Meet the Visionary Venture Capitalist Inspired by Marx and Keynes
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LP: Half? That’s quite a figure. It would surprise our libertarian friends.
WJ: Right. The other mission, of course, was the empowerment of the National Institutes of Health to conquer disease, to invest in the science upstream from the clinic.
The way I like to put it is that the American government built a platform in those two sectors in which people like me, venture capitalists, and the entrepreneurs we backed, could dance. Our dance was rewarded by that great bull market and the culminating great bubble of 1999 and 2000. During the five years prior to the climax of that bubble, the amount of money in the hands of venture capitalists increased from barely 25 billion to almost 250 billion dollars. In five years! Since then, since the collapse of the bubble and the closing of access of the public markets to the initial public offering window, the returns to venture capital have decline hugely. The funds committed to venture capitalists have declined hugely – unsurprisingly – and it is possible to expect that the great American VC industry that seemed such a profoundly innovative force is reverting to a much smaller practice by craftspeople who, in good markets and bad markets, have demonstrated the ability to sponsor, support, initiate new companies that make a difference. But there aren’t very many of those.
We do have an amazing quantity of academic research analyzing the statistical data on VC returns, and they show 3 statistical facts. The first is that out of all the venture capital funds that have been launched in the U.S. over 35 years, a very small number, less than 10 percent, have accounted for all of the investment returned in excess of what you would have received by simply investing in the NASDAQ index. Second, there’s persistence in those returns, so it’s not just a small number of funds, which might be random – it’s a small number of firms that have repeatedly been successful. Finally, the correlation of those returns with the state of the public market and particularly the degree to which initial public offerings are available—that correlation is very large indeed. It’s a long way of explaining how one gets from Keynes to practicing as venture capitalist.
From Marx there is a deep insight, which is one of the animating insights of the first volume of Capital, and that is that money (cash) and the commodities that it controls are independent of each other. There is a cycle through which the capitalist uses money to buy commodities, to resell them at a profit, usually having done something to them to increase their value. Now if you substitute the word that begins with “c” – “company” for “commodity”—you have exactly what the mission of the venture capitalist is. I proposed that back in the mid-1980s to Hy Minsky, whom I had gotten to know, and he loved it. I wrote some papers for Minsky on how to think about the venture capital process and practice in the longer context of the dynamics of capitalism, broadly defined.
LP: A Marxist formulation for venture capital is certainly something you don’t hear often. In your book, you describe a “Three-Player Game” that drives innovation. What is it and how does it work?
WJ: As an apprentice venture capitalist, back around 1980, I realized that the industry that I was really interested in – the most exciting industry in the world, computers -- was deeply dependent on prior investment in science and technology by the Defense Department, by NASA, by the Atomic Energy Commission. That made me conceive of the government not just as a kind of backstop for when the market economy failed in a kind of simplistic Keynesian mode, but as an active player in a kind of dynamic game between the marketplace and political process.