Private equity deals hit an all-time high in 2021, peaking at a total value of more than $1tn, with an average deal size exceeding $1bn for the first time. Founders were media darlings, valuations soared, and investors raced to get a piece of the action.
By 2023, many of those same companies — such as Klarna and Stripe — had lost billions in value. Klarna’s valuation plummeted by 85% from its 2021 peak of $45.6bn to $6.7bn in 2022. Stripe also fell dramatically, from $95bn in 2021 to $50bn in 2023.
Fast forward to today, and even more tech companies are folding, from no-code platform Builder.ai to fintechs Frank and Stenn. Yet investors are still ploughing fortunes into risky ventures — particularly in AI. Case in point: the Thinking Machine Labs raised an eye-watering $2bn seed round without a single proven product.
In a race to invest in the latest, most eye-catching tech, generalist investors with money to spend are focusing on personalities and promises, failing to scrutinise product value, market fit, and opportunity.
With $1.2tn in buyout dry powder still waiting to be invested — around a quarter of it idle for four years or more — pressure on dealmakers is intensifying. And when investors start chasing opportunities without much scrutiny, their behaviour starts to look like dating on impulse. It calls to mind a meme: the Hot Crazy Matrix.
Lessons for private equity from an internet meme
The Hot Crazy Matrix emerged in a viral YouTube video from the noughties. It offered a “scientific” framework for evaluating women based on two axes: “hot” and “crazy.” Problematic? Absolutely. But also, weirdly applicable to private equity.
Now, before anyone gets HR involved, we’re not rating investors on physical attractiveness. In this version, the “hot,” horizontal axis represents specialism. The more niche your expertise, the further right you sit on the chart. Think of it as an investor who knows how to speak the language. Someone who gets the investment thesis right off the bat.
Then there’s the “crazy,” vertical axis. In our private equity version, it represents how big and bold a fund is. At the bottom: large, generic investors who skim the pitch deck and call it research. At the top: niche, smaller operators who actually understand what they’re buying and how to build value.
How to spot danger
The left-hand side of the matrix — the no-go area — in this scenario doubles up as our danger zone. This is where we see large, generic funds with deep pockets throwing huge sums at investments without specific understanding or knowledge of the sector, product or commercial proposition. These guys jump in with limited ability to interrogate the details. This isn’t business — it’s gambling! A bit of fun while it lasts, but don’t be surprised if you end up losing your shirt.
To illustrate my point, see Exhibit A: Builder.ai.
Dazzled by the promise of a revolutionary new AI-powered platform, investors, including Microsoft and Qatar’s Sovereign Wealth Fund, poured more than $450mn into the business, pushing its valuation past $1bn. But beneath the glossy pitch, critical flaws went unnoticed: revenue figures had been overstated by 300%, and tasks marketed as AI-generated were actually being completed by a large team of human workers. The oversight was costly — and a stark reminder that deep pockets without deep understanding can lead to expensive missteps. The investors would sit on the left-hand side of our matrix.
On the other end of the scale, we’ve got the niche specialists. These PE investors know their stuff, but they’re often smaller. And while brains are great, a growing business needs brawn too — a firm that can actually move the needle.
Wife material
In the sweet spot — or “marriage zone” — is a fund that’s big enough to commit to a full buyout, but also knowledgeable enough to unlock real value in its niche sector, A capital markets data company, for instance.
It’s a virtuous circle: expertise guides the investment, and the investment, in turn, builds even greater expertise.
But what about the mythical unicorn? Does a huge private equity firm with deep, specialist expertise exist? Maybe. But finding one is like dating someone who’s rich, kind, funny, and knows how to fix your Wi-Fi. Possible, but you might be waiting a while.
In private equity, as in dating, it pays to look beyond the surface. Flashy pitch decks and billion-dollar valuations might be tempting, but if you don’t know what you’re getting into, you might wake up next to a portfolio full of regrets. When capital is abundant, but clarity is scarce, private equity needs more than just enthusiasm — it needs discernment.
The Hot Crazy Matrix may be a pithy internet meme, but its reimagining offers a serious lesson: the smartest investors aren’t chasing the hottest trends — they’re bringing together deep expertise with commercial insight. Because in the end, just like marriages, the best deals aren’t the flashiest — they’re the ones that last.
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