Wednesday, June 15, 2005

Hello Venture Capital

(A letter to the editor)

Howard Anderson ("Good-Bye to Venture Capital", illustrates so much of what's wrong with the VC community. He reminds me of the famous story of the patent examiner in the late 19th century who quit because "everything had been invented".

The notion that there's "too much venture money pursuing too many deals" is the mentality of someone who likes the prestige of being called a V.C., but who at heart really doesn't want to do his due diligence. He wants the quick and easy score with no judgment, no effort and no risk. Just look at the numbers, follow the herd and voila! Make money.

Yet there is nothing as risky as formula-based investing. And now he is crying in his beer while blaming "rational" markets?

His notion that "demand for new technologies is moribund and will continue to be weak for at least the next five years" reminds me of the thinking in the Dark Ages -- life is nasty, short and brutish, get used to it. It never occurs to him that maybe what's nasty is your thinking? Maybe what's brutish is the ideas that created the Dark Ages? Maybe if you thought some other ideas your life as an investor wouldn't be so short.

The problem is not "rational markets". It is irrational investors. I note that Anderson teaches at MIT's management school. Scary. I've always maintained that the "bubble years" had to be the result of what all the last generation of VCs were learning in school. Such a systemic problem as the Internet Bust (a heavily wired bra if there ever was one) could come from nowhere else.

If venture capital was just sitting in your office waiting for good "deals" to drop in your lap, anybody could do it. For the risk averse, that's called just "banking".

There will always be a demand for new technology that creates values. But it takes investors -- real V.C.s, not "wannabes" -- who have the judgment, brains and courage to find the new technology, see the potential, nurture and make it grow. Not someone who just seeks the quick score of flinging some seed on the ground and hoping it will come up, but someone with a real love of the good for being the good -- good technology that in principle has to be good for everyone, and therefore good to make money -- who will put the effort into finding the *right* seed and planting it in the *right* ground with the right watering.

For a more detailed lesson on this principle, pay close attention to the story of Rearden Metal in Atlas Shrugged and the character of Midas Mulligan -- the one investor in the world who recognized the value in Rearden's Metal.