declining social capital in VC
some days ago, i made a very brief post that included what i think is a very insightful and multi-faceted quote (the kind i like best). unfortunately, i haven’t found the source of the quote (google is no help, maybe it was radio, or maybe i bastardized it just enough to make it my own). in any case, it resonated with some of my current thinking enough for me to jot it down and eventually blog it, and today i found an interesting expansion on the subject.
Tim Oren comments on the unintended consequences of the push for disclosure of information in the business of venture capital.
since i’m flirting with venture capital, it’s a Very Good Thing for me to know more about how this works. i’m the guy with the Next Big Idea (which you may or may not know already from the content of this blog), but just a little bit of [not so great] experience sitting across the table from vc investors, so i do like the idea of being able to better dissect a few living examples. i’ll even admit that there’s a little part of me that says “hey, if you’ve got that kind of money, you get little sympathy from me. if only i had your problems…” while i try find a way to make rice interesting. again.
on the other hand, i appreciate the concepts of trust and delegation – they are, in fact, key to my Big Idea. there are issues of due diligence and “know thyself” well enough to survive the heartburn episodes. if you don’t do your homework, and the guy from “nigeria” runs off with your bank account, well… you shouldn’t be playing the game. and if you don’t have the stomach for the risks, then you shouldn’t be playing the game either. and maybe all of us are due a scam or two just for good measure and to keep us humble. that said, a fund manager is a fund manager (with a track record), because they understand managing a fund. at some point, as an investor in a fund, you just have to trust that you have picked a good manager (or team), sit back, take your blood pressure medication, and enjoy the ride.
Oren’s point is that disclosure of the process, and broad public scrutiny of the “work in progress” is not necessarily a good thing, and the consequences only begin with the initial public “oh my!” reaction – it ripples through layer after layer of social capital.
forcing open the books is a decline in social capital, and it increases the costs of doing business. MORE diligence. MORE lawyers. MORE FOIA lawsuits. and, as Oren points out, the consequences stifle opportunity for everyone involved. entire classes of funding sources (those subject to even the potential of public-disclosure suits) may vanish under the new reality. VC firms may be compelled to limit their funding sources. and on the other side of the table, entrepreneurs (and struggling entrepreneurs like myself) may be forced to work under the hot lights of public exposure (which can kill), or simply have fewer “quiet” options for funding.
if there’s one thing i’ve heard from vc investors over and over in public statements and casual conversations, it’s “trust us.” trust us with your life, your work, your economic well-being. in a world increasingly dominated by you-can-use-it-but-you-don’t-own-it end user licensing agreements, six-page non-disclosure agreements, and other arcane legalspeak, it’s almost refreshing that there still exists a segment of financial and human endeavor where trust is a key part of doing business. there’s a very solid, practical reason trust plays a huge role in venture capital. (that said, i disagree with a lot of the way the business is done, because i think proclamations of trust are insufficient, but that’s a subject for another day…)
in the end, i think the consequences outweigh the benefits. i’ve been getting my education in “vc mindset” the hard, tedious way, and that’s fine. i haven’t learned anything really useful from an investigative reporter on the subject. this is probably inevitable in the wake of the “scandals of the early 2000’s”- the public wants someone digging up the dirt on the next corporate scandal before it becomes a corporate scandal, and venture capital is the “high drama” end of the investment universe. does this eventually slip down to the level of “Star Search 2005: Who Wants To Marry A VC”? pick up your touch-tone phone, america, and pick the Next Big Idea….
a corner of the social network has been torn, and that means things will be more expensive for everyone, including me.