Investment

One of the fascinating realities in the startup ecosystem, particularly within venture-funded companies, is how perception can sometimes outweigh immediate fundamentals in determining valuations. Many founders successfully secure substantial funding at impressive valuations based largely on the promise and potential of future business growth rather than current financial metrics. The Venture Capital Incentive Structure # The venture capital model operates with a distinctive incentive structure. VC firms typically earn revenue through management fees calculated as a percentage of assets under management, with additional performance incentives when investments appreciate in value. This structure naturally encourages pursuit of companies that can rapidly increase in valuation and attract subsequent funding rounds at higher prices.

While I typically maintain caution around predictions, I believe we’re witnessing the early stages of a significant business model evolution. An emerging category of ventures—what I call “incentive-aligned businesses”—appears positioned for substantial growth and impact in coming years. The Principle of Mutual Risk and Reward # The concept of “skin in the game” describes arrangements where participants share both risk and potential returns with their counterparties. This principle already operates in certain investment contexts—angel investors provide capital to founders, accepting significant risk in exchange for equity that may grow substantially in value if the venture succeeds. This structure creates natural alignment between parties as their outcomes become interdependent.