The Media won’t Tell you the Truth about Startups & Venture Capital Funds

Andrzej Targosz

The Media spins fairy tales about the world of startups. They make heroes out of founders and they turn the growth of companies into a sideshow. A VC is like a good king that gives away half his kingdom on a promise. PR teams working for startups and VCs are effective in fanning the flames. Any problems – if they exist – are effectively camouflaged. Investigative journalists, if you can still call them that, only uncover the truth for the highest bidders.

The relationship between investors and founders is no fairy tale, although fantasy does play a large role. The king does not promise half of his kingdom after the mission has been completed. The king gives a treasure chest full of gold on the promise that you will create a new world for him.


Journalists love to write about startups that get funded

Let's look at it from a founder’s perspective: media interest is piqued by the fact that they’ve given up shares of their company for money. If the founder creates a game-changing technology company, it could be worth $100 million in five years. But the founder gave away 20% of the company's value for a measly million. They might be drinking champagne today, but tomorrow they should be crying.

They give away pieces of something that they believe in and have built with their own blood sweat and tears. At the same time, they allow themselves to be shackled and agree to carry a heaven burden. Occasionally it happens, like in a fairy tale, that they receive a magical gift in the form of uninterrupted support from their king. But in most cases, the support they receive comes in the form of a one-time cash injection and ruthless enforcement of promised results.

The status of being a tech company that has received funding ensures publicity and increases the chances of accessing subsequent investment rounds. Does it already guarantee that they will deliver the results and the solutions as promised? Not at all. In this world, a lot depends on the competences of the founder and fate. The 90/10 rule says that out of ten startups, at most only one has a chance of success. Full stop.

Under such circumstances there are no similar paths or patterns that a startup can follow to achieve some sort of predictable success. There is only a rule that dictates that very few will succeed. The fact that a good VC fund gave a founder money simply means that a VC fund gave them money. Of course, the better the fund, the better the verification of their idea, however this still doesn’t offer any actual credibility. Any reference to past successes or average amount of returned capital is problematic because such quantification tells investors nothing. There is no average. Most often the company in question is simply a 0 or 1.

Journalists are often superficial and unfortunately the oversimplification of complex issues helps them lose their essence. If you know a thing or two about a specific industry, you will immediately be able to detect nonsense (read: bullshit) when reading Business Insider or Newsweek. Any oversimplification – which is usually what journalists present – will always be false. It is impossible to simplify complex things by their very definition.

For example, some of our fund’s partners know about quantum computing. Whenever they read newspaper articles on the subject they end up pulling their hair out. Sophisticated discussions between "experts" play out across the pages. Without deep knowledge of a given subject matter, it is almost impossible to capture something that is not false. Even science journalists are not always able to understand the issues at hand. Despite their best efforts to drill down into a topic, the end result is often less than satisfactory.


Naive journalists are easily fooled by the PR of VC funds

Journalists have a tendency of showing just a small segment of a given topic and not showing the full spectrum. Around this one segment they are able to build their narrative in such a way that it seems that the topic holds water. They are not alone in this practice.

As an example, let’s take a look at a problem that Newsweek recently wrote about, i.e. boson sampling (sampling of the distribution of quantum bosons). The Chinese created a sampling machine and the journalist wrote about its advantages, comparing it to Western universal computers, which are of course smaller and have fewer qubits.

The problem, however, is that a quantum computer only makes sense if it is universal, i.e. it solves not only specific or selected problems. A classical computer is an imperfect implementation of an abstract model – the Turing machine. There is a quantum analog machine, i.e. a quantum Turing machine, which is also a universal computer. On one of them you can do almost anything with the right program. We should all strive to use solutions such as this and then compare the results with each other.

There are areas where the modeling of specific quantum phenomena leads to extremely difficult classical computations. Their complexity grows exponentially with the size of the modeled system. But you can create a quantum machine capable of just one specific purpose – but then it won't be universal. It is not suitable for normal computations, only for simulating boson distribution under certain conditions.

I suppose that it wasn’t so much that the journalist didn’t understand the issue, but they were perhaps influenced by an outside lobbyist. Someone wanted to use the media to spread the idea that America should put more money into quantum computers because it was losing to China.

You have to be able to read between the lines. If we can assume that an editor with substantive knowledge on the topic would not allow for such an article to be published (because it compares apples with oranges after all), let's try to look for another true purpose for the publication of this text. In this case: "Quantum computing is the technology of the future and America needs to invest more in it.”


Founders that are hungry for success are capable of bending the truth

In the world of VC funds and startups, there are many people who use PR to try to influence opinions. Often they convince themselves that they just need that one little missing piece to deliver what they promised. They then try to build up a similar belief in others.

Sometimes, however, an obstacle gets in the way that simply cannot be overcome in a month, but rather it will take two or three years to overcome, if ever. This was the case with Theranos and with D-Wave on the basis of quantum computers. In both cases many people warned their developers that they were opening Pandora's box and that their problems would drag on for years.

There are two options for getting out of such a situation – accept defeat or raise a lot of capital. What killed Theranos was the fact that they raised and then burned through a lot of capital but their founder was simply unwilling to accept defeat. The decision was made all the more difficult because running a startup is also a lifestyle choice. At some point, founders start living beyond their means and they start feeling like gods, and journalists start treating them like celebrities.

Elizabeth Holmes (CEO of Theranos) had a choice – close the project or acquire clients by telling them that the project was already up and running in order to gain credibility with other investors. Not only was the technology not ready – but it had already become clear that its creation might not even be possible. More obstacles appeared on the horizon which Holmes tried to cover up with more money. This is why she appeared in the media so often flanked by investors and politicians, and also why she falsified documents so that it would seem that everything was moving forward according to plan. She created an alternative media reality in which her technology triumphed. Journalists supported her and – perhaps worst of all – she started believing her own PR.


Public relations campaigns are able to change the way people think about an entire market

The main problem with the media is that different interests and influences are constantly clashing in their domain. Not everyone wants to talk about this fact, because, for example, they make money on advertising, sponsored articles, consulting and lobbying. Startups can take advantage of this situation by promoting only the most convenient messages related to their business activities.

Uber is a champion at this – in the name of the global gig economy, it excommunicated taxi corporations from the transport religion and separated them from their loyal flock. They built up the myth of freelancers earning extra money by transporting people. One of their vice presidents threatened that Uber would start airing the dirty laundry of journalists who looked into the company. Over the years the company has been accused of sexism, improper lobbying practices, and the use of dirty tricks against competitors, authorities and unfavorable journalists.

During their IPO, Uber showed results that were gross violations of accepted accounting practices. They included their foreign branches in their financial evaluation, as well as money they earned from selling these branches to other partners. Back then, the company was only profitable in New York and San Francisco. So the media built up a message that Uber was profitable in the markets where it had been operating for the longest amount of time. Therefore, it would only be a matter of time until it became profitable in other markets as well.

The truth was that in the aforementioned markets, they were able to earn money due to the specific conditions of taxi corporations and the gigantic licensing costs for drivers. Such a dysfunctional model was also supported by marginally corrupt local authorities. Given such market conditions, winning was certain if they simply threw money into the system and ignored certain applicable rules (properly adapted cars, insurance, etc.).

Uber bent the rules and on top of that, they had enormous money to battle incumbents with, i.e. traditional taxi networks. Nevertheless, wherever these networks worked decently, they had no chance. People went to Uber as long as they had trips sponsored by investor money.


Investigative journalists should target VC funds

The human world is ruled by opinions. What a journalist or an average person knows are just opinions based on the knowledge of experts. But the real, discernable world is not governed by opinions. You can't cheat physics. Therefore, to invest in innovative technologies, you need to be familiar with the given field, be prepared to navigate through a minefield of technological nuances – or at the very least have someone trusted to do it for you. In the media, instead of actual knowledge, there is a lot of self-inflated optimism, endless stroking of VC funds’ and startup egos to keep the bubble well-inflated.

The manipulation of facts and figures is not a problem unique to the Polish market, but rather one for the whole world. The examples of Theranos or Uber show us the true nature of the VC fund and startup ecosystem, but no one talks about it. Instead, we continue on hunting for unicorns.

Problems only arise when many investors lose money or don’t get a return on their investment. Then their willingness and will to have any kind of conversation about startups and with startups diminishes.

Sometimes there should be a moment when someone says – I’ll look into that. Mainstream journalists should start analyzing the VC fund market and take a closer look at startups. For example they could look for answers to a very simple question: “Dear Polish VCs, how much money have you returned to your investors after X years of operation?” They invested a million in you, so how much did you return to them? Eight hundred thousand or two million? Ask for specific data, because we know it’s out there.

There are no journalist voices saying that investing in startups is extremely risky. None of them will tell you that if you have saved money for your retirement, you shouldn’t use it to invest in startups. No one will tell you not to invest in just one project on your own, because then the chances of success are slim.

What they should say is: if you want to invest in startups, use the money you would otherwise spend on poker. The only difference is that you have a better chance than with gambling and you’ll have way more fun, as long as you understand how to navigate the ecosystem. It may turn out that you invested in that one startup out of ten that will actually change the world.