From multiple readers of my blogs I got independently forwarded a recent article describing how celebrated Silicon Valley angel-investor-turned-venture-capitalist (VC) Dave McClure rips the other VCs in the ecosystem as “f***ing arrogant and stupid a**holes”. And sans expletives I agree wholeheartedly with many of Dave’s assessments of the overwhelming dysfunction in VC, his assessment of what makes an entrepreneur, and as a technologist share his compassion for the production of groundbreaking innovation.
Right and wrong
But just because it is great to have Dave in my corner to cry foul, and we agree on the overwhelming dysfunction of VC and the causal cloud of false positives that for more than 20-years has smothered the false negatives of innovation, does not mean we agree on the cure to venture capital investing.
More directly, Dave’s description (gleamed from one of his other online talks) of what entrepreneurs should do to raise money sounds like that of a tribal medicine man selling a new alternative medicine that only he knows where to find. Hardly an answer for venture investing that would yield outlier returns compatible with an 80% greenfield of innovation.
Let me explain:
1/ Uniformity is the kiss of death to innovation
Groundbreaking innovation is by definition non-uniform, and thus are the funding requirements to support it. Dave’s description of what entrepreneurs should or should not do, is just another mold of uniformity. The one he prefers. And any uniformity in venture is lethal.
2/ The pudding of success
Silicon Valley applies great accolades to people who build or fund “successful” companies, and puts them on stage to spread their word to the world. But we fail to dig deeper and see if the aforementioned success actually correlates to socioeconomic value the world cares about, or merely robbed the bank of those who were not paying attention. More than 80% of technology stocks 2-year post-IPO are under water, and most acquisitions of technology startups are simply used as overpaid barriers-to-entry by their acquirers, and subsequently die an agonizing and slow death when their highly temporal value evaporates. So, when Dave decides to tag the merit of his opinions to his success, lets analyze his success to make sure it is indeed different from the success claimed by many VCs he scolds at, and confirm if his philosophy correlates to how venture investing needs to change. Dave’s “play-fund” size, excessive syndication and intake criteria suggest he deploys even more subprime risk than most VCs.
3/ The cost of success
But even if we outright acknowledged the investment successes that formulates Dave’s opinion to disprove VC, individual successes do not matter if they do not build portfolio returns. Dave’s portfolio returns are what could prove his strategy right, not to be confused with being right on an asset management strategy that – at most – would have only one Dave McClure in it.
4/ Angel underperforms just like VC
Venture capital and angel investing underperform at identical rates. Some 5 out of 790 (original) VC firms make any money consistently and monolithically in venture and maybe 5 angels out of thousands of angel investors manage to do the same. The reason for that identical failure rate way over 99.4% is not related to the amount of money but the implicit economic deployment of subprime risk, perpetuated by investor socialism. So, Dave needs to eat his own words if he wants to put angel investing on a pedestal against VC, as both investment vehicles appeared to have failed.
The right medicine
It may take a while before we all agree on the disease that has caused the production of groundbreaking innovation to falter, and even longer for us to agree on effective ways to cure it once and for all.
I am however not the patient in need of repair, and venture capital performance is not my personal problem. I am just the proverbial doctor with the confidence, deep insight and Silicon Valley experience, who not only accurately predicted venture capital’s demise more than six years ago, has spent years building an economic game plan to fix it and all the patience in the world for the pain to come seek me out.
For the sake of the protection of our economic leadership position I hope we quickly stop listening to the many posers on either side of the innovation ecosystem.
Economics to the rescue
We owe our entrepreneurial capacity the right answers to fixing their arbitrage. And those answers do not come from the technical aspects of investing in technology, but instead lie in its foundational economics.
Let me repeat debunking the most crucial myths once more:
- One should not expect to generate outlier asset class returns from 10 levels of bottom heavy diversification.
- One should not expect to produce prime returns from the deployment of subprime risk.
- One should not expect to find outlier innovation with uniform investment intake criteria.
- One should not expect innovation anarchy from investor socialism.
Mark my words
Only when we cure the economics of finance will we see a resurgence of the authentic and sustainable value of innovation we can produce. Only when the merit of finance is matched with the merit of production will we see a resurgence of our economic capacity.