Economic innovation for a bright new world
Venture Capital: the enemy is us
Tuesday - May 08, 2012.
On June 15th 2005, some 7 years ago, I came publicly to the conclusion from having worked in Silicon Valley for 17 years with many startups, that Venture Capital is broken economically (and argued the semantics of “broken”), created numerous blogs on the subject since, and produced The State of Venture Capital, now viewed by more than 11,519 people, reflecting the economic incompatibility between entrepreneurial assets and the role of its arbitrage, Venture Capital.
Only now does the Kauffman Foundation in a blistering report regarding its own performance as a limited partner in Venture in so much concede to my points of view.
Geniuses they are not
“We have met the enemy and he is us” is an interesting and frank report considering that the Kauffman Foundation is an organization many limited partners have called on for advice, has been used to feed the President’s impetus for ill-conceived programs as Startup America, fed the NVCA’s crumbling protective stance, and by virtue of Kauffman’s “economic genius” Paul Kedrosky (who apparently also contributed to the report) has percolated and held a hand above the institution of venture capital on Sand Hill Road for as long as I can remember.
The Silicon Valley emperor has no clothes is what I wrote a long time ago. The institution has been proven wrong, and it is time for its sinking ship to drag along its “economic geniuses” who kept it alive and made a healthy living doing so at the expense of the public.
Downstream recommendations
And while the report may be shocking to many, detecting the poor economic outcome of venture capital is only half (and the easy part of) the battle. The recommendations in the report filled with attributions from exactly those people who are responsible for its malaise, are merely downstream optimizations aimed to artificially adjust the undesired economic outcome, rather than a rethink of how venture capital should economically align with outlier entrepreneurs.
The delay in acknowledging the systemic problems in venture capital are as damning as applying the wrong fix suggested by Kauffman’s recommendations now. The likelihood that venture capital will change from subprime to prime using Kauffman’s recommendations is like expecting a bad sales person to sell more by changing his incentive. The answer to improve the performance in venture capital lies upstream, not downstream.
Fixable
But venture capital can be fixed with the same economic model that will fix our economy as a whole. Yet that fix requires the pain endured by the current model to drive for support and new courage to look for economic answers upstream. To question why we build financial systems the way we do, and wonder why we did not design them to deliver perpetuity to their underlying assets. I will describe exactly that and a new economic model with pragmatic (transitional) steps in my upcoming book.
It takes a lot of courage for the Kauffman Foundation supported by its interim CEO, to admit what they have preached for many years as the messiah, was simply wrong. It proves once again that any kind of socialism in the pursuit of outlier performance should be shunned. Especially since venture capital is merely the derivative in the exchange between the assets of limited partners and entrepreneurs.
Our fight, our win
Today I will relish in being proven right once again. Not for my personal sake, but for the sake of the recovery of entrepreneurial capacity that we have thrown away with the bath water for more than twenty years. My victory today is a small win for entrepreneurs, and a big win when policy makers start paying serious attention to what I have to say. The battle I am fighting is really not mine, it is all of ours. And one with an upside capacity to yield more than 20% of U.S. GDP that can set a new and much brighter example for us and the rest of the world.
Now is the time to perpetuate economic upside, rather than to staunchly protect downside.
Now is the time for courage.
>> Download the Kauffman report directly from their website here
.Say No to Consumer Protection
Wednesday - April 25, 2012.
Yesterday Barack Obama spoke at UNC in Chapel Hill, NC where he highlighted the importance of higher education and referred to the new Consumer Financial Protection Bureau’s
(CFPB) role in protecting consumers from deceptive, abusive and predatory loan products in the financial marketplace, with budding students cheering him on.We can do better
Barack’s work in softening the blow of a $15.6 trillion in spending spree raked up by the legislation managed by previous administrations exacerbated by a spiraling down of the economy should be commended. But many of the new initiatives he signed off on and that attempt to artificially correct, optimize or prevent certain economic outcomes (we refer to as downstream optimizations) pacify the public in having them believe those measures will solve our economic malaise, have a short political shelf life and are prone to partisan repeal as quickly as a CEO changing the logo of his company shortly after taking office. If only to mark a partisan territory in history.
Separation of politics and state
But politics has no place in the development of an economic master plan, simply because the right economic master plan is designed to build and serve the dynamic meritocracy of all of our ideals and beliefs. Partisan division occurs because short of the aforementioned economic master plan everyone thinks their unique implementation and interpretation supported by quick scoring downstream corrections will magically erase years of blatant macro-economic ignorance.
Downstream economic optimizations like The American Jobs Act, Startup America, and the Consumer Financial Protection Bureau’s initiatives are comfortably floating in midair of public (open microphone: election) karma, blissfully ignoring that detached from a viable economic master plan those corrections will simply spawn a more fragmented and more opaque composition of new economic fallacies, circumventions and fraud.
Marketplace, not unilateral protection
So beyond being the wrong economic medicine, applied independently and unilaterally, consumer protection is also in violation of free-market principles. Because in the protection of marketplaces that adhere to free-market principles our forefathers envisioned for us, both demand and supply should enjoy similar and balanced measures that maintain the evolution of a self regulating dynamic meritocracy. Meaning, one aught not to stimulate or regulate one side of the economic marketplace, but apply transparency so the fallacies on either side can swiftly be dealt with by the marketplace itself.
The role of government is to enforce the compliance to free-market principles in every aspect of trade. To ensure that those who lend money are just as protected as those who borrow. That the success of those “marriages” are just as transparent as their failures, to all marketplace participants (buy and sell). The only meaningful form of consumer protection is the one offered by a free-market.
The American Dream
The pursuit of the American Dream will never materialize if we keep violating the founding vision and economic principles our most beloved forefathers bestowed upon us. We need to stop deploying a plethora of unilateral regulations favored by flip-flopping party lines meant to artificially achieve a desired - yet temporal - political economic outcome, that then quickly upon implementation or change of government control requires a new host of perpetual corrections. We need to look for answers upstream.
The American Dream can only be achieved if we deploy a level playing field, in which the merit of those who establish viable marketplace marriages thrives and those who abuse the marketplace by virtue of transparency get ignored. It may surprise you that the majority of our financial systems today are in violation of free-market principles (a topic I substantiate on my blogs further), and thus the reason why our economy buckles under the obesity of finance eleven times the size of production.
A real meritocracy, for once
The American Dream starts with a new responsibility the President has to take on. And that is to ensure bilateral compliance of our economic and financial systems to free-market principles that can then with the magnificent resources we have at our disposal act as the petri-dish for a bright new meritocracy, in which all of us have not a dream but the ability to thrive.
Say no thanks to consumer protection if you demand better. We need to help our President develop a new economic master plan and compass, and short of a viable product by his traditional economists, we as entrepreneurs - used to thinking upstream - grabbed the bull by the horns and are building one.
The Jobs snobs
Thursday - March 29, 2012.
Filed in: Venture | Government
Read the complete article...
Introducing 2012: The State of Venture Capital
Tuesday - March 20, 2012.
Read the complete article...
Did Venture Capital promote economic growth?
Tuesday - January 24, 2012.
Filed in: Venture
An article in the Tenessean plays out a very naive summary of the role of Venture Capital with regard to economic growth. Naive because not only does it demonstrate a lack of real world experience with the demi-cartel deployed by an old-boys network in the epicenter of Venture located Silicon Valley, it is factually wrong in how it works, what it has produced and what it has done to the economy.
So, here is my response to their tantalizing statement:
It must not have sunken in to the writers of this article that the most important asset holders in the marketplace of innovation (limited partners with money, and entrepreneurs with ideas) are leaving the asset class, because either they are not getting the returns they were promised or their vision is dumbed down to subprime. For a comprehensive overview of the real risk deployed by Venture, study The State of Venture Capital.
Find the original article (not open for discussion on the site) here
.
So, here is my response to their tantalizing statement:
No, Venture Capital is supposed to promote economic growth. But subprime VC is just like subprime real estate. It makes for great press when you secure deals, and then someone else (the economy) gets left cleaning up the debris. With 20 years of subprime VC behind our belt and negative performance to boot, the false positives create a hole twice the size of false negatives that could have delivered sustainable economic growth.
It must not have sunken in to the writers of this article that the most important asset holders in the marketplace of innovation (limited partners with money, and entrepreneurs with ideas) are leaving the asset class, because either they are not getting the returns they were promised or their vision is dumbed down to subprime. For a comprehensive overview of the real risk deployed by Venture, study The State of Venture Capital.
Find the original article (not open for discussion on the site) here
.World Bank warns of deepening crisis
Thursday - January 19, 2012.
Filed in: Economy
As I stated before:
Nothing will improve in the economic outlook of our country until we improve the systemic economic imbalance between finance and production.
So, let’s get to work on fixing our economy from the top (instead of from the bottom).
SOPA spawns the need for economic reform
Tuesday - January 17, 2012.
Filed in: Commentary | Economics
I am responding to another article with regards to the Stop Online Piracy Act (SOPA) and the Protect IP Act (PIPA) with more or less the same commentary I posted on the European Commissions’ web site yesterday. It is an important topic worth repeating.
This time my response was to an article on Reuters PEHUB titled “SOPA Headed for a makeover”. It clarifies my stance on SOPA, and that we should not rush to regulate before we understand how it ties to our core economic principles. And given that we violate economic freedom all too often, to apply regulations today that depend on such flawed implementation of freedom is bound to do more harm than good.
Here is my response:
The full article, including my comment can be found on Reuters’ web site here.
This time my response was to an article on Reuters PEHUB titled “SOPA Headed for a makeover”. It clarifies my stance on SOPA, and that we should not rush to regulate before we understand how it ties to our core economic principles. And given that we violate economic freedom all too often, to apply regulations today that depend on such flawed implementation of freedom is bound to do more harm than good.
Here is my response:
Most of us look at this as an Internet problem but it is not. The root problem we need to solve (before we apply lucid regulations) is that we define what economic freedom really means (with or without the internet).It is a myth that free-markets do not require regulations. The implementation of a free-market requires regulations so every participant enjoys the same definition of freedom, and protects other participants using that same definition. Free-markets are not a free-for-all, meaning you are allowed to just do what you want. The way financial systems in violation(!) of free-market principles have been able to run amuck with our economic systems.The implementation of a true free-market system is now, really for the first time, being challenged by the internet as its distribution. And the time has come to shore up our economic definition before we apply it to the internet.I applaud meaningful regulation that secures everyones definition of freedom. But I would suggest to tread very carefully, for I see those who do not understand the basic fundamentals of a free-market implement regulations that throw the economic baby out with the bath water all to frequently.
The full article, including my comment can be found on Reuters’ web site here
.Internet reform is economic reform
Monday - January 16, 2012.
Filed in: Commentary | Economics
I am for the perpetuation of a free-market on the internet, but not if that purported compliance creates a free-for-all that violates free-market principles. It is a myth that free-markets do not require regulations, but those regulations need to be deployed with the proper recognition of what those free-market principles are. The latter is where most regulations fall apart and in turn do more harm than good.
Here is my commentary to Neelie’s blog posted on the European Commission’s website:
The internet for the first time forces countries to adopt a singular economic system across its distribution and that puts enormous pressure on the agreements needed between countries.While on the surface the U.S. proclaims to be in support of free-markets (and I am, living and working there), the implementation of a free-market requires regulations so every participant enjoys the same definition of freedom, and protects other participants using that same definition. Free-markets are not a free-for-all, meaning you are allowed to just do what you want. The way financial systems in violation of free-market principles have been able to run amuck with our economic systems.The implementation of a true free-market system is now, really for the first time, being implemented globally with the internet as its distribution. I applaud Neelie's work to balance the defunct free-for-all with meaningful regulation that secures everyones definition of freedom. But I would suggest to tread carefully, for I see those who do not understand the basic fundamentals of a free-market implement regulations that throw the economic baby out with the bath water all to frequently.
The original article can be found here
.From despite to because
Thursday - January 05, 2012.
Filed in: Economy | Policy | Behavioral
