VC funds raise money from limited partners for the express purpose of investing in early-stage companies. Sometimes, maybe all the current startups suck. Maybe the only things coming out of Stanford this season are food-delivery Instacarts and Twitter clients.

In these situations, the VC fund hands the money back to the limited partner and says, I’m sorry. I looked around the Valley and couldn’t find any good investments. You should just put your money into European index funds or maybe some corporate bonds.

Just kidding. That happens approximately never. No matter how crappy the market outlook, VCs will plow their committed capital into the least-mediocre ventures they can find. Even if that means they have to invest in startups that use kitten memes to teach Spanish.

There’s some discussion about how venture capital is currently in a slump. Judge for yourself.

VC investments can lag capital commitments by several years, but as long as VC funds have inflows, there will be corresponding outflows. And sometimes the outflows will go into things like Uber for dogs, because maybe that’s the best they can do.

Of note: So far this year, 12.6% of VC investments came from Corporate Venture Capital. Corporate VC does not need to fundraise.

There are two types of humans: Opportunity-seeking, and risk-avoiding. Bubbles are caused by the risk-avoiding humans.

Most animals are risk-avoiding. When faced with both a predator and a mate, the animal will run from the predator before it tries to get laid.

75% of humans will respond in the same manner. The other 25% will knowingly risk getting eaten in order to go after the mate.

This is an attribute caused by a polymorphism in the DRD4 gene, where a repeated DNA sequence affects the dopamine receptor [1]. Children who exhibit this polymorphism are frequently diagnosed with ADHD. Adults with this allele often become drug addicts [2].

But without this genetic mutation, humans as a species might still be cowering in the low plains of Africa. The survival of a population depends on opportunity-seekers to risk their lives in search of new sources of food and land bridges to Alaska.

Of course, the species also depends on the three-quarters of the population that focus on not dying. After the opportunity-seekers have discovered Rama Setu and the Isthmus of Panama, then the fear of loss drives everyone else. Humans are pack animals, and the risk-avoiders don’t want to be dropped from the migratory herd.

Bubbles begin their life cycle when one or more opportunity-seeking investors plunge some amount of money into a crazy stupid venture like CatAcademy or Cheezburger. Risk-avoiders provide follow-on investments, because they remember the pain of having missed out on Groupon and Zynga. Before you know it, companies like Snapchat are getting $4B valuations because both Google and Facebook are desperately afraid of losing a contingency of broke-ass 20-year-olds to each other.

Google and Facebook are practicing risk-avoidance. If they wanted to be opportunity-seeking, they would invest in Barnacle.

This mentality does not only apply to startup bubbles. The people who bought dot-coms in 1999, the ones who bought real estate in 2003, the first investors to reenter the stock market in 2009 – they were all opportunity-seekers. The last people to buy dot-coms in 2000, the ones buying houses in 2007, and ones who are only now rotating from fixed-income – these are the risk-avoiders.

Just remember, risk-avoiders are the last ones to get laid.

References:

1. J. Gelernter, et al. D4 Dopamine-Receptor (DRD4) Alleles and Novelty Seeking in Substance-Dependent, Personality-Disorder, and Control Subjects. The American Journal of Human Genetics, Volume 61, Issue 5, November 1997, Pages 1144-1152, ISSN 0002-9297, http://dx.doi.org/10.1086/301595.

2. M-J Kreek, et al. Genetic influences on impulsivity, risk taking, stress responsivity and vulnerability to drug abuse and addiction. Nature, Volume 8, Issue 11, October 2005, Pages 1450-1457.