Institutionalized Belief in the Greater Fool: Building a Second Subconscious

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Hatched by Glasp

Aug 25, 2023

4 min read

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Institutionalized Belief in the Greater Fool: Building a Second Subconscious

In the fast-paced world of startups and investments, the concept of the "greater fool" has become deeply ingrained. The belief that there will always be someone down the line who will buy out your business or investment at a higher price has led to a frenzy of valuations and unsustainable models. This institutionalized belief, however, can have dire consequences when the market shifts, as we've seen with the rise and fall of virtual events platform Hopin.

Hopin, founded by Johnny Boufarhat in 2019, experienced tremendous success during the COVID-19 pandemic. With the world in lockdown, virtual events became the norm, and Hopin's valuation soared to $7.7 billion. The company served over 100,000 organizations and hosted 15,000 events per month, generating impressive revenue. But as COVID restrictions lifted and people could travel again, the need for virtual events diminished significantly. Hopin's flagship product saw a drastic drop in usage, ultimately leading to its sale to RingCentral for a fraction of its previous valuation.

This rollercoaster ride is not unique to Hopin. Many startups and investors have experienced similar situations, where the initial success and hype are followed by a sudden downturn. The problem lies in the fact that too many investors are caught up in the fever dream of "dreaming the dream," without considering the long-term sustainability and market dynamics. Human behavior may change, but it does so slowly, and trends can be anticipated if we pay attention.

During the COVID pandemic, investors were swept up in the frenzy, pouring excessive capital into startups that showed promise in the virtual events space. But as the market changed and the need for virtual events decreased, these startups struggled to raise additional funds. The investing mania created a perfect storm, leading to more shutdowns than usual.

Too much capital can be a double-edged sword. While it provides runway for experimentation and growth, it also enables unsustainable models and predatory pricing. Startups backed by venture capital can charge unsustainably low prices to gain market share, creating the impression of recoupment and attracting later investors. This cycle perpetuates the belief in the greater fool, where investors and founders rely on the next buyer to hide their flaws and generate returns.

The problem with this institutionalized belief is that it fosters a culture of quick riches and selling to the greater fool. Businesses are built with the assumption that someone else will buy them out, rather than focusing on long-term sustainability and building a solid foundation. This flaw is particularly evident in businesses that were established between 2009 and 2021, during the prolonged bull market.

To combat this issue, we need a stronger commitment to building businesses that we would never want to sell a share of. The focus should be on creating sound operating models and valuation mechanisms, rather than relying on the belief in the greater fool. Liquidity is important, but the pursuit of quick riches should not overshadow the importance of building a sustainable and valuable business.

As we navigate the ever-changing landscape of startups and investments, here are three actionable pieces of advice:

  • 1. Embrace the concept of getting rich slowly: Instead of chasing quick wins and selling to the next buyer, focus on long-term growth and sustainability. Build a business that you are proud of and would never want to part with.
  • 2. Foster a culture of collaboration and thinking together: Knowledge production is a group activity, and great ideas often emerge from collective thinking. Encourage teamwork and collaboration within your organization to foster divergent creative thinking.
  • 3. Embrace evolvability and distributed tools: Break away from the traditional SaaS/Aggregator playbook and explore small tools that are personal, multiplayer, distributed, and evolvable. This approach allows for greater flexibility, adaptability, and creativity in problem-solving.

In conclusion, the institutionalized belief in the greater fool has led to a cycle of unsustainable models and valuations in the startup world. It is essential to shift our focus towards building businesses that prioritize long-term sustainability, collaboration, and evolvability. By embracing these principles and breaking away from the allure of quick riches, we can create a more resilient and successful entrepreneurial ecosystem.

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