I commented today on an article on Reuters PEHub called “A Pension Fund Does Away with the Middleman: the VC”, because I want people to understand my views on Venture Capital are balanced and sincere. I have no axe to grind with Venture Capital but for a single reason: the economic incompatibility to detect and arbitrate groundbreaking innovation.
So, it may surprise some of you that I am not in favor of removing VC as the middle-man in the Venture asset class. Here is my response:
It is the right concept to reduce the 10 levels of bottom-heavy diversification in the deployment of risk in Venture Capital that prevents it from producing viable returns moving forward. And with mostly subprime VCs populating the ecosystem today, the temporal opportunity to remove them may help certain LPs cross the time bridge of change.
But Venture Capital arbitrage is needed to produce viable returns, as long as you don’t populate it with subprime arbitrage.
So, what pensions should focus on is an economic framework that deploys the proper (non-uniform) risk with people who have the merit to spot it. And then force the deployment of non-uniform risk that made Venture Capital so valuable in its inception.
The concept of Venture Capital arbitrage is not broken, the execution is. And I wonder if a soccer game without a (highly merited) referee is actually better than one with a bad referee.
Especially when we’ve been living with 20-years of bad VC referees.
The disease that plagues Venture Capital requires a doctor that prevents it from becoming terminal. The improper diagnosis will yield the same outcome as doing nothing, a further dumbing down of the massive opportunity that awaits innovation.
So, the diagnosis of the Ontario Municipal Employees Retirement System (OMERS) with $53 Billion in assets under management is a dangerous one, especially when they conclude that if their gutsy move does not work “we won’t be doing [VC] for very long”.
Aspirin is not a cure for cancer.