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.