And then it rained…

How will your decisions now drive innovation into the future?

The state of the venture capital (“VC”) industry was already in dire straights before the SVB run. The two big problems for VC (and the innovation economy more broadly) are:

1) that interest rates were too low for too long, causing unreasonably weak bets to be capitalized with no accountability for profitability, and

2) massive quantitative easing efforts, causing the largest inflation in recent memory.

So, we now face innovation austerity. Innovation’s journey reminds me of the wealth creation cycle that many families go through.

When a family first creates liquid wealth, there is a large pull towards lifestyle design (spending on comfort and luxury). Through time, this lifestyle creep establishes new norms. This is the same process that VC just experienced. A large pull towards unsustainable industry norms with weak accountability:


During this period, some traditional investment classes became disfavoured (fixed income, value investing and gold come to mind), while venture and growth-at-all-costs appeared to set a new norm. A new “lifestyle class” to keep the analogy going.

This growth was aided in large part by government policies that supported the stock market. I believe Quantitative Easing and the other government policy tools during the pandemic did more than protect the vulnerable – the spending propped up the stock market in an unsustainable way.

So, unfortunately, many investment portfolios, including those reliant on investment returns for retirement, had become too “luxurious” and committed to the new “lifestyle” that the growth stocks delivered.

After entitlement; austerity.

And now we face austerity. It couldn’t have arrived at a better time.

There is perhaps no more difficult pill to swallow than a family adjusting it’s lifestyle habits to spend less. It feels like a failure. The ramifications are visceral. But of course, on the other side of austerity measures, no one actually feels materially worse (particularly when those austerity steps are taken with love, compassion and support from their community).

Austerity comes with so many fears to push through. People often feel embarrassed. They might feel hurt by that nasty little emotion that I hate referencing at all… fairness.

Yet if you look at the root of happiness, a person’s well-being, rarely if ever is someone worse off after austerity measures and often the reset of lifestyle expectations is very beneficial, both for the individual and their family’s long-term well-being.

It is time for VC and the North American innovation economy to reset. To take austere measures. Reset expectations, more discipline and more accountability will ensure that innovation rises back up better for it.

I’m particularly eager to see innovation companies focus on two concepts:

1) a company’s return on invested capital becoming more directly aligned with short term growth plans, and

2) human capital discipline. Utilizing technology and the new advances in work to make companies more productive.

With greater human capital discipline, human talent will no longer be mothballed, atrophying at the FANGs.

I personally hope the current times bring austerity to more than the innovation economy. I would argue it is time for the US economy as a whole to reset. To deleverage and reduce financial incentives. To take austere measures. And to come out the other side as the most powerful economy in the world for another seven generations.

Family offices have begun to reset their expectations for the Venture Capital asset class and the innovation economy in general. However, I hope these reset expectations does not result in disregard for the industry.

It has never been more important for purposeful investing and the innovation economy to align.

I believe innovation is the root of all liberal progress and I do believe that the West’s ability to innovate is absolutely critical to geopolitical stability and the world’s greater good.

I cannot fathom a world where the West loses a decade of innovation, which is possible in the current circumstances. More than ever, family capital allocators must find the courage and skill to deploy capital into the innovation economy reset.

Long term and private capital allocators have perhaps never been more important to an economy.

FW = R (HC + RC)

I’ve long advocated that the family office’ core business, investment strategy, must align with the family culture and purpose. Families that continue to address their unique answer to the tricky question “so what is all this money actually good for?” build better communication with their investment professionals. This then leads to better financial capital deployment (R, meaning “Resources”); better in terms of the alignment of those investment decisions with the family’s culture. This alignment, I believe, has an enormous impact on building stronger people (HC) and stronger relationships (RC) ultimately leading to greater family wealth (FW) and meaningful family legacies.

I would consider it an emergency that families meet and get laser-focused on which areas of innovation align best with their investment policies and family goals. The innovation companies will be desperate for your capital and they may often be difficult to find. With investment strategy clarity, families will find the right opportunities and in turn, these families should expect to benefit greatly.

Families will benefit financially certainly, but I believe the stronger returns will be in creating stronger wealth stewards capable of deploying capital in more difficult times and with clearer goals.

The coming difficult months and years are the exact time for wealth stewards to take action. Improve your IPS statements. Find important industries and work with your investment professionals on finding investment opportunities within those industries. Find ways to pull the right companies out of the ashes and into regeneration.

The story of the pandemic and quantitative easing’s impact on the venture industry will be told for decades if not centuries, what story will your family be telling future generations about your impact during this difficult time?