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Venture LPs blowing in the wind, continued

Chris Douvos, Co-Head, Private Equity, at The Investment Fund for Foundations comments on our article “Venture LPs blowing in the wind” in which we reference him, and we reply:

The real issue is that Venture Capital does not only produce poor index returns, it performs below the consumer adoption rate of technology in the same period, gets outperformed by corporate innovation and capital, has lost public trust because of bad past conversion from valuation to value and does not make a dent in the 80% greenfield of technology adoption.

As an LP you should expect from your GPs an alignment with the index of the market opportunity of the underlying asset, not with the performance of those attempting to pursue it.

It’s a mistake many make in startups as well, where your target and sole focus is the greenfield not on those who failed to empty it. The iPhone strategy is a great example of that. But to step back, any laissez-faire financial system that violates free-market principles turns quickly (depending on market fluidity) subprime. And Venture Capital has turned subprime by virtue of how risk is deployed.

Many LPs are unaware of the risk deployed in Venture, 10 levels of bottom-heavy diversification deployed by most LPs demonstrates that despite the belief in the PPM of an individual VC firm you still are unlikely to produce viable returns.

So, Chris, the issue is the economic principles by which money is deployed to Venture. And once we fix that, there will be no more room for VC players that cannot perform in line with the massive market opportunity that lies ahead.

Innovation scales, and Venture can too. Just not with the current financial model deployed by most LPs. And my fix resolves that.

Read the full commentary here:


About Georges van Hoegaerden

After my ideas had raised $14M and returned over $100M to investors in Silicon Valley I could not help but detect a systemic flaw in the way we detect, build, fund and support systems of innovation. On an entrepreneurial quest to root-cause I evolved my focus from the economics of innovation to the innovation of economics, and ended up completely rewriting the playbook of economics that must guide us all. I named my invention Renewable Economics™.

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