There’s an issue that’s been driving me insane lately. And nobody talks about it, even though it’s at the heart of a lot of discussions in startup land: discussions on bubbles, valuations, investors, jobs…
Here’s the fact: it’s an absolute DISGRACE that middle class retirement funds are being risked in the venture capital game, and the people who let it happen aren’t just playing with fire, they’re playing with dynamite covered in lighter fluid at a Benihana.
Let’s go step-by-step.
Venture capital is a high-risk game fueled by people who are sophisticated investors (it basically means they’re professionals). Every venture investor is looking for the 1% of startups that provide all of their returns. The other 99% is lost money.
That isn’t a bad thing, but it means that returns tend to be concentrated. It means that a fund can easily — EASILY — lose everything. And that means that there are investors who do not, in any way, come out ahead in the end. Not every venture capitalist is Marc Andreessen, and if you invest in startups, you better understand that.
Compare that to public markets. Say you invest in a mutual fund on the NYSE that tracks the S&P 500. That fund follows the S&P 500 over time, and provides a relatively well-balanced return. If the economy is going well, it goes up. If the economy goes down, it goes down. There’s nobody to blame, nobody’s a huge winner, and nobody’s a huge loser (generally). It’s the exact opposite of venture investing.
And it’s the type of investing, combined with things like bonds, that makes sense for public funds. Public money is part of a trust, it isn’t looking for massive returns, it’s looking for a steady payout that can be calculated AND COUNTED ON.
Yet…over the past few years, the headlines took over. Money managers saw that venture players were making great returns, and they wanted in. After the 2008 crisis, hedge funds were out, and people were looking for the next promise of returns.
But here’s the thing. Hedge funds fell out of favor because the total returns weren’t the returns promised in the headlines. Public money in venture is about to run into the same wall.
Why? Public funds like the BPI in France aren’t going to have returns — because they’re run by bureaucrats, not by investors, and definitely not by entrepreneurs. The same thing is going on with pension funds as they fuel higher and higher valuations but that in the end aren’t going to have the money they’re supposed to pay out.
And the people who are going to get screwed — people waiting on their pension or their social security payout — are ones who never even knew they were playing this game.
By the way, want a great reason why big public institutions like the BPI shouldn’t be doing anything with startups? It creates toxicity. This week, this sentence was written about a startup that raised millions in public money:
“To get out of the crisis, the startup is going to begin privileging revenues over subsidies.”
How do companies that have been around for years get away with — evidently — never worrying about revenue? It’s because there are bureaucratic investors using public money that they don’t have to account for!
Of course, let’s be honest: lots of good companies use public money to survive and build great things! We see this at The Family every day. But too often that public money is like a drug — it gives you a quick, hard high, you feel great, but then you come crashing down. You realize that you didn’t actually create anything that was in your head while you were high, and now the only way forward is taking more of the drug. It doesn’t happen every time, but it does happen A LOT of the time.
There’s nothing wrong with running deficits as a startup. There’s nothing wrong with hunting for investments in order to grow. But there’s a lot of things wrong with paying yourself for years with public money working on a business that isn’t even trying to make a decent return.
And the politicians who talk about supporting young people, and cheer “jobs created” in startups, and then go off and protect corporate interests the rest of the day, and do it all using the tax dollars mainly paid by working families…I’ll stop there.
It’s a disgrace.