The Overrated Search for Hype and Its Better Alternative
Hype waves emerge naturally in venture capital because the industry operates with limited transparency, long feedback cycles, and intense competition for access to the next transformative company. These dynamics amplify narrative-driven investing, where compelling trends quickly attract capital and talent, often reshaping entire sectors before fundamental results are proven. In other words, hype waves are particularly impactful to the venture space and are considered natural. That said, hype is by nature crowded and not differentiated. While the product provided by a hyped-up service might be interesting, competing companies become nearly interchangeable. Consequently, valuations become overinflated with “hot” rounds being overbid, and VCs overpaying for an unproven business. This high entry price of course can also cap future returns, with flat exits not being uncommon once hype cools. This all gets at the same, simple idea: if everyone is spotting the same trend, no one is discovering a unique insight. The success of a VC is determined by driving alpha through seeing value that others cannot yet quantify or identify, not hopping on the wave everyone else is trying to get on.
There are many other issues with investing in hype trains. Firstly, trend cycles are far faster than company cycles. Generally, VC investment horizons can be 7-10 years long, significantly longer than the duration of hype waves. This all means that the hype surrounding a company can peak before the company reaches maturity. So, what is the solution? Enter the one-of-a-kind company. Startups with ideas so unique and different that no one would ever think there was real demand for such a service. AirBnB is a great example of a company that took the non-trendy idea of vacation home rental and turned into its own industry. These sorts of companies have a unique insight, something that creates lasting defensibility.
Despite hype waves being intrinsic to the industry, venture investing rewards non-consensus insight, not trend chasing. Companies built to fit the latest hype are usually overfunded, overpriced, and easily commoditized, while the most enduring winners often emerge outside buzz cycles. In short: spot overlooked pain points and back founders who build what will be obvious in ten years, not what is fashionable today. * Written by Benicio Becka, Senior Editor
Benicio is a Sophomore at the University of Chicago studying Business Economics with a deep interest in seed stage startups and startup financing.
