A recent article in the popular Silicon Valley tech blog “TechCrunch” echoes Donald Trump’s call to “drain the swamp” — in this case, the swamp of money-losing investments in companies that make products for elites rather than ordinary people.
The piece, by Katelyn Donnelly and Arvind Nagarajan, argues:
…venture capital funds mainly invest in products and services that cater to the elites — the app-based economy that does nothing to serve the basic needs of most Americans. Indeed, 78 percent of startup funding goes to people in three states: California, Massachusetts and New York.
The dirty secret? If you’re an average American, your pension fund is likely backing these venture capital funds — and subsidizing our massages, dinners and Uber rides. Pension funds are a huge source of capital for these VCs, fueling the system that creates minor improvements for the elites while doing little for middle-class America.
There is also growing evidence that public pension funds are becoming tired of their venture capital investments producing lousy returns, carrying outrageous fees, and funding subsidizing services for big city elitists.
Public pension plans, representing about 20 million government workers’ retirement benefits, are the largest single funding source for venture capital (VC), accounting for about 20-25 percent of all VC paid in capital raised since the late 1990s.
These public employee funds were sold on the concept that VC investing would produce at least 3 to 5 percent better than investment returns than public securities markets by discovering disruptive new technologies.
Although the VC funds are structured with a minimum of 10-year investment illiquidity and carry sky-high 2 percent annual maintenance fees and a 20 percent cut of profits, the average VC fund’s investment returns have been about 3 percent worse than public market returns over the last 15 years, according to the Harvard Business Review.
Rather than focusing on creating breakthrough science that can serve the basic needs of most Americans, venture capital funds mainly invest in apps like Uber, HotelTonight, Manicube, and Airbnb that are used by elite big city cosmolites.
One of the top teasers to lure public pensions into venture capital was the expectation of making huge money on Silicon Valley tech initial public offerings (IPO).
But as Breitbart News recently noted, 2016 was the worst year for IPOs since 2003. IPO money raised by Silicon Valley companies peaked in 2012 at $19 billion and fell to just $1.2 billion in 2016. The number of companies going public in the Bay Area peaked in 2014 at 32 and fell to just 11 last year.
In an effort to encourage tech companies to go public, billionaire entrepreneur Mark Cuban complained at the tech “Upfront Summit” in Los Angeles on February 2, “I don’t understand the reticence to going public … It’s just plain stupid.”
It was hoped that the Silicon Valley tech drought would end in January with the IPO of San Francisco based Appdynamics.com. But like over 100 venture-backed unicorns that are supposedly worth over $1 billion dollars, Appdynamics is still unprofitable.
According to a statement of risk factors in Appdynamics’s Securities & Exchange Commission S-1 public disclosure statement, “We have incurred significant operating losses in the past, and as our expenses increase, we may not be able to generate sufficient revenue to achieve and sustain profitability.”