Dear VC: Your Car Did Not Cause The Accident

Venture capitalists confound consequence with the cause in their attempted pursuit of groundbreaking innovation. The depravity of reason is what follows. What does that title have to do with technology innovation and investing? A lot apparently to my brain.

VC spin doctors

The recent flurry of articles by individual Venture Capitalists (with catchy titles such as “VC right-sizing”) along with the help from their association (the National Venture Capital Association, NVCA) spin a wonderful story as to how external circumstances have closed IPO windows and reduced M&A valuations. “Helped” by an ailing economy, Sarbanes-Oxley, and other new regulations, VCs blame their inability to spot real innovation on anything else but their own choices. Good luck trying to convince the police officer that your car was really to blame for the accident, and the VC malaise we are in.

Didn’t your football coach teach you in school that you can’t blame the referee for your loss, even if the referee made the wrong call? He would tell you to man up and play better, so there is no room for error. Isn’t that what VCs expect from their entrepreneurs when they go to market?

And that is what I am now telling VCs.

No more excuses

I don’t believe for a moment that Google, Facebook, Twitter, Rosetta Stone and OpenTable have or will consider their ability to go public on just the pressure of regulations or the process of going public. Those companies have a macroeconomic value that is resistant to – perhaps – cumbersome rules. And companies that can’t jump the regulatory hurdle should frankly not be allowed to play in the big league of public markets and offered an opportunity to stain the reputation of technology innovation.

A significant issue that great new venture-funded companies face now is their ability to overcome the erosion of trust (as the currency of success) caused by its many sub-prime predecessors. For the last ten years, subprime VCs have collected sub-prime innovations which, without prior resistance, propelled meaningless valuations into unsuspecting public markets. The likelihood of the current VCs (gathered at the NVCA) regaining that trust is as likely as a cheating husband restoring the trust of his wife — it will take more than blaming everyone and everything else.

What matters is the entrepreneur

Moreover, the efforts of the NVCA described in their recent presentation emphasize the wrong point. The conservation of relentless entrepreneurs, not the VCs, is the real issue at hand. A VC, at best, is a derivative, not the creator of disruptive innovation. For too long, inexperienced VCs have been allowed to attract and perpetuate false positives and false negatives that have now clogged up the entrepreneurial ecosystem. And the only way to attract better entrepreneurs is to attract VCs with a vision as impressive as their personal entrepreneurial experience.

So, yes, I am in total agreement with Barack Obama’s stance on imposing regulations to curtail the erosion of trust in the public markets. The importance of a vibrant technology ecosystem is crucial to our economy (that part of the NVCA pitch I agree with), and fund and endowment managers need to do a better job of sourcing, segmenting and keeping their VCs on a tight leash.

All free-markets require rules

No regulation that embraces the spirit of innovation can be more damaging than a continuation of the current sub-prime VC model greased up with efforts to exit out even easier and faster. Thankfully, fund managers have woken up and realized that money is best distributed to people who add value, rather than merely extract money.

Instead of greasing the skids for VCs, we need to find capable risk managers who measure up to capable drivers, likely to avoid accidents altogether. So stop examining the vehicles, but instead take a close look at who is in the driver seat.

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