Vivek Wadhwa has a guest post up on TechCrunch, “What Have VCs Really Done For Innovation?” It’s obviously meant to court controversy. Mission accomplished.
This post is my refutation. Wadhwa’s post claims:
- VCs have little to no impact on startup success, and in fact, may have a negative impact
- Venture capital slows the innovation process
This is one of the most dangerous and wrong-headed posts that I have read all year. And I’m flabbergasted by the lack of critical thinking displayed in the comments section.
There is definite truth to some of what Vivek has to say. The NVCA’s estimates are bogus, because they equate investing in a company with being responsible for its success. This is an egregiously egotistical assumption.
It may very well be true that the venture industry as a whole trails index investing. It’s hard to pick winners. But so does the entire actively managed mutual fund industry.
But the statement that “VCs at best have little to no impact on these companies and at worst have a negative impact” is absurd.
First, there is a major survivorship bias problem with the data. By interviewing successful companies, the study fails to prove whether VC makes success more or less likely. All it says is that the majority of successful new businesses in the US do not rely on VC.
A number of commentators seem to be of the impression that VCs make easy money by investing in companies after all the risk has been removed by the entrepreneur. This is talking out of both sides of one’s mouth. If the VCs aren’t taking risks, then how can they be delivering sub-par returns? By definition, they must be taking risks.
Venture capital plays an important role in the startup ecosystem. It provides high-risk equity capital to startup companies. Not every company can be a bootstrapped consumer Internet company. Many important businesses (semiconductors, hardware, biotech) require significant up-front capital. If VCs went away, would there be enough funding for these business? Do you seriously think banks would start lending to these companies?
I also wager that most of the commentators pooh-poohing VC would be glad to accept funding for their startups.
This is not to say that I support a VC bailout. Screw bailouts. All bailouts do is support the weak and incompetent. There are plenty of VCs who are doing just fine.
On the other hand, having the government hand money over to startups is stark, raving mad. If you think VCs are incompetent at allocating capital, just wait until you start a government program to do so! While in principle, a tax break for entrepreneurs sounds good, the net result will be like cash for clunkers–a disastrous transfer of wealth to people gaming the system.
The three most important companies in Silicon Valley are Cisco, Apple, and Google. All were funded with venture capital before they became going concerns. Keep that in mind before you begin to discard the VC model.
(Cross-posted @ Adventures in Capitalism)