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Venture Capital: the enemy is us

On June 15th 2005, some 7 years ago, I came publicly to the conclusion from having worked in Silicon Valley for 17 years with many startups, that Venture Capital is broken economically (and argued the semantics of “broken”), created numerous blogs on the subject since, and produced The State of Venture Capital, now viewed by more than 12,203 people, reflecting the economic incompatibility between entrepreneurial assets and the role of its arbitrage, Venture Capital.

Only now does the Kauffman Foundation in a blistering report regarding its own performance as a limited partner in Venture in so much concede to my points of view.


Geniuses they are not
“We have met the enemy and he is us” is an interesting and frank report considering that the Kauffman Foundation is an organization many limited partners have called on for advice, has been used to feed the President’s impetus for ill-conceived programs as Startup America, fed the NVCA’s crumbling protective stance, and by virtue of Kauffman’s “economic genius” Paul Kedrosky (who apparently also contributed to the report) has percolated and held a hand above the institution of venture capital on Sand Hill Road for as long as I can remember.

The Silicon Valley emperor has no clothes is what I wrote a long time ago. The institution has been proven wrong, and it is time for its sinking ship to drag along its “economic geniuses” who kept it alive and made a healthy living doing so at the expense of the public.


Downstream recommendations
And while the report may be shocking to many, detecting the poor economic outcome of venture capital is only half (and the easy part of) the battle. The recommendations in the report filled with attributions from exactly those people who are responsible for its malaise, are merely downstream optimizations aimed to artificially adjust the undesired economic outcome, rather than a rethink of how venture capital should economically align with outlier entrepreneurs.

The delay in acknowledging the systemic problems in venture capital are as damning as applying the wrong fix suggested by Kauffman’s recommendations now. The likelihood that venture capital will change from subprime to prime using Kauffman’s recommendations is like expecting a bad sales person to sell more by changing his incentive. The answer to improve the performance in venture capital lies upstream, not downstream.


But venture capital can be fixed with the same economic model that will fix our economy as a whole. Yet that fix requires the pain endured by the current model to drive for support and new courage to look for economic answers upstream. To question why we build financial systems the way we do, and wonder why we did not design them to deliver perpetuity to their underlying assets. I will describe exactly that and a new economic model with pragmatic (transitional) steps in my upcoming book.

It takes a lot of courage for the Kauffman Foundation supported by its interim CEO, to admit what they have preached for many years as the messiah, was simply wrong. It proves once again that any kind of socialism in the pursuit of outlier performance should be shunned. Especially since venture capital is merely the derivative in the exchange between the assets of limited partners and entrepreneurs.


Our fight, our win
Today I will relish in being proven right once again. Not for my personal sake, but for the sake of the recovery of entrepreneurial capacity that we have thrown away with the bath water for more than twenty years. My victory today is a small win for entrepreneurs, and a big win when policy makers start paying serious attention to what I have to say. The battle I am fighting is really not mine, it is all of ours. And one with an upside capacity to yield more than 20% of U.S. GDP that can set a new and much brighter example for us and the rest of the world.

Now is the time to perpetuate economic upside, rather than to staunchly protect downside.

Now is the time for courage.


>> Download the Kauffman Report 2012.



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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