What is wrong with the positive news of a new $500M Fund-of-funds dedicated to Venture Capital reported by Reuters PEHub, you say dear Debbie Downer?
Nothing except for one crucial thing says Debbie; the deployment of risk in Venture Capital. If you have been living under a rock and have not been studying my The State of Venture Capital, you will not realize that Venture Capital, the way it is constructed today, can by economic principle never produce outlier returns. And thus, Wisconsin’s very gutsy initiative will not yield more than the false positivity we have become so accustomed to.
The problem with the support for innovation is not the lack of capital, but the type of arbitrage and risk that is deployed through that capital. I say that having just come off a 2-hour phone conversation with a Fund-of-funds manager who deploys $700M in Venture Capital per year and emphatically stated everything – no everything – I warned him for in my blog has happened to him (including the script of my VC roast).
Deploying capital is the least of the problems we have, the Private Equity overhang is still aplenty. The problem is that many Fund-of-funds managers do not know how to deploy the proper arbitrage to make that investment produce viable returns. And now Wisconsin government thinks it can outperform the public sector in providing sustainable Venture returns? It is sad to see how ill-informed constituents can be sold on the easy promise of false economic positivity.
Spending money is easy; having it produce a return is a whole other ball game. I hope, for the public’s money sake, they have the guts to give me a call.