I needed to read this story twice.
There are so many implications that I’m glad TechCrunch plans to follow up on it. They chronicle a handful of funds that are investing $100’s of millions in companies that probably don’t need that kind of money. When the Fed behaves this way, we worry about general price inflation. Unnecessarily large amounts of money chasing products that cost much less the day before.
When the private sector does this, we call it a bubble. The mega-VC’s are able to raise the money…and so they do. There are big fees in raising big money. In so doing, they create an oligopolistic secondary market where shares of Facebook, Zynga and others are “shadow-traded” almost as if they were publicly available stocks.
Even with most of the hard, company-building work out of the way, some investors will win and some will lose as it should be in capitalism. One or two of them will concentrate enough value to buy the others, but meanwhile, artificially inflated values will be created for the second tier and the third tier and so on.
The dynamic reminds me of the NFL Draft. When the #1 overall pick is highly coveted, he commands an artificially high salary. Which sets the bar for #2 which sets the bar for #3 and so on. Even #32 benefits and he’s probably going to be over paid.
I believe the country would be better off if this overheated capital were invested in smaller amounts on a variety of younger companies of unproven talent. It’s a lot easier, though, to be the guy that overpays for Peyton Manning than the guy who takes on a project like Tom Brady (overall picks #1 and #199 respectively by the way). While the NFL wrestles with rookie salary caps to solve this problem in their industry, we can’t really force the same in the tech-company investing league. But it would be a better league if we would.