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
.The Jobs snobs
Thursday - March 29, 2012.
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.
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
.Subprime Visa
Tuesday - March 15, 2011.
- Every dollar spent on a subprime VC investment dilutes the opportunity to create the prime innovation that can produce prime returns. And for the last 10-years VCs have waved subprime money around using the "capital efficiency" thesis which produced negative 4.6% IRR for Limited Partners. And so you'd expect we learn something from that. Quite the opposite, because many local entrepreneurs refused to be taken for an underperforming ride we now attract foreigners who are willing to start a company under subprime terms to the US, starting with a $100K investment. Welcome to the new subprime startup visa, or depending on your role: how Venture descends further down to its self-induced subprime maelstrom. [Links: PEHub
]
Startup America for dummies
Thursday - March 10, 2011.
I wrote a blog about why Startup America is a bad idea, which has garnered a lot of attention. Not so from the Obama administration who ignored my request to participate in its first roundtable. Go ahead administration, and ignore the "best Venture Capital thinker in the world" (according to a Venture Capital journalist). As a (now financial) entrepreneur I am used to being ignored in the beginning, so I don't take it personal.
In that blog I made clear that not entrepreneurialism in this country needs help, but the financial system that acts as the arbitrage responsible for -4.6% 10 year returns is to blame. Simply put, by economic principle any black-box laissez-faire financial system turns subprime by default and so has Venture Capital. It is the exact same uniform deployment of fragmented risk that created the Real Estate implosion, that is also responsible for the innovation implosion. All while an 80% adoption greenfield is eagerly awaiting technology to enhance its life.
So, for Startup America to focus on the education of entrepreneurship using the existing subprime financial arbitrage is foolish and a waste of tax-payers money. Would you be watching American Idol when judges were trying to teach wannabes how to sing? I think not, American Idol contestants are evaluated (not taught) on their innate ability to sing.
Entrepreneurs are born with the confidence and ability to think different, just like a singer is born with great vocal cords. Both will spend the rest of their lives perfecting the application of that skill. But they better not be evaluated along the way by judges who don't know how to produce results themselves. Pushing wannabes through the same subprime funnel will not do our economy any good, quite the opposite.
Venture Capital has already lost more than 10-years of great entrepreneurial capacity it failed to recognize, by virtue of its subprime arbitrage.
In that blog I made clear that not entrepreneurialism in this country needs help, but the financial system that acts as the arbitrage responsible for -4.6% 10 year returns is to blame. Simply put, by economic principle any black-box laissez-faire financial system turns subprime by default and so has Venture Capital. It is the exact same uniform deployment of fragmented risk that created the Real Estate implosion, that is also responsible for the innovation implosion. All while an 80% adoption greenfield is eagerly awaiting technology to enhance its life.
So, for Startup America to focus on the education of entrepreneurship using the existing subprime financial arbitrage is foolish and a waste of tax-payers money. Would you be watching American Idol when judges were trying to teach wannabes how to sing? I think not, American Idol contestants are evaluated (not taught) on their innate ability to sing.
Entrepreneurs are born with the confidence and ability to think different, just like a singer is born with great vocal cords. Both will spend the rest of their lives perfecting the application of that skill. But they better not be evaluated along the way by judges who don't know how to produce results themselves. Pushing wannabes through the same subprime funnel will not do our economy any good, quite the opposite.
Venture Capital has already lost more than 10-years of great entrepreneurial capacity it failed to recognize, by virtue of its subprime arbitrage.
EU cookies
Wednesday - March 09, 2011.
- Technology companies in Europe must by May 25th explicitly ask site visitors for permission to generate a browser cookie, according to a new law. Nothing in that law will prevent any other site from using someone else's cookie to gleam information. Ridiculous regulation is the outcome of when government is uninformed about the state of technology, but pretends otherwise. [Links: TechCrunch
]
Obama's pipe
Friday - February 18, 2011.
- I am not sure what is in Barack Obama’s pipe but a statement from White House press secretary Jay Carney makes me wonder:
The crucial assignment of praise should go to the unrelenting entrepreneurs not to the defunct financial system and arbitrage that on average has produced negative 4.6% returns for Limited Partners and not generated an average positive return for LPs since 1998. Why do none of the economic geniuses in his administration whisper in his ear that financial cartels by economic principle can never scale, and Venture Capital full of collusion, price fixing, extreme fragmentation and bottom-heavy diversification has turned just as subprime as real-estate? I am very worried who Barack surrounds himself with in his attempts to fix our economic situation. Would love to set Barack Obama straight on this subject, who can get me in?the high-tech sector has been "a model, really, for that kind of economic activity that we want to see in other cutting-edge industries in the U.S. where jobs can be created in America and kept in America, and that's what he wants to talk about.”
Startup America is a bad idea
Tuesday - February 08, 2011.
Read the complete article...
$1B companies build GDP
Saturday - February 05, 2011.
- Carl Schramm, CEO of the Kauffman Foundation during the Startup America announcement at the White House confides the number of new $1B companies defines the health of our GDP, so therefor why are we building subprime technology companies funded by subprime VC funds who cannot fund anything but innovation socialism?
U.S. Brain drain, Dutch clogging
Thursday - February 03, 2011.
- Vivek Wadhwa, an academic at Duke, Harvard, and UC Berkeley describes the departure of well educated immigrant students back to their homelands instead of staying, working and growing new businesses or developing new technology in the U.S.. Might that have something to do with the defunct state of Venture Capital?
- Holland has the lowest unemployment of any other country in the Eurozone with 4%. Yet unless you can ride a bike to work, I cannot see how a country with such massively clogged up highways can turn a low economic deficit into a sustainable advantage. Sixteen million people and growing on a postage size landmass (mostly below sea-level) will pose significant impending economic problems.
Startup America
Monday - January 31, 2011.
- Startup America, a White House-led partnership of private companies and investors to promote entrepreneurship in the U.S. is another sign of overreaching of the government and bound to fail to produce returns. Government should enforce free-market models, not extend the reach of investment cartels. Judge for yourself, but I expect more of the same Venture performance from the natural practices of its supporters, AOL Inc. co-founder Steve Case and the Ewing Marion Kauffman Foundation and other groups participating include Astia, Blackstone Charitable Foundation, Ernst & Young LLP, Google Inc., JumpStart Inc., MassChallenge and TechStars.
Out-innovate
Wednesday - January 26, 2011.
- Yes, Barack, we do need to out-innovate other countries (have you been reading my blog, I know your administration has?). But the only way for the U.S. to out-innovate other countries is to build a financial system that establishes a true meritocracy, with free-market principles at its foundation. A Venture Capital system with ten-levels of bottom-heavy diversification will never be able to keep us at the top. Much innovation is currently being kept out by its flawed economic model.
Infectious Stupidity
Monday - January 24, 2011.
I am told some Limited Partners in Venture listen to a fellow called Paul Kedrosky, an economist (and fellow at the Kauffman Foundation
) who has also captured the hearts and minds of hungry Venture Capitalists chasing them. I like Paul’s Infectious Greed blog
and sincerely enjoy his observations on a broad range of subjects. But economists are like forensic pathologists; great for finding the effect of death but inexperienced in the cause and conviction of the perpetrator. Cause establishes effect, not the other way around. Or put differently, deep hindsight rarely yields productive foresight - especially in the innovations business.
And so, a good economist is respected in the way we have to respect world renowned forensic pathologist Henry Lee
, understanding and clearly communicating of his role as a scientist and leaving the conviction of the crime up to those who can trace the events, establish motive and analyze reason. With that in mind you may be just as surprised as I was to have an intelligent guy like Paul on his Twitter account from my analysis of why funds smaller than $250M make no sense, allegedly refer to me as “asshole”, “tourist” and “idiotic” (see screenshot) to a VC that had sent it to him. Clearly I have hit a nerve, with Paul’s counter arguments to the article lacking. The deeper I dig into Venture Capital the stronger the odd protectionist behavior proves we have not seen the bottom of that dysfunctional barrel yet.
One would expect a more appropriate and susceptible attitude of VCs and those who advise them towards self improvement, considering the negative absolute IRRs and deplorable creation of Social Economic Value that has turned Venture Capital into the public disgrace of innovation and entrepreneurialism.
For the sake of a healthier financial system that can truly drive innovation and produce healthy returns for Limited Partners I will continue to hold those who benefit from its dysfunction responsible. With arguments.
The State of Venture Capital
Wednesday - October 13, 2010.
Read the complete article...
Saving Silicon Valley
Wednesday - July 28, 2010.
Read the complete article...
Don't bite the public hand that feeds you
Tuesday - May 25, 2010.
Read the complete article...
New York, an empire state of mind
Thursday - January 21, 2010.
Read the complete article...
Predicting the future is why macro matters
Tuesday - January 05, 2010.
Read the complete article...
Why Venture Capital will not simply recover when the economy does
Friday - December 04, 2009.
Read the complete article...
The importance of being free-and-earnest
Tuesday - October 20, 2009.
Read the complete article...
The telephone-game of derivatives
Monday - October 05, 2009.
Read the complete article...
Why innovation needs regulation
Friday - August 21, 2009.
Read the complete article...
The Silicon Valley emperor has no clothes
Saturday - August 08, 2009.
Read the complete article...
The economy is not the problem
Friday - March 06, 2009.
Read the complete article...
Trust is the currency of success
Thursday - November 20, 2008.
