Amphibians, a trending topic?  A recent article in The Economist caused me to think back to a long-ago letter from Warren Buffett to his Berkshire Hathaway shareholders.  In it, Mr Buffett lamented the fact that investors kept chasing and overpaying for bad deals, or toads:

“Investors can always buy toads at the going price for toads. If investors instead bankroll princesses who wish to pay double for the right to kiss a toad, those kisses had better pack some real dynamite. We’ve observed many kisses but very few miracles. Nevertheless, many managerial princesses remain serenely confident about the future potency of their kisses — even after their corporate backyards are knee-deep in unresponsive toads.” 

In its April 3, 2021 Buttonwood column, entitled “The Frog Chorus,” The Economist describes the overheated venture (vc) capital market, recently joined by many new-to-venture capital investors, among them pension funds seeking to improve their returns on investment.  More money is chasing a relative scarcity of talented teams with good ideas.  The prices paid by investors are rising accordingly.  Or, as Mr. Buffett might have written, toad values have gone up.

So, is that such a bad thing?

It can be.  The greater the vc investment the more difficult it is to achieve targeted investor returns.  With higher start-up values also comes a natural investor tendency to look for proven technologies/business models; money is attracted to investment types that have performed well recently.  Often, that means that unique, category-defining opportunities are overlooked.  History suggests that higher startup valuations can lead to fewer cash constraints on startup managers as well.  WeWork is a classic example.  Larger investments can hide inherent business problems.

With more vc players chasing and making investments the army of frogs (or toads, if you favor Mr. Buffet’s amphibian of choice) is growing.  Statistics show that only 10-20% of vc deals yield substantial returns; the rest fail or they provide minimal returns.  The croaking of these remaining frogs grows louder, and comes at more than just the cost of investment.  Promising ideas that, as lifestyle businesses, may have flourished, are shuttered.  Jobs are lost.  When too much money chases a relatively finite number of potential unicorns, it is not necessarily a positive development.

As an advisor to startups, this last sentence may seem antithetical.  “Too much” investor money?  Higher startup values a bad thing?  Yes, I admit that it sounds almost counterintuitive.  Kinda’ like the idea of growing amphibian populations.


Peter Dragone - Co-founder of Keurig.