CapitalMasters of the Universe
I was having breakfast with one of the genuine Wall Street Masters of the Universe, the type that Congress or even the President calls out for having too much power, influence and compensation. We had not met before, and one of the first things he said to me was that he, in fact, never made anything, never started anything, but he was very, very good at making money. I have a theory that most people, upon meeting them, will tell you what they’re all about within the first few sentences, and I felt this statement was a positive data point for my theory.
This particular Master of the Universe is unquestionably bright and successful in terms that Wall Street measures—he has made a lot of money for himself, his bank and, I hope, for his clients. The conversation was fueled with truly amazing stories of the power one holds when one can finance, or not finance, others’ ambitions. Even with my 10-to-1 ‘inflation’ ratio (all Wall Street talk is greatly exaggerated when openly discussed—a $1 million deal is $10 million, and so on), he was involved in huge deals.
We were meeting about a small (very small) deal that normally should not have been of interest to any Master of the Universe, but the potential was there for amassing prestige and social points that earning money simply does not accomplish; how perhaps doing the right deal or giving away money en masse might accomplish. And somewhere in the conversation, the talk turned to venture capital. Suddenly, watching the mind of a Master of the Universe at work had become something more like a National Geographic special on Orcas: an awesome, truly amazing creature who suddenly grabs a full-grown sea lion and flips it like a bloody toy—the scene is suddenly very serious. One has to watch it unfold, of course—all the while feeling conflicted, as the Orca is amazing but so is the sea lion.
You see, this Master was talking about how all the VCs were “toast.” He went on with intensifying energy: “We are not going to give them any more money. They didn’t perform. We can invest the money better directly, put it to more productive use. If a company isn’t making money, then it doesn’t deserve funding.” He mentioned all the major names in venture capital and how they themselves would soon be flung like bloody toys by the real powers that be, cut off from oxygen—meaning they would be cut off from his (and he did say “his”) capital.
He is not alone, really, in this view. There are those that still look at the whole Internet Bubble as justification that capital was “wasted” and that the orgy of easy money produced some sexy but not real businesses. A former CEO of a big-box retailer I had dinner with was certainly lodged in this mindset, enjoying the satisfaction of feeling superior—the Internet Bubble had burst and the world was safely back into the box, or box stores, if you will. He said that Apple, although “sexy,” wasn’t a real company like Microsoft. I tried not to choke on my food, then asked why the market had recently valued Apple over Microsoft. It was fashion, again like the Internet Bubble, was the reply, and all one had to do was look at who had more cash. It was interesting to me that an American manufacture of hardware had surpassed a software company in market cap and that the cash difference at the time was $16 billion versus $20 billion. This was an argument over profitable companies and not even Web 2.0 dreamscapes, but it illustrates a mindset.
I have always been an idea person, frequently in the role of asking for money for some start-up or film or other project. In our society, those who need capital are the lesser ones and those that have it superior, until an idea works and becomes a Facebook or Apple or Genentech. I value, and I think society should value much more, those that see an idea and say, “Here is my money, my firm’s money, let’s try to make that happen.” They take the risk, and when it works, everyone wins—investor, entrepreneur, and society. When it doesn’t work, we as a society still gain from that experience.
We are awash with cash in the world today; something like $82 trillion in global financial assets. There was $70 trillion before the recent financial crisis, and the bigger, safer banks run by the Masters of the Universe did manage to reduce that number by half. Since then, the world rushed back with value creation, and now the Giant Pool Of Money (a phrase I love, from Planet Money/This American Life) had grown to an even larger-sized ocean of $82 trillion. Amazing.
That money, though, isn’t doing what we really need it to do. It is trapped in really big funds that need to invest really big amounts into relatively “safe” investments. I was looking for $30 million for a deal recently, and the biggest problem was that the request was too small—“Thirty million? We need to look at deals north of $250 million for it to make sense” was a common response.
And therein lies the real problem we have today. It isn’t efficient to move money to small deals—be it investment in a new start-up or small business lending. The big pools of cash need big places to invest, while our economy needs smart people taking smart risks, accepting the fact that some of those projects won’t work. Or we can wait for the big pool of money to get larger and so pressured that it forces another idea like CDO’s and other exotic derivatives to be conjured so that the pressure can be released and big chunks, ocean sized chunks worth of cash can move and those moving it can get paid a small bit that ends up being a huge number—and Wall Street can keep paying out $170 Billion in bonuses or more a year. I don’t begrudge success at all, I applaud it—but this success and wealth concentration comes with a high price to our society. When those that founded Apple, Intel, Google and so forth earn huge rewards, so do their investors and society is enriched by greater employment, less income inequality and the creation of opportunity building infrastructure.
The Internet Bubble decade from 1990 to 2000 was an amazing time in the United States. Venture capital investment went from $2 billion a year to a level where, in one quarter in 1999, $200 billion was put into VC funds and thus into a whole host of ideas. It was a rush of money thrust toward the Idea People, and they did what Idea People do—they pursued their idea to see if it would work. Some ideas did; most did not. But in the process, the world changed, and for a decade, capitalism truly joined forces with democracy as never before. If you were able to write your idea on a napkin, you might just get a million or ten to see if it worked. What ensued was the one of the most prosperous times in our country’s history. It fueled the largest growth of the middle class, produced a federal budget surplus, and allowed unprecedented fluidity in the job market. Was capital wasted? Sure—does an oak tree “waste” thousands of acorns to sprout ten oaks and build a forest? Yes. But jobs were created, wealth was created, infrastructure built and taxes paid.
But the adults, the Masters of the Universe, want to terminate those that fueled this boom, the VCs and the Idea People behind them, and put the capital to “productive uses.” If they knew what ideas were productive (if anyone knew what would be productive), then it would be easy. It isn’t. Risk has reward and failure as bookends. When you make a mistake in a start-up, it may be individually painful, but the financial ecosystem handles it with aplomb; make those mistakes that were amplified by the Masters, and you have the entire world economy in a tailspin (from which we are still recovering).
The response to this financial wreck? The Masters want a system where they, a very few, decide what is and isn’t working. This is about as wrong as when government tries to make the call. Regulation, you say? Well, that is a whole other subject for another discussion.
I came to finance via ecology, so I always default to what has worked for millions of years. Nature is successful, it is brutal, and it is wasteful. Nature is a market economy. Efficiency is the first sign of an unhealthy ecology; one species doing extraordinarily well is an outlier of disease, perturbation and decline, and is also a sign of an unhealthy economy. Profits are inefficient, venture capital (or any risky) investment is inefficient—but it is healthy.
In the guise of “regulatory reform” and “prudent investing,” the giant pool of life-sustaining capital will slosh around, trying to find a way out of the Master’s dam; meanwhile, the Idea People will dry-land farm until the next monsoon.