“You can be thinking your shit smells like ice cream.” – Marc Andreessen

Marc Andreessen, the former co-Founder of Netscape and current co-Founder of the elite early-stage Venture Capital firm Andreessen Horowitz, is famous for at least two things: his fast-talk style and an unparallelled knack for remarkable quotes (“Software is eating the world” is perhaps his most famous one).

This week’s flowery quote addresses a critical, yet often overlooked fact of the way Venture Capital operates: 

  1. How objective are Investors when they value their portfolio companies for a subsequent round of funding?
  2. Why does that objectivity matter so much?

VC firms who invest money in a startup rarely lead the next round of financing. A new lead Investor who is not an existing shareholder will take a fresh look at the company’s prospects and bring a different perspective.

Lead investors raise their hand and say “we are in”. They will negotiate price and terms, hire a lawyer, negotiate documents, and get the deal closed.

Fred Wilson – Union Square Ventures (Source: his awesome blog)

Current Investors, on the other hand, may come to believe the prospects are better than they are. Their judgment is often clouded by their relationship with the Founding Team, the view of what was accomplished, and personal issues around declaring a dud in their portfolio to the Venture Capital firm’s other partners.

In other terms, they could come to believe that “their shit smells like ice cream“.

There is a psychological force at play, too. VCs sometimes fail to acknowledge that the startup has hit the end of the road, and push to keep funding it to salvage the initial investment. It’s called “escalation of commitment”.



Experienced Venture Capitalists know that it’s better to “cut the finger now than the arm later”.

Valuing Venture Capital Portfolios At Market Value

Introducing a new lead investor often plays a pivotal role in establishing a market price for a funding round. Venture Capital firms routinely present the valuation of their holdings to their Limited Partners (LPs) – these are the individuals and entities that have invested capital into the fund.

This process provides LPs with a clearer perspective, especially when making investment choices concerning portfolios that haven’t seen numerous exits. In the Venture Capital vernacular, this is known as the “realized vs. unrealized valuation” conundrum.

However, during thriving market conditions, portfolios can often appear inflated in value. This is primarily because General Partners (GPs, another term for the heads of VC firms) leverage the valuation from the latest investment round as a benchmark to value all shares within a startup. The buoyant ambiance of the market, brimming with capital and newcomers willing to pay premium prices, exacerbates this situation.

We are in the middle of an enormous multivariate kind of Ponzi scheme.

CHamath Palihapitiya – Social Capital (Source: This Week in startups)

Chamath Palihapitiya of Social Capital has sounded alarms in recent years about potential distortions, likening certain practices in Silicon Valley to a Ponzi scheme.

However, during downturns or more turbulent times, GPs tend to delay the adjustment of their holdings to reflect the current market value. This hesitation can sometimes mask the true value or potential risks associated with their positions.



Conclusion: tl;dr

Marc Andreessen’s candid expression, “You can be thinking your shit smells like ice cream,” serves as a blunt reminder of the perils of overconfidence, particularly in Venture Capital. The phrase captures the notion that Founders, Venture Capitalists, or anyone deeply involved in a project can develop a sort of “tunnel vision,” believing their venture is invincible or destined for unequivocal success.

This kind of thinking can lead to a dismissal of warning signs, an underestimation of risks, and a false sense of valuation. Andreessen’s words serve as a cautionary note, urging all parties to remain grounded and aware, to question their assumptions continually, and to be wary of becoming too enamored with their own ideas.

author avatar
Aram Founder
Aram is a veteran investment professional with 20 years of experience. He’s realized over 45 transactions across Project Finance, LBO Financings, Growth Equity, Venture Capital, and M&A in half a dozen countries on three continents.

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