Venture capital has failed to earn its stripes as the most effective custodian of groundbreaking innovation, underperforming consumer adoption rate of technology (minimum 7%), delivering mediocre socioeconomic value unable to make a dent in feeding an 80%+ adoption greenfield and instead abusing public trust (with 2-year post-IPO values severely underwater), and being blown away by corporate innovation arbitrage (iPhone anyone?) during the same period.
Limited partners (the investors in venture), confronted with poor asset-class returns from 99.4% of venture capital firms that fail, now flee or minimize their allocations to the venture sector, causing a contraction of venture capital firms, and subsequently a contraction of funds made available to promote the needs of groundbreaking innovation.
As a result, venture capital’s effective size (i.e., minus the “walking dead” and remaining subprime posers) is now smaller than it was more than twenty years ago and yields a regression of innovation arbitrage that is diametrically opposite to the progression an 80% adoption greenfield yearns for.
Embedded risk equals embedded failure
Now, I have highlighted on my blog many times why venture capital – unchanged – cannot and will not substantially improve that success rate. The short of it is that the financial system that acts as the arbitrage of innovation, with ten levels of embedded risk, has turned by economic principle subprime and, therefore (over time) has become incompatible with finding the outliers of innovation. A structural problem that starts with pancake economics at the top of the asset management food-chain all the way down to the deployment of embedded subprime risk applied to innovation.
So, the economics atop venture capital (I casually refer to as Neanderthal economics) result in an innovation arbitrage deploying the improper assessment of risk, and systemically picking and attracting the wrong entrepreneurs as a result.
Many venture capital general partners have taken that defunct economic system along with the karma and purported voodoo of innovation for a glorious ride, with management fees on sizable (stacked and parallel) funds alone taking better care of their future than their pensions ever could. Don’t blame them, blame ourselves.
Massive confusion as the fallout
In the wake of more than 20-years of dysfunctional arbitrage deployed by subprime economics in venture capital now lies an ocean of entrepreneurial false positives and false negatives perpetuated by the false positivity of the many bottom feeders. Undercover of self-induced noise and confusion, they continue to make money off of selling false promises to the deployment of a dream that by economic principle can never come true. For the deployment of subprime risk can only yield subprime returns.
That misplaced execution towards the entrepreneurial dream causes even more confusion and noise for limited partners and entrepreneurs who, for more legitimate reasons, remain faithful in the opportunity and potential for innovation and enter the fray after.
The mess subprime venture capital leaves behind is massive, and those who come after now not only have to deliver technology with a socioeconomic value the public can truly understand but also need to remove a backlog of mistrust stemming from the lies the public has been told before.
Death is evolution
Applying the above quote from Steve Jobs, venture capital in its current form and economic makeup is close to dying and perhaps has to disappear entirely before it can be reborn using new more sophisticated economics, and back to deserving the merit of a thriving catalyst of innovation it achieved some 40 years ago.
The worst thing we can do to the evolution of innovation is to prevent venture capital that, in its current state, continues to hold innovation hostage in a subprime state, from dying. And only the bottom-feeders who still benefit from its current mediocrity, afraid of their impending cannibalization, and who cannot see beyond the horizon, will attempt to prevent venture capital’s imminent death and innovation’s evolution. Their defense of the cannibalization of venture capital is a direct offense to the evolution of innovation.
Authentic and realistic positivity opens the door to a much brighter future for innovation.
One in which the massive greenfield of innovation will yield tangible public value while building renewed public trust. And that can only happen with a new form of venture capital that is held to the same rigorous meritocracy as the one applied by the marketplace to innovation.