[twayt]

On the outside, VC should theoretically be about value investing in the best startups that have sound fundamentals and can grow. Practically, when the market is optimistic and everyone wants to invest in high growth startups, the game can become about "passing the bag". Invest in a company at a low valuation in their seed or series A and wait for a later stage investor to come in and be the one left holding the bag. Ideally, the startup generates enough hype to IPO and then all the investors have a successful exit. You can see this trajectory with startups like WeWork.

When the market is not that optimistic anymore and people are in conservation mode, there's no one to pass the bag to anymore so VCs have to appropriately adjust which businesses they are going to invest in and the valuation.

This is why hype, signaling and FOMO plays such an important role in fundraising. It is about whether the startup can generate enough promise to convince others that they're a high growth investment vehicle and not as much about whether they are profitable in the short term.