The nitwits op Sand Hill Road

Vrijdag 2-10-2009 - Venture capital wereld - I could not help but chuckle (again) when Oracle's 30-year-running CEO, Larry Ellison (full disclosure) fiercely yelled out the words from the title of this blog, referring to the artificial arbitration of innovation applied by Venture Capitalists (VCs) we talk about in this blog so often.

Sand Hill Road, for those unfamiliar is the street in Menlo Park, California where the majority of Silicon Valley VC enjoy some of the most expensive office rent in the country and invite their often starving entrepreneurs to "beg" for money. The area is considered the birthplace of Venture Capital Capital.

Larry goes on to say that Venture Capitalists think that innovation is like coming up with a new technology buzzword, expressing his specific dismay with the term cloud computing (watch the Churchill Club interview on YouTube, skip to 47:53 min if you don't like boating).

The reason why I bring that up is four-fold:

1. Entrepreneurs are subject to this artificial arbitration (that is applied with the seasonality and commonality of fashion) as the primary method to get their high growth company funded. Entrepreneurs think that "wisdom" leads to success, yet deplorable VC returns proves otherwise.

2. Limited Partners (LPs) seem to respond commensurate with their limited allocation in venture (usually less than 15% of total allocation) and their natural inclination is to rest with the excuses (we debunked) from VCs, who never fail to reiterate that cyclical behavior of the financial markets and the economy are to blame for the deplorable returns in venture.

3. VCs are downplaying the systemic risk of this artificial arbitration (applied by the venture investor cartel) to our government, stating that $200B of venture investments pose less systemic risk than other asset classes, while completely ignoring that their behavior kills the meritocracy and innovative culture our country was founded upon.

4. Other VCs in the country (and around the world) copy the tactics of Silicon Valley investors, with similar results awaiting them.

But feel free not take my word for it. Agreeing with Larry Ellison, Mike Moritz, one of Silicon Valley's most lauded VCs was recently heard saying the Venture Capital business has been broken for twenty years. So do similarly successful venture peers Vinod Khosla and Greg Lamond, who believe - like we do - that when the risk is sucked out of investing, one should not expect great returns.

Still not listening? Stanford, Yale, Harvard and Princeton universities all appear to be suffering from significant losses to their endowment as a result of investments in "alternative" assets, which includes venture capital. To combat, according to PE Hub, Stanford has just raised a $1 billion in a bond offering last April in case of a "true emergency".

By the way: with those Ivy League universities having bred the most renowned economists and professors in entrepreneurship does anyone question whether their expertise is worth the tuition? Are the experts really what they claim?

How much exactly of that depressing news can be contributed to the performance of Venture Capital is not clear to me today (Hedge funds and Private Equity are the most common other assets) yet reports from both CalPERS and CalSTRS pension funds suggest a lackluster contribution of VC across the venture spectrum.

Deaf? Many of my peers in executive positions at Apple, Cisco, Oracle, HP, eBay refuse to enter the venture fray in which the equilibrium of entrepreneur and investor is completely out of whack. The cyclical nature of the downward sub-prime spiral continues to rear its ugly head. The only entrepreneurs that submit to sub-prime investments today as sub-prime as their investors, incapable of building great fund performance.

The alarm bells are ringing. Limited Partners need to wake up, simply because of the loud reverberation of a vast proponderance of circumstantial evidence. It is time for LPs to listen, not to popular opinion from the people who got them in this financial debacle in the first place, but to people who offer ideas that simply serve entrepreneurs better. The time for change is now.

Passively waiting for consensus on data driven views is guaranteed to lead us to what Larry referred to as an L-shape recovery in the venture business.

Venture Company