The VCC Die-Off By William CateIt's March, 2000. The DotCom Bubble has burst. Investors have lost billions of dollars. This isn't
first major investment mania to implode. There was Market Crash of 1929 and Silver Collapse of 1893. In fact, hundreds of speculative investment failures can easily be traced back to Tulipmania in 1636.
All speculators believe that someone will take them out of their investment at a profit. Speculators focus upon how much money they will make in a deal and not on how likely they are to lose their risk capital. The speculators' perceptions can easily be manipulated. Manipulation potential is a fatal flaw. Markets fail because greater fools can't always be found.
The reason that greater fools can't be found is that reality of risks of speculation eventually overcomes speculators' false perceptions. Is an Internet Startup Company, without revenues, worth a billion dollars? Is this company likely to have a balance sheet value that justifies billion-dollar market capitalization, given that odds are about one-in-one hundred that they will succeed? However, these questions aren't asked while speculators are in a feeding frenzy. It happens only after time when a shortage of greater fools causes mania to end.
There were certainly winners in Internet Speculation Mania, like Apple and Microsoft. But, for every winner there were over one hundred losers. Venture Capitalists and Angel investors have taken this one hundred to one odds against gamble for decades. They almost always lose over time. Usually, new speculative investors entering Market offset failure rate of past speculators, who depart Market poorer. The DotCom burst bubble reduced gamblers entering market while increasing percentage of short-term Venture Capitalist and Angel investor losers. The short-term failure rate lead to a major die-off of traditional Venture Capital Clubs (VCCs).
Traditional Venture Capital Clubs were a major source of risk capital. Membership was usually about equally divided between Accredited Investors, called Angels and principals of Venture Capital Firms. The Prime Directive for Venture Capitalists at Club meetings was to recruit Angel investors as clients. Venture Capitalists are always seeking accredited investor clients. It's their source of money for their business gambles.
After World War II, VCC organizational structure was simple. The members paid a fee to attend monthly meetings. The entrepreneurs paid a fee to offer their investment to membership at these monthly meetings. The members who invested in a project almost always lost their money. After losing money in two to four gambles, member dropped out of Club. Over time, new members became harder to find as losers were pointing out reality that speculations didn't prove profitable. Most of losers never understood why they lost their money. It wasn't evil entrepreneurs or crooked club organizers. It was probability theory. The odds are always against Venture Capitalists and Angel investors.
