The Infinite Loop of Middlemen and the Good Ole Bros Network
Two big reasons why many startups fail.
In the Startup space, there are several major hazards that virtually nobody talks about, one to the startups, and the other to investors. In effect, they are mutually exclusive, but one of the two is virtually always present. Those hazards are the Infinite Loop of Middlemen (for Startups) and the “Good Ole Bros Network” (Herd Mentality) of investors.
The Infinite Loop of Middlemen occurs when investor interest is low, like actual Blue Ocean Markets where virtually nobody ever invests. One individual offers to connect you with investors, for a small fee, but they almost always only connect you with either other middlemen, also looking to scrape you for fees, or with the sketchiest “investors” imaginable. This is a big part of why so many startups fail, there is a massive human parasite problem, separate from any problems that may exist within the startups themselves or the market as a whole.
The “Good Ole Bros Network” kicks into gear when investor interest is high (Red Ocean and soon-to-be Red Ocean Markets), which generally follows the patterns of Herd Mentality, where one bull rushes in a given direction and the herd follows. These aren’t decisions based on the market, nor are they rationally grounded. They tend to more closely mirror GroupThink and other embodiments of Cognitive Bias that act directly against the best interests of those following the herd.
While many quote and praise Warren Buffett, few follow his advice on this matter “Be fearful when others are greedy and greedy when others are fearful”, or remember his use of the “Oil discovered in Hell” story to illustrate the folly of herd behavior.
The net result of these two is that the Infinite Loop of Middlemen kills many startups that could have been ideally suited for the market, since their ability to survive that loop has no causal relationship (and only weak correlations) to their ability to serve the market.
Those who do are then met with investors who devalue their own efforts by following the herd, not seizing opportunities before demand for those assets spikes. Because investors repeatedly shoot themselves in the foot, en masse, they then attempt to recoup the damage of their own terrible investment practices by applying more pressure for 10x+ returns from the fraction of their dominantly poor decisions that pan out. This predictably harms the startups that they invest in.
A funny thing about the bull leading the herd of the Good Ole Bros Network is that people assume that they must have done some actual Due Diligence, even when the evidence very clearly shows that they didn’t. Anthropic’s founding claims were objectively false and impossible, yet millions and billions poured into them, even after the $500m in money laundering from Sam Bankman-Fried was revealed in late 2022.
The bull leading the herd is often a bad actor, sometimes at the peak of a Pyramid Scheme, as we’ve seen play out with “GenAI” over the past 3 years.