How ‘Tourist Capital’ Is Screwing Up Tech Investing

July 18, 2017, 5:10 PM UTC

The tech boom means it’s a great time to be a founder. Investors of all stripes, anxious not to miss out on the next Facebook or Uber, are lining up to throw money at young companies—but not everyone is happy about this.

For seasoned venture capitalists and private equity firms, tech mania means a flood of dumb money is creating screwy valuations and power-mad founders.

“There’s too much tourist capital,” said Mood Rowghani, a general partner at the VC firm Kleiner Perkins. “It’s made a mockery of our craft because these people would write a check to anyone.”

For Rowghani, who made the remark at a roundtable at Fortune‘s Brainstorm Tech summit in Aspen, “these people” include sovereign wealth funds, high net-worth individuals, and others willing to rush into tech investing without a sound grasp of the industry.

He’s not the only one who holds this view. Rebecca Lynn, a general partner at Canvas Ventures, believes a reckoning is coming.

“A lot of silly money has come in, and the reset hasn’t come,” said Lynn, adding the flood of dumb dollars means many companies that should have bitten the dust often get “one more at bat.”

The phenomenon peaked during what Rowghani called the “looney tunes” days of 2014 and 2015, but is still ongoing. One side effect: “Series A is the new seed round,” meaning brand new companies were receiving funding rounds of $5 million or more, which were once reserved for companies that had passed a series of business milestones.

All of this is distorting the investment landscape. But if you want to look on the bright side, the madcap days of 2014 means there is a bumper crop of companies that took seed rounds a few years ago, which means opportunity for firms like Canvas Ventures that specialize in A and B Series funding rounds. The only catch, Lynn said, is there are now five startups instead of one for every conceivable tech category.

Meanwhile, larger tech trends mean many firms are struggling to grow into their valuations. This is especially the case, said Maha Ibrahim of VC firm Canaan Partners, when it comes to enterprise software firms that being forced to reduce product prices due to their clients looking to replace expensive licenses with open-source software or Software-as-a-Service arrangements.

Investors may hope to respond to such market challenges by imposing more discipline on founders. But once again, “tourist capital” can make this more difficult.

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According to Rowghani, the hoards of undiscerning investor make it easy for founders to demand limitless power through “super shares” (which come with outsize voting rights) or other exotic corporate rules.

“It’s the elephant in the room,” he said, adding that founders’ ability to wield dictator-like power is a failure in governance, which leads to a slow burn crisis between board members and founders—a crisis that eventually produces a meltdown of the sort that happened at Uber this year.

But despite the unresolved issues of tourist capital and startup governance, the investors at the roundtable, which was hosted by Fortune’s Erin Griffith, remain optimistic. According to Vincent Letteri, a director at private equity firm KKR, the overall U.S. economy remains strong even after an unprecedented period of growth.

Letteri added that investment opportunities still abound even if his job is complicated by a host of sovereign wealth funds, pension funds, and other entities willing to throw down money at the drop of a hat.

“They don’t usually take up board seats at least, but they might screw up the cap table,” Letteri said. “They’re putting terms sheets on the table without any work.”

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