Venture Capital: the Beginnings — 2019
Maybe Theranos was indeed a Ponzi Scheme of sorts. But, also, maybe, it was an investment of sort in the future!
What if Theranos got screwed by the medical authorities and the SEC (ok, maybe lying about yearly revenues was a dumb idea!); NOT the other way round?
What if Uber is investing in the next 30 years of transportation and fund-management instead of mere “P/L” within the next 5 years?
What if Tesla doesn’t need to make a profit from its operations while it is still investing in Gigafactories, solar roofs, batteries and EV technologies? Maybe only in 20 years can we start “worrying”: when all the machinery, tools, factories and products made by the company are fully available on the market?
No Growth — No Capital!
Peter Thiel provided a warning about 8 years ago that unless Western countries start “building/innovating” for the future, they will face increasing economic growth pressures that are linked to employment, low tax income, sustainable food supply, sustainable wealth, secure wealth, living costs and upward (economic) mobility in society.
The most fundamental problem that Peter Thiel highlighted (in the book Zero to ONE million), is that even fund-managers will face increasing confusion about where to place their own (and clients’!) money and assets.
Property is no longer safe! The demand for rent and/or for buying property will eventually align with the slowed economic growth rates to further discourage the property sector’s profitability or the “asset-security” in the near future.
Inflationary (monetary) pressures that have been imposed by Governments under various “Keynesian” regimes over the past 80 years will continue to falter in the face of increasing costs of living.
“Cashing Out!”
In times past, cash was never king! In fact, even (consumable) “goods” were never king! (Recall what Jesus said to the rich fool who stored piles of wheat in a barn…).
Real “treasure” is always forward, not backward looking. Traditional accounting measures that have been employed in the past 100 years that are obsessed with “P & L” will also continue to falter in the face of these new challenges…
For example, company founders have been known to “cash out” as soon as there is an offer to buy a company out at a much higher value… Well, unless the company founders are doing it to address temporary “cash-flow” problems, it is highly unlikely that the classic “liquidity moment” in which the founders sell-off the entire company to another entity will work out well for both the founders and the equity-buyers.
The reasons for this are extremely complex but can be summarised as follows:
- it will become increasingly harder to build a sustainable company around short-term profits; due to exponentially increasing consumer pressures and costs
- consumers, due to their own pressures re: -ve spending-power + decreased upward mobility + inflationary economics will begin to pay more attention to brands and the value of the products and services they buy; this puts even more pressure on merchants to only produce items of extremely high quality so as to “stand apart” from the rest…which will obviously cost more money and time!
- due to decreased (expected) consumer demand and corresponding decreased profits, it will become not only harder but prohibitive to “sell-off” a company at its earlier stages.
- for companies that do manage to “sell-off” and “cash-out”; the problem of long-term sustainability will persist… a problem which can become quickly intractable if the founders are no longer involved!
- even if the founders “cash-out”, it will become increasingly harder for the founders to find a home for both their capital (due to the “growth problem” explained above), and livelihoods (due to increasing socio-economic uncertainties).
All these “intractables” can be resolved by founding new innovative companies that are focused on the future rather than on the present; even if they are unprofitable (e.g. Uber, Tesla), do Not have a “good product” yet (e.g. Theranos + many other not as well known), and will not break-even in the next 30 years (e.g. Amazon?)….
Short-term gains have never truly wrought long-term gains…
Overall, due to heavy economic pressures, these “vc” techniques are UNLIKELY to slow-down. They have ONLY just begun! That’s until better “alternatives” arise for keeping and growing capital.
Side Jam!
Part of my thinking, has been that even Peter Thiel gets it wrong when he puts too much emphasis on “network effects” business models.
Sometimes, as humans, in order to be “incentivized” for the future, we need a “temporal” framework to enjoy/work-in the present while “waiting” for the future. In ages past, that was called “faith” and hope.
In the present age, this is all viewed through some form of a statistical measurement: “luck”, probability, “credit/hedging/insurance”, future- prediction and “chance”.
It is believed that the more of these “statistics” one has one their side, the “better” or more “guaranteed” the future is; thus fulfilling the present.
While the “probabilistic” feature is much better and more forward-looking than the “historicist” framework of traditional accounting and “P & L”; it still has its faults/downsides as in the case of Theranos (and who really knows if Uber and Amazon will actually succeed in the long-run!?).
Once again, my thinking is that one needs to measure their rate of success in a way that corresponds with their “long-term” goals. I call it “Recursive” target setting. As such, it matters more WHAT their venture capital brings to the table than HOW MUCH they have been able to raise… Similarly, it matters more WHAT product, the company has built/is-building than WHO is in charge.
(I am aware of a “high-level” capital game venture capitalists play, which is to “invest-early” with the aim of investing in capital itself, rather than the company or product. But that’s an extremely tricky house of cards that can quickly collapse as it did in the case of Theranos…)
