{"id":619249,"date":"2023-03-18T09:49:03","date_gmt":"2023-03-18T14:49:03","guid":{"rendered":"https:\/\/news.sellorbuyhomefast.com\/index.php\/2023\/03\/18\/how-venture-capital-can-avoid-the-next-silicon-valley-bank-fiasco\/"},"modified":"2023-03-18T09:49:03","modified_gmt":"2023-03-18T14:49:03","slug":"how-venture-capital-can-avoid-the-next-silicon-valley-bank-fiasco","status":"publish","type":"post","link":"https:\/\/newsycanuse.com\/index.php\/2023\/03\/18\/how-venture-capital-can-avoid-the-next-silicon-valley-bank-fiasco\/","title":{"rendered":"How Venture Capital Can Avoid the Next Silicon Valley Bank Fiasco"},"content":{"rendered":"
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In the public<\/span> imagination, venture capitalists are often seen as independent wealthy actors seeding early-stage companies with their personal money. But the vast majority of VC capital is from \u201cLPs\u201d\u2014or limited partners\u2014including public pensions, university endowments, hospitals, and wealthy families. In other words, venture capitalists manage large sums of other people\u2019s money. This makes them de facto gatekeepers of innovation, deciding what gets built and who benefits<\/a>. When this system works, we end up with world-changing companies and technologies. When it fails, as in the case of Silicon Valley Bank, we risk setting ourselves up for stagnation and decline.<\/p>\n

Historically, society has given venture capitalists wide latitude<\/a> to shape and influence the innovation economy. Our laws and policies exempt VC investors from many of the rules and regulations<\/a> that apply to other money managers. In the midst of SVB\u2019s collapse, however, many people have started to question the wisdom<\/a> of granting so much leeway to VC leaders.<\/p>\n

As conflicting theories<\/a> for the bank\u2019s meltdown swirled, commenters from across the ideological spectrum seemed to all agree on one thing: VCs\u2019 responses to the crisis were shockingly unprofessional. Some criticized VC leadership for a panicked<\/a> response; others characterized the pleas for speedy government intervention as the “ravings of idiots<\/a>.” The harshest critics accused VCs and startup executives of being “asleep at the switch<\/a>.\u201d They claimed SVB depositors were financially negligent, citing reports<\/a> alleging that some VCs and startup founders had received personal benefits, such as 50-year mortgages, in exchange for keeping risky uninsured deposits with the bank.<\/p>\n

Del Johnson<\/span><\/strong> is a venture capital investor, limited partner, angel investor, and author. He is a graduate of UC Berkeley and Columbia Law School.<\/p>\n

<\/p>\n

As one of the only VCs who raised early concerns<\/a> about the asset\u2019s systemic risks, I was suprised by neither the VC-led bank run<\/a> nor the week of finger-pointing<\/a> that followed. Venture capital investors have long prided themselves on promoting a collaborative, “pay it forward<\/a>” culture, guided by close networks and personal relationships. However, as a son of the Bay Area who got an up-close look at VC responses to the collapse of the dotcom bubble, I knew this narrative amounted to little more than slick marketing.<\/p>\n

To know why the industry\u2019s panicked and erratic response unmasked flaws at the core of how it operates, we must understand VCs\u2019 reactions to the SVB failure as an outgrowth of the industry\u2019s deeply ingrained cultural norms. VCs are notorious for being \u201cherd animals<\/a>,\u201d behavior reflected in both the bank run and their response two days after the government\u2019s extraordinary<\/a> interventions to make SVB depositors whole. Over 650 firms\u2014including prominent names like General Catalyst, Bessemer, and Lux Capital<\/a>\u2014recommended that their companies keep or return their money to SVB<\/a>, despite an ongoing public conversation about the systemic risk<\/a> of aggregating startup capital into a single bank. Research suggests that this culture of groupthink is the result of consolidating capital<\/a> in the hands of just a few massively influential fund managers.<\/p>\n

According to<\/a> the 2022 Pitchbook Venture Monitor report<\/a>, about 5 percent of VC managers control 50 percent of the capital in the United States. A staggering 75 percent of these power brokers<\/a> attended an Ivy League school, Caltech, MIT, or Stanford, and 91 percent are male. Moreover, these \u201cBig VC\u201d firms tend to cluster<\/a> geographically, with over 90 percent<\/a> based in either Silicon Valley, New York, Boston, or Los Angeles, creating regional imbalances<\/a> that have historically excluded<\/a> promising entrepreneurs and investors from outside of these tech hubs.<\/p>\n

To achieve such a skewed concentration of capital amongst a handful of industry actors, Big VC firms have persuaded<\/a> themselves, their peers, and the public at large of their superior investment acumen. But the lack of basic financial literacy these VC leaders seemed to demonstrate during the crisis underscores serious concerns<\/a> about their competence. One study<\/a> found that VC investment decisions demonstrate \u201clittle or no skill either in the short or long term.\u201d According to a Cornell University model<\/a>, what seems like VC skill is just a matter of a fund being around to invest at the most opportune moments. A recent Harvard study<\/a> even found evidence that investor performance erodes over time, suggesting that experienced Big VC managers might actually be worse<\/a> than their novice counterparts.<\/p>\n

If we want to unlock the true innovative potential of our society, it has become clear that we must dilute the unearned influence of Big VC. Achieving this goal requires us not only to break up the market power of Big VC funds and investors, but to reimagine innovation investing from the ground up.<\/p>\n

We\u2019ll need to build structures that avoid the types of financial entanglements and conflicts of interest that pervade the current system. One way to achieve this is by conducting more research that challenges venture capital conventions, such as VCs\u2019 overreliance on personal relationships<\/a> for dealmaking and the tendency of LPs to overvalue<\/a> brand-name funds. This could be done through new structures, such as publicly funded innovation laboratories, or through private institutions that do not invest in VC and are not entrenched in that ecosystem. The work done at such institutions would have the added benefit of helping reform many of our public innovation programs<\/a>, whose rules are often governed<\/a> by the same erroneous logic, conventional dogma, and untested assumptions as traditional VC.<\/p>\n

As we build new models, we can use legal and policy tools to reduce the influence of Big VC managers and halt the behaviors that contributed to the meltdown. For example, to limit the extent to which the most powerful actors can dominate the market, legislators should consider laws<\/a> that tax VC compensation as personal income, or limit the number of funds or assets subject to preferential tax treatment. To stem the cozy relationship between startup banks and VCs, lawmakers should also consider closing VC-specific loopholes<\/a> that allow banks to invest massive amounts of capital into these structures. On the LP side, we can encourage\u2014through regulation or legislation\u2014more investment outside of the enmeshed<\/a> Big VC system. This could involve lifting the cap on the number of non-VC limited partners a small, emerging fund can have, or creating tax incentives to encourage LPs to invest in new or smaller funds raised by non-enmeshed outsiders.<\/p>\n

Finally, if society has now decided Silicon Valley VC is structurally important, as many have argued<\/a> throughout the collapse of SVB, then lawmakers must also ensure that the VCs who hold overwhelming influence over the sector are subject to professional standards<\/a> and rules of responsibility<\/a>. In numerous other fields\u2014like medicine, law, or investment advising\u2014professionals are required to demonstrate basic proficiency, particularly when incompetence could present a danger to the public if left unchecked. VCs should be no different, given the immense control they have over innovation in vital sectors such as AI, national security<\/a>, and defense<\/a>.<\/p>\n

Ultimately, it is up to us to fundamentally rethink the power we have given VCs and push for meaningful reforms to ensure that the industry fulfills its fiduciary and societal duties. We must act on the lessons of this moment and break the market power of Big VC incumbents, both to save the innovation ecosystem and to ensure economic prosperity.<\/p>\n

\n

WIRED Opinion publishes articles by outside contributors representing a wide range of viewpoints. Read more opinions<\/em> here<\/em><\/a>, and see our submission guidelines<\/em> here<\/em><\/a>. Submit an op-ed at<\/em> op*****<\/span>@***<\/span>ed.com<\/span><\/em><\/a>.<\/em><\/p>\n

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\n Del Johnson<\/p>\n","protected":false},"excerpt":{"rendered":"

In the public imagination, venture capitalists are often seen as independent wealthy actors seeding early-stage companies with their personal money. But the vast majority of VC capital is from \u201cLPs\u201d\u2014or limited partners\u2014including public pensions, university endowments, hospitals, and wealthy families. In other words, venture capitalists manage large sums of other people\u2019s money. This makes them<\/p>\n","protected":false},"author":1,"featured_media":619250,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[248,46,27666],"tags":[],"class_list":{"0":"post-619249","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-capital","8":"category-technology","9":"category-venture"},"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/newsycanuse.com\/index.php\/wp-json\/wp\/v2\/posts\/619249","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/newsycanuse.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/newsycanuse.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/newsycanuse.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/newsycanuse.com\/index.php\/wp-json\/wp\/v2\/comments?post=619249"}],"version-history":[{"count":0,"href":"https:\/\/newsycanuse.com\/index.php\/wp-json\/wp\/v2\/posts\/619249\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/newsycanuse.com\/index.php\/wp-json\/wp\/v2\/media\/619250"}],"wp:attachment":[{"href":"https:\/\/newsycanuse.com\/index.php\/wp-json\/wp\/v2\/media?parent=619249"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/newsycanuse.com\/index.php\/wp-json\/wp\/v2\/categories?post=619249"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/newsycanuse.com\/index.php\/wp-json\/wp\/v2\/tags?post=619249"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}