Bijt niet de hand die je voedt

- OPINIE VAN GEORGES VAN HOEGAERDEN

28-5-2010 - Venture capital wereld

As I explained in ?2010: The State of Venture Capital?, our Venture primer and ?How to fix VC once and for all?, Venture Capitalists are the derivative between the assets of the Limited Partner (money) and the assets of the entrepreneurs (ideas).

Venture Capitalists, because they are equipped with the keys to the kingdom by Limited Partners (LPs) therefor claim they must know what is best for the marketplace to function properly, and deploy their best practices (read regulations) to identify investable innovation. And money hungry entrepreneurs bow down to learn from VCs how to build companies, approach investors, time the market, build scale etc.

In absolute terms Venture underperforms

The only problem is, very little of that has paid off. With fully loaded commitments from LPs, more highly skilled entrepreneurs than ever, an 80% technology greenfield with 7% growth in even the worst of economic developments, Venture Capitalists managed to perform below the technology sector it rides on. None of the financial relativity theories (such as IRRs, financial sector comparisons etc.) can debunk that Venture should have out performed the organic growth in technology and they should have tapped deeper into its virtually unlimited greenfield.

LPs are getting more frustrated by an exploding technology sector with imploding Venture returns and one recently communicated on PEHub what I have heard many times now in private:

The correlation between ?well-regarded firm? and actually profitable (for its investors) firm is close to zero. I've spent the last five years meeting with ?well-regarded? firms and it's the rare exception that has actually delivered returns.

Clearly the Venture Capital arbitrage, deployed as a demi-cartel in Silicon Valley and feverishly and foolishly copied around the globe, can no longer be trusted. It is time to renew the marketplace and reset the compass of innovation.

The public buys stock

As depicted on the included chart, the role of the public is crucial in establishing a healthy Venture ecosystem. If for nothing else, the most explosive Venture returns are realized in the process from turning a private company public (IPO = Initial Public Offering), and the threat of that investor independence can boost the company's merger and acquisition value. So, a solid understanding of the value of an early stage venture by the public (which we describe as Social Economic Value) is crucial in establishing authentic public stock value.

The public buys product

The best way to have the public understand the value of innovation is to have them use it. Without many people understanding the intricacies of social networking, it does not take a lot of imagination that Facebook would be a valuable public investment solely based on its user growth. Facebook tapped into an existing macro-economic need to reconnect with people who were too busy or too remote to stay in touch with otherwise, and now reaps the reward of deploying new monetization schemes to a large installed based with no lead generation cost.