Key Takeaways
- Fast markups create an artificial feedback loop: rapid revenue growth brings early capital, which buys talent and narrative momentum regardless of underlying product stickiness.
- Every metric targeted by venture capitalists gets gamed over time, from net revenue retention tricks in SaaS to loose annualized run rate definitions in AI.
- Market booms expand the "bezel," John Kenneth Galbraith's concept of temporary, invisible accounting distortion and metric inflation before reality sets in.
- Cycles do not implode from equity write-downs; they fracture when companies default on debt obligations that cannot be casually marked to zero.
- Financial cycles reliably transition across three distinct cohorts: the innovators who invent new structures, the imitators who copy them, and the idiots who overextend them.
The Soros Reflexivity Loop in Venture Capital
When a venture firm marks up a portfolio company fast, the valuation itself changes the company's real-world odds. Venky Ganesan views venture kingmaking through George Soros's theory of reflexivity. The thesis is simple: market participants do not merely observe reality; their biased bets actively shape it.
“See to me that is a great example of Soros's reflexivity,” Ganesan explains. “What do I mean by that is you have a company that does well. And because it does well and the revenue is growing really fast, it has a quick markup. And because of that quick markup, it gets more capital.”
That fresh capital buys top engineers, pays for aggressive marketing, and brings in customer logos. The momentum makes the startup look invincible to the outside world. Yet the valuation drove the resources, not the other way around. When market conditions shift or growth stalls, the reflexive loop flips in reverse just as violently.
The Expansion of the Bezel and Metric Gaming
Whenever investors crown winners based on a single metric, founders optimize for that metric instead of running a durable business. It happened with Net Revenue Retention (NRR) in cloud software, and it is happening with Annualized Run Rate (ARR) calculations in artificial intelligence today.
Ganesan points out that this behavior is predictable: “If any metric is measured by an investor and they put a lot of weight on it, it's going to be gamed and that's just the nature.”
During bull runs, this metric gaming grows what economist John Kenneth Galbraith called the "bezel": the inventory of undiscovered financial distortion floating through the market.
“When there's a boom the bezel is high,” Ganesan notes. “Not just people are going to pick metrics. People also going to have some interesting accounting techniques which by the way will happen every cycle and this probably happening at this cycle.”
Where Cycles Actually Break: Debt, Not Equity
When hype reaches its peak, financial engineering takes over from genuine product development. Ganesan charts the standard path: “I feel like in every cycle you get the innovators, then you get the imitators and then you eventually get the idiots.”
In early stages, structures like tranche financing emerge as an intelligent way to stage capital ("build with me money"). By the final stage, unviable businesses pile on structured debt to manufacture the illusion of equity growth.
When the cycle turns, the fallout does not start with venture equity write-downs. Equity investors expect zero returns on failed bets and mark them down silently. The real panic starts when fixed repayment schedules collide with dried-up cash flow.
“I think usually the first sign comes with some major debt default,” says Ganesan. “Equity is never the reason why these things crack because equity you write it down, you just take the loss. Debt, on the other hand, people have this expectation they're going to get paid back.”
What to Do With This
Audit your revenue reporting this week and strip out non-standard accounting. If your reported ARR relies on one-time setup fees, short pilot contracts multiplied by twelve, or temporary compute credits, recalculate your actual baseline on recurring cash collected. If your business cannot service its obligations without a speculative follow-on markup next quarter, cut your burn before credit markets make the decision for you.