Venture capital didn’t create the bubble

Dave Winer is a smart guy, and when it comes to Web 2.0 he’s been smart a lot longer than I have — but when it comes to investing and the stock market and venture capital, I think he might be a little out of his depth. I wouldn’t tell Dave how to put together an OPML editor, and by the same token I’m not sure anyone should listen to how he wants to “reform” the venture capital business.

Like a good friend, Robert Scoble is being kind when he says Dave’s post contains “great insight.” I would tend to agree with Paul Kedrosky that his proposed solution is more than a little on the wacky side. Even his description leaves me shaking my head. Here’s part of it:

That’s how Netscape and the dotcommers that followed went through the roof of the stock market. People who traded could see the raw power of the Internet and knew, one way or the other, that this was going to change how everything was done, from business to romance, travel, gambling, everything. So the users of the Internet bid the stock of the Internet up. And up. And up. And so on. So what did the middlemen do exactly? They invested in all kinds of idiotic things.

The point of this seems to be that “people who traded” were the ones who knew what to invest in, while the “middlemen” or VCs threw money at idiotic things like and, so we should get the middlemen out of the way and let users run things and decide what to invest in. I’m not sure which bubble Dave was watching, but I remember plenty of supposedly smart “investors” who bought stocks like and others all the way up into the stratosphere. Was that the fault of stupid or venal VCs? Hardly. They were just supplying what the market had already shown that it wanted: Internet-based anything, and right now.

As Nick Carr has pointed out, bubbles are born on the demand side, not the supply side. And yes, it’s true that there are problems with much of what goes on in the venture capital business, as Canadian VC Rick Segal and others have described. I’m interested to see what Rick has in mind — but with all due respect, I hope to God that he doesn’t take Dave’s advice on this one.

For more on the same topic, I think Fraser Kelton has some worthwhile points, and as usual Fred Wilson summarizes things well:

I would suggest one rule and only one. Be the entrepreneur’s partner. Help him or her. Be there for them. Support them. Counsel them. Share the risk with them. Have fun with them. Laugh and cry with them. And make boatloads of money with them. It’s a time tested formula and it will work forever.

Meanwhile, Rick Segal has obviously been thinking about all this as well — as he hinted in an earlier post — and does what I think is a great job of distilling what the “new” startup landscape looks like, and asking the question (my paraphrase): “If you don’t need much money, and you don’t need a lot of hardware or software, and the Web gives you lots of points of contact, what do you need VCs for?” Go read his post for the answer.


Dave Winer doesn’t think much of my comments, not surprisingly. Fair enough. To answer Dave’s questions (since he doesn’t allow comments on his blog), I am not a VC, and whatever investing I do is through mutual funds, so my track record is effectively a blank slate. But I have been writing about investing and the stock market for about 15 years now. I wasn’t saying that I’m more experienced than Dave, just that his argument for reform in venture capital is logically flawed.

Anne Zelenka, who posted some comments here, has written an excellent post on her blog that breaks down — from an Econ 101 standpoint — the elements of Web 2.0 that make it different from Web 1.0, and why the venture capital business just keeps getting harder.

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