Silicon Valley’s Weird VC Boner

If you’ve ever spent time anywhere within a 50 mile radius of Sand Hill Rd, you know that people here in the valley worship venture capitalists. Knowing a VC, working at a VC, or name-dropping a VC are ways for us young mortals to up our Valley street cred, and being a venture capitalist (especially a well-known one) vaults one to a level of swag reserved for athletes and rock stars in other parts of the world. And it is fully deserved – without that stretch of road between Stanford Golf Course and I-280 and the bright minds that work within its lushly landscaped office buildings, Silicon Valley, and the entire technology world as we know it, would be nothing like what it is today. Facebook, Google, Yahoo, Hewlett-Packard… you know the spiel. And because of it, guys like Marc Andreessen and John Doerr get to ruminate on billion-dollar funds the way cows do cud, sitting back in their chairs and identifying industries ripe for innovation that just need the capital to thrive.

But in the words of the uncle from the first Tobey Maguire Spiderman movie, “with great power comes great responsibility.” This is a notion which seems lost on most of Silicon Valley’s critics. Even upon a thorough rifling through of Techcrunch, ValleyWag, and even the bullshit on Business Insider, it is very difficult to find a piece actually criticizing the Valley’s venture capitalists. It’s kind of weird how immune they are to even the least thought-out bit that is oft vomited out of BI and onto Facebook News Feeds. Instead, people are quick to turn on startup CEO’s, market trends, and the formation of the bubble which critics (including myself) are convinced is forming before our very eyes. We freak out about valuations in consumer tech, but we seem to forget that valuations are numbers derived entirely from private investors such as VCs, based mostly on in-house bookkeeping but partly by in-house psychic readings, and exist only because VC’s are pumping cash into the companies to begin with.

I’m by no means upset that VC’s are inflating valuations or investing their money into companies that they find important. I am weirded out, though, by two things: 1) venture capital’s lack of personal accountability for market failures (and the reluctance the public has to point the finger) and 2) the shifting value set within VC as a whole from innovation to profit. I’ll attack number one first.

I preface this that I myself have a huge boner for cleantech. That being said, venture capital really dropped the ball with cleantech. Worse for me, though, is that rather than admit that the poor returns following the splurges in green energy in 2008 were partly, if not mostly, to blame on the sources of capital invested, Silicon Valley made it seem like cleantech was a weak or broken market and that VC’s were fleeing because the money simply wasn’t there. This not only cut a lot of companies down at the knees (when Series A or B rounds weren’t followed by B and C), but helped turn those on the fence about cleantech, and even global warming as a whole, further towards the conservative, status-quo-perpetuating agenda which has launched our planet into the shitstorm (no Haiyan or Katrina pun intended) that got us thinking about cleantech to begin with.

The truth about cleantech VC and the failures of 2009–2012 is much more complicated. The analogy I use is of a poker player who bets big early but gets called, and, knowing he probably still has the best hand but all of a sudden doubts whether he wants to put his money where his mouth is, folds (and then tells the table he was “probably beat”). In other words, VC’s poured money into the incredibly capital intensive industry of grid-scale energy (so, so much more capital intensive than the internet companies they were used to, who could be built overnight and scale basically indefinitely provided they had the server space) but didn’t realize just how much money was necessary to scale the business until shit started to get real. A prototype would be built with seed money and a pilot plant with Series A. Everything going hunky dory. But when plants two and three required 200 or 300 million dollars, the VC gurus who had made their billions on software, and hadn’t seen the type of hockey stick growth out of the company they were used to, second guessed whether or not they were in it for the long haul and many of them bounced.

Now, this is heinously over-simplified and slightly unfair to VC’s as there were many other factors at hand. Some technologies, such as Solyndra’s cylinder-shaped cells, were simply not as viable as first expected. Chinese price dumping of solar cells certainly didn’t help either. But with the Obama administration so firmly going long on renewable energy, tossing cash around like depressed men at a strip club, things shouldn’t have turned out as badly as they did. As it turns out, the VC’s most deeply familiar with and specialized in the industry made responsible and inevitably good investments and remain afloat and prosperous today. (Shameless plug for the Westly Group, where I once interned) But those that made decisions more rashly got burned badly, and have a torched portfolio to show for it.

Back to my point. VC’s were quick to flee cleantech as LP’s were getting bummed, Vinod Khosla was getting bummed, pretty much everyone was getting bummed that 40% IRR wasn’t just something you could pull off year after year like in the internet glory days. Peter Thiel went as far as to call cleantech a “failure” as early as 2011, which can be seen in this video (scroll to 1:11:16 to hear me asking him to explain himself). He claimed that technology was doing “more with less” which is a fancy way of saying make more money while asking for less money. I interpret this translation as being purely capitalistic due to my thinking that making a watt of energy out of the sun or out of a gust of wind rather than with a hydrocarbon trapped deep within the earth is indeed doing more with less, but good luck convincing Mr. Thiel that.

It is widely accepted within the cleantech community that 2009 Sand Hill VC money was the wrong kind of money for grid-scale energy projects, and the current gameplan has shifted to “cleanweb”, or companies that are more software-based than hardware (see: energy efficiency, smart grid, etc.) What is not widely accepted is that the people to blame for the poor results aren’t the companies that were asking for money, but the companies shelling it out without a clear understanding of the industry. If someone on the street asks you for 200 dollars and you give it to them and they disappear with it, you are the stupid one. This reality is not shared by many people, and I think it needs to be.

A similar problem seems to be happening now with consumer tech. We all know something will go wrong soon; Snapchat is not worth 3 billion, Pinterest isn’t worth 4, Facebook wasn’t worth 100 at IPO (they have been killing it recently, though), Flipagram isn’t worth anything, and who knows about Twitter. We all sense that something will go very badly very soon, unless the concept of value has become something very, erm, ephemeral. But we seem to not be second guessing the money going in, just the numbers coming out. What we fail to question is why Snapchat is raising round after round while their product remains basically identical. We don’t flip a shiznit when we hear that that FourSquare recently raised 35 million more dollars at a 500 million dollar valuation. Yes, FOURSQUARE. What? Calling Sand Hill: what are you smoking? Can I have some?

When the bust happens, I bet we will also turn our heads away from the Andreessens, the Khoslas, and the Kleiners, and zoom in on the Spiegels; judge every decision, criticize every product feature, question every user acquisition strategy. But much like we demonized banks in 2008 for screwing the economy over rather than looking at the people who bought homes they couldn’t afford, I think we need to look back at Sand Hill and ask them to do a better job. Again, with great power comes great responsibility.

Part of this problem stems from the second problem I mentioned way above (thanks for still reading, peeps). This is a shift in what I consider a value structure within venture capital, and it is that of flipping a fund and making LP’s happy (aka making moneyz) rather than really invest in innovations which are believed to be solving the world’s biggest problems. After all, why not invest in Snapchat if you can? Zuck is literally licking his chops over the damn thing. It’s nice to invest in things that seem like will be successful. That’s, like, the point of investing, is it not?

Two problems here. Things are looking good largely due to the fact that people think that things are looking good. Snapchat is worth 3 billion because we are in a market in which that valuation could make sense, so capital goes in and the valuation begins to match. To make my point, I’ll ask you to lookup terms like speculation, bubble market, etc. My second point is going to piss off all the free market peeps out there, so I’ll ask you to calm down in advance. This point is that venture capital, while a business, is a business with an unspoken second bottom line – that of innovating to fix things that are broken and empowering entrepreneurs to make the world a better place. I don’t think it’s cheesy, sappy, or immature to hope that the guys sitting on billions of extremely risk-tolerant capital have a responsibility to invest it in ways which help actually change the world. I feel that software is reaching a glass ceiling in which marginal investment has diminishing returns on world-changing-ness (<- real economic term, by the way… naht) so maybe we should begin to look elsewhere. And yes, I agree this is my cleantech boner once again talking, but following that guy’s voice isn’t always a bad idea (see: Facebook relationship status)

Anyway, so ends my frustration with VC’s. Do I want to be one? Yes. Do I want to hang out with one? Yes. Do I want to kiss one? Why not. But I would like to see them fess up to more mistakes, and think about more things than making money once in a while.

Like the solar panels being stared at longingly by a little brown man in a Stanford tee.

That is all.

-James

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