“The historical track record of old white men crapping on new technology they don’t understand is at, I think, 100%.”
Marc Andreessen, Venture capitalist and Bitcoin investor
Andreessen made his dismissive comment this summer at a forum discussing the future of Bitcoin, a crypto-currency I mentioned in a prior blog. The old white guy he was dissing was Warren Buffett, who had made some comments skeptical of the intrinsic value of Bitcoins.
Andreeseen was technically correct about Buffett’s predictive track record. He just had the value sign wrong. Buffett’s track record of forecasting the value of new technologies is indeed 100%, but the Sage of Omaha has been correct, not incorrect. Back in the late 1990s, Buffett published a comprehensive takedown of the technology bubble in Fortune magazine. At that time, tech enthusiasts dismissed him, indeed often ridiculed him for being old and out of touch. But Buffett was right. Investors in high-flying tech stocks lost most of their money as the tech-heavy NASDAQ index fell by almost 80% between March of 2000 and October of 2002.
Paying respectful attention to Warren Buffett is an intelligence test for any investor. So in trashing Buffett, was Andreesen ignorant, arrogant, or both?
The answer, I suspect, is neither. He was simply, as the tech world puts it, “talking his book.” (Thanks for that phrase, Mike.) Andreessen is a smart guy. He was one of the inventors of Mosaic, the first web browser, and a founder of Netscape. He reaped billions from his early tech career. Now a venture capitalist, he’s recently invested millions in the Bitcoin ecosystem — the range of companies working to provide support services to facilitate the deposit, spending, and transacting of Bitcoins and/or other crypto-currencies.
Most of what is happening around crypto-currencies is absolute nonsense, entirely reminiscent of past bubbles from the tech bubble to the original South Sea bubble in the early 1700s. (A new crypto-currency named after the tooth fairy? Really?) Will any part of the Bitcoin phenomena persist? Hard to say.
What is easier to understand is the overall track record of venture capital since the collapse of the tech bubble. Over the last decade and more, the return on venture capital as an asset class has been roughly zero. (As Jayne Cobb said, “Ten percent of nothing is, let me do the math here, nothing into nothing, carry the nothin’. Nothing.”) That does not mean there have no profitable new technologies. In fact, Andreesen was an early investor in Twitter, Facebook and other key tech plays. But it does suggest that, across the span of new business initiatives, the universe of venture capitalists have been unable to discriminate between promising and dead-end technologies, or perhaps between good and bad business plans. (Some successful first-generation venture capitalists, like Bill Janeway formerly of Warburg Pincus, refer to the approach of many current VCs as “spray and pray.”)
Back in 1997, the last time tech stocks were flying high, I went on a bike trip in France. One of the other cyclists was a famous venture capitalist, whose firm had bankrolled some of the most successful tech breakthroughs of the prior decades. At that time, he was contemplating leaving his firm and starting over, because his partners were not aggressive enough. He wanted to go into the freshman dorms at MIT to fund new Internet startups. Understand that he did not really think those freshmen were likely to have any genuinely valuable business ideas. He simply saw them as a source of new merchandise to peddle to the eager suckers.
This is a capital markets model, not a business model. I suspect part of the reason for the lousy returns may be that venture capitalists have gone from trying to invest in a broad range of technologies that solve actual human problems to trying to manufacture product for credulous investors.
Perhaps I am over-complicating the issue. It may be as simple as too much money chasing too few genuine economic opportunities. In any case, here at TGS we remain entirely comfortable have exactly zero direct exposure to venture capital as an asset class. Or as Jayne would say, “Nothing, carry the nothing. Still nothing.”