Venture Capital: The Enemy Is Us

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The Kaufmann Foundation appears to have read my stance on venture capital over the last seven years. Good for them.

The Kauffman Report

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 (in different media) by more than 20,000 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 upon 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 precisely 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 is 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 lousy salesperson to sell more by changing his incentive. The answer to improving 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. 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 precisely 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 just 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 a 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 sake, but for the recovery of entrepreneurial capacity that we have thrown away with the bathwater for more than twenty years. My victory today is a small win for entrepreneurs, and a big win when policymakers start paying serious attention to what I have to say. The battle I am fighting is 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 the downside.

Now is the time for courage.

>> Download the Kauffman Report 2012.

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Georges van Hoegaerden
Georges van Hoegaerdenhttps://www.method41.com/georges
Georges is the Founder and Managing Director of method41. From analyzing the workings of policy, capital, and innovation, Georges noticed how these siloed constructs are woefully incompatible with the principles nature deploys to produce regenerative performance. With humanity stuck in a fabric of its own making, Georges set out to reinvent the operating-systems of humanity to fix the theory that determines what humanity can discover, aiming to fundamentally improve human adaptability to nature's entropy.
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