correction sometime in the near future. "
At the moment, she says, the money is flowing freely. "We still see rising ratings, even for these very, very young companies."