It is time for a Venture Capital (VC) roast, for I continue to see so many General Partners spread the rhetoric that Venture hasn’t performed all that miserably and that it will all rebound — ignoring that the opportunity-cost incurred by a systemic slide from Venture into micro-PE (or what we prefer to call subprime VC) is more expensive than not investing in Venture at all.
The VC roast
So, let’s have some fun and show you what to do when you are a Venture Capitalist and do not want anyone to get suspicious:
– You graduated cum laude from one of the top Ivy League business schools in the U.S. that also invested in your firm as an LP, and discover that none of them have been able to make their endowments in Venture produce a decent return for the last ten years. Oh well, at least your parents loved you enough to give you a great start.
– You copy the Private Placement Memorandum (the business plan of a VC) from a brand-name VC, enter new General Partners in the about section and voila, another VC star is born that Limited Partners (LPs) cannot possibly say no to.
– You start raising new money, four years after your first, making it impossible for your LPs to establish the real merit of your initial investment thesis. You’ve just added another 12 years to your already comfortable existence and enjoy the stability of a more secure job than anyone else in government.
– You are vague in the actual deployment of your investment strategy so you can balance early and later stage investments based on how the vintage of your fund should look on paper and what the marketability of your second fund is four years into your first.
– You tell the world about how holistic your job really is, and how you as a member of the Venture sector are responsible for generating all these jobs, forgetting of course that you are mainly the matchmaker in the process (between the assets from LPs and Entrepreneurs) and it is not your money you put to work but the public’s money (dispersed through LPs to VCs).
– You tell the world that you really need to exist because innovation is crucial to this country. Forgetting that anyone with real entrepreneurial experience and verifiable merit will gladly take your place the minute you get out of the communal hot-tub you refer to as a unique fund.
– You become a member of the NVCA, whose protectionist agenda and lobbyist resources will provide you with plenty of ammunition to LPs and the government as to why your investment thesis, that is so similar to your peers in the industry should be protected at all cost for the sake of innovation.
– You decline to discuss publicly any rounds of funding into portfolio companies and its valuations, because at some point that may actually lead to the discovery of your real knowledge, vision and merit of decision-making in Venture, or what a fool you really are.
– You build out your investment firm to a wide global network, so you can have the unique ability to smooth out investment returns and strike up generous stacked management fees in all.
– You tell the LPs that you are investing in “Capital Efficient” companies, omitting that capital efficiency is defined not by how much downside you protect, but how you enable upside.
– You make the world believe that the best companies to invest in start with the discoveries from white males, under thirty, only a technology proposition, twenty miles from Sand Hill Road and built in a garage where you spoon-feed them $250K tranches, minimizing investor downside risk. Ignoring comfortably that the long-tail of viable ideas should just no longer be explored.
– You tell on your blogs how entrepreneurs need to get better in building companies or how to navigate venture constructs, as opposed to spending all your time on finding groundbreaking innovation with enough upside that helps them hire the best.
– You tell entrepreneurs nothing about your knowledge, performance, and merit (and ability to invest or not) but expect the entrepreneur to be fully transparent.
– You demand from entrepreneurs that they realize you will bring more than money, while you will not talk to them directly and provide no substantial differentiation of your investment thesis on your website. It is maybe because you are not that special, to begin with?
– You sit in your office searching through piles of business plans, waiting until technology walks in the door that strikes your fancy. How come the visionary in you cannot proactively induce groundbreaking innovation?
– You preach at the many technology “flea-markets” about what constitutes innovation and how to find the outliers, making no one wonder what you are doing at this “flea-market” to begin with.
– For ten years you pushed valuations through the IPO funnel with little value, and now, after you’ve squandered public trust, and struck by the impending retribution, you defer all early risk to entrepreneurs and wait as long as you can to see if something miraculously pops up.
– You add different investment vehicles to your firm, such as PIPEs, annex funds, buyouts to further hide your real merit in the demanding venture sector.
– You write on your blog that Venture is all about relative performance and then compare Venture indices with those of 100-year old asset classes (with nominal green field and growth), so Venture still looks like a “star”.
– You act confident that when the economy recovers all boats in Venture will rise again, delivering the evidence that you do not understand that groundbreaking innovation is resistant to economic aberrations, and your boats should be sailing the skies by now (as other custodians of innovation have proven).
– You cry on stage (like a real man) about the noble cause of improving our climate after you realize technology investing does not make turkeys fly anymore, and you are looking for greener pastures. Giving you the out to turn your venture firm even faster into a private equity firm (compatible with making green tech investments), a perfect slow-paced Venture retirement strategy that makes everyone feel warm inside.
– You tell the world that the Venture business is still “the envy of this world”, forgetting that the financial system does not create the value, but the unwavering drive of the groundbreaking entrepreneurs you are choking.
– You tell the government that regulation will kill innovation, forgetting that – at most – regulation will kill venture capitalists who cannot stand to have their merit exposed publicly.
– You convince the Senate that innovation is not at risk in our country, based purely on the size of our financial system larger than that of all other economies combined. Forgetting that a financial system eleven times the size of production is a very unstable foundation, to begin with, and how we’ve become a nation of gamblers rather than producers. Act surprised when other nations slowly start to eat our lunch.
– You tell Congress that there is no systemic risk in Venture, convincing congressmen that the sum of all investments in Venture, about $300 Billion in the the last ten years, should really not have yielded more than $66B in IPO value.
– You tell the world that the malaise in Venture has everything to do with the economy, while venture funds have been fully loaded and start-ups (at best) produce discretionary revenue that is a minute portion of the overall market and thrives on the pressures of change in economies.
– You tell your LPs how you invested responsibly by chopping up available funds into ten levels of bottom-level diversification and get them to nod favorably about the elimination of risk, rather than embrace the risk that separates Venture returns from Private Equity.
– You tell your LPs afterward that investing is cyclical and that they should have factored that in their equation, especially now that venture capital has turned into micro private equity. You do not need to tell them that Venture has become riskier merely by the risk you induced as a member of the VC demi-cartel.
– You tell others, shhh…, how LPs are really not the brightest people on the planet and that they should take part responsibility for the demise of Venture. Because you are simply executing on the same “proven” strategy as your peers in the VC business.
– You tell your LPs that your performance is top-quartile, allowing you to specify who you want to be compared with. What better job than to get away with writing your own report card.
– You say goodbye to Venture based on the lack of liquidity opportunities in Venture, dumping a sector from which you have extracted a “glorious reputation” and income, but do not want to be bothered with the hard work of fixing it.
As with all roasts, the underlying message here is a very serious one. I can write and speak for days about the empirical improprieties in Venture I discovered as an entrepreneur, venture catalyst, CEO, and venture capitalist in Silicon Valley. But rather than to debate each one, it is more important to realize that they occur because of an incompatible financial system that allows so many people to take it for a ride.
“Mistrust of every kind of authority grew out of this experience, a skeptical attitude toward the convictions that were alive in any specific social environment — an attitude that has never again left me, even though, later on, it has been tempered by a better insight into the causal connections” — Albert Einstein
We need to fix, simplify, and make our financial systems more accountable, and to erase the behavior that stifles innovation. Our government needs to play a role in establishing marketplace transparency and instead of trying to curtail the symptoms, fix the disease, the causal connection that produced it in the first place. Limited Partners need to deploy more discipline with people who know the Venture Ecosystem inside-out, and better yet, how it should work.
Financial systems are a systemic threat to our economy
The behavior in Venture is very similar to the many improprieties of other financial sectors, and only less overt because of its complete lack of transparency to entrepreneurs and limited partners.
But, improper behavior in Venture is like “child abuse” of our growing economy; it cuts off the spirit, zest, courage, and vision of outliers who have the opportunity to become the new business leaders of our world. We will never be able to recover from the Venture malaise if it persists for too long, and other nations are not sitting still.
The real optimist in the face of the malaise in Venture is not the one who continues to milk the dysfunction or walks away in search of greener pastures, but the one who builds a systemic fix for the failure in Venture and helps groundbreaking entrepreneurs define a new compass of innovation.
Selflessly, I have done both.