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.

Comments (18)

  1. Jacob Levy wrote::

    Dave responded to your article, go read that. Anyways, IMHO Dave gets it wrong. Its not that anyone should actively NOT listen to Dave’s ideas, its that you’re questioning WHY anyone should listen to Dave more than to, say, ME :) We’re both not in the VC industry, we’re both exactly the same age, we’re both bald or balding… None of which qualifies us as experts.

    Sunday, January 29, 2006 at 2:05 pm #
  2. Mathew wrote::

    Thanks, Jacob. I updated the post to reflect Dave’s comments. As I noted there (and would have on Dave’s blog if he allowed comments), it’s not that I think Dave’s ideas should be ignored because he doesn’t have experience in the field, or because he’s a balding non-VC — I think they should be ignored because they don’t make any sense.

    Sunday, January 29, 2006 at 2:22 pm #
  3. Anne Zelenka wrote::

    Mathew – interesting post. Since VCs are in the middle, they influence both supply and demand. One reason there were so many dot-coms in the last bubble was the demand for them created by VCs. What do you think? Does this idea change your analysis at all? I don’t completely follow why you think Dave’s analysis was logically flawed, but hey, I’m no VC.

    It seems like some shake-up is going to happen for VCs just because start-ups can get by with so much less money these days and because it’s so much easier to get noticed now without already having the right connections. I think the market will come up with a solution, but I couldn’t predict what it might be.

    Sunday, January 29, 2006 at 3:01 pm #
  4. Mathew wrote::

    Thanks for the comment, Anne.

    I agree that VCs are in the middle, but I would disagree that they influence both supply and demand. I would argue that VCs only respond to what the market is telling them, and if the market says it wants more profitless dot-coms, then that is what VCs will put their money into. By themselves, they can’t create demand

    The reason I think Dave’s analysis is flawed is that he seems to be proposing a kind of public investment fund, and yet the investing public — including many knowledgeable users and investors — is what caused all the trouble last time around. One of the most dangerous things when it comes to investing is drinking your own bathwater, and I think you could argue that good VCs probably save as many startups from flaming out by going too fast as they do the opposite.

    Sunday, January 29, 2006 at 3:19 pm #
  5. People are forgetting that The Bubble was our generation’s Gold Rush, with all the giddiness, hope, success, wealth, failure, desperation and heartbreak that went with the *real* Gold Rush. All was possible, basic financial reality was questioned, and there was a real sense that you had to jump in because this was a Once In A Lifetime Thing. You *had* to be in – this was your brass ring, boyo, and don’t you DARE miss out.

    For all its’ seeming frothiness this go around doesn’t feel ike that. Yes, it is minor-league frothy, but there aren’t jillions of dotcom features-masquerading-as-companies, and seemingly pointless-unless-you-squint-really-hard “end-to-end-solutions” to a non-existant problem floating around. I mean let’s cut to the chase: how many of these hot things of the moment *are there*, this time? Not too dang many. Nothing close to the last go around. I mean, it felt like a week didn’t go by without some air-filled whozit going public to breathless acclaim and visions of dollar signs dancing in heads. If that stuff is happening weekly now, I am sure not seeing it.

    The big excitement is not really broad based this time – I mean, for the most part the action is either with GYM+aol or in their immediate orbit. The outfits getting attention are – with serious respect to those who created and drove them (I’ve been there, I get it, you did it, nicely done) – neither numerous, nor huge.

    All this to say that, for VCs, the sandbox in which they are able to play *is* smaller in many respects this go around. That said, anybody who thiks that the role of VCs is off to the dustbin doesn’t get how hard it it to build a profitable, sustainable, matters-to-customers business. It is not easy, and if Big is the desired destination, *rarely* cheap. But good on anybody in VC-land who sees the emerging issue, and is thinking about how to roll with those punches.

    — Stuart

    Sunday, January 29, 2006 at 4:38 pm #
  6. Mathew wrote::

    I think you’re right, Stuart. Maybe this bubble is Bubble 2.0 — more distributed and less expensive than the original :-)

    Sunday, January 29, 2006 at 4:50 pm #
  7. Anne Zelenka wrote::

    Mathew, yeah, I see your point a bit better now. VCs didn’t create the bubble, I agree with that. However, whether they acted as an accelerant or a modulator… I’m not sure. In a somewhat parallel situation the current real estate bubble has been exacerbated by new types of mortgages like interest-only and 100%, that themselves are available because hedge funds have been buying up mortgage-backed securities sometimes without attention to the risk involved. Did VCs help manage risk, like you propose, or did they make the situation worse because they were playing with other people’s money? I understand other countries don’t have quite extensive a VC industry as we have… I’m wondering how the presence of VCs affected the bubble.

    Anyway, I like looking at it through a supply-and-demand lens… that’s a good thought. I blogged my own economic perspective on the current situation after reading yours.

    Sunday, January 29, 2006 at 7:43 pm #
  8. Marina Architect wrote::

    Scale out and grow at any consequence was what the VC model predicated for fueling the bubble. No denying it. Get a clue Ingram. Having said that, that approach works in the long run: look at finally makin’ money every 3 months(cash flow not paper). VC’s are critical in idea development (our US society) but the model is beginning to fade in that software and service needs to be profitable in the near term and not the long-term. This is the difference. But then Skype sold for . . .

    Sunday, January 29, 2006 at 7:53 pm #
  9. Mathew wrote::


    I would definitely agree that having so many VCs — driven by the hot IPO market — fueled the bubble… no question. I just didn’t think it was fair to say that they created it.

    And thanks for pointing me to your post — you did a nice job of explaining in fundamental economic terms what makes Web 2.0 different from Web 1.0, and that is a valuable thing for all of us to keep in mind.

    Sunday, January 29, 2006 at 8:21 pm #
  10. Mark Kuznicki wrote::

    Better late than never, I’ll add my two cents here.

    Friday, March 17, 2006 at 2:38 pm #
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    Thursday, May 29, 2008 at 8:01 am #
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    Monday, July 14, 2008 at 3:04 pm #

Trackbacks/Pingbacks (13)

  1. Qumana Investor Blog :: Main Page on Friday, March 24, 2006 at 4:14 am

    As part of a start up company, this is clearly close to me. The questions and suggestions brought up are good. The thinking is challenging. Is Web 2.0 now the time to think about alternatives? The discussion: Mark EvansMathew Ingram Dave Winer Crunchnotes Robert Scoble Tags: Venture capital, VC, investment Powered by Qumana

  2. Remarkk! on Saturday, March 18, 2006 at 6:35 pm

    that acknowledged some issues in VC land. He followed up with a little more clarification, and a focus on the software and web services space. His posts triggered a flare up of discussion, notably here, here andhere. It’s been stuck in my brain ever since. Umair Haque, as always, has some fascinating thoughts on the subject, particularly as it relates to media. He makes a bold statement: But let me be more honest than I perhaps should be: from my POV, as a

  3. Vince Outlaw's Weblog on Sunday, February 5, 2006 at 8:20 am

  4. The Doc Searls Weblog : Saturday, July 1, 2006 on Tuesday, January 31, 2006 at 7:18 pm

    [IMG] Nick Carr andMatthew Ingram seem to agree that bubbles are born on the demand side, not the supply side. Says Nick, Bubbles are simply a matter of supply and demand – too much demand (investor cash) chasing too little supply (investment opportunities).

  5. Scripting News: 6/30/2006 on Monday, January 30, 2006 at 8:33 pm

    [IMG A picture named youngMenWithBuckets.gif]Matthew Ingram: “I’m not sure anyone should listen to how he wants to ‘reform’ the venture capital business.” I’ve heard this before. Once David Weinberger and Howard Rheingold told me that people wouldn’t listen to my ideas on anything other than technical issues. I

  6. Great Things on Monday, January 30, 2006 at 5:01 pm

    on reinventing venture capital. Of course, reinvention will help Rick because he is not on the inside of the VC club. But the need for everyone, now including me to pipe on the topic, creates very little value in a debate that the market will decide.Mattew Ingram, Mark Evans, Tom Evslin, Doc Searls, Dave Winer and a host of others have commented on the issue. John Battelle seems to be the only A-list blogger not to have throw in his ideas. Yes, it is easier and cheaper to start companies now then it has ever

  7. Newsome.Org on Monday, January 30, 2006 at 12:56 am

    greater fool theory and rush a bunch of companies to market that have no way to turn their ideas into a profit. This happened far too much leading up to the last bust. And as an aside, online ad revenue by itself does not a business plan make.Mathew Ingram: Says that the VCs didn’t create the bubble and that as a practical matter, we can’t simply take the middleman away under our current system. He also says, and I heartily agree, that the smart investors who might otherwise serve as a balance against

  8. Anne 2.0 on Sunday, January 29, 2006 at 10:29 pm

    venture capital didn’t create the bubble.” Other opinions from the bloke-o-sphere can be found here, here, here and… oh, why don’t you just go look on tech.memeorandum for the latest. I’m sure you’ve been wondering, “what does Anne 2.0 think?” because everyone wants to know what a

  9. Horizon of Stars on Sunday, January 29, 2006 at 7:25 pm

    I really think that a VC market will produce far greater disruption of the VC investment industry than the creation of a publicly traded VC fund as Dave Winer has proposed. Links to Conversation: Michael Parekh, Paul Kedrosky,Mathew Ingram, Michael Arrington, Mark Evans, Robert Scoble Technorati Tags: VC, Venture Capital, Markets, Disruption, Doc Searls, Dave Winer

  10. The Post Money Value on Sunday, January 29, 2006 at 6:22 pm

    , in other words hire the consultant, he does the voodoo, give em the check, done. Maybe a VC firm calls upon him from time to time or maybe he (or Seth or others) are on retainer. Maybe. Matthew Ingram,in his post, makes the point Venture Capital didn’t create the bubble and I agree with Matthew on doing a variation on public company thing, not sure if that would work any better/worse then what we have in Canada, aka Labor Sponsored VC funds.

  11. *michael parekh on IT* on Sunday, January 29, 2006 at 10:43 am


    ALL TOGETHER NOW… Dave Winer has a 5-step idea to disintermediate VCs and directly connect entrepreneurs with users to create a User Internet Capital Corp.. Specifically, the motivation is to:’Take out the middleman. We don’t need the partners, li…

  12. Computerworld Blogs on Monday, January 30, 2006 at 8:28 am

    VC 2.0? (and cult UK IT TV)

    In today’s IT Blogwatch, we look at "Venture Capital 2.0." Not to mention the new soon-to-be-cult TV sitcom set in your typical IT department …

  13. Don Dodge on The Next Big Thing on Monday, January 30, 2006 at 9:41 am

    Economics of the VC business

    There is a lot of blog buzz this week on the VC business. Rick Segal started the discussion with his VC Rant and VC 2.0. Both posts basically say that VCs need to make smaller investments in a lot more companies, and that VCs need to be more open to