Saturday, March 7, 2015

Wilderness Temptations and Unicorns

Government media censors in Vietnam were somewhat puzzled years ago when I was asked to critique the U.S. venture capital model at a speech in Hanoi.  Rather than extolling the virtues of Sand Hill Road, I suggested that without military and 'intelligence' spending with their excessive price elasticity in classified procurement; without tax-loss harvesting for wealthy elite; and, without a celebrated sociopathic cult of the individual, the U.S. venture-based entrepreneurial model would collapse.  And while the edges of classified relationships between espionage and domestic surveillance with companies ranging from social media and telecommunications to high tech are leaking with greater frequency, the full extent of venture complicity in U.S. government concessions in media and technology remains opaque (and likely keeps Edward Snowden in the negotiating driver's seat with the data he's yet to dump).  The full, unedited text of my speech was published to the surprise of many conferees.

Over the past several weeks I've encountered snake-oil salesmen who are attempting to promote this 50 year-old economic failed experiment across Europe, the Pacific, Asia, and Africa.  Despite pouring billions of public dollars down venture capital and venture banking yawning chasms of recklessness, governments and private sector interests continue to delude themselves into the irreproducible model that none have seriously studied.  Throw a little northeastern business school logo on the propaganda and you've got best-seller fantasies designed to seduce from Sydney to Singapore to Stuttgart.  And the most recent version on the delusion - the much heralded "unicorn" phenomena - is being lauded in economies with no private equity,  middle market M&A, or meaningful IPO ecosystems!  It's one thing to be optimistically naïve.  To be clearly detached from reality is another matter all together.

During a recent conversation around a business partner's dinner table, the subject of venture-backed entrepreneurship came up in its typical historicism-laden acclaim.  Maybe like any other toxin, the body builds up a tolerance to a certain level and then, one dose too many and full on anaphylaxis shows up.  As the audience was explicitly predisposed to the Christian tradition, I decided to critique the venture model in unambiguous religious metaphor. 

In the Gospel of Luke, the fourth chapter details the forty day tribulation of Jesus in the wilderness.  After fasting for over five weeks, the "devil" approaches Jesus with the simple proposition, "If you are the Son of God, turn these stones into bread," to which Jesus answers, "Man shall not live by bread alone."  Next, the devil took Jesus to a vista from which he could see all the kingdoms of the world and said that, for the price of bowing down to him, he'd be given them all.  Jesus' response was, "Worship the Lord your God and serve him only."  Finally, the devil then places Jesus on the pinnacle of the temple and tells him to throw himself down to let the angels show up and rescue him.  Jesus responds, "Do not put the Lord your God to the test."

The parallels between this account and the modern venture based entrepreneurial model are spectacular. 

Stones to bread.  In our hunger to achieve our autonomy and fame, we're conditioned to "make a living".  Most people do this through the cunning prostitution of time and labor in exchange for money.  In the dominant entrepreneurial meme, innovation and invention are the stones which need to be turned into funding.  Never mind the veracity or uniqueness of "innovation"; the mere possession of an idea that some pool of capital is too naïve to know has already existed in another context or location is sufficient for the first seduction.  What makes this phase so seductive is the allure to perform the ultimate alchemy - turn the ignorance of oneself and others into gold (yeah, and saying you'll do great philanthropic things with the gold doesn't launder the price of your soul).  And well over 90% of those who promote themselves as being worthy of funding aren't.  They cannot stand alone as business creators.  They cannot stand alone as managers.  They cannot stand alone as discerning stewards.  And they manufacture the tax losses that provide their patrons with benefit in their own demise.  Temptation failed!

Kingdoms of the World.  Those who 'make it' through the first or second funding round get the privilege to cede their impulse to those who provide capital for the lure of individuated fame and fortune.  In this next phase, the community that supported the emerging impulse is referred to as "friends, family, and fools."  All you need to do is prove allegiance to the arbiters of scarce capital flow and they'll give access to the world.  In this stage, the network of proximity is traded away for the illusion of anonymous influence on the masses.  Numbers exist in 7 and 8 figures with many zeroes.  It's not funding for what the enterprise requires, it's a number that feeds the ego.

Desecrate the Temple.  Throw yourself down and the angels will catch you.  This last phase is the ultimate seduction.  File your S-1 and, in this day and age, the angels are the pensions and the institutions that pour billions of dollars into public offerings to lift up value based on PE ratios that range from the ludicrous to the ephemeral in which E doesn't even exist.  It's not about revenue, it's about influence the salivating masses are told.  Who needs a business if you have the right story?  After all, this is about capitalism, isn't it?  And if you can put your revenue in a tax haven, all the better to doubly undermine the systemic risk already fluffed into the system.

So the formula is simple.  Start with an individuated breach of integrity fueled by the illusion of scarcity.  Add loyalty purchased, not earned.  And top it off with illusions foisted on the fawning public.  Presto, change-o!  You've got the system that has not grown wealth for the majority of America over the last 60 years.  According to the data feeding into the FOMC next week, while we've grown employment for the last 12 quarters, wages have not grown while the total number of permanently jobless has.  And this is the model that we seek to export to a disillusioned world.

Is there an alternative?  Absolutely!  Is it worth taking?  The jury's out on that one for many.

The whole stones-into-bread nonsense is the by-product of isolation and its off-spring: scarcity.  When genuine innovation shows up, it does so in context.  Innovation is far from an individuated phenomenon.  It is the synthesis of disparate inputs into a coalesced conception.    If it is allowed to take root and manifest in the fertile soil in which it germinates from an idea to a formulated impulse it can be embodied in sufficient scale to conscript aid in all forms and from all sources.  Once sprouted, others can engage with the idea and take it to deployment at an appropriate scale and distribute it to the local area network in which the context exists.  The response to the dissemination of the ideas, goods or services provides discernment from a connected community that acknowledges or rejects the value proposition at which point these inputs can be assimilated for the enterprise cycle to commence.  Enterprise based on maximize productive, utility and consequence seeks flow and current, not static charge.  Kingdoms-of-the-world promises are management nightmares.  Few of us adequately manage our own lives to say nothing of colleagues, markets, and corporate empires.  And while the lottery-odds unicorns are celebrated by those still living in fantasies, slipping into delusional states is best done when it doesn't put public capital at risk.

It's a sad commentary on humanity that the last 2,000 years has done precious little to change how pathetically predictable our vulnerabilities are to the exact same temptation formula.  What's even more grievous is the gladiatorial silent assent that fuels our diversions ranging from venture conferences to Shark Tank where we watch serial proselytizing of the predatory dogma.  If we're going to bring the capital flow back into reality, it's going to take serious education of capital and entrepreneur alike.  One without the other is destined to fail.  But educated in tandem, we might find enable our higher angels.


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Thank you for your comment. I look forward to considering this in the expanding dialogue. Dave