4 ms·

Steve Blank: Venture Capital Is “Liquidity Ponzi Scheme”

97 points by t23 10y ago

cs702 10y ago
There's a lot of truth to Blank's statement, but like all generalizations, it's unfair to the best VC and early-stage investors. For example, it would be extremely unfair to describe Y Combinator's business as a "liquidity Ponzi scheme."
- cloudjacker 10y ago
  Then you should read some of the SEC's enforcement actions on what they perceive to be fraudulent Ponzi schemes My conclusion is that it is extremely relative. The definition of "Ponzi scheme" is quite simple, because what Mr. Ponzi did was quite simple. It works until it doesn't. It doesn't matter if your reputation is 1 year old, or 20 and "one of the best", while you are able to pay investors nobody questions anything despite how obvious the source of funding is, if you are unable to pay investors and halt redemptions then you have a problem.
rfreytag 10y ago
Medium post is taken from this original site: https://www.startupgrind.com/blog/venture-capital-is-liquidity-ponzi-scheme-says-steve-blank/ https://www.startupgrind.com/blog/venture-capital-is-liquidi... Maybe a moderator can fix the original link.
- sctb 10y ago
  Thanks! We updated the link from https://medium.com/startup-grind/lean-startup-pioneer-steve-blank-venture-capital-is-liquidity-ponzi-scheme-ac1d28b392ec#.tlhagrdd0 https://medium.com/startup-grind/lean-startup-pioneer-steve-....
im_down_w_otp 10y ago
Two things: 1) the loose definition of Ponzi Scheme he's applying here seems so broad as to be meaningless. Multiple banks offering you lines of credit you can't pay back would be Ponzi Schemes too with his characterization. 2) the stuff about what makes great founders reads like post-hoc projection of his own life experience onto rationalizations for his success. In other words, bias. Given almost half of Silicon Valley founders apparently don't come from "dysfunctional" upbringings. A veritable coin toss doesn't make a compelling case.
- HillaryBriss 10y ago
  What percentage of families in society overall are dysfunctional?
  - danielvf 10y ago
    You've got the right question to see if this datapoint matters at all. I don't know the answer unfortunitly, so I'll answer a much easier question instead: Only 46% of US children are in a family with two married parents.
    - HillaryBriss 10y ago
      yeah, i mean, what is Steve Blank really talking about when he says 'dysfunctional'? which definition of that word do we even use?
      - danielvf 10y ago
        Self reported. I think he's referring to this article he wrote in 2009: https://steveblank.com/2009/05/18/founders-and-dysfunctional-families/ https://steveblank.com/2009/05/18/founders-and-dysfunctional... Though I don't think you have have to come from a dysfunctional family to handle choas well. Working in theater will teach you that just as well. :)
    - intopieces 10y ago
      >Only 46% of US children are in a family with two married parents. Care to cite your source on this? The number appears to come from the Pew Research report from 2014[0]. If so, you've severely misconstrued their findings. From the report: "Fewer than half (46%) of U.S. kids younger than 18 years of age are living in a home with two married heterosexual parents in their first marriage." That's a whole lot different from "in a family with two married parents." [0]http://www.pewresearch.org/fact-tank/2014/12/22/less-than-half-of-u-s-kids-today-live-in-a-traditional-family/ http://www.pewresearch.org/fact-tank/2014/12/22/less-than-ha...
kordless 10y ago
> Blank has found that more than half of all Silicon Valley founders come from chaotic, dysfunctional families. “It’s the cruelest and most effective training ground for being a founder,” Blank said, "and that ability to shut out everything except for what's important for survival turns out to be exactly what you need to do to be a successful CEO." The ability to shut out what is important for good mental survival is an unhealthy, dissonance creating behavior. By ignoring what is crucial to one's mental stability and focusing on an arbitrary goal (which is to make someone else not doing the work more money) is an INSANE behavior to practice. It might make sense if it were life and death, but rationalizing the technology improvements that come from these types of efforts, and the money that comes with those improvements, is just a sign of massive societal dissonance. Technology will continue to increase in sophistication regardless of how idiotic we are with our own mental health and sanity. These people, mostly billionaires I will point out, only stand to profit from others throwing themselves into something so completely that the chances are that the founders will either succeed widely or end up being broken as a result. Justifying "brokenness" as a needed trait for CEOs using biased blaming statements is a sign of a self centered rationalization. And for what? That jackass on the right was even laughing about people paying $10 more to sit closer to him. Fuck those guys. Build your own company on your own terms. Live your life fully TODAY, for tomorrow may not be at all.
paulsutter 10y ago
> "While they might like you, you’re just part of a liquidity Ponzi scheme," Completely incorrect use of the term "Ponzi scheme". > "Their only goal is to make you liquid or go public. They will support you to do that, but that's about it." I've never met a founder that didn't know that taking a VC money means liquidity is your overarching goal.
- Noseshine 10y ago
  The guy who founded OwnCloud, who recently made headlines all the way to HN by leaving that company and founding NextCloud using the same open source software, seems to be one of those. I heard an interview a few days ago, in German (somewhere on Youtube, it's very recent), where he listed that as a major downside (of VC capital) and in the end something that lead to his move. I'm sure he if you ask him won't say he was surprised, and that he knew it - but him pointing this out as a major point shows that even if he was aware of it, he was not aware of what that means in reality. > I've never met a founder that didn't know this. "Being aware" of something has several layers. A lot of people are "aware" of things on a conscious level, but when you look at their actions you see that it doesn't seem to influence the behavior. Just "knowing" something doesn't mean all the parts of your brain responsible for your actions got the message. For example, people now speeding or texting and driving may kill you, but I bet those who experienced it first hand will show much improved behavior in that respect compared to those who only "know about it".
  - Noseshine 10y ago
    Can't edit any more to fix the typo: For example, people know speeding or texting and driving may kill you, but...
- JumpCrisscross 10y ago
  By that definition, a bond is a Ponzi scheme because the lender's only goal, in respect of your bond, is to pay back your interest and principal.
Negative1 10y ago
I don't think the term Ponzi Scheme is correct but I'm not sure a name for this has been invented yet. Calling it a 'hustle' might be better but still doesn't express what is happening. VC's want to make money, pure and simple. The only thing that matters is the liquidity event that allows them to recoup their investment. It can be argued that in the end all these people actually create is personal wealth for themselves since the product and it's long term success (and the success of the founder and company) really don't matter. I think that's a pretty bleak outlook considering they could be making money doing a lot of other things and there is great value in what they do. VC is a game, and to play it right, they need to distill their decision making into core principles. This whole thing about dysfunctional families that the article discusses, well, I do think you need a certain temperament to be successful in the VC game and maybe the dysfunction helps to build that kind of mindset (non-sentimentalism and drive).
leroy_masochist 10y ago
Very interesting thoughts from Blank. I thought the interviewer was terrible: visibly nervous and insecure, and his non-sequitur questions to the audience were especially inane. "Who here uses data?" "Who has the next billion-dollar idea?"

97 points by t23 10y ago

cs702 10y ago

There's a lot of truth to Blank's statement, but like all generalizations, it's unfair to the best VC and early-stage investors. For example, it would be extremely unfair to describe Y Combinator's business as a "liquidity Ponzi scheme."

cloudjacker 10y ago
Then you should read some of the SEC's enforcement actions on what they perceive to be fraudulent Ponzi schemes My conclusion is that it is extremely relative. The definition of "Ponzi scheme" is quite simple, because what Mr. Ponzi did was quite simple. It works until it doesn't. It doesn't matter if your reputation is 1 year old, or 20 and "one of the best", while you are able to pay investors nobody questions anything despite how obvious the source of funding is, if you are unable to pay investors and halt redemptions then you have a problem.

rfreytag 10y ago

Medium post is taken from this original site: https://www.startupgrind.com/blog/venture-capital-is-liquidity-ponzi-scheme-says-steve-blank/ https://www.startupgrind.com/blog/venture-capital-is-liquidi... Maybe a moderator can fix the original link.

sctb 10y ago
Thanks! We updated the link from https://medium.com/startup-grind/lean-startup-pioneer-steve-blank-venture-capital-is-liquidity-ponzi-scheme-ac1d28b392ec#.tlhagrdd0 https://medium.com/startup-grind/lean-startup-pioneer-steve-....

im_down_w_otp 10y ago

Two things: 1) the loose definition of Ponzi Scheme he's applying here seems so broad as to be meaningless. Multiple banks offering you lines of credit you can't pay back would be Ponzi Schemes too with his characterization. 2) the stuff about what makes great founders reads like post-hoc projection of his own life experience onto rationalizations for his success. In other words, bias. Given almost half of Silicon Valley founders apparently don't come from "dysfunctional" upbringings. A veritable coin toss doesn't make a compelling case.

HillaryBriss 10y ago
What percentage of families in society overall are dysfunctional?
- danielvf 10y ago
  You've got the right question to see if this datapoint matters at all. I don't know the answer unfortunitly, so I'll answer a much easier question instead: Only 46% of US children are in a family with two married parents.
  - HillaryBriss 10y ago
    yeah, i mean, what is Steve Blank really talking about when he says 'dysfunctional'? which definition of that word do we even use?
    - danielvf 10y ago
      Self reported. I think he's referring to this article he wrote in 2009: https://steveblank.com/2009/05/18/founders-and-dysfunctional-families/ https://steveblank.com/2009/05/18/founders-and-dysfunctional... Though I don't think you have have to come from a dysfunctional family to handle choas well. Working in theater will teach you that just as well. :)
  - intopieces 10y ago
    >Only 46% of US children are in a family with two married parents. Care to cite your source on this? The number appears to come from the Pew Research report from 2014[0]. If so, you've severely misconstrued their findings. From the report: "Fewer than half (46%) of U.S. kids younger than 18 years of age are living in a home with two married heterosexual parents in their first marriage." That's a whole lot different from "in a family with two married parents." [0]http://www.pewresearch.org/fact-tank/2014/12/22/less-than-half-of-u-s-kids-today-live-in-a-traditional-family/ http://www.pewresearch.org/fact-tank/2014/12/22/less-than-ha...

kordless 10y ago

> Blank has found that more than half of all Silicon Valley founders come from chaotic, dysfunctional families. “It’s the cruelest and most effective training ground for being a founder,” Blank said, "and that ability to shut out everything except for what's important for survival turns out to be exactly what you need to do to be a successful CEO." The ability to shut out what is important for good mental survival is an unhealthy, dissonance creating behavior. By ignoring what is crucial to one's mental stability and focusing on an arbitrary goal (which is to make someone else not doing the work more money) is an INSANE behavior to practice. It might make sense if it were life and death, but rationalizing the technology improvements that come from these types of efforts, and the money that comes with those improvements, is just a sign of massive societal dissonance. Technology will continue to increase in sophistication regardless of how idiotic we are with our own mental health and sanity. These people, mostly billionaires I will point out, only stand to profit from others throwing themselves into something so completely that the chances are that the founders will either succeed widely or end up being broken as a result. Justifying "brokenness" as a needed trait for CEOs using biased blaming statements is a sign of a self centered rationalization. And for what? That jackass on the right was even laughing about people paying $10 more to sit closer to him. Fuck those guys. Build your own company on your own terms. Live your life fully TODAY, for tomorrow may not be at all.

paulsutter 10y ago

> "While they might like you, you’re just part of a liquidity Ponzi scheme," Completely incorrect use of the term "Ponzi scheme". > "Their only goal is to make you liquid or go public. They will support you to do that, but that's about it." I've never met a founder that didn't know that taking a VC money means liquidity is your overarching goal.

Noseshine 10y ago
The guy who founded OwnCloud, who recently made headlines all the way to HN by leaving that company and founding NextCloud using the same open source software, seems to be one of those. I heard an interview a few days ago, in German (somewhere on Youtube, it's very recent), where he listed that as a major downside (of VC capital) and in the end something that lead to his move. I'm sure he if you ask him won't say he was surprised, and that he knew it - but him pointing this out as a major point shows that even if he was aware of it, he was not aware of what that means in reality. > I've never met a founder that didn't know this. "Being aware" of something has several layers. A lot of people are "aware" of things on a conscious level, but when you look at their actions you see that it doesn't seem to influence the behavior. Just "knowing" something doesn't mean all the parts of your brain responsible for your actions got the message. For example, people now speeding or texting and driving may kill you, but I bet those who experienced it first hand will show much improved behavior in that respect compared to those who only "know about it".
- Noseshine 10y ago
  Can't edit any more to fix the typo: For example, people know speeding or texting and driving may kill you, but...
JumpCrisscross 10y ago
By that definition, a bond is a Ponzi scheme because the lender's only goal, in respect of your bond, is to pay back your interest and principal.

Negative1 10y ago

I don't think the term Ponzi Scheme is correct but I'm not sure a name for this has been invented yet. Calling it a 'hustle' might be better but still doesn't express what is happening. VC's want to make money, pure and simple. The only thing that matters is the liquidity event that allows them to recoup their investment. It can be argued that in the end all these people actually create is personal wealth for themselves since the product and it's long term success (and the success of the founder and company) really don't matter. I think that's a pretty bleak outlook considering they could be making money doing a lot of other things and there is great value in what they do. VC is a game, and to play it right, they need to distill their decision making into core principles. This whole thing about dysfunctional families that the article discusses, well, I do think you need a certain temperament to be successful in the VC game and maybe the dysfunction helps to build that kind of mindset (non-sentimentalism and drive).

leroy_masochist 10y ago

Very interesting thoughts from Blank. I thought the interviewer was terrible: visibly nervous and insecure, and his non-sequitur questions to the audience were especially inane. "Who here uses data?" "Who has the next billion-dollar idea?"