Venture Capital Needs a Reset
Guilfoyle: “Your entire life has prepared you to publicly fail” - Silicon Valley Season 6 Episode 7, December 2019
The venture-capital-startup ecosystem needs a meteor strike to kill off its dinosaurs. Unfortunately, the Silicon Valley Bank collapse seems to have been not much more than a pebble in the pond. It seems it will take a true financial disaster to purge the excesses that have been created by the overcapitalization and overstaffing of American technology investing.
That’s how it’s always worked in the past. Venture capital booms are built in the rubble of previous overexpansions of either military or commercial spending on technology development. It always takes time, probably a minimum of seven years, for the depressive effects of the tech investment down-cycle to dissipate.
Remember that it was SVB’s large depositors—-who also were its borrowers and fellow wine investors——who panicked each other into creating a bank run. Then the Biden Administration, the Federal Reserve and the FDIC decided over a weekend that the rest of the country’s depositors had to fully underwrite their bailout.
I believe that SVB should been forced into an asset fire sale, with haircuts or delayed payouts for large depositors. The VC-tech ecosystem would have taken substantial losses, yes. But that’s what it’s supposed to do from time to time. If venture investing is underwritten like a Federal agency, then there is no good case for it to earn premium returns through informed and responsible capital allocation. Instead, the SVB bailout has turned the tech ecosystem into an overpriced public utility.
And so within days the VCs were closing on new funds or new rounds of financing for their portfolio companies. Pricing is a bit weaker—-the entrepreneurs are having to accept “down rounds”, or lower valuations for their companies when they raise new money. Loans for startups without revenue are drying up. Otherwise, though, within a couple of weeks SVB’s failure had become, as one VC told me “an afterthought”.
This is not good. SVB’s failure should have been allowed to trigger a purgative crash in venture investing and poorly conceived and managed startups.
Instead, several more years will be required to cut the excesses and recreate innovation finance. For now, the VCs are over-funded and so are under little pressure shed their underperforming investments and partners.
You can see this decadence of the venture-tech ecosystem in the “innovations” the industry has been unveiling in the last few years These range from the perversely habit forming, such as RobinHood’s gamified stock brokerage, to the dangerously half-baked, such as consumer-facing AI programs that generate plausible fake work.
As Esther Dyson, the investor and tech world muse, told me, “The venture world’s metabolism now is driven by addiction. But it’s an addiction to exits, not to profits. They are not working to build enterprises, but to get out of the ones they have so they can go out and do another raise.
“There are no rules to fix this. We need a change in the culture.”
Mind you, the problem is not just one of the internal dynamics of technology finance but with the artificially prolonged business cycle. Business failures, economic downturns and postwar recessions are humiliating and painful. Failures are necessary, though to force us to abandon outdated technologies and liquidate unproductive or marginally productive capital.