Push Capitalism

Capitalism when there’s too much capital.

Every three months Price Waterhouse publishes a vaguely pornographic list of new technology companies in Silicon Valley, together with the money they have raised from venture capitalists. The list grows steadily longer and the sums involved swell magnificently. Back in 1990, the Valley’s venture-capital firms handed out a bit more than $500 million to create about a hundred new companies. In 1997, they handed out $3.7 billion to create 700 new companies. Every day a big pile of new money is handed to some entrepreneur who, just a few years ago, would have been sent packing.

Of course the reason so much money comes to the Valley is that, for the past few years, there has been no more rewarding place for money to be. If you put $2 million into Cisco in 1987 you were worth more than $6 billion in 1997. Back in 1995 a million-dollar investment in Netscape was almost instantly worth $300 million. According to one large Valley investor, Valley VCs returned 53 percent in 1995, 58 percent in 1996, and 31 percent last year. But money is now flooding so swiftly and copiously into the Valley that the locals have started to complain about it. They bitch and moan all the way to the bank that they don’t know what to do with all this money. It’s so … corrupting. “It used to be that funding was a means to an end, a way of achieving a dream,” a VC named Tim Draper told the San Jose Mercury News. “Now what happens is that they [the entrepreneurs] will take a ton of money [and] rather than building a culture of being cheap, there’s suddenly money flying everywhere, and 100 employees who don’t know their way to the bathroom.”

Capitalism when there is too much capital is something of a novelty, and it turns out to have a couple of odd traits. The first is to invert the usual relationship between people who have money and people who need it. The capital that funds the Valley’s boom has come mainly from pension funds and university endowments. The most seasoned of these is the Stanford Management Co., which manages Stanford University’s endowment. Stanford got into venture capital back in 1971 when a new VC firm–back then all VCs were new–called the Mayfield Fund was so desperate to interest the university and anyone else in its services that it simply gave Stanford a percentage of its revenues, gratis.

These days the Mayfield Fund does not waste a lot of time or money raising more money. Rather, like all the established VCs, it routinely explains to universities and pension funds that it simply cannot accept any more of their godforsaken money. New investors wind up in a kind of audition before the Valley’s leading venture capitalists, in which they try to prove their essential docility, and their willingness to endure hardship and degradation. Stanford Management now keeps its offices right next door to the offices of Kleiner Perkins, the Valley’s premier VC firm. “I look out my window,” says one Stanford boss, “and see these nice, perfectly respectable people walking into Kleiner Perkins to try to invest in the next fund. They almost always leave with these dejected looks on their faces.”

But money, even more than other commodities, creates its own demand. If Kleiner Perkins refuses the new money then the new money will seek out some less successful venture capitalist who is less finicky about how he gets rich.

The same strange dynamic–call it push capitalism–is at work the next rung down on the money ladder, where the venture capitalists hand it out to entrepreneurs. The oddest sight in capitalism– after investors begging venture capitalists to take their money–is venture capitalists begging a 31-year-old first-time technology entrepreneur to take their money. The beginner, who has never started anything or managed anybody, can often play one VC against another until he has driven the hardest bargain ever driven by a capital-starved 31-year-old. There are of course 31-year-old entrepreneurs who fail to please the venture capitalists, and to them the whole game still looks badly rigged in favor of the capitalists. But in general, power has shifted away from the owners of capital to the users.

When money becomes as abundant as it has the past few years in the Valley, it loses its power as a signalling device. In the Valley this is a serious problem. In most industries you can determine the essential worthiness of a businessman or a company simply by examining his balance sheet. But here all pedestrian calculations–profits, price-earnings ratios, etc.–are useless. Many companies on which entrepreneurs and venture capitalists make money never turn a profit–or do so long after the entrepreneurs and venture capitalists have sold their stakes. In the beginning their chief asset is the hype that surrounds them: We are the company of the future, we are the next Netscape, that sort of thing. The hype in turn transforms them into stock-market celebrities. People buy shares in them because they think other people will buy them.

Only New York magazines and Hollywood movies depend on buzz as much as do new technology companies. But the torrent of capital also badly gums up the buzz machine. If anyone can get his hands on money to start a new technology company then the mere fact of having a few million dollars of venture capital says next to nothing about your prospects. Everyone has venture capital. So yet another signal is needed. Suddenly it becomes important whose venture capital it is. If you are a venture capitalist, you pride yourself on being a recipient of money from Stanford Management, since Stanford is the most knowledgeable and discriminating of the institutional investors. If you are an entrepreneur, you boast that Kleiner Perkins rather than say, the Chase Manhattan, gave you money. Money from Kleiner Perkins has a mystical power to transform its recipient from an ordinary businessman into the man of tomorrow. Money from Kleiner Perkins handed to you personally by John Doerr, as opposed to one of the firm’s other general partners, is best of all.

So the new capitalism still needs a class structure. Some things never change.