The media treats with reverence the geniuses who invested early in tech giants such as Google, Facebook, and other big Internet names. If you're a super wealthy person, and you obtained your wealth by luck, inheritance, or financial manipulation, you're probably eager to prove you have something useful to offer the world. You want to be associated with a sexy new startup to demonstrate your brilliance and establish some family honor. You want to do the modern equivalent of buying yourself a title. Instead of becoming Lord of Devonshire, you can be an early investor in a startup that might become a household name. You want to be like Sean Parker, who will forever be introduced as co-founder of Napster and founding president of Facebook. Internet companies are the new royal titles.

My theory is that venture capital used to be a more rational business model. Today, I think venture capital is largely ego-driven. For wealthy investors, it's more about proving how smart you are, and having the chance to forever associate your name with a startup success. It's sort of like the Kennedy family transitioning from their bootlegging roots (allegedly!) to politics. Rich people often need to scrub their family reputations. Investing in startups is the modern way to do that.

I came up with the Ego Theory of Venture Capital while reading through a list of startups that recently got funded. Maybe it's just me, but I didn't see anything in the bunch that looked like a potential winner. Ego has to be behind much of the funding because economics wouldn't explain such weak investments, even under a venture capital model. Historically, a venture investor hoped to succeed 10% of the time. Now I'm seeing startups that seem, at least to my non-expert eyes - to have something like a 1% chance of success.

Interestingly, all of the doomed startups comprise, collectively, a system in which poor people can redistribute wealth from the top 1% to themselves. If you want the rich to have less money, one sure way to do it is by starting an Internet company and getting venture capital funding. The only way your scheme for income redistribution can fail is if your startup unexpectedly succeeds and makes the rich investors richer. And what are the odds of that? Check out this article in Business Insider about the poor performance of venture funds.

Now we have this absurd situation in which society is complaining that the rich have too much money at the same time the rich are begging the poor to take their money. The only condition the wealthy put on the transfer of money is that the poor need to put together some PowerPoint presentations that use the words "social" and "cloud." Is that too much to ask?

If you think the rich have too much money, stop complaining and do something about it: Start your own Internet company and go get some venture capital funding.

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May 23, 2012
Hi Scott

I would just like to say that you have totally called the Venture capital thing AND the 'one percent' floating Island thing! (see the link below)

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May 15, 2012
I only want to do it if i can have Dilbert as an invester.
May 14, 2012
A friend and I started up an internet company, and he was ravenous for venture capital. I didn't really understand it. I already had a business fiber connection to my house (for personal use), a server rack, servers, and all the computers we needed. I didn't need a salary (as I worked on it during evenings and weekends after my day job), and we didn't have any business expenses.

In the end, he accumulated about $80,000 in venture capital, most of which my partner paid himself in salary, with the rest dumped into a dumb patent that we couldn't have possibly defended.
May 14, 2012
Uh, didn't something like that happen just afew years ago? People had these great 'ideas' and people just gave them millions and millions of dollars. Then when people realised it was all a bunch of hooey, people lost everything.

But it wan't the rich that lost. Rich people, who didn't get that way by being suckers, gave a million here and there (of their billions) and then convinced a bunch of middle class people to invest their life savings.

Then the geniuses who had these 'ideas' leveraged the cash with the bank (owned by the rich people). So then when the ideas flopped, the bank took their cut, plus interest, and the investors got nothing. Wealth flowed from the rich to the rich, and from the middle class to the rich. The middle class has not recovered.
May 14, 2012
This (PowerPoint with "cloud", etc.) reminds me of your old "Buzz-phrase Generator." Is that still around?

For those of you who never saw it, it was a program that would assemble a meaningless jumble of buzzwords into something that approached being a sentence but actually had no meaning. You know, kind of like "Our strategic value is to associate an unexcelled customer experience with world-class cloud services in an earth-friendly way." It was so cool!

But I digress.

On the VenCap side of things: I recall speaking with a guy who was part-owner of a venture group. He told me that their goal hit rate was 20%. That is, for every five businesses in which they invested, four of them would go belly-up prior to the "B-round," and one would make at least enough money so that they'd make a slight profit on the total investment in the five companies.

He also had a sub-group that worked like this: for a company to either go public or, more likely, to be an attractive take-over target, it had to reach a certain revenue level. His sweet spot was around $60 million. So what they'd do is find an industry that had a bunch of small competitors - companies with revenues between $5-10 million in terms of revenues, and profitable or break-even, and buy them. Then, they'd consolidate them into one company, reduce the overhead (single accounting, combined customer service, etc.) to make them more profitable, and then try to find a buyer for the new, consolidated company.

I actually was involved in one of those when I was VP Sales/Marketing for a small manufacturing control software company. A venture group wanted to buy our company (I had no equity, so I could have cared less, but they made me the front guy for presenting the company) and consolidate it with some other competitors of ours. The deal fell through because our owners put some ridiculous terms into the deal (lifetime employment for the owner's kids, etc.) But it was an interesting time, a la the Chinese curse.

Sure, it helps to have money to make more; but if that were the only way it could be done, there'd be no Apple. VenCaps are mostly good businessmen trying to help out other businesses as well as themselves. This win-win scenario is what we should all strive to emulate. Not a bad way to go, IMHO.
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May 13, 2012
Kind of nitpicky, but I think you're more describing angel investing than VC. VC has a reputation for often !$%*!$%* over the entrepreneur, not the other way around.
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May 13, 2012
Is burning it an efficient use of capial?
-3 Rank Up Rank Down
May 13, 2012
Great idea: take advantage of the egoism of the rich to punch them in the !$%*! They're so time-starved that they're scatter-brained ditzes who've probably never learned how to switch on a computer. Won't know what hit them, poor dears!
+7 Rank Up Rank Down
May 12, 2012
Interesting how the current administration has subliminally defined "The Rich" largely as Greedy Doctors and CEOs. Rich Entertainers such as Actors, Sports Figures, Artists and Musicians get a pass.
+2 Rank Up Rank Down
May 12, 2012

Here is a real time example of a venture going broke during a recession.

The Norwegian telecom company Telenor has roughly 1.6 billion dollars of public funds, similar to the US Capital International's pension funds. Telenor bribed the Indian telecom minister and bought spectrum licenses at throw away rates hoping to make a killing.

The fraud was exposed, the minister imprisoned and the licenses withdrawn. Norway is not a country that can write off 1.6 billions of public money. Diplomats are busy drawing up recovery plans.

Norway is lucky India is not China. The Chinese would have taken half of Norway on lease for the next 5 decades as they have done in Pakistan and North Africa.

Want to learn how to milk the rich? Learn Chinese.

May 12, 2012
Isn't this blog just the plot to the film The Producers?

BTW It is not the Lord of Devonshire or even Lord Devonshire, it is the Duke of Devonshire
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May 12, 2012

Appreciate your response.

You are right about simplicity. No matter how deep or wide-spread, the roots are always the simplest part of a tree.

Dr. Amartya Sen's thesis on micro-finance was a remarkable trend setter. But it would have been more useful if he was not a part of the ivory towers in Harvard. This top echelon is trained to complicate everything.

The big banks, I believe are an integral part of this hideous system. The Davos meetings, the Basel standards for risk management, the caveats of IMF and World Bank are live evidences of the indiscriminate conspiracies hatched and executed against common people of all nations. The US is included. Money does not recognize patronage, citizenships, boundaries, race, religion or culture.

Politically, the US and India are the only two countries left which still have an enduring democratic system. We are not supervised by a King or a Queen hovering over us like a divinity. We can still overthrow our leadership by simply expressing our opinions through votes. I think we have every reason to be proud of it. The Magna Carta has changed our world altogether, even if it didn't do much for the people of UK who wrote it.

However, as you said, corruption continues to hound us like an evil spirit in one form or another.

The corruption in India is slightly different from that in the US.

In India, except for one Italian family, the rest of the politicians, government officers and private citizens are all Indian nationals. The government officers help the private citizens to evade taxes and the unaccounted cash is used for further politics.

This is unlike the US where the government invests in its own enterprises outside the country. They have stakes in Syria, Israel, Egypt, Libya, Iraq, Afghansitan, Pakistan, Sudan, Yemen and all those countries where companies of Houston are operating. So, corruption and money laundering have taken a more sinister form.

The problems faced by the people in India and US may be different in form and features, but they have the same conceptual roots.

It's only a matter of time before we realize it. I never loose hopes.

Cheers. Have fun. I think we are deviating from Scott's post about milking the rich.

May 12, 2012

Thank you for the reference.

I heard of the micro lending concept a few years ago, probably NPR. But never looked at it to know who, or how it worked specifically.

I'm ignorant to how the system currently functions.

In regards to Dr Amatlya, system. Complexity may be whats killing the cat....The fragmentation of the system is, i'm sure problematic.

Keep it simple. And have some regulation keeping the bad practice out of the mix.

The simpler the system is, the less bad things that can be hidden.Such as corruption and money laundering.

The way I see it, The average reading level in the united states is at a 8th to 9th grade level.

So the contracts should be written at a 8th grade level.

Part of the sub prime loan problem was caused by people who couldn't understand the terms...
If people don't understand the terms they sign, they don't understand the consequence of what happens when they make a late payment...

I shouldn't have to have a law degree or rely on some scum bag to interpret the contract...

Wise words from jesus. " don't trust scribes"

Its not rocket science...

But of coarse our current system is OBVIOUSLY designed to be complex and confusing to screw people over and hide shady bank practice.. Banks make profit from confusing people. Just think of how many homes they repossessed the past few years!

The big banks will never admit the deception, because they are nothing but egotistical fools with no integrity.

Plus they don't obviously want to be sued.

So for the well being of society, someone with enough money needs to come up with a better, simpler, product with integrity...

The system is a tangled mess...

The big banks cheap, complex, confusing crap product can be beat if someone created a better, simpler more valuable product with integrity,that people actually understand.

Thats how capitalism works right...
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May 12, 2012

An Indian economist named Dr. Amartya Sen, got the Nobel prize for just the same model of micro-loans that you described, though his was more elaborate and without a reference to platinum.

Micro-capital has worked wonders in a country called Bangladesh. But that economy is too small for significance on a statistical measure. Even it's army can be financed by micro-loans.

A nation like India, with a modest 3 trillion dollar economy, has a combination of all sorts of venture capital, from those of private citizens to nationalised banks, multinationals, and even Islamic banking which gives loans without charging interests.

The VC market among the private rich is not as ego-centric in India as Scott says it is in the US. It has more to do with tax evasion and money laundering.


May 12, 2012

Microbank can be marketed to anyone. The middle class mother who need a little more cash for diapers, the poor college student who needs some ramen noodles or beer, if of age. The poor guy that needs toilet paper...
May 12, 2012
Heres a start up a rich person who has some "Real ball's" can do.
May not make astronomical amounts of money. So you may not be able to crap on a platinum toilet and have 10 homes.....
But "Honestly "how much crap do you need to be happy.

The current banking industry needs to be changed. I was raised to pay attention to results, and the results of the current system is nothing but pure crap... Every thing seems to be ran by egotistical idiots, Who prefer a messed up system. And obviously they prefer The messed up system because they make a profit from a messed up system. Apparently they "need" to crap on platinum toilets...

I haven't studied micro lending done in third world country's, so I don't know how others do it .

But this is how I would do it....

1. Start a bank that specializes in "ethical" micro loans.

And when I say ethical I mean ethical... Not ethical as in" big bank ethical" where they figure out some cleaver way to screw you over.
Its called integrity people.....

The loans can be as low as 10 dollars.

Interest would be absolutely capped at 10 %. No more...

A computerized universal micro credit system can be created, that keeps track of loans and payments. Customers who become delinquent on their loan will not be able to get another loan until their first loan is paid off.

Micro credit will not effect regular credit.

No damage to their regular credit will occur because micro credit will be separate from the standard credit agency's. Micro credit ratings can only be reported to the regular agency's if the consumer gives permission to have their micro credit rating applied to their standard credit. So good or bad credit is kept private to the micro lender and customer.

Customers who keep a good standing on their micro loans can apply for larger loans. micro loans max out at a couple of thousand dollars? And Any larger loans can go the standard mode of lending.And as a plus, micro credit rating can be applied to their standard credit for larger loans.

The reason humanity has survived for so long is because we are able to adapt. The reason why some company's stay afloat for many years, is because they are able to adapt.

Part of adapting is smart risk,and taking the advice of idiots with a grain of salt.
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May 11, 2012

During the rennaisance wealthy patrons would give artists a stipend so they could create their art without worrying about things like food, clothing...rent. The economy has grown to the point where instead of the wealthy helping people one at a time....you can club together, form a company!
+17 Rank Up Rank Down
May 11, 2012
Scott, I just emailed you my powerpoint called "mobile social cloud for big data".
When can I expect your check?
+9 Rank Up Rank Down
May 11, 2012
From each according to his inheritance, to each according to his graphics.
+28 Rank Up Rank Down
May 11, 2012
" The only condition the wealthy put on the transfer of money is that the poor need to put together some PowerPoint presentations that use the words "social" and "cloud.""

It's hilarious that people actually think these company founders are starting off poor before striking it rich.

Zuckerberg, founder of Facebook, was a Harvard student and the son of a doctor. His other co-founders had their parents loan him tens of thousands of dollars in seed funding before the "real" VCs got involved.

Kevin Systrom, founder of Instagram, went to Stanford, a $40 thousand per year institution.

VCs aren't giving money to the poor. They're giving money to other rich people. However, I'm sure they feel poor in comparison to the VCs giving them money!
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