Venture Capitalism = Socialism?

If there is one group of people who believe in capitalism, it’s venture capitalists. If you need proof just take a look at the last word of their name. However, with all this talk of food stamps recently, and my involvement with the VC system we depend on to bring us the disruptive technological development that we need, something occurred to me. Under their current approach VCs perform a huge amount of wealth redistribution. 

 Could it be that, in fact, the current VC system we use is one of the largest sources of wealth redistribution in our society? In all honesty, the answer is probably no; and it certainly is not so dramatic, but it is an interesting characteristic of the system that it takes a massive amount of wealth from the super rich and re-distributes it to the not super rich. Here is how.

 If you take a look at the plot above you will see that about 40% of VC backed companies completely fail outright. For these companies, this is the end of the road and they dissolve into nothingness. The important part is that the money the investors put into the companies, while gone, went somewhere. Sure, the entrepreneurs are not joining the ultra rich, but they did presumably take a large enough salary from the VC money to buy food, pay rent, and maybe even go to the dentist. For however long their runway was, they were not unemployed and were not a burden on the food stamp system. 

 Now, looking at the federal government only about 6.8% of the budget really goes to welfare as you and I think about it. 40% vs 6.8% is a huge disparity. Sure, the US federal budget is huge and so the actual value of federal welfare is significantly higher. But for every dollar the federal government spends significantly less is spent redistributing wealth than if VCs had spend the same dollar. 

When we look at where the money is coming from the story gets even more interesting. 

For the VCs, the money is coming from their limited partners. These folks are the richest of the rich (A good rule for judging how rich people are is by how mysterious their names sounds: “limited partners” = rich, “taco bell cashier” = not rich). So lets assume that 100% of the VC money comes from the ultra rich. 

For the federal budget the top 1% of people pay about 37% of the taxes. We will use this as our definition of the ultra rich because that seems to be the trendy thing to do. So, when it comes to income re-distribution, we need to change our numbers a little because the not-ultra-rich paying taxes and then getting the money back is not really re-distributing much. 

When we do this the total redistributed money from the VC system remains $8.8B but the federal redistribution drops to just $118B. What’s more, the adjusted amount of wealth moved from the ultra-rich to the not-ultra-rich through the food stamp system is only $22B. In other words, VCs are re-distributing almost half as much wealth as the entire national food stamp program. At the very least it should make you think, is this system actually doing what it is meant to? 

** a note** Clearly there are many ways to argue against this piece of writing. I can think of 5 ways off the top of my head why this argument is meaningless. The point of this post is that the VC system that is supposes to be helping humanity develop breakthrough disruptive technologies is, among other things, doing something crazy.