The National Venture Capital Association (NVCA) has released its recovery plan (4-pillar plan) to fix Venture Capital that is eerily similar to that of the auto companies. It focuses on the prolongation of (their) life rather than on the quality of its product; the ability to spawn meaningful innovation.
Now I am sure Dixon Doll, from his perch atop a $1.6B Venture firm, means well but his purview is severely limited by his role as chairman as one of the most closely held investment clubs in the nation. Its members, ninety-something percent of the U.S. VCs are simply not incented to present all options for improvement, and certainly not one that would include self-cannibalization.
Nothing in this plan covers the stimulus and meritocracy required to spawn and monetize disruptive innovation. The plan mentions entrepreneurs, as the real value creator in this equation – in passing – only once (slide 11) amongst its thirty slides. The plan seems to forget that the entrepreneur is the real value creator, not the VC.
The plan, like the plan of the auto companies boasts of past accomplishments (count on two hands; poor result coming from 800 VCs, but we all know that) and how it puts a lot of people to work (it better when $28B of LP money is dispersed; what else would you spend it on), yet it offers no clues as to the fundamental resurrection of IPOs and meaningful M&A. Could it be that VCs simply picked the wrong companies to invest in? Could it be that the driver, not the car caused the accident?
Faster and easier liquidity paths, using the suggested liquidity platform, does not make up for ill-defined risk assessment applied by many VCs. I predict, such a platform will then be used by VCs who are stuck with many false positives as the pump-and-dump platform to hide their bad choices. The proposed structure of the NVCA reminds me of an intermediary company/fund that tried very hard to sell me equity in some of Kleiner Perkins (KPCB) later-stage companies. I happened to know a little more about those companies and their products and gracefully declined.
We don’t need more complexity in the Venture Capital business. We need to flatten, segment and remove derivatives in the same way we are about to remove derivative structures from the banking world. We need Venture Capitalists that can quickly be held accountable for their actions and implement transparency that offers LPs the instruments to do so. After all, the VC is merely a derivative in the process of innovation.
Fixing VC will be remarkably easy when you consider the needs of entrepreneurs and I plan to present my entrepreneur focused plan to the LPs soon. A further descent down the subprime spiral (in which all participants are entangled) makes it hard for some to see the forest through the trees and find a solution. But the current situation is bad for Silicon Valley, for our leadership position in an increasingly global technology landscape and detrimental to our economy as a whole. That is why I care. I care about the meritocracy we talk about so often but so poorly deliver on, with capitalism as the excuse.
I don’t want to see other countries walk away with an optimized model of our technology innovation like we seem to lose many other innovations just because they understand that (at least local) meritocracies require some form of regulation, transparency, and other aspects of free-market principles. Capitalism, just like football, requires rules to flourish.
The NVCA plan is bad because it does nothing to fix the false negatives and false positives VC produces today, one that is currently shutting out meaningful innovation. And it demonstrates how it continues to treat entrepreneurs with remarkable ignorance.