You may be surprised to discover that in the past 10 years, overall venture capital return is zero, according to a conversation between Clayton Christensen (Innovator’s Dilemma) and Marc Andreessen (a16z) (a must see video here from StartUp Grind Conference in 2017 Redwood City). It may be even more surprising to learn that innovation and human creativity, which largely contribute to economic dynamism, were never considered in economic modeling. This is a key challenge illustrated by Nobel laureate in Economics, Edmund S. Phelps in his recent speech, “The Three Revolutions Economics Needs”
“The (third) challenge is the utter omission from economic theory of economic dynamism. … the West as we know it …began with the great scholar Pico della Mirandola, who argued that all mankind possesses creativity. And the concerns of many other thinkers – the ambitiousness of Cellini, the individualism of Luther, the vitalism of Cervantes, and the personal growth of Montaigne – stirred people to use their creativity. Later, Hume stressed the need for imagination, and Kierkegaard emphasized acceptance of the unknown. Nineteenth-century philosophers such as William James, Friedrich Nietzsche, and Henri Bergson embraced uncertainty and relished the new.
“As they reached a critical mass, these values produced indigenous innovation throughout the labor force.” Phelps continues: “When MIT’s Robert Solow introduced his growth model, it became standard to suppose that the ‘rate of technical progress,’…was exogenous to the economy. So the idea that people – even ordinary people working in all industries – possess the imagination to conceive of new goods and new methods was not considered. And it would have been dismissed had it been mooted. The Dynamism Revolution in economic theory was put on hold. With the great slowdown and a decline of job satisfaction, however, there now appears to be a chance to introduce dynamism into economic modeling. …The importance of understanding the newly stagnant economies has sparked an effort to incorporate imagination and creativity into macroeconomic models.”
Back to the aforementioned conversation between Clay Christensen and Marc Andreessen: In defense of the venture capital industry, Mr. Andreessen comments:
“The total amount of money going to tech (startup) companies is about $50 billion…(But) in the U.S alone, S&P 500 companies have distributed $6 trillion back to their shareholders. To me, the macro question is not what happened to the $50 billion going into startups, but what happened to $5.99995 of the six trillion? Another macro number is that globally there are $6 trillion of bonds that are returning negative yields. So there is $6 trillian in financial instruments world where you have to pay for the privilege of owning them. You not only don’t get any money (back), you have to pay to own them. Again, let’s compare the $50 billion and the $6 trillion. I think the critical crisis in the economy at large is not unicorns are overvalued, but the crisis is there are not enough unicorns at the price point that big companies can be as aggressive enough to invest in the future. As the market is telling us is exactly the point: capitalism is abundant but opportunity is scarce. “
It will be interesting to exam these two propositions to see how they might coact with each other in the near future.