The Displacement of Tom Perkins With The Greater Fool Theory

I was deeply saddened by the news that Tom Perkins died last week. Though I never had the opportunity to meet him, I greatly admired his business acumen and appreciated his overall positive impact on Silicon Valley, where I have lived virtually my entire life.

Tom was an early pioneer of venture capital investing, and unlike many VC firms today, he conducted detailed analysis before determining the companies he supported. While Valley denizens today like to pay lip service to wanting to make the world "a better place," Perkins-backed companies actually did, most notably Genentech, the biotechnology company (acquired by Roche), Acuson, a sonograph manufacturer (acquired by Siemens), Tandem Computers, which manufactured computers known for their reliability (acquired by Compaq), and LSI Logic, a maker of computer chips.

The VC industry that Perkins spawned bears little resemblance to his disciplined investing. It is dominated by a closed circle of VCs who share deal flow amongst themselves and fund their investment progenies with sky high valuations, knowing that their initial involvement will lead to even higher valuations when more investors are lured into the deal. On Wall Street this investment approach is known as The Greater Fool Theory, a name that pretty much speaks for itself.

Admittedly VC returns have outpaced those of hedge funds over the past decade. But that's because some of Silicon Valley's biggest success stories - Facebook, Uber, and AirBnB were in their startup phase prior to and during the financial crisis period between 2006 and 2009. During this period, only the top-tier, experienced VCs were the ones able to raise funds so there was considerably less "dumb money" chasing startups.

Although sanity is gradually seeping backing into the VC market, the fallout from the "irrational exuberance" of the past few years has not yet been realized. A few months ago, I asked a partner at a well-known VC fund how companies getting funded at ridiculously high valuations would ever generate the requisite returns to justify them.

His response: "Many venture firms are not rational right now. It's all about getting into the next "hot" company, regardless of their operating metrics and the value they really bring to society." The problem with rampant chasing of hot deals is that investors who are late to the party inevitably get burned.

It's unfortunate that Perkins' legacy is marred by various personal and business scandals after he achieved considerable success. His family and friends can take great comfort that Perkins made a meaningful contribution to making the world a better place.

RIP, Tom.