Economic innovation for a bright new world
Venture LPs blowing in the wind, continued
The real issue is that Venture Capital does not only produce poor index returns, it performs below the consumer adoption rate of technology in the same period, gets outperformed by corporate innovation and capital, has lost public trust because of bad past conversion from valuation to value and does not make a dent in the 80% greenfield of technology adoption. As an LP you should expect from your GPs an alignment with the index of the market opportunity of the underlying asset, not with the performance of those attempting to pursue it. It's a mistake many make in startups as well, where your target and sole focus is the greenfield not on those who failed to empty it. The iPhone strategy is a great example of that. But to step back, any laissez-faire financial system that violates free-market principles turns quickly (depending on market fluidity) subprime. And Venture Capital has turned subprime by virtue of how risk is deployed. Many LPs are unaware of the risk deployed in Venture, 10 levels of bottom-heavy diversification deployed by most LPs demonstrates that despite the belief in the PPM of an individual VC firm you still are unlikely to produce viable returns. So, Chris, the issue is the economic principles by which money is deployed to Venture. And once we fix that, there will be no more room for VC players that cannot perform in line with the massive market opportunity that lies ahead. Innovation scales, and Venture can too. Just not with the current financial model deployed by most LPs. And my fix resolves that.
Read the full commentary here:
Venture LPs blowing in the wind
Yet according to Cesar Milan we should blame the owner for the dogs behavior, and thus we should certainly assign blame to LPs for the underperformance of GPs. Not in the least because the economic model under which Venture is deployed is economically flawed.
In his announcement email as the co-chair of the 22nd Annual Venture Capital Investing Conference, June 7-9, 2011 at the Sofitel Hotel in Redwood City Chris writes to await for a new crop of VCs to emerge and refers to winds of change in Venture and conveniently referring to miserable last 10 years in Venture as a down-cycle. Of course the proverbial down cycles are a great way to diffuse any argument against underperformance. Just wait until your child comes home with miserable grades from Harvard and simply referring to them as a 10-year down cycle.
But the most benighted part of Chris e-mail is how he defers all performance issues in Venture to GPs, blissfully forgetting that LPs hire the GPs that don't perform. And thus expecting change in Venture without a seminal event to induce that change is foolish.
A broken system rarely gets fixed by those who created and still benefit from it (by skimming management fees), and Chris' suggestion of synthesizing the old with the new may be wishful and self serving thinking, but hardly realistic. Chris' words demonstrate he certainly has been drinking the NVCA kool-aid. Venture Capital needs to be remodeled from the top down, economically.
But the good news is that Chris' wishes can come true if he is more critical of the role of LPs in the sub-priming of Venture Capital over the last twenty years. Only a rigorous financial reform can resurrect Venture.
[Links: Venture Capital Investment Conference
]P.S.: Greetings from Bretagne, France.