I am getting tons of questions by readers on my syndicated article, “Why Romney is wrong on jobs.” This blog article will be updated (semi) live as more (sincerely inquisitive) questions come in.
Rebut #1: Based on the initial article mentioned above, a financial advisor from New York asks:
“if the moneys committed to venture by limited partners were not deployed via Bain Capital the investment committee of an institutional investor would have deployed that allocation to some other VC firm.” Just trying to understand – if a VC doesn’t give to a particular enterprise; then another one automatically will? When you elect a to invest in a VC, isn’t the idea to have them select worthy growth stories to invest in. If these stories grow, do they not employ people? Or would the investment come from some other non-VC source and the growth would happen anyway?”
The growth in jobs is a function of the allocation of funds by LPs, which are then married with the ideas from entrepreneurs. LPs make allocations to alternative assets (including Venture) driven by the consent of an investment committee and (more or less) without regard to who they can find to deploy it. Trust me, many supposed “alternative investment experts” will gladly take their money, not in the least to enjoy a comfortable management fee for the duration of an investment vintage. If LPs don’t find enough VCs, who can produce returns, they will reassign that portion of assets to other alternative assets.
Yes, VC is supposed to produce outlier returns based on the deployment of outlier risk. But it has not for the last 12 trailing years. Not because it couldn’t, but only because with a laissez-faire deployment of investment discipline, Venture has fallen to the same subprime fate as real estate.
Rebut #2: The same financial advisor rebuts:
Do you think Romney’s position was based on his own experience and what the VC world was like when he was at Bain (13 years ago); or like it has been for the past 12 years? I don’t know. Stating generally that VC performance has been flat for 12 years. To me that means there have been as many winners as losers. The S&P’s been flat for nearly 13 years. I think that private (vs. public) investments ultimately create jobs; regardless of the funding vehicle.
The critical path to success in the musical chairs of asset management is steeped in 10 levels of bottom-heavy diversification. A structure in which even my 7-year-old can understand that the supposed deployment of risk going in will not produce a compatible return on the flip side. See my presentation on The State of Venture Capital, prominently featured on my site.
In the darkness of marketplace in-transparency (VC is a demi-cartel really), it is easy for Romney to hide behind ten levels of risk diversification and claim that his unique role contributed to the creation of jobs. Especially considering anybody in the 90s with the ability to raise money from LPs could enjoy the strong winds that made turkeys fly. Our current economic situation is quite a bit more challenging, to which Romney has not delivered any proof or vision of merit.
No, VC has produced negative returns, and of 791 VC firms (post 911) only a handful make consistent returns for LPs monolithically in Venture. What that means is that the opportunity lost to innovation is twice the size of the investment dollars put in by 95% of the VC wannabes. An investment in a false positive creates a missed opportunity for a false negative twice the size. That has severely eroded the opportunity and attraction to building groundbreaking innovation. Over twenty-plus years, we have undermined the definition of innovation and thrown smart entrepreneurs out with the subprime with, if you will.
What we need to do is create a sustainable economy that creates sustainable jobs. But creating jobs by artificially tinkering at the bottom of an already fragile economic system may have the lifespan of one presidency perhaps, but certainly will not keep us at the top of the global leader board.
Rebut #3: A Chinese professional on a White House forum states:
As sustainable jobs, I think that should base on the cognitive and behavior abilities of the citizens. The new economic styles should be sustainable economy, green economy, health economy and intelligence economy.
Agreed, but our current implementation is laissez-faire and in violation of free-market principles and hence not sustainable. The political system itself is similarly broken, and thus those who comply to it today can not be trusted as leaders with new foresight, including Romney.
No candidate that rides the systemically defunct economic bandwagon today, Democrat or Republican, can be taken serious in setting the framework for leadership in the new economy we require (globally). Our economic problems stem from not understanding basic economics very well and using free-markets as a buzzword rather than implementing its disciplined principles.
Rebut #4: An advisor on capital-raising, M&A, and restructuring rebuttals:
Georges seems to downplay the importance of allocation of capital, i.e., capitalism, in the economy. That’s deeply political if you ask me, despite the claim to the contrary. Yes, it’s true that VC and private equity firms will trumpet their successes and downplay their failures. That’s only human — entrepreneurs do it, individual investors do it, and institutional investors do it too. If PE and VC firms are not providing a valuable service, well then shame on the investors who pay them so much money. In the end, job creation requires not just cash and ideas, but cash allocated to the right ideas, backed up by the right execution structure. It takes time, effort, sound judgment, and experience to do that well, all things one looks for in a PE or VC firm.
Not quite. I have no problem with the concept of Venture Capital; I have a big problem with the implementation of it. A demi-cartel in violation of free-market principles is the opposite of the founding principles of the U.S., And any smart person will realize that demi-cartels are not scalable, not sustainable, and simply illegal.
I believe there is a vital role for Venture Capital once it complies with free-market principles. And when it does, we can establish who has the merit to operate as the arbitrage of groundbreaking innovation. Today, except for a handful of firms, the rest does not make money for LPs at all, damages the innovative culture by picking false positives, erodes the trust of the public by pushing those through an IPO, and turns the underlying asset subprime.
Rebut #5: A principal software engineer rebuts:
How about a comment about the other side of the argument, that Bain destroyed jobs by shutting down companies? It would seem to me that if you claim VC’s don’t create jobs, you also have to admit they don’t destroy them. Your argument that VCs don’t create jobs is technically correct. The companies create jobs using money from the investors, the LPs. But VCs do provide a service, acting as a conduit between the LPs and companies. VCs (at least good ones) research companies on behalf of the LPs to select the best ideas (of course, they are right about as frequently as the weatherman is…but that’s a different topic) and the good ones provide insight to the companies they have invested in (market insight, connections with other portfolio companies, etc.). I think the statement that VCs assist in creating jobs would be correct. How is the company that needs $15m to set up a manufacturing process or take an idea from the drawing board to a computer board going to find the funding without someone acting in the role of a VC? Certainly the garage inventor is not going to be able to find large-scale funding without someone like a VC or investment banker.
Actually, they can be responsible for destroying companies since their subprime arbitrage upon a decision to invest actually deflates the upside of many ideas and thus the associated returns. The key to VC investing is the deployment of upside risk, rather than downside risk. But investing in upside means you need to have foresight proven to deliver merit, a trait which you won’t learn in school.
A VC assist in the matchmaking between the assets from Limited Partners (money) and the assets from entrepreneurs (ideas). The quality of that arbitrage is crucial in promoting the socio-economic value that will secure the public’s trust (and thus returns). So, my point is not that the concept of VC would be invalid, my complaint is that the way we have deployed VC by economic principle is in violation of the free-market tenets and thus cannot scale, is not sustainable and frankly hurts the underlying asset and trust in the massive opportunity for groundbreaking innovation.
I should add to the previous comment that an arbitrage deployed by VC and responsible for false positives and false negatives aggravates the sub priming of the sector and over time creates a dance between subprime entrepreneurs attracted by the trendy and subprime VCs responsible now for 12 year trailing negative returns and the public providing input, output and thrust is losing trust in.
But VC can be fixed, by deploying an economic model that implements a true meritocracy. It can be implemented by LPs today. And at that point, you will see a new evolution of innovation start to occur.
As Einstein said, it is the theorem that determines what can be discovered.
For more backdrop study The State of Venture Capital on my site and hundreds of articles on the topic that address your questions further. Do not hesitate to comment there if you need further clarification on my stance.
Rebut #6: An investment professional states:
When you look at VCs, are you looking at PEGs within a VC population, or only PEGs/VCs? Very different strategies and risk profiles. Venture is a different animal. I also think it’s hard to hold out Bain as an example of a PEG whose performance reflects the average. Institutional LPs would certainly disagree with the premise that the mean can be used to accurately portray their performance for LPs and their ability to efficiently deploy LP dollars in a meaningfully diversified strategy. And, don’t confuse what the Bain funds that Romney managed with venture capital. He was always involved in the private equity funds, which use a much different strategy and invest in completely different situations.
#1: Considering that Venture Capital produces negative 12-year trailing returns for Limited Partners, underperformed the consumer adoption rate during the same period, is proven wrong in its excuses by corporate innovation, delivers negative absolute returns vis-a-vis total moneys deployed, erodes public trust, and has turned overwhelmingly subprime, I would consider Venture Capital as an asset class a complete and utter failure.
#2: Much of “VC” today is subprime or micro-PE. And since LPs are steeped in 10 levels of embedded diversification of risk, it is no surprise all of those involved are entirely missing the point on what VC is supposed to be.
LPs can fix their deployment to VC tomorrow with a framework that automatically regulates the implementation of appropriate risk in Venture and thus establishes the merit of who deserves the VC moniker.
Rebut #7: A CEO and board member states:
I would disagree on two points. first, it is core to capitalism to have an efficient method for allocating capital to those ideas most likely to succeed and that is the core role of a venture capitalist. Without someone sifting through the millions of ideas floated daily, money would go to a lot of losing propositions and a lot less jobs would be created. For a rough sense of this, compare average VC returns to average angel organization returns. Second, a significant amount of what Bain Capital did was private equity and more specifically turnarounds. That is an entirely different animal, as the private equity company steps in to businesses that are headed for death (and loss of all jobs) and finds at least some companies to turn around. That definitely contributes to job creation. Now how does this relate to a politician’s argument that they are a job creator? It doesn’t. Those claims are completely specious, as the private sector creates all jobs (even government jobs by providing revenue to pay for them). So Romney’s argument shouldn’t be that he created hundreds of thousands of jobs, it should be that he understands how to support the private sector which then does actually create jobs. But these kind of arguments are too nuanced for the average reporter, let alone the public at large that consumes political information in 30 second bites. Hence the rather silly argument about who is a bigger job creator. Without a doubt, Obama’s administration has been a substantial job destroyer. The truth is that is what politicians mostly do (whether left or right). So we really ought to be arguing about who will destroy fewer jobs–Obama, Romney, Gingrich, Paul, or Santorum–if we are interested in an honest debate.
#1: Let’s use better benchmarks for the performance of VC. Considering that Venture Capital produces negative 12-year trailing returns for Limited Partners, underperforms the consumer adoption rate during the same period, is proven wrong in its excuses by corporate innovation, delivers negative absolute returns vis-a-vis total moneys deployed, erodes public trust, and has turned overwhelmingly subprime, I would consider Venture Capital as an asset class a complete and utter failure.
#2: Maybe. But Romney claimed it was as a result of his role as a Venture Capitalist. A VC assist in the matchmaking between the assets from Limited Partners (money) and the assets from entrepreneurs (ideas). And even with ten levels of embedded diversification, VC still manages to underperform. Enough with the excuses: see my State of Venture Capital.
So, for Romney to claim job creation as he claims is as much of a long shot as eHarmony claiming it is responsible for child-birth.
My article was not meant to create a political discourse, and thus I will not comment on the political fallacies on either side.
The real question is why we the people allow our capacity to produce be enslaved by financial systems and politicians that violate our founding principles daily.
Rebut #8: the latter CEO responds:
#1 Maybe returns on average are poor for VC’s. God knows I have met many VC’s that don’t have a clue. But these statistics can be a bit misleading. Without something to allocate capital in the very high risk arena (which probably does have negative average returns under almost any scenario), you would get worse results. VC’s don’t have a 12 year horizon, so I wonder why this arbitrary choice? Five to seven years are more typical. And in the end, it seems a bit over the top to call this a failed asset class. It is a very high risk, high reward asset class. On average, it is like Las Vegas–most people lose. You don’t choose to put money here relative to mutual funds, as it plays a different role in an asset portfolio. But not everyone loses and skill can make a difference and create very large rewards. So I don’t think the arguments are on point and the comparisons are inappropriate. #2 The VC label is a mislabel by the media: “Bain Capital is not, as Cameron (of Fox News) said, a venture capital firm. He wasn’t the only reporter to mislabel Bain, either… looking over transcripts from Fox News, CNN, and MSNBC, TPM found that all three often continue to use the term “venture capital” to refer to Bain and Romney’s private sector experience…To confuse matters more, Bain Capital does dip its toe into venture capital as well — but it only represents a fraction of the total business. Through a venture capital arm of the company called Bain Capital Ventures, Bain has investments in dozens of companies for a total portfolio of $1.5 billion — accounting for 2.5% of Bain Capital’s $60 billion portfolio.”
#1 No, what is misleading that a capitalistic system keeps coming up with excuses why Venture could not perform, especially after having been one the sector is steeped in socialism. Investors turned subprime, and hence they attract that kind of supply. You should review my State of Venture Capital. No entrepreneurs would get a pass from a VC for similar reasons for underperformance and excuses.
#2 Yes, again, my argument wasn’t against Bain; it was against the claim that VC is responsible for job creation. A foolish argument considering such miserable performance of the sector, no matter what benchmark you use. As a politician, he should know better.
VC has not grown up and endorsed an economic model, so it can prove to scale with the 80% adoption greenfield. Old boys’ networks akin to demi-cartels cannot scale by economic principle. Hence unchanged, its size and total output will remain, by self-induction, artificially constrained. There is however, an easy way to unleash it.
Rebut #9: the CEO again follows up:
Good luck with your article and wherever it leads you. You are making an interesting argument. But again, Bain was/is a PE, not a VC and they did clearly create jobs by turning around underperformers. I agree it is a misplaced argument in the silly sweepstakes of presidential races. As to the excuses of capitalists, the heavy hand of government, particularly in the form of crony capitalism is a pretty decent one. And my argument is not that Venture should be excused. My argument is that venture capital by its nature will produce below average returns. It is subject to large and irrational bets by people who can afford to lose.
Yes, but VCs have ten levels of bottom-heavy diversification built-in to ensure they can mitigate risk. We are fooling ourselves if we do not assign merit that kicks out those who fail, especially with the many safeguards being made available to them. It is time to hold the arbitrage of innovation just as accountable as those who create innovation.
The unfortunate side effect is that VCs may be able to afford to lose but every wrong bet results in the erosion of innovation twice its size. Hence the laissez-faire control of arbitrage is regressive to the opportunity to create scale for groundbreaking innovation. So, the loss of the financial bet has significant ramifications to the underlying assets.
Rebut #10: and again, the CEO responds:
and the market is actually holding them responsible. If you see the shakeout and the movement of dollars, you can’t say that VC’s aren’t paying a price when they perform poorly. but the phrase: “…the laissez-faire control of arbitrage is regressive to the opportunity to create scale for groundbreaking innovation” is chilling as it suggests some kind of intervention by governments to better direct those investment dollars. When that happens and politics gets substituted for business sense, we all lose enormously. The nature of innovation is that it is unpredictable and it tends not to be associated with concentration of capital. Necessity really is the mother of all invention…. Let’s keep the heavy and incompetent hand of the public sector out of this….
Not quite, the burden to innovation is higher than the less than 5% of total AUM that does not work out for LPs. So the bets have a disproportionate ramification. And the excuses from the NVCA playbook you use prevent LPs from pulling the plug on them until VCs have wasted fund III too… Just imagine the massive number of false positive and false negatives of innovation 790 failing VCs have created over the years that have eroded the faith in our ability to innovation, unjustifiably.
It is a myth that free-markets don’t require regulation, so every participant adheres and is protected by the same definition of freedom. Isn’t it ironic that those who preach free-market capitalism now need to be saved by the public sector by instituting artificial incentives and disincentives at the bottom of the economic food chain?
It proves we don’t have the economic framework to support free-market capitalism. And that is why we fail, not because we are free but because we are not. What the government needs to do is ensure all market systems adhere to free-market principles and not just pay it lip service. But that assumes our government knows what they are, and that is where my book comes in…I am going to teach them a lesson too.
Rebut #11: unrelenting, the CEO continues:
Free markets are not being saved by the public sector and the incentives and disincentives just add to a problem of excessive public interference. The US innovates just fine and well ahead of the rest of the world where government “support” is more prevalent. Any time the government offers “help”, it is time to watch your wallet and step back from the Alice in Wonderland world that politics spawns. The failures of capitalism have been at the top, not the bottom. And they have been driven by crony capitalism, particularly in the financial services sector, where there is revolving door between Wall Street and the federal government. Competitive markets work and in innovation, the government does not bring either more competition or more freedom to pursue innovation. I would have to respectfully disagree with your premise and conclusions. Best of luck.
We do not have a free-market as indicated by the old-boys network of VC that resembles the economic equivalent of a demi-cartel, full of collusion and other salient restrictive side effects of markets that are not free. The only reason why the US still out innovates other countries is that we, as entrepreneurs, still manage to disobey the wrath of subprime VC. We succeed despite, not because of the lack of free-markets deployed by dysfunctional arbitrage (see my blog).
But if your perception is that markets are just fine, I would quote Oprah Winfrey by saying: how is this all working for you? Because no one could or should deny at this juncture of economic malaise that our stubborn and old-fashioned past has gotten us into this economic malaise, to begin with. The conservative views of the past have proven not to extrapolate to a bright future. I will let others drum up the numbers.
Everyone will have to contribute, VCs will need to be transparent (to all marketplace participants) and obey a meritocracy, entrepreneurs will need to meet higher standards of disruptive capabilities to feed VC returns, and the government needs to ensure everyone follows the free-market principles. The result will be less regulation that is more meaningful, a self-promoting and dynamic system rather than a system in constant need of artificial adjustments of undesirable outcomes.
The stock market is not a free-market, nor is Venture Capital, nor are any of the financial systems we deploy today. I have outlined that on my site time and time again. Those are the lies we live today that are responsible for the decline of our economic prosperity and the American dream as we know it.
Rebut #12: a President/CEO responds:
George you seem to have some insight into some of the problems inherit with the current system. The US talks free market but they use a Harvard mind set to deny any new innovations. If your not part of the group then you don’t qualify even if you can change the market for the better. I like the European outlook: if it works then lets use it! We been busting our chops to bring new innovation to the piracy problem and all they want to do in Washington is create new laws and protect Madison Avenue.
Our economic systems have a global impact since most of the global economic systems are copied from ours in the U.S., but they are flawed from a fundamental perspective and in violation of free-market principles. Europe is experiencing the delayed “gratification” from that inefficiency and thus will suffer the same fate, if not worse, since Europe still leans on the U.S. for innovation too.
With regards to piracy, that issue is not an internet issue but the same laissez-faire economic model that because of internet distribution rears its ugly head quickly and fiercely. So regulating piracy now, without the economic fundamentals in support of it, is doomed to fail. And there is nothing worse than implementing regulation that does not have any economical basis.
Rebut #13: a Chinese professional responds:
The economic meaning for innovation is the limited quality for requirement of original products and services. If people have new requirements, they needs new innovation, which based on the new cognitive and behavioral ability. I do not know how Romney expressed his thoughts recently, but as a former governor from Massachusetts, he understands innovation.
No, you are wrong. Less than 8% of the world’s population has access to high-speed internet applications to enhance their life. So, the greenfield for technology adoption is enormous, and so is the opportunity to innovate.
Whether or not Romney understands that it is a political standpoint you can make, is not the point of my article. I commented on his claim as an investor, not as a politician. And so to suggest that Romney as an investor (mostly PE, and thus investing after crossing the chasm) he, therefore, must understand innovation is another long shot. As a VC, Romney operated before the bubble burst and with strong winds in which turkeys could fly. Today’s post-bubble era of investing in VC is quite different, and I would not merely assume a VC before the bubble would succeed post. There is a reason why, out of 790 VCs pre-bubble, only a handful make any money for LPs.