Venture capital investor and author Del Johnson has been warning for years about the need for a more efficient, equitable venture capital industry, so when the risk of aggregating startup capital into a single bank led to a run on Silicon Valley Bank and its subsequent failure, he wasn’t surprised.
To avoid systemic risks or contagion to the banking system or the economy, federal regulators invoked the “systemic risk exception” for Silicon Valley Bank and another failed lender, Signature Bank. This meant the Federal Deposit Insurance Corp. (FDIC) could guarantee uninsured deposits.
The banking crisis exposed Big VC’s flaws and it’s time to rethink venture capital’s power, Johnson wrote in an opinion piece for Wired.
A handful of Big VC firms have persuaded themselves, their peers, and the public of their superior investment acumen, Johnson wrote. “But the lack of basic financial literacy these VC leaders seemed to demonstrate during the crisis underscores serious concerns about their competence.”
Johnson is a limited partner, angel investor, and a graduate of UC Berkeley and Columbia Law School. In his Twitter bio, he describes himself as “The Most contrarian thinker in VC & Father of Modern Venture Capital. VC, Angel, LP. prev: @Google @Oracle.”
Silicon Valley Bank partnered with nearly half of all venture-backed U.S. tech and healthcare companies.
“Society has given venture capitalists wide latitude to shape and influence the innovation economy,” Johnson wrote. “Our laws and policies exempt VC investors from many of the rules and regulations that apply to other money managers. In the midst of SVB’s collapse, however, many people have started to question the wisdom of granting so much leeway to VC leaders.”
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When the bank collapsed on March 10, most commentators agreed that the response of venture capitalists was “shockingly unprofessional,” Johnson wrote. “Some criticized VC leadership for a panicked response; others characterized the pleas for speedy government intervention as the ‘ravings of idiots.’ The harshest critics accused VCs and startup executives of being ‘asleep at the switch.’ They claimed SVB depositors were financially negligent, citing reports alleging that some VCs and startup founders had received personal benefits, such as 50-year mortgages, in exchange for keeping risky uninsured deposits with the bank.”
Johnson claimed he was one of the only VCs who raised early concerns about the bank’s systemic risks, and he was not surprised by “the VC-led bank run” or “the week of finger-pointing that followed.”
Venture capitalists promote a collaborative, pay-it-forward culture guided by close networks and personal relationships, Johnson wrote. They have deeply ingrained cultural norms and a herd mentality.
About 5 percent of VC managers control 50 percent of the capital in the U.S., according to the 2022 Pitchbook Venture Monitor report. Three-quarters of these power brokers attended an Ivy League school, Caltech, MIT, or Stanford University, and 91 percent are male, Johnson wrote. The “Big VC” firms tend to cluster geographically, with more than 90 percent based in Silicon Valley, New York, Boston, or Los Angeles. This creates regional imbalances that have historically excluded promising entrepreneurs and investors from outside the tech hubs, Johnson wrote.
Overall, Black entrepreneurs usually get less than 2 percent of all VC dollars each year while companies led by Black women get less than 1 percent, according to Crunchbase data, CNBC reported.
A former member of the Kauffman Foundation and Indie.vc’s verified scout program, Johnson led the Backstage Capital fund’s scouting, diligence, and operations in New York. His funds have invested more than $7 million into 100+ startups led by founders from groups traditionally overlooked by venture capitalists, according to his LinkedIn page.
“Over 650 firms—including prominent names like General Catalyst, Bessemer, and Lux Capital—recommended that their companies keep or return their money to SVB, despite an ongoing public conversation about the systemic risk of aggregating startup capital into a single bank,” Johnson wrote. “Research suggests that this culture of groupthink is the result of consolidating capital in the hands of just a few massively influential fund managers.”
Johnson is publicly challenging the core premises around which the VC industry has organized itself over the last 50 years and is calling for fundamental, structural changes, wrote Moshe Modeira, a founder, product manager, advisor and investor focused on “communities, commerce, capital, defi & web3.”
Johnson’s criticisms of the venture capital industry are “almost memes unto themselves,” Modeira added. These criticisms include the industry’s “insularity. It’s whiteness. It’s elitism. It’s cronyism. It’s insider-ism. It’s systemic racism and prejudice … pervasive sexism. The industry’s comically obstinate resistance to any substantive change over the years … (and its) extreme sensitivity to any criticisms of its core business models and value propositions.”
Modeira mentions firms that mandate diversity and inclusion including Backstage Capital, Harlem Capital, BLCKVC and Latinx VC, Overlooked Ventures and RareBreed Ventures.
Johnson is pushing for “meaningful reforms” to ensure that the venture capital industry “fulfills its fiduciary and societal duties. We must act on the lessons of this moment and break the market power of Big VC incumbents, both to save the innovation ecosystem and to ensure economic prosperity,” he wrote.
Photos: Del Johnson, Twitter @DelJohnsonVC / Silicon Valley Financial Center, https://www.flickr.com/photos/christianrondeau/