The Parallels Between VC Funding and Ponzi Schemes: A Closer Look

Steve Blank shares an insider's perspective on how data and analytics are disrupting the art of venture capital investing. Is the era of "gut feel" VC coming to an end? What does the future of startup funding look like?  

Venture capital (VC) funding has long been heralded as a critical engine for innovation and growth in the startup ecosystem. By providing early-stage companies with the capital they need to scale, venture capitalists (VCs) aim to drive the creation of disruptive technologies and groundbreaking products. However, there are growing concerns that the practices of some segments of the VC industry share unsettling similarities with the mechanics of a Ponzi scheme. Understanding these parallels is essential for investors, entrepreneurs, and stakeholders in the startup ecosystem.

Historical Chart Fed Interest Rates vs SPX 1971 to 2013

This chart alone should tell you how much impact the Federal Reserve has on the overall economy.  The Fed can obviously influence bankers but they have a little trickle-down effect on the overall economy.  Housing market bubbles yes but business growth and jobs no.   

 Is the economy 27x stronger than it was in 1971?  Or is this a Ponzi scheme spending and debt policy that have simply propped up markets artificially. Is the value created over the last 40 years at risk to collapse? 

Historical US Unemployment Rate

Duration of Unemployment 

The labor participation rate is collapsing.  

Is a Currency War about to Cause the Next U.S. Stock Market Crash?

Is the money printing debt ponzi scheme about to come to a crashing end?

In the intricate web of global finance, the notion of a currency war looms ominously over the stability of economies and financial markets. With recent geopolitical tensions escalating, particularly between major global powers, concerns about the onset of a currency war have intensified. But what exactly is a currency war, and could it spell disaster for the U.S. stock market?

Understanding Currency Wars

A currency war can be broadly defined as a situation where countries engage in competitive devaluations or monetary policies to gain a trade advantage. Typically, this involves countries deliberately weakening their currencies to boost exports, protect domestic industries, or reduce the burden of debt denominated in foreign currencies. While each country may have its own justifications for such actions, the collective impact can destabilize global markets and economies.

Current Geopolitical Landscape

As of recent updates, tensions between major economic powers, such as the United States, China, and the European Union, have been strained. Issues ranging from trade disputes to sanctions and geopolitical posturing have heightened the potential for economic retaliation, including currency manipulation strategies.

Implications for the U.S. Stock Market

The U.S. stock market, being one of the largest and most influential in the world, is intricately linked to global economic conditions. A currency war could impact it in several ways:

1. Market Volatility: Increased volatility is a hallmark of uncertain economic environments. Currency fluctuations can exacerbate this volatility as investors react to sudden changes in exchange rates.

2. Corporate Earnings: For U.S. companies with significant international exposure, currency fluctuations can impact their earnings. A strong dollar can make exports more expensive and reduce revenue from overseas operations when converted back into dollars.

3. Investor Sentiment: Currency wars often lead to heightened uncertainty and can dampen investor confidence. This could lead to capital flight from riskier assets like stocks to safer havens, affecting stock prices negatively.

4. Interest Rates and Inflation: Central banks often adjust interest rates in response to currency movements. Higher interest rates to defend a currency can increase borrowing costs for companies and consumers, potentially slowing economic growth.

Historical Precedents

Past instances of currency wars, such as the competitive devaluations during the Great Depression and more recent trade disputes involving China and the United States, offer lessons. These events have shown that currency tensions can escalate quickly and have profound implications for global markets.

Mitigation and Preparedness

While the specter of a currency war looms, investors and policymakers can take steps to mitigate its potential impact:

• Diversification: Maintaining a diversified portfolio across asset classes and geographic regions can help mitigate the risks associated with currency volatility.

• Monitoring Policy Developments: Keeping abreast of central bank policies and geopolitical developments can provide valuable insights into potential market movements.

• Risk Management: Implementing robust risk management strategies, such as hedging currency exposure where feasible, can help protect portfolios from sudden currency movements.

Conclusion

The possibility of a currency war causing the next U.S. stock market crash remains a significant concern amidst current global economic tensions. While the future is uncertain, understanding the dynamics of currency wars and their potential implications is crucial for investors and policymakers alike. By staying informed and prepared, stakeholders can navigate the complexities of a volatile global financial landscape more effectively, potentially mitigating the worst impacts of such a scenario.

In summary, while a currency war may not be inevitable, its potential ramifications underscore the interconnectedness of global financial markets and the importance of prudent risk management in safeguarding investments and economic stability.

Obama's Views About Business

Translation on Obama's Views About Business

Prop up all big crappy businesses (ie. Auto Industry & AIG) to protect middle-class jobs that will crush all disruptive and innovative start-ups. Bigger businesses are better than free market innovation and smaller more volatile companies. Free market capitalism does not work so let the Government call all the shots about what businesses succeed.

Obama's business plan for the USA might as well have been written by a 5th grader.  His vision is incredibly short term, thinking that roads, bridges, and now runways (ooooh) will somehow create sustainable jobs?  This is ridiculous since that was our business plan from the 1930s and has nothing do with wealth creation or capitalism.  How does this help the United State create jobs and new companies that compete with China, Brazil, and Russia in a global economy?  It does not and has nothing to do with technology, education, healthcare, or environmental innovation.

There is a huge disconnect and this is why IPO's, venture capital, start-up acquisitions are at its lowest levels in decades.  The Democratic National convention should be a rude awakening for all start-ups and investors.  Put your money and checkbooks away if Obama gets elected because it will be a market of big businesses getting bigger.  Protecting middle-class jobs will be more important than letting start-ups innovate that create sustainable jobs and long-lasting companies.

The problem is capitalism is happening 100x faster than ever before and many Democrats are too stupid to get out of the way.  What would the auto industry look like today if we let GM go bankrupt?  We might have fewer jobs but better & cheaper cars?  Companies like Tesla might actually be an industry leader.  Think about all the companies that wanted GM to fail?  That's capitalism and preventing capitalism goes against American ideals.  Democrats call it a "zero-sum" game.  But no . . . the Government decided that GM is better.

Failure is good for business so they can be restructured.  GM was a huge shareholder cram down without restructuring by a shareholder (aka Gov't) with unlimited money. Some call this a Ponzi scheme because the cram down shareholder (Gov't) can print unlimited money and prop up the stock in the free market. GM has the same union problems and will ultimately fail soon as smaller companies slowly catch up to compete.  Obama just delayed innovation in another decade. Slower change is better? F that.

This goes without mentioning that the capital cycle needed to start new companies is broken because of faulty taxation assumptions.  Millionaires and billionaires (limited partners in VC, Private Equity, and Hedge Funds) need to be incentivized more to invest more.  Raising taxes on capital gains will kill the capital cycle flow back into companies drastically.  Making the pie bigger is a far better solution than redistributing money through higher taxes.  Mediocrity will soon become the middle name of the USA. 

Our Government is too big and needs to be restructured as well.

Vertical Incubators vs Startup Accelerators

What is the difference between a vertical incubator and a start-up accelerator?  First, let me preface my opinions by stating that, most entrepreneurs and investors don't have a clue about how much competition exists or have any appreciation for how long it takes to build a business.  Every entrepreneur and investor should always assume that 1,000 companies are doing the exact same thing and assume it will take five to ten years before the business reaches critical mass.

How Much Treasury Debt Does Japan Own?

Japan Owns 20% of the US Treasury Debt or $885 Billion

Why is no one inf the financial press talking about Japan being the 2nd largest holder of Treasury debt as a problem?   Is this the stock Black Swan the market did not see coming?  Will the US Government be able to issue enough treasury debt at current yields and continue the ponzi scheme it has been running for the last few years.  The next few treasury auctions are going to be very interesting to see if the US government can fill the demand and at what price.  If one of the largest investors Japan needs to pull back its contribution of over $885 billion?  Isn't a red flag that one of the largest treasury bond holders funds Pimco has sold their entire portfolio?  Will we see US treasury bond yields spike to 7-12% like Greece and Ireland?    They are currently between .05 and 4.5% depending on the duration.

I happen to be one of the few people that believe the market has been artificially propped up by the Fed buying bonds in the open market.  This cash gets invested back in the markets in order to prop up equity prices.  I am all for capitalism and organic growth but the current run up in bond and equity prices have not been commensurate with the level of growth and unemployment.

Why am I worried about this as an early stage investor? Well, because I don't believe that our growth has been created organically by capital formation and venture capital.  Our industry is still shrinking drastically.  The day that the VC industry starts to expand in the US I will be the first person to claim we are in a real bull market for an extended period of time.  However, for the time being I am bearish until the government can get out of way with regards to financial regulation and the government restructures their balance sheets to fit the private sector drop in wealth.  

Are Groupon Coupons Getting Spammy?

The latest Groupon coupon fad reminds me of the mailing list spam days back in 1999.  Back in the day companies like Yahoo couldn't get their hands on enough lists of emails and would use these lists to pump out advertising offers left and right.  Eventually consumers got smart and had to use spam blockers and finally the Government required companies to offer opt-in email programs.  Groupon is not much different, however, this time they give you a sense of urgency by saying that inventory is limited.  Not only do most offers claim to limit the inventory but they often give you 50% off for a limited time.  Yes, it seems like a good short term promotional tool but how long will it last and what will it do for customer loyalty?

Will Groupon become a victim of their own success always chasing the next deal and lose customer support?  I think coupons should be scare commodity and not available to everyone.  If everyone has a coupon it defeats the purpose of pricing anything and creates a sense of dishonesty amongst your loyal customer base.  I think at the end of the day when this local coupon bubble pops the winners will simply be just good at local display advertising.  I think Google gets this as well and will will likely start see display ads targeted on mobile phones that show offers like this.

Groupon turned down an offer from Google to buy them for $6 billion dollars apparently and it looks like they are headed for an IPO.  I think this is a blessing in disguise for Google and they should be thankful that this did not work out.  The competition in the coupon space is furious and there are literary thousands of Groupon clones that do the same thing.   When Groupon first received funding and their valuation was north of $100M I said it was a great investor ponzi scheme and still think this.  Its a big house of hards that is only held up by the huge pile of cash they have been able to raise.  Its also not surprising to see them acquiring several companies in order to try and consolidate their competition.  I also wouldn't be surprise to see some more controversy surrounding this company get publicized before it tries to go public.  Groupon has lots of "skeletons in the closet" that will come out and at the end of the day the winners will ultimately be small niche local companies like Boomstreet who will be successful.   

Ben Bernanke has Purchased Double D's

The Fed has spent most of the last two decades artificially inflating and deflating the stock market whenever they feel the economy needs a boost or is getting overheated. They know what they do has no direct effect on the economy but its a quick fix and doesn't provide any organic growth. Today, the only weapon the Fed has is the so-called wealth effect by driving the stock market up so people feel wealthier because interest rates are at 0%. The stock market went up 80% in 2009 so investors should be spending 2.4% extra of the entire value of the stock market, which is about two percent of GDP.  Here is a great video explaining the boom and bust cycles and is a warning to all entrepreneurs to stay current with stock and currency markets because it now directly affects you even if you are a small business. Maria Bartiromo sits down with Jeremy Grantham who has made some incredibly good predictions over the last few years.  Has the Fed lost control of the bond market?

The new $600B of quantitative easing goes into the banking and corporate sector of the economy who is largely sitting on the largest cash balance in business history.  They don't need the money at all and it's not the sector of the economy who is going to take our unemployment rate down from 10-15%.  Those who need the stimulus money the most, small business & private investors, can't get it. Seeing a company like General Motors go public again makes me want to puke.  I can think of 100 other companies who deserve to be public companies before GM and that creates far more future value, jobs and innovation in our economy.  GM going public is simply private equity, government money, and investment banker Ponzi scheme.

I was an apart of one of the largest business boom cycles in the late 1990s and there were a lot o great things about that time the US Government, FDIC, and Fed have forgotten.  Investors were pouring money into Venture Capital funds that were providing funding to companies who were providing real long term jobs and creating new markets of innovation.  Much of this money came from the Government in the form of FDIC subsidies and they made lots of money for taking this risk.  Once the bubble burst and hedge funds drove the market 80% lower there was no optimism or money left in the VC industry to spark new growth.  The VC industry has shrunk drastically in the last decade and almost 80% of the VC funds not based in Silicon Valley are virtually out of business (aka "the living dead funds").

Capitalism in general is kind of a Ponzi scheme but it can be done organically if the IPO market is fair and open.  Capitalism also works when Government regulatory agencies stay out of our way and don't favor big business monopolies.  I think if $100B in stimulus for struggling VC funds this would create another boom of optimism that we need.    The Fed and FDIC should also consider an Emergency Fund to fund to solve the overweight population epidemic that is slowing the US economy down.  Here are a few other ways President Obama could help create jobs.