Hang the Venture Capitalists

“Something Ventured” is a documentary celebrating Silicon Valley venture capitalists. The movie made me angry.

I have to first admit, I am not sympathetic to the people on this movie. Now, they come across as nice enough in the edited version of their conversations, but when at the close they do that thing where they show the characters at the end of the movies and give a capsule synopsis of what happened after that’s what make me think something’s off. One of the guys had built and operated the world’s first fully computerized yacht. Another noted that his favorite charity was the Ayn Rand institute. They literally must have called this guy up after most of the production was done and basically asked him “what do you want to be your legacy?” and he said the Ayn Rand institute.

Here’s the problem with that. You can talk about how good these guys are since they helped lend expertise and cash to companies at early stages when they needed the capital to grow. Perhaps we can see them as something like the Walrasian crier, helping the market work. But to think that they’re the ones with the new idea, the ones really taking risk to the point where they identify with Randian principals is laughable. The Objectivism ideal is that it is the entrepreneur who is taking the risk, the individual superman who is making the world going. If anything, the VC people are parasites and leeches on the people who are making contributions to society. For every Genentech where the VC helped and ended up saving lives, there’s an Apple or Cisco where the founder was kicked out unceremoniously. That’s not making the economy work better, that’s predatory.

And then we have to struggle with the fact that VC as an industry has not been around forever. Now it is attached to Silicon Valley, but the question I had when I was watching this was “Where was the VC that helped Edison?” Business formation happened before these vulture funds came to being. But an even bigger question in terms of business formation is why has it dropped? If VC funds are really making the economy more efficient, there would be more jobs created by these new firms. So a chart like the one below would trend up, and not down (there are a lot of variables having an effect here, not just VC firms).

It also made me think about what kind of distortions these funds have on the market. There is money to be made, but there are very few Googles. So the firms have to spread their money around, hoping to have a major hit that makes up for their losses elsewhere. This does two things that I can think of. First, it takes away the incentive to go public and face the reporting requirements that that brings. Second, it increases valuations all around, boosting balance sheets on companies that really haven’t figured out how to make a profit. I’m thinking here specifically of Uber, which is using flows of VC money to undercut the taxi industry worldwide and it’s going to be horrible to see that bubble pop and all the diminished capacity that exists because everyone was chasing this phantom yield.

And finally, we have to ask if they’re even that good. Most of the top flight people with long experience interviewed in this film were lamenting that they didn’t give money to apple. Why didn’t they see the promise in what is now one of the largest companies in the world? Jobs and Wozniak were smelly hippies with poor time management skills and assholes to boot. So these titans of foresight and capital allocation didn’t give them money.

Look, in a capitalist economy, incentives need to be in place so that capital is allocated to the place where it will benefit the most people. The profit motive is strong and there are a lot of winners – some much bigger than others. But we don’t need to celebrate these people as heroes.