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I feel like venture capital is a major choke point in our current implementation of capitalism, where "the market will decide" is really a euphemism for "a smal

I feel like venture capital is a major choke point in our current implementation of capitalism, where "the market will decide" is really a euphemism for "a small handful of extremely wealthy investors will decide." We're paying a massive opportunity cost on all of those ideas that don't ever reach the market because VC's don't think they're easy money. A good way to resolve this would be to reform the accredited investor laws into something more meritocratic. Instead of needing to own one million dollars in assets, there ought to be some sort of knowledge-based competency exam so that regular people can invest in ideas they think are worthwhile.

clavalle 9y ago
VC is really only applicable to a small subset of possible successful business. It is actually poisonous to businesses that will succeed financially but with rates of return less than 10x in a relatively short time scale. So, for what VC is doing in the market I think it is fine for a handful of people that can absorb the necessary risk make those decisions and the bets. But there is a huge gulf between those types of new business investments an d smaller risk(both in size of capital needed for the experiment and unknowns)/smaller reward investments. That fat middle is where smaller investors or crowdfunding could really come into their own.
- soup10 9y ago
  part of the problem is VC has developed a doctrine that is designed for investors, not companies. VCs should be focused on serving their companies, not their benefactors. But in todays world its just not the case. You hear founders talk about burning money and rocket ships and high-risk and danger because of this perverse set of incentives. A revolutionary change is needed to put power back in the hands of companies where it belongs. Companies that are changing the world need to be run by patient careful men, not unstable kids with a dangerous appetite for risk.
  - pge 9y ago
    Putting "power back in the hands if companies where it belongs" requires no change at all. Just don't take VC money. It's that simple. Most companies are not best served by raising money from VC firms (and I say this as someone that has been an institutional VC for almost 20 years). But if your take on a business model that requires capital, the expectations of return of those investors are going to be commensurate with the risk. As soon as you raise outside capital whether from a VC or borrowed from your local bank, you have committed yourself to new obligations that will put constraints on how you run the business. Those constraints can be explicit ("pay us X interest every month") or implicit ("the risk associated with the startups we invest in is so great that we have to swing for the fences with every investment, so we are going to push you to a billion or bust strategy."). It is important to understand them before you take outside capital (topic for a longer post...). But if you want to stay in control, it's always best just not to take any outside capital at all.
    - soup10 9y ago
      This isn't realistic. Many business need outside capital, they just need it without the institutional baggage. For my own business i'm specifically looking for investors that are aligned with the companies goals first. And its proving difficult because so many investors have distorted ideas about the very nature of business. Many believe the point of business is to make money. Which is exactly the wrong mindset from my point of view and highly dangerous to what we are trying to accomplish.
gabrielgoh 9y ago
you are correct about this, but I think what you frame as a negative is really a positive. I think the VC model is one of the only examples funding I've seen where really innovative, experimental and risky projects can even get a tiny bit of traction (the other example is a government grant). I think the public is most likely risk adverse, and will be burnt with 100 startups promising the moon and failing.
ojbyrne 9y ago
Minor point - you can also be an accredited investor if you "have income at least $200,000 each year for the last two years (or $300,000 combined income if married) and have the expectation to make the same amount this year." [1] That feels somewhat more "meritocratic" to me. 1. https://en.wikipedia.org/wiki/Accredited_investor#United_States https://en.wikipedia.org/wiki/Accredited_investor#United_Sta...
pdog 9y ago
If you're smart enough to pass the competency test, why can't you just make a million dollars in ten years? Essentially, the minimum net worth requirement for accredited investors already serves as a de facto test.
- aqme28 9y ago
  It's crazy to me that you're conflating income with intelligence. There are a lot of stupid ways to get rich and a lot of really intelligence-demanding careers that don't pay well at all.
  - Swizec 9y ago
    I think the point is a far more cynical one. If your goal is to make money, why are you not making money? Either it's not your goal (and you shouldn't be an investor) or you're too dumb to be successful at it (and you shouldn't be an investor). It's a litmus test not an intelligence test.
moxious 9y ago
VCs are a perfect implementation of "the market will decide" but I think you misunderstand in this case what the market is. It's not some idealized invisible hand, the market is the people who show up and participate, exactly like your local farmers market for vegetables. And the VCs are the ones who show up and participate, so they are in large part the market for early stage startups. Anyone else who wishes is naturally allowed into this market as well. Markets are no panacea, they've only ever worked as well as their participants, (being composed of nothing else) and they tend to do better when they're broader and deeper, which VCs most certainly are not, in comparison to other markets such as for stocks.
vikingyc 9y ago
This is where ICOs (Initial Coin Offering) Token Sale may help. It is doing two things: 1. democratization of who gets to be VC 2. democratization of access to capital.
- qznc 9y ago
  ICOs show quite well how that "democratization" can have bad effects. Most of them are plain stupid (better and easier to realize without a blockchain or smart contracts). I assume they are for speculation/gambling only. There should be safeguards in place to prevent people from dumping all their money into it. Now, I agree that crowdfunding startups should be possible. Why shouldn't I be able to participate funding with 10$? The valid argument is that the process is so costly that it makes no sense for this tiny amount of money. So, how can we make the process cheaper without (!) removing all the safeguards?
  - stonlyb 9y ago
    You can. Republic.co and a few others are allowing non - accredited investors access to startup investing at nominal levels, thanks to title iii of the jobs act. Adoption will grow with awareness that this is an option.
tibbetts 9y ago
If you want to increase good ideas getting to market, fund basic science, not startups. VCs might not be picking exactly the right companies, but it is hard to argue there isn't enough private investment capital for high growth startups. The real missing link is support for new ideas long before they are startups.

clavalle 9y ago

VC is really only applicable to a small subset of possible successful business. It is actually poisonous to businesses that will succeed financially but with rates of return less than 10x in a relatively short time scale. So, for what VC is doing in the market I think it is fine for a handful of people that can absorb the necessary risk make those decisions and the bets. But there is a huge gulf between those types of new business investments an d smaller risk(both in size of capital needed for the experiment and unknowns)/smaller reward investments. That fat middle is where smaller investors or crowdfunding could really come into their own.

soup10 9y ago
part of the problem is VC has developed a doctrine that is designed for investors, not companies. VCs should be focused on serving their companies, not their benefactors. But in todays world its just not the case. You hear founders talk about burning money and rocket ships and high-risk and danger because of this perverse set of incentives. A revolutionary change is needed to put power back in the hands of companies where it belongs. Companies that are changing the world need to be run by patient careful men, not unstable kids with a dangerous appetite for risk.
- pge 9y ago
  Putting "power back in the hands if companies where it belongs" requires no change at all. Just don't take VC money. It's that simple. Most companies are not best served by raising money from VC firms (and I say this as someone that has been an institutional VC for almost 20 years). But if your take on a business model that requires capital, the expectations of return of those investors are going to be commensurate with the risk. As soon as you raise outside capital whether from a VC or borrowed from your local bank, you have committed yourself to new obligations that will put constraints on how you run the business. Those constraints can be explicit ("pay us X interest every month") or implicit ("the risk associated with the startups we invest in is so great that we have to swing for the fences with every investment, so we are going to push you to a billion or bust strategy."). It is important to understand them before you take outside capital (topic for a longer post...). But if you want to stay in control, it's always best just not to take any outside capital at all.
  - soup10 9y ago
    This isn't realistic. Many business need outside capital, they just need it without the institutional baggage. For my own business i'm specifically looking for investors that are aligned with the companies goals first. And its proving difficult because so many investors have distorted ideas about the very nature of business. Many believe the point of business is to make money. Which is exactly the wrong mindset from my point of view and highly dangerous to what we are trying to accomplish.

gabrielgoh 9y ago

you are correct about this, but I think what you frame as a negative is really a positive. I think the VC model is one of the only examples funding I've seen where really innovative, experimental and risky projects can even get a tiny bit of traction (the other example is a government grant). I think the public is most likely risk adverse, and will be burnt with 100 startups promising the moon and failing.

ojbyrne 9y ago

Minor point - you can also be an accredited investor if you "have income at least $200,000 each year for the last two years (or $300,000 combined income if married) and have the expectation to make the same amount this year." [1] That feels somewhat more "meritocratic" to me. 1. https://en.wikipedia.org/wiki/Accredited_investor#United_States https://en.wikipedia.org/wiki/Accredited_investor#United_Sta...

pdog 9y ago

If you're smart enough to pass the competency test, why can't you just make a million dollars in ten years? Essentially, the minimum net worth requirement for accredited investors already serves as a de facto test.

aqme28 9y ago
It's crazy to me that you're conflating income with intelligence. There are a lot of stupid ways to get rich and a lot of really intelligence-demanding careers that don't pay well at all.
- Swizec 9y ago
  I think the point is a far more cynical one. If your goal is to make money, why are you not making money? Either it's not your goal (and you shouldn't be an investor) or you're too dumb to be successful at it (and you shouldn't be an investor). It's a litmus test not an intelligence test.

moxious 9y ago

VCs are a perfect implementation of "the market will decide" but I think you misunderstand in this case what the market is. It's not some idealized invisible hand, the market is the people who show up and participate, exactly like your local farmers market for vegetables. And the VCs are the ones who show up and participate, so they are in large part the market for early stage startups. Anyone else who wishes is naturally allowed into this market as well. Markets are no panacea, they've only ever worked as well as their participants, (being composed of nothing else) and they tend to do better when they're broader and deeper, which VCs most certainly are not, in comparison to other markets such as for stocks.

vikingyc 9y ago

This is where ICOs (Initial Coin Offering) Token Sale may help. It is doing two things: 1. democratization of who gets to be VC 2. democratization of access to capital.

qznc 9y ago
ICOs show quite well how that "democratization" can have bad effects. Most of them are plain stupid (better and easier to realize without a blockchain or smart contracts). I assume they are for speculation/gambling only. There should be safeguards in place to prevent people from dumping all their money into it. Now, I agree that crowdfunding startups should be possible. Why shouldn't I be able to participate funding with 10$? The valid argument is that the process is so costly that it makes no sense for this tiny amount of money. So, how can we make the process cheaper without (!) removing all the safeguards?
- stonlyb 9y ago
  You can. Republic.co and a few others are allowing non - accredited investors access to startup investing at nominal levels, thanks to title iii of the jobs act. Adoption will grow with awareness that this is an option.

tibbetts 9y ago

If you want to increase good ideas getting to market, fund basic science, not startups. VCs might not be picking exactly the right companies, but it is hard to argue there isn't enough private investment capital for high growth startups. The real missing link is support for new ideas long before they are startups.