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I like the post - loved the presentation as well - the longest presentation that I have ever sat through on the web. I realize his arguments are sort of drumme

I like the post - loved the presentation as well - the longest presentation that I have ever sat through on the web. I realize his arguments are sort of drummed up for effect, but I thought the analogy between VC and patronage was weak. Its true they were both systems whereby rich people would pay talented poorer people to make things for them, but the further connection - the reason for the payments and the building, doesn't hold up. Do VC's really want to build companies to feel good about themselves, or to show off, or to look better? Only if those companies make money. Pets.com was a stupid idea and if anything the VCs that invested in it have probably never lived it down. Not too successful as a vanity project. Also, the VCs aren't investing their own money, so they are responsible to do more than look good, while those whose actual cash is invested (angel's aside) aren't well known - nor do they appear to seek out reknown. Anyway - I figure this wasn't a legal case he was pleading, just my .02

raganwald 18y ago
"Do VC's really want to build companies to feel good about themselves, or to show off, or to look better? Only if those companies make money." I think you misunderstand the VC business. They charge a fee for managing money. Therefore, their business is attracting investment. This is exactly how mutual funds operate as well. Now, they stand to make money when their funds make money through various incentives and so forth. But by far the biggest incentive is that if they have a home run, they get more money invested, which means more management fees. So aren't they incented to make money for their investors? Not really: if they have a string of modest investments, averaging out to making money, they will not attract a lot of capital: the money will flow to the VCs that have name brand hits. Whereas if they have a ton of total and otherwise embarrassing failures but hit one out of the park, they will get a ton of new money when they start another fund. Or if their portfolio companies are the darlings of the press, they will get a ton of new money when they start another fund So... Their strongest incentives are to own companies that get a lot of press and hopefully get a few really press-worthy hits. That is a lot like patronage to me.
- jcl 18y ago
  I have to agree with goodgoblin: VC is not quite like patronage. Patronage is gift culture; its message is: "Look how much I can afford to give away!" A patron patronizes something not merely with a risk of losing money -- losing money is the expectation and practically the goal. VCs, on the other hand, invest in something with the hope that they will eventually have more money than they started with. You point out that ambitious VCs will invest in riskier propositions to increase their chances of a big hit. But their motivation for doing this is so that the big hit draws more money for the next round. This feedback loop (money -> fame -> more money -> more fame) is not present in patronage, because a patron's fame is not expected to lead to significantly more money.
  - raganwald 18y ago
    There is room for both of the expressions "a lot like patronage" and "not quite like patronage" to be true. The big question about using patronage as a metaphor is whether discussing the ways in which Venture Capitalism 'is' and 'is not' like Patronage leads to greater insight. What do you think?
    - jcl 18y ago
      You are correct -- the insight is what matters. But in this case, I do not think the patronage analogy is helping. Giles brings up patronage as an explanation for why VCs -- who are otherwise interested in money -- are not interested in hearing about a profitable microloan business. From the patronage analogy he gathers that they are more interested in power than money, hence their class hierarchy and why microloans are beneath them. I feel the patronage analogy misses the point because it implies that VCs are somehow not interested in profit. If you follow this logic through, you'd conclude that startups are profit-losing ventures kept alive only for the power trips of VCs. While this may be true in a few cases, I think it is an incorrect conclusion, since VCs are interested in profit (or, at least, their investors are), and there is apparently enough return in startups that investors do not go elsewhere. There is a simpler explanation for why VCs are not interested in microloans: it is far enough out of their geographic and technical areas that they don't think they could do very well at it.

raganwald 18y ago

"Do VC's really want to build companies to feel good about themselves, or to show off, or to look better? Only if those companies make money." I think you misunderstand the VC business. They charge a fee for managing money. Therefore, their business is attracting investment. This is exactly how mutual funds operate as well. Now, they stand to make money when their funds make money through various incentives and so forth. But by far the biggest incentive is that if they have a home run, they get more money invested, which means more management fees. So aren't they incented to make money for their investors? Not really: if they have a string of modest investments, averaging out to making money, they will not attract a lot of capital: the money will flow to the VCs that have name brand hits. Whereas if they have a ton of total and otherwise embarrassing failures but hit one out of the park, they will get a ton of new money when they start another fund. Or if their portfolio companies are the darlings of the press, they will get a ton of new money when they start another fund So... Their strongest incentives are to own companies that get a lot of press and hopefully get a few really press-worthy hits. That is a lot like patronage to me.

jcl 18y ago
I have to agree with goodgoblin: VC is not quite like patronage. Patronage is gift culture; its message is: "Look how much I can afford to give away!" A patron patronizes something not merely with a risk of losing money -- losing money is the expectation and practically the goal. VCs, on the other hand, invest in something with the hope that they will eventually have more money than they started with. You point out that ambitious VCs will invest in riskier propositions to increase their chances of a big hit. But their motivation for doing this is so that the big hit draws more money for the next round. This feedback loop (money -> fame -> more money -> more fame) is not present in patronage, because a patron's fame is not expected to lead to significantly more money.
- raganwald 18y ago
  There is room for both of the expressions "a lot like patronage" and "not quite like patronage" to be true. The big question about using patronage as a metaphor is whether discussing the ways in which Venture Capitalism 'is' and 'is not' like Patronage leads to greater insight. What do you think?
  - jcl 18y ago
    You are correct -- the insight is what matters. But in this case, I do not think the patronage analogy is helping. Giles brings up patronage as an explanation for why VCs -- who are otherwise interested in money -- are not interested in hearing about a profitable microloan business. From the patronage analogy he gathers that they are more interested in power than money, hence their class hierarchy and why microloans are beneath them. I feel the patronage analogy misses the point because it implies that VCs are somehow not interested in profit. If you follow this logic through, you'd conclude that startups are profit-losing ventures kept alive only for the power trips of VCs. While this may be true in a few cases, I think it is an incorrect conclusion, since VCs are interested in profit (or, at least, their investors are), and there is apparently enough return in startups that investors do not go elsewhere. There is a simpler explanation for why VCs are not interested in microloans: it is far enough out of their geographic and technical areas that they don't think they could do very well at it.