Private equity offers reached an all-time high in 2021 and achieved a total value of More than $ 1 TNWith an average deal size over 1 billion USD for the first time. Founders were media favorites, reviews, and investors ran to get a piece of the campaign.
Until 2023, many of the same companies – such as Klarna and Stripe – had lost billions of value. The evaluation of Klarna fell 85% compared to its 2021 highlight of $ 45.6 billion to $ 6.7 billion in 2022. The stripe also dramatically fell from USD 95 billion in 2021 to $ 50 billion in 2023.
Fast lead to the present day and even more technology companies fold from NO-Code Platform Builder.ai to FinTechs Frank and Stenn. Nevertheless, investors still plow the assets into risky undertakings – especially in the AI. A typical example: The memorial laboratories have raised eye help of $ 2 billion without a single proven product.
In a race for the latest and conspicuous technology, generalist investors invest with money that spend money, concentrate on personalities and promises and do not examine the product value, market adjustment and opportunities.
With $ 1.2 TN in Buyout dry powder I was still waiting for invested investments – about a quarter of it, four years or more – the pressure on the dealmakers intensified. And when investors start to pursue opportunities without a large test, their behavior looks like impulses. It is reminiscent of a meme: the hot crazy matrix.
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Lessons for private equity from an internet meme
The hot crazy matrix was created in a viral YouTube video from the Noughties. It offered a “scientific” framework for the evaluation of women based on two axes: “hot” and “crazy”. Problematic? Absolutely. But also strangely applicable to private equity.
This diagram serves as a startup investor manual. Credit: Tactical reaction crew / YouTube
Before someone is involved in the HR department, we do not evaluate investors for physical attractiveness. In this version, the “hot” horizontal axis specialism represents. The more niche your expertise, the further right you sit on the table. Consider it as an investor who knows how to speak the language. Someone who receives the investment thesis right from the start.
Then there is the “crazy” vertical axis. In our private equity version it shows how big and fat a fund is. Below: Large generic investors who fly over the pitch deck and call it research. At the top: niche, smaller operators who actually understand what they buy and how to create value.
How to recognize danger
In this scenario, the left side of the Matrix and NO-GO area deserves as our danger zone. Here we see large, generic funds with deep pockets that throw huge sums without specific understanding or knowledge of the sector, product or commercial proposal when investing. These boys jump in with limited ability to question the details. This is not a business – it’s gambling! A little fun as long as it takes, but don’t be surprised when you lose your shirt.
To illustrate my point of view, see exhibition A: Builder.ai.
In the promise of a revolutionary new AI-driven platform, including Microsoft and Qatars sovereign wealth find, more than $ 450 million entered the business and urged its evaluation of $ 1 billion. However, critical defects were unnoticed under the shiny field: the sales figures were overrated by 300%and as a-generated tasks were actually done by a large team of human workers. The supervision was expensive – and a strong memory that deep pockets can lead to expensive missteps without deep understanding. The investors would sit on the left side of our matrix.
At the other end of the scale we have the niche specialists. These PE investors know their things, but they are often smaller. And while brains are great, a growing business also needs muscles – a company that can actually move the needle.
Woman material
In the Sweet Spot -or “marriage zone” is a fund that is big enough to commit to a complete buyout, but also knows that it opens up a real value, for example, in his niche sector, a capital market data company.
It is a virtuous circle: specialist knowledge conducts the investment and the investment in turn takes on even greater specialist knowledge.
But what about the mythical unicorn? Is there a huge private equity company with deep specialist knowledge? Perhaps. But finding one is like someone who is rich, friendly, funny and knows how to repair her Wi-Fi. Possible, but you could wait a while.
In private equity, like in dating, it is worth looking outside the surface. Striking pitch decks and billion dollar ratings could be tempting, but if you don’t know what you are getting into, you may wake up besides a portfolio full of regret. If the capital is abundant, but clarity is scarce, private equity needs more than just enthusiasm – it needs a distinction.
The hot crazy matrix may be a cozy internet – but their reinterpretation offers a serious lesson: The smartest investors do not pursue the hottest trends – they bring deep specialist knowledge together with commercial insights. Because in the end the best offers are not the most striking – just like marriages – they are those that take.
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