The recurrence of the wave by which Tim describes the purported cyclical nature of investing, is a desperate tool to keep Limited Partners from fleeing the asset class altogether and sell the pipe dream of defunct venture capital economics – incompatible with finding the outlier of innovation – to the greater fool.
Instead venture capital is in a regressive downward spiral that makes even Draper’s investor refer to its returns as “the most disappointing asset class over the past 10 years”.
The wave of rebuttal
Here is how we set Tim Draper’s delusion straight:
The only cyclicality in Venture Capital is a need for venture capitalists to raise another fund, ignoring comfortably that the marketplace they created is in violation of free-market principles and therefore by definition subprime and regressive. I feel sorry for the Limited Partners who buy into this cyclical thesis and ignore the fact that without the proper economics deployed to Venture Capital, innovation will never be able to scale with the 80% greenfield that still awaits. It’s time for renewable economics to be deployed to Venture Capital.
Now, I don’t question Tim’s desire to reinvigorate the need for groundbreaking innovation to help dig us out of the economic slump we are in. I too have an endless desire to perpetuate innovation that drives authentic social economic value.
The problem of innovation is venture capital
But venture capital’s merit as the arbitrage of innovation is in serious question, and proven not to be the proper construct to promote outlier innovation. More specifically to the article, my point is that its performance degradation is systemic, and not a wave. Unless you want to describe the cadence of a downward spiral as a wave too:
- Venture capital has underperformed the organic adoption rate of consumer technology during the same period.
- Venture capital has performed at minus(!) 4.6% IRR during the same period in which other arbiters of innovation produced 400%. Market excuses are therefore moot.
- The number of venture capital firms (out of the 790 original posers) with any verifiable merit is about one handful, equal to how the sector started some 50 years ago.
- Venture capital is unsuccessful in making a dent in the 80% technology greenfield that awaits, while other forms of innovation arbitrage have.
The merit of arbitrage
The fundamental disagreement I have with Tim is that groundbreaking innovation can only be found if the merit of the innovation arbitrage is held to the same standards as innovation itself. And that means instead of drawing a wave, Tim should simply make his merit of investing in innovation transparent to those who seek it.
Because with that information we can all conclude for ourselves whether Tim’s extensive investment network, in which he admits to smoothing out investment commitments, still deserves to have the right to govern innovation, and speak for its potential on our behalf.
I do believe we can resurrect innovation, but it can only with the renewable economics that hold innovation and its arbitrage to the same rigorous standards. And I am afraid (and have some proof of resistance) Tim Draper is quite unwilling to reinvent himself to achieve a brighter future of innovation.
[The article that spawned this rebuttal of The Draper Wave can be found here]