I just watched the video (sans slides) of Mark Suster’s keynote speech at Venture Alpha East, a Thomson-Reuters April 4th event in Boston. I was scheduled to speak at the same event were it not for an injury I sustained one day in advance. A great pity, for I would have stirred the pot of venture socialism.
For those who care, I am doing well.
Marky Mark and the funky bunch
What strikes me most about this keynote is how a wonderfully naive Mark Suster (a general partner at GRP partners) describes his rationale for the still spiraling subprime maelstrom of underperformance of venture capital I predicted some eight years back that could have saved a lot of money and lost the opportunity if taken seriously then.
To sum up, Mark’s “solution” of disruption seems to hinge on a branch of the downstream progression of venture capital’s existing workings.
But for self-preservation, it is not the first time, and it will not be the last time venture capital ignores its fundamental problems, described briefly in my The State of Venture Capital Infographic and covered in my conversations with members of The Senate and Congress.
What is even scarier is how the supposed new crop of venture capital, Mark and the funky bunch (a title easily deserved when mentioning Dave McClure way too many times) as the arbitrage of innovation, demonstrate to know so little about the evolution of evolution and basic economics. Especially scary since venture capital is supposed to pick its portfolio companies based on precisely those propensities mentioned above, the pertinent factors in evaluating investment risk and business success.
As an influential voice (hold for returns that produce socioeconomic value) in venture capital, Mark should know that the disruption of anything is unlikely to come from those who perpetuate the old. That to save venture capital is not to sell the refurbished old as new, to a fresh batch of greater-fool limited partners, under the snappy moniker of disruption.
Help the greater-fools
Nobody wants or deserves to be called a greater-fool, so let’s debunk the statements made by Mark in the video (with approximate markers) to prevent that assignment from happening.
00:15s – Rearview mirror analysis
It is fascinating to hear Mark mention how those critical to venture capital must be using a rearview mirror analysis of “the industry,” given that all of his slides and changes to venture money appear based on an evolution of statistical studies and surveys from the past. For those paying attention, Mark surrenders to his own fallacies.
How do we tell the arbiter of innovation – the emperor – who is supposed to know better and advise startups to succeed, that deep hindsight does not lead to better foresight?
Should we explain to the arbiters of innovation that real disruption has no precedent nor provides the statistical analysis (yet) that would make everyone conclude the same? That the disruptive innovation to venture capital itself cannot come from more downstream analysis of the past, which Mark continues to describe in great detail for the next thirty minutes or so.
01:00s – Startup ecosystem became over-funded
The real problem with venture capital, regardless of the amount of money pumped into the asset class, is that it has failed to produce good companies that yield socioeconomic value the public can trust. The deployment of subprime risk (however composed) can only deliver subprime value by economic principle.
An 80% worldwide greenfield of innovation (by the greenfield of high-speed internet connectivity worthy of the invention) suggests venture capital has flunked to mature as the preeminent arbiter of innovation. Venture capital cannot even outperform the (often stale) corporate innovation it is supposed to feed, and then some.
Not the size of the ecosystem is to blame, but the inability of venture capital to select and produce innovation turnovers the public can trust. Money-in nor money-out matter to limited partners if the asset class plays hooky with its renewable value and the public’s trust, guaranteed to cause asset class returns to atrophy.
01:30s – Of course venture capital underperformed
Mark is using the same circular arguments I have heard so many times from the venture capital lobbying group (the NVCA) he is so desperately trying to distance himself from. He uses what I call “the what happened because what happened” theory as the basis for his thesis on the disruption of venture capital.
The general venture capital excuse goes as follows: because the IPO windows closed, the money going into venture capital was not coming out, and thus no one but the illustrious “market” is to blame.
Comfortably forgetting, of course, that there is no such thing as an IPO window (for more, see my roast), except for the cumulative disappointment by the public in the socioeconomic value derived from venture capitalists’ choices. Ignoring also that corporate innovation blew the doors off those market excuses during the same period.
The math, dear Mark, is indeed simple. Money-in will never yield money-out if you, as the arbiter of innovation, do not promote innovation that instills public value and trust. The fragmentation, syndication, collaboration, and education you promote will systemically prevent you from discovering the prime risk that can produce exceptional value (and thus returns). Socialism is incompatible with finding outliers.
02:10 – Road ahead, the road behind
Indeed, Mark, we should all focus on the road ahead. Let’s bury the hatchet again like we’ve been doing for the last 20 years. First in bull, now in bear – but equally economically flawed.
Einstein taught us that disruption does not come from those who keep perpetuating downstream innovation, not even in the forgiving business of venture capital. Because disruption means you swim upstream, in this case, we change the perspective from the needs of venture capital to the needs of innovation.
And for innovation to survive, venture capital does not. The way venture capital works, including the continuous downstream optimization sold in this video as new, should no longer be given an eternal shelf life. That is, if we do not want to continue making greater-fools of ourselves.
Yes, we can reinvent venture capital once we re-evaluate the role innovation plays in the evolution of evolution. It is pretty easy to align a financial system to innovation needs as long as we are prepared to hold them to the same meritocracy.
For the sake of my precious time, the limited word span in this blog, the continued circular theories, and the attachment to the same old downstream optimizations leading us down the wrong rabbit hole of financial support for innovation again, I will refrain from further comments on the video here.
I do believe Mark’s heart is in the right place. He has been one of the few venture capital investors to comment publicly on the astuteness of my prior observations. It takes a man to admit his own mistakes.
But the want for Mark to do the right thing, using an American Idol analogy, does not ensure that he can sing. And even if he can sing (and proves to produce the venture capital value the public post-IPO cares about), it does not by default mean he can teach others.
I have sat in front of some venture capital founders, who made tons of money in the asset class and are clueless about how to rescue their peers – or save their offspring.
The fix to venture capital requires an innovator’s mind.
As an investor or entrepreneur, the merit of an American Idol is not produced by the growing mold of solidarity and uniformity the venture capital business models itself and its investable assets after. Unsurprisingly, the flawed greater-fool theories weighing on top of most of us will continue to prove those who submit to those theories so saliently wrong.
A happy and prosperous future of venture capital can only happen when it and its investable assets follow the renewable evolution of nature, which requires the intervention and vision of more than a funky bunch of technocrats.
Venture capital needs to come clean. And Mark, your story is not it.
[Any association with Mark Wahlberg’s hip-hop group “Marky Mark and the funky bunch” is purely a play on words, without an implied reference to, or an association of, merit. I think very highly of Mark Wahlberg’s merit as an actor and producer.]