Venture Capital (VC) was supposed to be this unique sector of Private Equity, equipped with the particular expertise to detect, identify and spur groundbreaking technology innovation. At least that is what Limited Partners (the investors in Venture Capital) were made to believe when they allocated a portion of their funds to the Venture sector. And with negative 4.6% 10-year average VC returns oh boy have they been deceived.
But not just Limited Partners (LPs) have been deceived. The loss to entrepreneurs (the other asset holder of the innovation marketplace) is double that, as the opportunity to invest in false negatives has been squandered by the investment in false positives. Hence, much of American innovation that is poised to produce $1B companies that contribute to a healthy economy is severely suppressed by an innovation arbitrage of VC that is simply not producing results.
In Facebook’s overwhelming defiance of the Venture Capital norm (hello DST) and self-driven value, few other Internet staples (such as LinkedIn and Twitter) quickly hop into Facebook’s slipstream to pretend that they too have produced the massive platform value that makes Facebook so appealing. Few have the strategic ability and vision to separate the men from the boys in this field, and who cares. The current game in Venture Capital is make-believe. And as long as you can make an acquirer and/or the public believe that a company has value, its value becomes equal to that belief.
All of the Venture Capital community will tout their horn about the success of Facebook, as I have seen its success already spawn many new fathers. And I am sure that the VC’s lobbying organization (the NVCA) is eager to include the statistics of the make-believe bandwagon in their pitch as to why Venture Capital should not be held to higher scrutiny. Fewer than five deals will keep many Limited Partners with one toe in the game, as their allocation to the Venture sector is meaningless as a percentage of overall commitments. Life is more comfortable for them when they change nothing.
And thus subprime VC hanging on to a secondaries life-line will continue to live. Thanks, Facebook.
But seriously, we cannot blame Facebook (I cannot praise them enough, even though their growth may hurt a bit at times). We ought to blame an in-transparent laissez-faire financial system that violates free-market principles and therefore by economic principle can never scale its underlying asset. We can produce more companies with Facebook’s intrinsic value if we change the arbitrage of innovation, here is why:
- The market pull of technology, 7% growth in the worst of economic circumstance, outgrows the performance of Venture Capital
- Corporate innovation outperforms the innovation selected by Venture Capital by a long shot, during the same period, and disproves its excuses
- An 80% technology adoption greenfield lies ready for the picking
Subprime VC cannot scale because of its uniform deployment of risk, not because we lack entrepreneurial capacity in this country. But a financial system that by economic principle closes its ears to the breadth of opportunities that are out there will not be the instigator of that innovation.
I just wished Facebook was born ten years later because the financial bubble being created around its slipstream will – once again – (temporarily) reduce the urgency needed to turn a defunct financial system prime.