

Recycling Capital: The Key To The Startup Economy - yarapavan
http://www.avc.com/a_vc/2011/04/reinvesting-capital.html

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fnazeeri
Fred Wilson is one of a very small group of investors that has actually
achieved any exits to recycle. The problem isn't that investors aren't
recycling their returns, it's that they aren't making any returns.

So the next thought is that investors are somehow to blame, but no. It's
entrepreneurs who aren't creating businesses that generate good investments.
The core problem here is that we need to create more good businesses.

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laujen
I'm in Portland, Oregon, and think this is actually the biggest problem with
our start-up culture. There just aren't enough people who have been there/done
that before that are investing in the next generation. There are investors
around and the government has stepped in to fund some investment groups to
bridge the gap, but until we have a round of winners really supporting the
next round of companies I think our community will struggle.

~~~
colinyoung
In Chicago, where I'm located, this is our core problem too. It's all about
that first round of winners. I think startup scenes really launch after the
employees from the first big win sell _their_ companies.

~~~
laujen
We actually had some winners in the 90s but many of them either lost their
winnings in the dot bomb or never invested in other companies. A few of those
winners are guiding their second or third start-ups, too.

~~~
colinyoung
Definitely. The main reason they didn't reinvest was timing -- everyone was
burnt out on startups even if they had won after the dot.com burst.

But now, FB or Google employees are like, wow, that was awesome, let's do it
again. I think the startup scene is more mature now and that reinvestment is
more likely to happen outside of SV now -- the key difference is that startups
are more stable, wiser, far leaner, and more `cool' now, so it's seen as an
actually "safe" bet to re-invest. I know if I ever had a win that's exactly
what I would do, in fact being able to re-invest is a lot of my motivation for
being a founder.

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stretchwithme
As I read this, I couldn't help but think of how much better real investing is
for the overall economy than government stimulus.

When the government spends money on make-work projects solely to stimulate the
economy (with no actual benefit for the public), that capital is gone. Nothing
is returned to the people who provided it.

And there is no gain. Its not compounding over time. Someone ate it all up.

That means less overall wealth. That capital wasn't preserved. It cannot be
invested again and again and again like wisely invested capital.

~~~
trevelyan
When Keynes picked his example of stimulus, the analogy he choose was paying
people to bury money in mine shafts and dig it up again. The reason he chose
this is that it makes stimulus logically identical to what happens under the
gold standard without it: society puts effort into digging up more when the
total amount of gold in circulation falls.

So as long as the economy is facing deflation, it isn't hard to see that
stimulus is at worst the conceptual equivalent of doing nothing. And it is
usually much better because it funds activities with a bigger collective
payoff than moving dirt back and forth. And it prevents mass unemployment!

Standard caveats apply that this only holds in deflationary conditions, and
monetary policy is usually preferred where possible. But it isn't hard to see
that stimulus isn't intended to compete with private investment, and actually
enables it in many situations. Especially since holding cash (or buying gold)
is often preferred to other investments when the currency is falling, interest
rates are low and the economic outlook is otherwise dismal.

~~~
stretchwithme
I disagree. Its the collapse of the Keynesian housing bubble that's causing
the current unemployment.

Keynesians ignore where the money for their spending comes from. It can only
come from taxes or borrowing, both of which make less capital available for
the private sector. Instead of allowing the phony economy die, they seek to
keep it going. As if building more houses than we can afford somehow creates
wealth, instead of putting hundreds of billions of our debt to sit and rot.

And replacing the judgement of millions of people actually spending their own
money with the judgements of short-term oriented politicians that haven't
worked for the money they spend and who are actively trying to fool us most of
the time is not going to result in smarter investments.

The government loves to make waves on the pond, call attention to the highs
and distract you from the lows. But no new water is created. And when the
instability they create knocks boats over, they claim no one could have seen
it coming.

All the splashing around is just magnifying the distortions.

~~~
trevelyan
Keynes doesn't say what you think he does. But I can see where you are going
wrong. Look at the way you use water as a metaphor, but use it to mean
simultaneously (1) the money supply (increasing/decreasing), and (2) the wave-
like boom-bust flow of economic activity.

Conflating these things leads you to paradoxical statements like "no new water
is created" when you are taking about governments increasing the money supply.
Or the way you say "all the splashing is magnifying the distortions" when this
is theoretically impossible: preventing deflation by printing money cannot
cause worse deflation by definition.

What I think you want to argue is that MAN-MADE changes to the money supply
are bad. But not only is this empirically wrong (read about "The Great
Moderation"), it brings us back to the point that Keynes made above, when he
asserted through a very simple analogy that there is no such thing as a
natural economy as long as your idea of one is based around a currency (like
gold) the supply of which can only be increased by digging it out of the
ground. In this situation you CANNOT be worse off by having your government
increase the money supply, because market forces will slowly encourage people
to "print more money" themselves by just digging it out of the ground. Which
means we're all better off to skip the shoveling and spend the labor on
building an airport or something with at least the potential for social
return.

My contact information is in my profile -- I'd be happy to carry this on over
email if you'd like to continue. And I'd encourage you to read Keynes. And
also Kindleberger and Eichengreen if you genuinely believe that the worst of
what we are seeing these days is anything like what the world has gone through
in the past.

~~~
stretchwithme
when more money is printed, the value of existing money goes down. all that's
happening is that value is being taken from the general population and being
given to the banks.

deflation is not a problem. you had huge asset inflation and this is merely
the correction of that distortion.

The Fed's easy money and loose lending of Fannie and Freddie caused a doubling
in price of the most expensive thing most people will ever buy. It was
completely unsustainable and its deflation a necessary occurrence if normal
economic growth is ever to be restored. Throwing money at every expansion of
government ever conceived of will not restore it.

~~~
fbailey
Well, deflation can be the worst problem any economy can have. If my money is
worth more if I don't invest it and just hold onto it, I'm not going to invest
anything. This is actually a situation that killed several medieval economies,
there was just not enough currency to go round. Our modern western economy is
worth a lot more than the combined gold supply of the world, so if we want to
have a working currency we have to print it. Now the remaining question is how
much to print, you can never print exactly the amount you would need to get 0%
inflation, so you have either inflation or deflation. Since deflation makes
investment worthless and kills your economy, inflation is the way to go. If no
money is printed you have deflation there is no way to have a growing economy
and not increase the monetary supply.

~~~
stretchwithme
Can you give me an example where this deflation worked as you described, where
there was too much wealth and gold didn't provide enough money? I think it
would be interesting to examine the policies that lead up to investments being
worthless.

And also an example where Keynesian has been followed and 0% inflation was
achieved by just going with a big enough stimulus.

From what I can see, out in the real world, the biggest practitioners of this
theory are wracked with big growing systemic risks. At least those with large
economic resources that allows them to gamble. China is doing this right now
and when it pops, the Keynesians will be telling us how no one could have it
seen it coming.

The poor countries that believe in wealth through currency manipulation end up
defaulting on the loans required to play these games.

Meanwhile, there are plenty of examples where government focussed on a stable
legal system and property rights. Switzerland, Singapore, Hong Kong.

And plenty that used to have these conditions but got wealthy enough for its
politicians to being playing the artificial growth games, like Japan and the
US, who are actively pissing away all of their advantages.

And your examples?

~~~
trevelyan
The Great Depression was a case of deflation transmitted internationally via
the gold standard. Friedman followed Keynes here although this was not
demonstrated statistically until Barry Eichengreen showed up with country-by-
country evidence that recovery followed quickly once countries were forced off
the standard (Golden Fetters). See also:

[http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/200211...](http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021108/default.htm)

China took a Keynesian approach in 2008 and rode out the international
economic crisis fairly well. There is a massive real estate bubble in major
cities, but this dates back to the late 1990s and is being fueled by China's
lack of property taxes (making real estate free to own) and the lack of
alternate investment opportunities (Chinese citizens cannot invest abroad). So
China is seeing local bubbles and general inflation. The fact that local
governments are financed by land sales creates a further incentive to jack up
land prices and puts the central government in a bind. If you're interested in
this stuff, you might find this podcast worth listening to:

[http://popupchinese.com/lessons/sinica/attack-of-the-
china-b...](http://popupchinese.com/lessons/sinica/attack-of-the-china-bears)

It's a good question what will happen to the Chinese economy when the bubble
bursts. But whatever precedes that doesn't have anything to do with Keynes or
liquidity traps or deflation. And if you still have trouble with this think
back to the basics and explain where Keynes' analogy is wrong. Why -- in the
situation he describes of general deflation (a decrease in the money supply)
-- would you ever want to increase the money supply by forcing people to dig
rocks out of the ground? Why not just print more money and build an airport?

~~~
stretchwithme
Because printing more money is just another form of stealing.

And more government spending is just running up debt that must eventually be
stolen from future taxpayers for some piece of infrastructure that people are,
apparently, unwilling to pay for. If we need another airport (in a free market
anyway), prices for using an airport would increase until its clear a new
airport would be profitable.

Government destroys that ability to know if things make sense. Instead, its
completely politically driven and waste and unnecessary debt is the result.

The gold standard makes inflation impossible in the long run. The deflation
back then was simply a correction of the inflation created by the Fed with its
low rates since 1913. A situation made worse by creating industry cartels that
prevented any recovery until they were dismantled and many other bad policies.

Now there is no mechanism preventing government from stealing your money. That
is not a good thing. And the final removal of the gold standard by Nixon
allowed inflation to destroy a great deal of wealth.

The deferral of consequences Keynesian enables, coupled with a corruptible
currency, only allows those consequences to build and build. You can respond
to each bubble collapse with a bigger bubble, but eventually you can't.

All of these things are just tools for making government's destructive impact
larger, and for deferring and confusing the causal relationships. Its all just
a sophisticated way of doing what the Seven Samarai were hired to put a stop
to. And a whole bandit class has evolved as a result.

Its this requirement for confusion that makes it hard to apply Keynesian to a
simple small group situation. It always requires a large economy with decision
removed to a special class and bodies that operate in secret so that people
can't discern whats happening.

A group of 20 people could readily detect inherently dumb things, such as
borrowing large amounts of money from the neighbors to build things that the
people aren't willing to spend money on so cronies of the decision maker can
have more money at everyone's future expense.

I wonder at what population Keynesianism magically starts to work in his
theory. I suspect it is simply whatever size enables obfuscation.

It most definitely cannot operate without some group of industrious people
that prepare for the future and who are also dumb enough to lend to people who
don't prepare.

~~~
trevelyan
"Because printing more money is just another form of stealing."

When the amount of gold in circulation falls, its value rises and people go
dig up more. And yet your logic would make this a criminal act, because
"digging up gold is just another form of stealing". You make the gold standard
criminal by definition.

So I doubt you really mean what you are saying, and I have serious doubts you
understand these issues since your rhetoric as well as your misunderstanding
of what Keynes wrote basically echos the rhetoric of the Republican Party
under Reagan and Bush, the two administrations which have done the most long-
term damage to the US national budget, and whose anti-debt crusade (once out
of power) has been largely responsible for keeping unemployment so high this
long after the crisis.

What would Keynes have advocated in 2008? Unquestionably a more aggressive
fiscal stimulus in 2008 once it became clear monetary policy had failed to
prevent deflation and soaring unemployment. Your concerns about debt would be
irrelevant because the cost of capital to the US government was zero: the
world was (rightly or wrongly) clamoring to buy Treasury Bonds at non-existent
rates of interest.

This approach becomes untenable once there is inflation or when competition
for capital raises interest rates. But if the former happens then you've
eliminated deflation and solved the unemployment problem. And if interest
rates rise without triggering inflation? Then you use monetary policy to lower
them and increase the money supply again through market mechanisms until
deflation stops. Rinse and repeat until unemployment is close to its natural
rate again and/or you get inflation, at which point you declare victory and go
home. Radical? Considering that the total cost of the 2008 Economic Stimulus
act was about 1/4 of the annual US military budget, it is hard to see pursuing
full employment as an unreasonable policy, especially when the cost of doing
so was effectively zero.

~~~
stretchwithme
Gold is the most stable commodity in the world, which is one reason its ideal
for this purpose. Most of the gold that has been mined throughout history is
still part of the supply.

And the one getting that portion of the gold supply is doing the work of
getting it out of the ground. So I really don't see how that's stealing.

Fiat money is another matter entirely. As most fictional things are quite
different than real things.

Jude Wanniski makes an excellent case for gold in The Way the World Works. He
also explains why inflation is so dangerous. I encourage you to check it out.

~~~
trevelyan
No-one is advocating inflation: we are talking about the best policy response
to a deflationary shock and liquidity trap.

First you claimed that increasing the money supply to prevent deflation is
wrong because it is theft. Now you retreat to the claim that theft is OK as
long as it requires "getting [gold] out of the ground". So you're claiming
that there are certain arbitrary activities (moving dirt) which should be
government-protected as legitimate ways of debasing a currency and stealing
from other citizens.

Leaving aside the fact that your proposal encourages political corruption in
natural resource extraction, I fail to see why someone with a pick-ax should
be entitled to inflate away my savings. But if you insist on the matter please
tell me again how your proposal is different from Keynes' example of burying
money in mineshafts.

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zzleeper
What I found pretty disturbing is that this type of reinvesting (keeping
everything in startups, reinvesting 100%), is very similar to the patterns
seen in Ponzi schemes.

(The basic idea is that if everyone reinvests everything, then bubbles are
VERY easy to sustain)

Now, I don't have a clue on whether this is a bubble or not, just pointing out
this curious pattern

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khsdf7
This blog post is SO New Yorker. It is the height of arrogance to pass off
what is, like it or not, a form of gambling, an expression of greed, as a
philanthropic, altruistic gesture. I know as well as anyone here that this is
one of the engines of the economy, but come on. Everyone is playing the same
game, and you happen to be good at it. Don't insult our intelligence.

