Taking Capitalism out of the VC-model.
Good ideas tend to stick. When Rockefellers persuaded their friends to spray some of their wealth on young and hopeful startup-ists in the 1960s, they have began what we now know as Venture Capital(-ism).
A lot has happened since then… .
Some exceptional businesses have been created that have managed to disrupt entire industries, and surpass the size of smaller European countries. The odds of an exponential upside made other institutions pour billions into VCs, and then some more after 2007, when alternative investments began to look surprisingly good next to the banker-infected public market collapsing on itself.
With so much money at play, Venture Capital has become a game of statistics. The urgency to deliver double-digit returns means that VCs like to shoot for the stars. A naturally high rate of failure among startups is driving VCs to make up for the loss by searching for absolute moonshots. Put simply: a 100B+ company with a 1% chance of success is more appealing than a 200M company with a 10% chance of success.
That is why we have the UBERs of this world…
A logical consequence of this inclination to look for crazy businesses is that VCs then do everything in their power to accelerate the growth of their startups. The premise is simple, and paraphrasing the words of Erin Griffith from New York Times: ‘you get all the cash you want, but then you have to use it to grow aggressively — faster than your competition, faster than regulators, faster that normal people would think is sane.’
And that can’t be good, right?
A breakneck pace of growth above all else is sure to lead to some moral risks. Would UBER have engaged in unethical practices, and alienate its drivers if it hadn’t been pushed by the urgency to grow?
What makes things worse is that the VCs’ ability to pick winners is questionable*, which then further raises stakes for them to turn those few ‘next Facebooks’ in their portfolio into an astronomic success.
This is understandable. In contrast to private equity industry, finding winners among early-stage companies is not a bottom-up problem. In many ways it is the complete opposite because it is impossible to measure vision, energy, soul, excitement … the odds that this startup can be the ‘next Facebook’. VCs are not denying this. Bessemer VP, one of the world’s top VCs, openly parade their anti-portfolio, comprised of unicorns they had a chance to invest in, but passed on.
There is also the question of network imperatives, which may be instructing where VCs invest. What Dima Leshchinskii argues in his journal is that VCs may have a tendency to invest in a cohort, in effect pouring money into the same companies. All this casts a very bad light on VCs, degrading the model of Venture Capitalism to something of a cold soulless apparatus.
Let’s cut it into pieces.
Nothing is perfect, of course. But some of these negative externalities could be removed by cutting the VC funds into smaller tradable pieces. Indeed, tokenization of a fund is nothing more than breaking the vehicle down into pieces with an added layer of technology that make them trade intelligently.
Why does this matter?
…because liquidity removes the urgency to achieve exits and return money within a certain period of time — investors can simply sell their stake in the fund if they want to. This gives the VC fund a freedom to be transparent about its investments; it also allows it to let its portfolio companies grow at a more natural pace, arguably building sustainable businesses for the long-term, not moonshots with a sacrificed moral core.
bardicredit is a member of the Alternative Investment Management Association (AIMA), a global association of hedge funds, private equity and VC funds with more than $2 trillion under management.