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Private equity deals reached unprecedented levels in 2021, with over $1 trillion in total value and average deal sizes surpassing $1 billion for the first time. Founders were celebrated media figures, valuations soared, and investors eagerly jumped on the bandwagon.
However, by 2023, many of these same companies had lost significant value. Klarna’s valuation dropped from $45.6 billion to just $6.7 billion, a decline of 85%, while Stripe fell from $95 billion to $50 billion. Today, even more tech firms are folding; examples include no-code platform Builder.ai and fintechs Frank and Stenn. Despite this, investors continue to pour money into high-risk ventures, particularly in AI. For instance, Thinking Machine Labs raised a staggering $2 billion seed round without any proven products.
In their rush to invest in the latest, most eye-catching tech, generalist investors focus on personalities and promises rather than scrutinizing product value, market fit, or opportunity.
With $1.2 trillion in buyout dry powder still waiting to be invested—around a quarter of it idle for four years or more—the pressure on dealmakers is intensifying. This behavior resembles dating on impulse, calling to mind the Hot Crazy Matrix meme.
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The Hot Crazy Matrix emerged from a viral YouTube video in the early 2000s, offering a framework based on “hot” (specialism) and “crazy” (boldness). In this context, it represents private equity investors. The left-hand side—our danger zone—is where large, generic funds throw huge sums at investments without specific understanding or knowledge of the sector.
For example, Microsoft and Qatar’s Sovereign Wealth Fund invested over $450 million in Builder.ai, which had critical flaws that went unnoticed. On the other end are niche specialists who know their market well but are often smaller firms.
In the sweet spot—our marriage zone—is a fund large enough to commit to a full buyout but knowledgeable enough to unlock real value. This virtuous cycle of expertise and investment builds greater expertise over time.
The mythical unicorn—a huge private equity firm with deep, specialist expertise—may exist but is rare. In private equity, as in dating, it pays to look beyond the surface. Flashy pitch decks and billion-dollar valuations might be tempting, but without discernment, you could end up with a regretful portfolio. When capital is abundant but clarity is scarce, private equity needs more than just enthusiasm—it needs discernment.
The Hot Crazy Matrix, while a pithy internet meme, offers a serious lesson: the smartest investors bring deep expertise and commercial insight together. Because in the end, like marriages, the best deals aren’t the flashiest—they’re the ones that last.
