> Yes, it's hard to predict the future.
Which only makes the problem worse, because the early investors then have the incentive to create and prop up garbage companies as long as they think they can sell them to do the next guy before the crash. Which is more possible the less the funds need to pay attention to each stock, i.e. the more "diversified" each person's investments are.
> One reason those small startups can attract capital in the first place, is because their early investors can reasonably expect to cash out by selling to huge funds once the company gets established.
The funds are an abstraction over the underlying investors. Right now you have Joe Middle Class who has a retirement account which is invested in thousands of companies he has no incentive to pay any attention to because none of them individually affect his savings by a significant amount. If it was four or five companies, he would have the incentive to keep track of management decisions there. He may even be working for one of them, because he is then using an information asymmetry to his advantage when he knows from the inside how well that company is managed. But then we try to inhibit this kind of thing even though it would make markets more efficient.
The bigger cause of the problem is that companies are huuuge, so that they can't be owned by any reasonable number of people. A trillion dollar company has to be owned by millions of separate individuals because even the 99th percentile individual doesn't have enough wealth to own a significant fraction of a company that size. But why do we need companies to be that big? Break them up. They could have the same total valuation as many separate companies, without each being so unmanageably large.
Potentially even higher total valuations, because the need to do the following is less when each company is smaller and less complicated:
> As an investor, you can go by the maxim of 'guilty, unless proven innocent'. So if a company does not have that transparency, you should value them as-if they have skeletons in the closet.
And that's the point. The transparency isn't possible, not because the company doesn't publish the numbers, but because it's not worth deep diving into their conglomerated operations when they're only 0.2% of your portfolio. And when investors will be doing this regardless of whether the company is actually sacrificing long-term prospects for short-term numbers, the company has the incentive to do just that.