TechCruch has the post about the Winklevoss Twins of the Social Network movie fame jumping into the VC bandwagon. I think the VC bubble story is now complete, well maybe in the US but it has not started in Iceland. I was informed that all the banks in Iceland are thinking about doing VC funds (it is a nice rumor and I wish all of them luck).
I wanted to ponder on the acronym VC, as I have written before for me VC stands for VALUE CREATOR. What should a value creator do to earn a living? well, that is obvious one has to create value. Do banks create value? I am not so sure and I used to work for a bank! The 3+ years I worked for a bank I was always thinking how do I create value, actually I remember a funny incident when I suggested to an Investment Banker that it makes no sense to me that we don’t try to help the companies that we lend into or raise money for. Like Management Consulting Services, my logic was we analyze their business, industry and everything else under the sun to make a credit decision or convince an investor to put money in the company, we know a lot more about the business because we spend considerable amount of time creating the material that is used to make the capital decision, why don’t we follow through and ensure all the promises we make during the fund raising process actually get done. The investment banking professional almost fell out of the chair laughing, I was not sure why this was so funny so I asked him. He only had one question to me “Who is going to pay for the time and effort we put in helping our customers!” I could not believe that he asked me that question. My understanding was we DID get paid a fat 2% to 5% of the capital raised, is that not sufficient to pay for helping our customers? apparently he was thinking of the disproportionate bonus he was hoping to get at the end of the year and did not believe helping our customers after the capital is raised creates value for him. He really did not want to work hard to make that money! I should have quit banking then! I could not understand this logic, this short term thinking… no sense of purpose, no goal higher than whats in it for me. Well, maybe the “professional” that I was talking to was an exception to the rule and I am sure there are many professionals who work in the banking industry that work very hard to create value. But the fundamental problem is always, leadership and incentives drive behavior. The professionals within the banking industry have a very poor incentive mechanism, it is not the professionals, it is the weird income and bonus structures that create perverse incentives.
Thats why a strong leadership is needed to ensure that there is a grander vision for the organization. I believe there needs to be balance in an organizations vision, it needs to balance 4 things, Body, Mind, Heart and Spirit. I will write about leadership in another post. I believe if one wants to understand what drives someone to do something one just has to look at the incentives. I fundamentally believe the Investment banking business model is dead! yes, you heard it here for the first time. Not totally dead but it is like watching a train wreck in slow motion.
- The Winkelvoss Twins Have Decided to Call Themselves VCs, Because That’s a Thing Anyone Can Do Now (pandodaily.com)
- 4 Things a VC Will Never Tell You (inc.com)
- European VC isn’t dead – it’s just subsidized (gigaom.com)