It baffles me how the representatives in Congress keep listening to, and the media stay enthralled with the self-serving circumstantial excuses of Venture Capitalists (VCs) that also still manages to retain some Limited Partners (LPs, their bosses) tuned in. I predicted five years ago, with my declaration of sub-prime VC that Venture Capital was on the brink of disaster, so what is the hot news now?
VCs continue to demonstrate their lack of foresight as they only now when the statistics of their performance are rolling in, seem able to “predict” their demise with remarkable accuracy. And that while foresight should be one of the most critical traits of early-stage investors. They still do not understand that an underperforming artificial market leads to one of two outcomes: cannibalization or replacement.
The VC benchmark
News to me is that one of Silicon Valley’s most renowned VC funds; Benchmark Capital is rumored to be the first and only VC firm scrambling to produce at least a 1x return on all of its funds. Is such best-of-the-worst a crowning achievement to be proud of and listened to? Such top-quartile performance is not going to save the reputation of the venture sector (even if it does Benchmark’s), which relies on the deployment high risk to promise high rewards.
Let me juxtapose why VC should have performed much better than any other time in history:
- Technology has moved from hardware to software, to software services with immediate market recognition and impact, allowing for simple business models and reduced risk concerning customer adoption.
- The Internet, with its ever-increasing penetration, provides a vast addressable market for technology that a successful proposition can tap into at almost no additional expense.
- Until this year (thankfully LPs are now waking up) there have been truckloads of support from Limited Partners to the Venture sector, allowing VCs to pick their preferred fund size and implement their ideal diversification strategy.
- We produce more highly skilled local students and have access to a much larger petri-dish of (global) entrepreneurs than ever before, that should account for a much more abundant supply of disruptive ideas and development resources.
- The penetration of applications to vertical markets (healthcare, oil, and gas, real estate, etc.) remains pretty much untapped, leaving low hanging fruit investment opportunities unserved.
- The deployment of macroeconomic principles with the application of technology to drive more efficient marketplaces remains untapped, leaving winner-takes-all investment opportunities unserved.
So no, I do not buy into the excuses from the current VCs who point to irrelevant market indices or anything else they can hang their hat on to justify why they should be allowed to deploy a fundamentally flawed risk profile for another ten years.
The Venture business should continue to outperform other asset classes by a long shot, by
- its long-term commitments from LPs, and
- its never-ending (long-tail) supply of entrepreneurs, and
- its resistance to economic aberrations (as monetization of disruptive monetization happens typically at the end of the funding runway)
And VCs who do not, should be ashamed of themselves and be pushed out of business. LPs should no longer accept anything but bottom-line results, regardless of the state of the economy. Playing with someone else’s money requires merit, just as much merit as we demand from entrepreneurs to help their companies grow. It is time we hold VC to higher standards and make them accountable.
Free this marketplace
VCs spin their rhetoric and mask that for too long they have deployed not Venture Capital but micro-PE (Private Equity) to innovation, a fundamentally flawed risk/reward investment thesis applied to the early-stage sector. And they continue to do so under cover of darkness (to the marketplace participants).
No improvement in the economy, except for the implementation of free-market principles (see “How to fix VC once and for all”) will change the outcome of the Venture Capital sector.
Congress and government should worry less about the symptoms of its considerable systemic risk and stop applying worthless post-mortem regulatory checks to the Security and Exchange Commission (SEC), but instead, deploy macro-economic principles so the “disease” will not continue to percolate and the marketplace of innovation will self-regulate based on transparency and merit.
It is time to demand from VC not relative, but absolute performance. And stop listening to those who are going to be cannibalized or replaced. All the ingredients for an efficient marketplace for innovation are here, and with newly established free-market principles at its foundation, we can finally let the real cooks emerge.
