Venture capital, short term, and India

From Wladawsky-Berger’s blog entry on Carlota Perez’s analysis in 2005:

She mentions three particular structural tensions that we need still to work out in order to move on: investments continue to be focused on short-term gain, not on long-term production and growth; the social system continues to foster an unstable environment in which the rich get richer and the poor get poorer; and there is too much idle money chasing and inflating assets like housing and not going into expanding the demand needed to soak up all the excess supply being produced.”

And from the Wall Street Journal in April 2009:

The Mushahar in Bihar are part of a political and economic shift that is building across the Indian countryside. The transformation, largely driven by development spending by national and state policy makers, will be put to a test starting next week. The world’s largest democracy kicks off a month of polling April 16 in which many of the leaders behind these experiments are seeking re-election.

Growth has slowed in the new India of technology outsourcing, property development and securities trade. But old India — the rural sector that is home to 700 million of the country’s billion-plus people — shows signs it can pick up the slack. The rural awakening helps explain why India continues to grow even as the U.S. recession drags on the world economy.

The very idea of the “elevator pitch” encodes a complex economic theory in which investment ideas are supposed to be reducible to 1minute sound bites that professional money managers have the judgment and expertise to screen.  To me, one of the problems in the US economic system is that too much power is concentrated in the hands of professional money managers – from bankers to venture capitalists to investment advisors.  For 30 years or more, we in the US have been force fed a theory that the government doesn’t have the expertise to pick winners and losers compared to the nimble and efficient market. And certainly, it is clear that the government can blow lots of money on nonsense. But compare the Internet, developed by a government monopoly and by DARPA and then NSF, to Pets.com or, worse,  Countrywide, and ask which was a better considered, smarter investment.

3 thoughts on “Venture capital, short term, and India”

  1. Victor:

    While your major points may well have merit I’m not sure that citing DARPA and NSFnet as examples of the government’s wise hand at work supports your argument. Between 1969 (first ARPANET interconnect) until 1988 (NSFnet opening to commercial interests) I think we might have been hard pressed to find much benefit at all to the man on the street for the tax money used to create and sustain these networks. Were these expenditures “nonsense”? No, certainly not. I do think that if the major Internet backbones were still reserved for non-commercial and academic usage only that we wouldn’t have the Internet that we have today. I think Minitel might be a good example to consider.

    It is not my opinion that government can’t do anything well and that private enterprises do everything better. They each have their areas of competence and their shortcomings. I do think, however, that all public enterprises and those particular private enterprises which wish to sup at the taxpayer trough should be held to the highest standards of efficacy and efficiency. Far to often that fails to be the case.

    Brad
    http://rbdixon.googlepages.com

  2. Well, the point is that the Internet was built because of patient money and long term investment of a kind that VCs and banks don’t seem to find particularly interesting – and India’s rural development seems to have also benefited from investment of a kind that has distributed, long-term, national returns. How it gets done, public or private, may not matter, but to me, America has suffered from too much money going into short term, easy to understand, bets, and too little to long term work.

  3. I agree with Victor — the capital markets seem to miss many of the long term ideas — ideas that need years to mature in favor of the quick turn around of short term bets. Money managers may — or as has been so painfully shown may also NOT BE — good at managing money, but Wall Street and the City in London often fail when it comes to allocating capital needed in order to build for the long term.

    In many ways our economy has become hollowed out by the thought process of short term capital — so focused on the quarterly bottom line that it loses sight of the finishing line.

    Sometimes we need to invest for long term benefit and sometimes we need government to step in and drive the changes that are needed.

    This is what I argue on my latest post on my blog: The US Needs a Green Energy Marshall Plan Now! at: http://greeneconomypost.com/the-us-needs-a-green-energy-marshall-plan-now-1428.htm

    We need as a society to move beyond the regime of shortsighted capital allocations that have come to characterize anglo-american capitalism and begin to invest for the long term.

    Chris de Morsella

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