2.4
2.3 
2.4 
2.5 
2.3 VC's or Investment Bankers
TheFunded.com Open Letter
Posted by carlwimm on 2010-02-25
TO everyone
Tom Perkins (Kleiner Perkins) wrote an article in the WSJ.
He tries to point out some differences between Venture Capital (The Valley) and Investment Captial (NY).
He writes:
Venture capitalists work with entrepreneurs to start new companies from the ground up. We earn our reward only when companies become successful.
Investment bankers are deal makers. They're in charge of bringing companies public and advising on acquisitions.
Now ... points of view are what the world is all about.
1) Let us take the first statement about VCs
Venture capitalists work with entrepreneurs to start new companies from the ground up. We earn our reward only when companies become successful.
Really????? When was the last time that Mr. Perkins took a phone call from an entrepreneur and wrote a 250,000 dollar "let's get you started " cheque.?
It wasn't in the "naughties", or the 90's. It may not even have been in the 80's. The last time people "worked with entrepreneurs at start up time" was in the 70's.
The correct statement is
Certain VCs will "interview" entrepreneurs who start new companies from the ground up.
But "work with them"????? Hell, even Angels don't do it that much anymore.
2) the statement about IBs
Investment bankers are deal makers. They're in charge of bringing companies public and advising on acquisitions.
So let me get this straight. A VC, who is a mezzanine lender (a "participating lender" in my terms), working with a 10 year time horizon, is not concerned with a) bringing companies public or b) an exit via acquisition???????
Or that they are not expert in just those two things.
Come on, be serious.
VCs on their own web pages tout the number of successful acquisitions and IPOs that they not only participate in (how else do they exit) but give the impression that it is the VC form that engineered it.
Here are the real differences.
1) IBs in New York are politically tuned in. Why ... because the federal reserve system of money printing which enables government overspending is a political invention.
VBs in the Valley have no such mechanism of covering up their mistakes and blunders.
With a federal reserve in your back pocket, the IBs are not really IBs, they are more like Washington "running dogs" with big bonuses.
The proposal is to tax IBs as "running dogs" - full taxes and no bonuses. Why not, after all, none of it is their money. The bankers who started the federal reserve some 97 years ago, might be angry that politicos have usurped their money machine and deny them unearned profits ... but that is another post.
2) VCs live off the pension, foundation system. They take in large amounts of money and invest it over 10 years in well established technology companies, with sales, profits and market traction/position.
That is EXACTLY what an investment banker does.
I will agree with Mr. Perkins that "people in his group" (I cannot use the term VC to describe them) have a different time horizon. They want a "ten bagger" over 5 years while the NY running dog crowd wants 10% on a deal that lasts a month.
(Do the math, it works out about the same)
I will agree with Mr. Perkins that "people in his group" do get involved, they join boards, they form policy... all on an ongoing basis. The running dogs never join Boards - why take on that liability?
3) Tomato, Tomahto
But metaphysically, certain similarities are striking.
a) Running dogs take vast amounts of printed F-reserve money at 1/4 of 1 % and lend it to the government at 3%, pocketing a neat 27 billion per trillion, risk free.
b) "people in the group" rake in vast amounts of pension money, live off a "2 and 20" regime ("2 and 30" in the case of the specific tidepool in which Mr. Perkins swims) and try and hit home runs off deals that have been around ofr 5 years and already proven themselves.
They are the new "investment bankers".
So, since the purpose of Mr. Perkin's article was to claim a privilege of lower taxes, may I suggest that any politician reading this consider the justice of his claim.
Running dogs (Wall Street) are lending to Capital Circle, not to Main Street. Tax the hell out of them. - 40%
Any "people in the group" who have a fund over 25 million in size are NOT "venture" anything. They are investment bankers. Tax them at the old IB rates. - 20% cap gain.
And people who really start businesses, people who invest at the founding stage, people who put in 5, 10 years and more at no pay .... no taxes at all.
Now that WOULD be fair.
best wishes.
I agree that VCs and IBs are different to some extent, but that "extent" is highly firm-dependent. Some VCs are really entrepreneurial and some are not. Some IBs are moderately risk-oriented and others are not. That's all good because the market needs an entire spectrum of funding options.
What's bad for everyone is the deliberate misrepresentation made by a number of VCs and LPs who claim to be what they are not.
What REALLY should be done regarding tax rates is quite simple: only those monies that are actually transferred to companies to grow them should be taxed at the lowest capital gains tax rate. Any income derived from the rest should be treated as ordinary income or some intermediate rate between W-2 and the lowest capital gains tax rate.
This modest step alone would provide an incentive for limited partners (LPs) to choose only those VCs that put the vast majority of their investment money into an actual company versus using it for overhead. Otherwise, their tax situation would not be nearly as attractive.
This modest step would also encourage VCs to make better investment decisions and encourage them to reduce the "2" of the "2-and-20" rule.
It's like choosing a charity: is the majority of the money really going to help people in need or is it merely for advertising and fund-raising efforts? Efficiency in this important space is essential and this step would do a lot to improve it.
>The correct statement is
>Certain VCs will "interview" entrepreneurs who start new companies >from the ground up.
>But "work with them"????? Hell, even Angels don't do it that much >anymore.
They "interview" entrepreneurs, find out what they have and then turn their ideas and inventions over to their portfolio company until ...
Check out this story about why Agami shut down mysteriously
http://www.indusbusinessjournal.com/M...%3A%3AArticle&mid=8F3A7027421841978F18BE895F87F791&tier=4&id=57350E0A348D4E338A2C68208221E12E
KPCB was an investor of Agami.
Amen!!
One of the few VCs I have worked with over the years who actually does add value to a company sees this as problematic to the industry. In his words, if we have to pay ordinary income tax it becomes a much less attractive career option.
That may be a very good thing as a shakeout of those VCs who are only in it for the capital gains rate taxation and the ability to make money vs. those truly entrepreneurial VCs who enjoy starting new ventures would take us back to the 70's and 80's and get rid of the B-school types.
It is very hard to argue that someone who puts nothing at risk (VCs) but manages someone elses money should receive capital gains treatment. When they have run your company into the ground and put you out of job, they just turn to their next portfolio company or investment, while the entrepreneur, who has risked everything, is out in the cold and the LP has lost a boat load of money.
TO Duffer, #4
Taxation is almost not the issue.
Like bankers who get 50 million bonuses for destroying a financial system, VCs who get cap gains, are viewed as undeserving.
The financial model (banking) is going to change and so will the model by which funds are brought to innovative projects.
Both changes will be painful because so many sectors have been spoiled by easy, undeserved gains.
but it will come.
best wishes