Beyond Venture Capital, how to save capitalism.
A case for long term investment vehicles
The world moral values are shifting every 30 years
Sorry to my dear business school teachers, but let’s be frank, to most people Economy is as boring as the people who talk about it and so are politicians, wall street traders, and large corporations. On the other side of the spectrum startups and younger ventures are the future and nothing matters more than meaningful social impact. To visualize this, I have (poorly) sketched a spectrum of what modern workers / millennial perceive (funny enough it’s the opposite of the 80s, c.f cycle graph after)
This simplistic perception is what most of us have in mind and is, of course, a distortion of reality. At the end of the day, one needs the other and I do believe they oscillate through time… We’re just in one of this oscillation.
This has many side effects including an obvious one I’m familiar with: Corporations trying to look cool by opening what Steve Blank calls innovation theaters. It’s basically as ridiculous as someone old trying to wear younger clothes (but kinda funny)
The world as seen by the 1%
In this long (sorry) article I’d like to open the door to how investors see the world. So put yourself in the expensive shoes of the top 1%, close your eyes and think of the world as a beautiful ecosystem of cash and people. You see it? Great now everything will make sense!
From that perspective, startups and the boring corporations dying are actually just something that has a financial return or in the case of a startup the promise (long term) of a financial return… Ultimately the boring corporations being disrupted are feeding back the cool startups that keep disrupting them, it’s the famous creative destruction on steroids. You can also think of it as the cycle of Life. But is it really working? Or is this theoretical cycle of life, some kind of a death circle?
Corporations dying is a good thing from a capitalistic perspective
They used to die at 60 years of age, but now most corporations die at 20 years old! It makes the job of pushing relevant innovation even harder. As a result keeping a job as a CEO gets trickier. We can observe this acceleration of the turnover of CEOs (highest in the past 16 years) this also produce a lot of value as Marissa Mayer can testify. It also it produce a lot of entrepreneurs (e.g my post on entrepreneurial companies)
Who cares about how long corporation survive? Not investors; it made them 2800% more $$$!!
A lot of people care about keeping our society stable and jobs stable etc… But from an investor perspective money wins, and we can compare the graph below to the return of the S&P 500 to understand that, it basically went up by 2800%!
The founders CEOs fight back!
Jack Welch famously talked about maximizing shareholder value as “the dumbest idea in the world.” CEOs and especially founders hate the idea of not being able to develop longer visions and better products. But they need to keep in mind that it’s the result of a trade. Like an Entrepreneur raising money in exchange of Power, the same happens for large corporations, but instead of power, it’s a trade-off long-term vs short-term vision.
It used to be different when this idea came into place but with 90% of trade being done by mathematical models who don’t give a sh*t (yet) about vision; a corporation, when publicly traded is basically doomed to be analyzed mathematically by a machine, you end up realizing you’ve made a deal with the devil!
Stakeholder vs Shareholders : Shareholders win
As we established, Public companies give away long-term visions in exchange of capital, the trade is that they need to return quarterly results, and that’s a really hard task for non-founder CEOs and their boards. On the other side of the spectrum, Founders CEOs like Jeff Bezos wrote a letter to his investors when Amazon went public; it is a model of how to align long-term goals with investors, and a possible cure for short-term market effects. Another way is to go private again like DELL did.
What about convincing the market?
For years some of the most respected minds in the world of business have tried to convince the market to change its metrics and looking at things like Return on Assets (ROA) but from an investor perspective why bothering fixing it if it aren’t broke?
Nothing is real anyway
On the top of faster trade we also have 80% of the value of traded companies to be almost entirely virtual. For example, the value of the Coca Cola Brand does not appear on its PnL but does on the market, what about the value of Facebook Data? (e.g my previous post on Return on Data) That makes things really volatile, one day twitter can lose billions, the same goes for bitcoin! So why as an investor would you bet on the long uncertain and scary long term? Well you kinda do that, but with the ability to pull the plug really fast! What if your company as the right vision but goes through tough time?
Venture capital is 0,15% of petty cash for thousands of venture capitalists pursuing a lifestyle business
While the market is damn good at investing in short terms it struggles with longer term and venture investment. Venture Capital just represents a steady 0,15% of the value of the stock market (Kaplan 2009) and that’s because the vast majority of Venture Capital return close to nothing compare to the market; So while it is truly a great lifestyle business for those managing it, it’s mind blowing to think that out of 1,000+ Venture funds in the US the top 20 (top 2%) returns more than 95% of the value, so yes 95% of VCs are basically useless from a market perspective… Also a lot of funds are truly working on making a difference (Hi to my Venture friends!)
Venture Capitalists will still have a great lifestyle business
So why is venture capital still relevant? Well because 0.15% of capital does not matter much to the market and this little amount has the amazing effect of feeding more than 50% of the IPOs! I will write more about Venture Capital later on to understand how we got there and why today Venture Capitalists should be renamed Un-venture Capital…
The rise of robots powered by quarterly gains
While leadership focus more and more on creating shared value and looking cool doing innovation and social impact, we already established that corporate management will have a hard time making that shift, they will also keep fighting for short terms gain, and this will be easily achieved thanks to massive automation
From efficient capitalism to Piketty 21st century Capital, social tensions are rising!
We have now reached the point where this has become a source of social tensions and therefore a political issue; Critics of the shareholder driven management thesis are rising as wages are stagnating; and it has gone worse with the rise of HFT (High Frequency Trading) and now RPA.. Where grandpa’s trading was about investing in good business that grows and have a solid CEO with a good vision, 21st century trading is basically equations and by taking the human out of the equation all that matters now is short term trading. To avoid social revolution we need to develop stable investment vehicle that goes beyond what we’re doing with venture capitalism. We need to stabilize society and to repurpose capital towards society not at the cost of it. At the end of the day I believe in Capitalism but as described by some of my mentors in their book there are good and bad capitalism. I believe in stabilizing our economy by providing longer term options for LPs (aka the top 1%)
My top 4 actions to promote good capitalism.
So how to better purpose 99% of our capital? We need to focus on long term investment and we need to compensate destroyed value and other inefficiencies both on the social and capital dimensions.
- The first one is to rethink Merger and Acquisitions (M&A) 75% of M&A fails, that’s $4 trillions every year! That’s a lot of waste. We’re working on our side at pushing better integrations of Startup as explained by Steve Blank
2. The second is to rethink the IPO Process, I find extremely interesting what Eric Ries Long term stock exchange (LTSE) is doing for example.
3. Finally we will optimize the recycling of key resources to increase financial performance (Recorp is doing that with entrepreneurs) leading to a more stable society and better performance (play your happiest song now and go dance at burning man!)
4. Making the work society more fluid but with the stability of a job is going to be another challenge. But resource allocation is going to be more efficient thanks to technology!
The world needs YOU!
I hope it inspired you! What would you do to purpose capital in a more efficient way on the long term?
Please share if you liked this article :)
