Early stage or very high growth companies across all industries are valued almost entirely on their future expected revenues and earnings. That is sizzle. The steak is what they have today in product or service, IP, customers, revenues and earnings but the investors are being asked to pay for the future potential in all of these metrics. In the high tech and especially internet world, sizzle is the main meal as VCs and investors are all trying to find a “unicorn” to lift them into the rarified air of the great success stories. It’s instructive to remember that some 75+% returns in the venture capital industry have come from a very small group of companies such as Microsoft, Apple, Google, Facebook, Amazon. Sizzle rarely pays off.
Another sector where this sizzle phenomenon is rampant is in biotechnology. Investors can rarely understand the science to its required depth and biotech CEOs are notoriously talented story tellers. Admittedly, we have just come through a biotech bull market where tremendous value was created and, in cases like Gilead Sciences, the sizzle turned into steak.