Changing of the Guard: The Evolution of Venture Capital and the Role of Early-Adopters in Web3
Doing Capitalism in the Innovation Economy by William H. Janeway is one of the most highly regarded books by the likes of Marc Andreessen (Co-founder at Netscape and Andreesen Horowitz), Tim O’Reilly (Founder and CEO at O’Reilly Media) and John Seely Brown (Chief Scientist at Xerox and PARC). It provides a roadmap for technological progress. The text pays homage to Keynesian macroeconomics, which focuses on the idea of creating new jobs and economic output by incentivizing individuals to pursue entrepreneurial ambitions. Janeway’s PhD research at the University of Cambridge focused on the intersection of politics and macroeconomics. More specifically, he researched the economic output of venture capital investment in the absence of state-sponsored investment.
Following Janeway’s time at the University of Cambridge, he decided to validate his research at a top venture capital firm. As a venture partner at Warburg Pincus, he focused on startup financing and corporate governance during Web1 and Web2. His various anecdotes of companies that were part of the Warburg Pincus portfolio validated much of his research as well as the Schumpeterian waste theory. Two causalities of successful technology startup companies during his tenure as a venture capitalist were decentralized governance and equity granting en masse.
Bill Janeway navigated a portfolio of technology startups during bull and bear markets, respectively. He found success in creating decentralized governance within portfolio companies that distributed power amongst board members. Subsequently, it became apparent that founding teams with compensation plans consisting of more equity than cash outperformed teams with compensation plans consisting of just cash. Janeway cites multiple examples of corporations with substantial amounts of personnel and cash reserves that were oftentimes cratered by executive teams with excessive cash compensation packages. The now cash poor company when restructured by Warburg Pincus was equivocally turned around by a new executive team driven by generous equity packages. This set the stage for the traditional venture model that focuses on facilitating rapid growth in cash poor, technology startup companies using equity as the core incentive structure.
Janeway’s research allows us to deduce that investment and economic waste are essential for technological advancement and economic growth. The dot com bubble bursting in 2000 and the subprime mortgage crisis in 2007 were devastating, but the economic output created by the trillions invested in venture capital have far outpaced those loses. This can be measured by finding the delta in economic gains from startup exits, valuations and the losses in public markets during recessions.
Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages by Carlota Perez reaffirms Janeway’s research in macroeconomics. It becomes clear that over the five successive technological revolutions spanning from the 1770s to the 2000s that the government has played a diminishing role in the overall technological progress of the private sector. Through Web1 and Web 2, venture capital firms have assumed all private sector investment and economic waste. It is within the scope of Perez’s macroeconomic theory that the sole proprietor for investment and economic waste will again start to shift with the rise of Web3. Individual Web3 enthusiasts who are primed for more risk than ever before will collectively invest. With core tenets around decentralization, security, privacy, and the creator economy, it is a perfect storm for the bourgeoisie to fund the next generation of the Internet. In closing, Web3 will usher in a new generation of deal flow with liquidity pools that will primarily be serviced by early adopter individuals and subsequently less involvement from traditional venture capital investment firms as well as the public sector.
A subsequent article looks at real-world examples that help validate the assertions above. For recent case-studies related to this thought piece, stay tuned for How the Mobilization of Web3 Early-Adopters is Changing the Startup Financing Model.
Edited by: Nathaniel Carroll (founding member of SphereDAO)
Sources:
Doing Capitalism in the Innovation Economy by William H. Janeway
The General Theory of Employment, Interest, and Money by John Maynard Keynes
Capitalism, Socialism, and Democracy by Joseph Schumpeter
Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages by Carlota Perez
