Investing venture capital into a startup is like putting gas in a Formula One race-car. Quite a different process from putting fuel in a regular car. Not only is the fuel different to meet the expectation of speed, but the car is also completely different, the trajectory is different and so are the driving skills needed to control the vehicle.
What’s in the name?
Today’s innovation is held hostage by a venture capital club having lost much of its mojo (massive attrition and narrowing of the asset class, and many emperors without clothes), lured to purported freedom by easy-peasy bottom-feeders (500 startups, Y-combinator, Angellist etc.), the government (Startup America) and the socialization of crowd-funding efforts attempting to pick-up the pieces innovation’s preeminent financial arbitrage, in the confounding of money and risk, has left behind.
The use of the term venture capital has also changed, along with the regression caused by its sub-priming, but pay attention now: the fundamentals of risk have not.
The literal interpretation of venture capital, as any kind of venture requiring capital, may entice many bottom-feeders to call themselves venture capitalists (as investor Kevin O’Leary from TV-show The Shark Tank did recently), but the spoon-feeding of money should not be confounded with the pursuit of prime risk that made venture capital such a worthy asset class at inception.
Today’s venture capital climate, hinging on the deflation of risk by hindsight, deploys a private equity risk profile (show me your traction) to fortuitously achieve the rewards of unchartered foresight. Fat chance, as Einstein agrees: since the thesis determines what can be discovered.
As the risk profile deployed to innovation has deflated to the uniformity of subprime, so have the startups selected to match the thesis, and so have the returns. Not only have we deployed the improper risk profile, but we have also – to diversify the trading of subprime – fragmented risk and responsibility to an extraordinary degree.
A handful of entrepreneurs escape the wrath of subprime venture capital, by concocting new and powerful consumer technologies loaded with deferred trojan horse monetization and blatant economic malpractice, to successfully reel in the greater-fools of advertising. A cunning strategy to secure massive investment returns to last throughout an IPO process, yet without renewable socioeconomic value capable of outliving its founders.
Facebook took off innocently and promisingly, with a holistic goal to connect people electronically. Today, Facebook deploys a single oligarchical controlled implementation of privacy and “freedom” to the unsuspecting users in nations who fought wars and risked their lives over the protection of their sovereignty.
One and a half billion users as a fertile breeding ground for the trojan horse of advertising businesses to unleash its propaganda has single-handedly driven up the valuation of many other consumer technologies in the slipstream of similar blatant violation of the principles securing trust, integrity, and respect for individual sovereignty.
Much of today’s innovation funded by venture capital is built on the backs of advertising schemes and has dramatically suffered to produce tangible socioeconomic value. Not because of a lack of opportunity and Greenfield, but because the investment thesis of innovation’s arbitrage responsible for the exploration of outliers has turned subprime.
We lack a system deploying the deliberate deployment of non-uniform prime risk, for the simple reason the investors in that system, the asset managers, have themselves never implemented prime risk, and thus do not know how to conceive and maintain such a system. Neither have the fund-of-funds springing up to lend a “helping hand.”
The trick to producing viable venture style returns is to deploy prime socioeconomic risk, not to avoid it. Prime risk correlated with the propensity to deliver renewable value. A risk that is narrow yet deep – not wide and shallow. A risk opposite to the risk deployed by asset managers who allocate money wisely, and to venture as merely one of their asset classes.
The overwhelming majority of venture capitalists today still put fuel in stock cars made to look like Formula One race-cars, driven by people who posture like Mario Andretti to become him.
Venture capital as the mechanism to spur meaningful innovation is a big – fat – white lie. As since the mid-1990s we have not addressed the cause of its dysfunction. Yes, venture capital has changed. Downstream mostly, with the aid of government interference, perpetuating its ever sickening and convoluted economic consequences.
Venture capital will continue to produce some returns, as long as we let a greater-fool ecosystem funded by public money feast on its dog-food. But our society will, drowned by the populism of false positivity, suffer from the trojan horse schemes conjured up by its investment thesis, more than evolution will ever stand to gain. That is until we change the model under which venture capital is allowed to operate and finally unleash the real freedom of entrepreneurial thinkers.