Venture Capital

This BusinessWeek article on venture capital describes why the process of capital formation and nurturing of new ideas is not working as well as it should or it has in the past. Historically, venture capital in the United States has helped us to be very good at the creative part of the creative-destruction process.

It's my view that all the energy that is put into things like proprietary trading and other related non-productive financial activities is damaging to the US. My other posts have covered this ground. It saps energy and talent away from the higher calling of matching dollars with good ideas or, better yet, innovation and entrepreneurship.

Well venture capital is definitely not one of those non-productive financial activities. We need more of it and less prop trading.

Unfortunately, according to the article VC is not working all that well these days.

Some excerpts:
In the era of the financialization of everything, corporate and public pension funds got in the game...Since institutional investors are under pressure to show short-term returns, VC funds are trying to keep them as investors by going for maximum liquidity, creating early payoffs via premature "exits" (selling some startups in their portfolios within three years, say). Instead of working to make their best startups strong and independent, they're "flipping" them...

In other words, today the traditional VC fee structure promotes haste in putting money to work rather than skill in developing new enterprises...

The article closed by saying...

History attests to the importance of capital sources willing to fund unknown companies exploring uncertain innovations. The sooner we revitalize the stale relationship between VC funds and their investors, the sooner the industry can again support America's entrepreneurs.

Today, you have 1) the VC process not working very well and 2) Wall Street's brightest expending all kinds of energy on things like prop trading instead of using that energy to move dollars to good ideas.

As we ponder the problem of prop trading, let us consider Goldman's stunning $3 billion second quarter profit. It appeared to be almost all hedge fund trading. - Jeremy Grantham

A less efficient VC process and the emphasis on prop trading is a net loss for the US and, at least, partly explains some of our current problems with job creation. It comes down to poor allocation of capital and other resources. When something like $ 100 million ends up in the hands of a bad results in a sugar high that's not sustainable while a better idea goes unfunded or gets underfunded. It's a loss of sustainable wealth, productivity and job creation (think of all those dot-bombs). is worth remembering that every valued job created by financial complexity is paid for by the rest of the real economy, and talent is displaced from real production, as symbolized by all of the nuclear physicists on prop trading desks. Viewed from the perspective of the long-term well-being of the whole economy, the drastic expansion of the U.S. financial system as a percentage of total GDP in the last 20 years has been a drain on the health and cost structure of the balance of the real economy. - Jeremy Grantham

Whether it is the current state of venture capital as described in the Businessweek article, prop trading or other related non-productive financial activities we'd be better off with incentives/disincentives to change the balance. I'd restructure the incentives yesterday if I could. Those same minds could matching money to good long-term ideas (or given the brainpower that exists within these organizations...develop those ideas in the first place) and nurturing their development into businesses.

Let's just say it's a good thing Brin and Page didn't go to a hedge fund.

That's the future. The development of complex trading schemes to extract the last dollar out of the financial system is not.

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Venture Capital
Venture Capital
Reviewed by jembe
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Rating : 4.5