startup-america

Startup America is a bad idea

Now that I actually watched the hour-long introduction of the announcement at the White House I am even more convinced that Startup America is a very bad and naive idea. The mere existence of the program is evidence of Venture Capital’s systemic failing to which this program subsequently applies even more money.

 

Misguided focus

The primary reason for Startup America’s impending failure is not the lack of goodwill from those involved, but the misguided focus of the program. Instead of its focus on educating entrepreneurs it should fix the dysfunctional arbitrage formed by an investment club that violates free-market principles and antitrust laws.

Pumping more money in “innovation” without fixing the economic model through which the innovation is supposed to be recognized, is the kiss of death to innovation.

 

Venture Capital is broken, not our capacity to innovate

As Albert Einstein so eloquently stated: “Whether you can observe a thing or not depends on the theory which you use. It is the theory which decides what can be observed“.

Venture Capital as the financial system, arbitrage and theorem built on the principles of socialism (including fragmentation of risk, deal staging, syndication, collusion, price-fixing) has by economic principle a hard time attracting the anarchy promoted by groundbreaking innovation that can produce $1B companies. As a result Venture Capital has turned subprime just like Real Estate, exasperated by uniform deployment of deflated risk – the opposite of what this unique sub-sector of Private Equity requires.

 

The simple role of government

The role of government is not to spur private markets with artificial programs that prolong the life of underperforming economic principles. The role of government is to fix artificial markets by simply having all financial systems adhere to free-market principles. And few of our financial systems are free-markets, Venture Capital certainly is not. Simply put: the power of production can only come to fruition if it is married with the merit of the appropriate investor.

So instead of priming the pump with more money, government should ensure Venture Capital adheres to transactional transparency to all marketplace participants. That the definition of private investments does not mean those investments cannot be publicly visible, just not publicly investable (yet). That Venture Capital investments become competitive, rather than syndicate to social mediocrity. And that those Venture Capitalist who deploy risk in innovative and social economically successful companies are recognized and rewarded for taking that risk. And most importantly, that great entrepreneurs for the first time can establish the authentic merit of the investor who can no longer hide behind the black box of money, large firms, investment networks and lobbying organizations.

The government’s role is to establish free-market systems and to ensure that all participants have equal transparency to the transactions that take place, and new entrants (entrepreneurs) can make wise decisions as to which investor can help them realize dramatic upside.

 

Too many hooks

Beyond the misguided focus of the program, the smaller hooks this convoluted program deploys to a mix of Small Business, Startup, University efforts will make its effect even more unmeasurable and unaccountable.

Anyone with any early stage investment experience will realize that $1B companies that contribute to GDP do not come from pumping more money into small businesses, reducing the early stage risk for Venture Capital even further or a reliance on University based innovation.

Small businesses need a more level playing field, startups need free-market investor competition, and universities need to align themselves with relevant business requirements. Each requires its own program that does not grease the skids with dumb money, but deploys economic models that enable optimal market access.

 

Affect effect

We will see a formidable stampede chase the money this program makes available by those who have no problem robbing a bank when the doors are open. But if you really want to affect the economic outcome of the United States, not the money but the effect of Startup America is your concern.

Dear President, I remain at your service.

 

8 replies
  1. M. Edward (Ed) Borasky
    M. Edward (Ed) Borasky says:

    I’d like to see some data here, not just mouthing of “free-market economic principles” and slogans. I’m not saying you’re wrong – I suspect you’re right, in fact – but in the absence of solid data and credible models, slogans are useless.

    Reply
    • Georges van Hoegaerden
      Georges van Hoegaerden says:

      Clear hindsight rarely delivers a projection to great foresight. Hence the future of Venture reinvented is like innovation itself; not mired in the way the world works today (and statistically measuring out to minus 4% IRR for LPs), but the way the world should work. That innovation principle should be adopted by the financial systems supporting innovation.

      To make you feel more comfortable, free-market principles are founding principles of the United States, that we lie more about than anything else in the financial sector. It is the sole reason of its deplorable performance, not the lack of innovative capacity (larger than in the last 14-years according to Kauffman).

      All things equal, money is not what creates an investable advantage, unique foresight is. And as an entrepreneur and investor, you either align with that foresight or not. But the kiss of death is to wait until the populous gets it (supported by trailing statistics), at which point not just innovation but its investable advantage has disappeared.

      Hope that helps, read more of my blogs for more rationale and visit 2010: The State of Venture Capital.

      Best,

      Georges

      Reply
  2. Robert Gray
    Robert Gray says:

    Actually George there is one more thing we “lie about” more than “free market principles” – and that is distinguishing investment from speculation. Venture Capital is about speculating, not investing. Go check out the core definitions carefully. This bit of very fundamental lying is at the center of a huge amount of disfunction and confused expectations and missed outcomes.

    Reply
    • Georges van Hoegaerden
      Georges van Hoegaerden says:

      Robert, I believe Venture Capital investing should be about speculation. Because unique foresight is the only investable attribute in Venture. The problem is that foresight has been deflated to way below the runway needed to produce successful companies. And thus its returns have been similarly deflated. That is why I coined it subprime VC.

      Best,

      Georges

      Reply
  3. Goodsport45
    Goodsport45 says:

    Georges is spot on and I’m sure more VCs will now come out of the woodwork to attack him until their nap time later this afternoon.

    We’ve been looking for money and finally started to study and quantify the issue so we can take the issue national. I have the numbers and they more than validate this post. The top 20% of our population now owns 93% of the financial wealth in America. That leaves 7% of the wealth for 80% of us – hardly what I would call a free market system. This concentration of wealth is partially the result of outdated SEC laws of 1933 restricting small investors form participating. Amazing what paid lobbyists and lawyers can do to the middle class.

    The two greatest skills of the funding monopoly are their ability to sell themselves to gullible investors and their ability to flush great companies down the drain by their uncanny inability to ignore the real winners.

    Anyone who can bootstrap should do so. Big ideas like ours with greater national impact require more money.

    I recommend that investors directly seek out the incredible deals that are available in their fields by attending networking meetings where entrepreneurs congregate. With a little work and fair terms, we can get America moving again and make more money for our investors.

    Reply
    • Georges van Hoegaerden
      Georges van Hoegaerden says:

      Thanks Bill. The US needs financial reform, and not the band-aids that are currently being applied in an attempt to cure cancer. We need chemotherapy, if you will, deployed by proven economic principles. Apply free-market principles to our financial system and there will be no need for 10-levels of derivatives, collusion, fragmentation etc. Because once an investor has to prove himself in the same way an entrepreneur does, great new marriages will be formed in which authentic value delivered to the public will produce massive returns.

      Best,

      Georges

      Reply
  4. Rob Gordon
    Rob Gordon says:

    I always ask one question when I see these programs: ” how do I sign up?”. Incredibly, there is no way to do that. That alone is pretty damming.

    Reply

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