Lynn Parramore: What does it mean to be a venture capitalist inspired by figures like Marx, Keynes, Schumpeter and Minsky?
William Janeway: My professional maturation came from a somewhat distinctive educational background. I left Princeton in 1965 with a Marshall scholarship to Cambridge University in Britain because I had been enormously influenced by reading Keynes – not just the General Theory, but other writings. What I took from Keynes was a broad vision of an economy in which people who knew they couldn’t know enough had to make decisions, and they would be held responsible for the consequences.
Keynes pointed out that knowing they couldn’t know enough, people would necessarily seek to respond to uncertainty in a variety of ways which most economists would have thought of as being irrational or self-destructive, when, in fact, they were doing the best they could in a world in which we spend half our time arguing about the meaning of the past that we’ve experienced, and the other half speculating about a future which we cannot know.
Perhaps the best-known aspect of Keynes’s work was his invocation of government as a necessary institution for offsetting and counterbalancing the instability inherent in the market economy. So you have the integration of money and finance, the role of liquidity, a necessary and occasionally positive role for government, and all of that in the context of inescapable uncertainty. You roll that into how venture capital actually emerged and has been practiced in the United States, and there is a remarkable resonance. First, venture capitalists are investing in ignorance. They cannot know the expected future cash flow from the start-ups that they’re funding. Second, it turns out on examination that the returns that venture capitalists have earned have been very directly correlated with performance of the stock market in general and, in fact, were dominated by the extraordinary speculative excess of the great dot.com/telecom bubble. One way to put it is that far from being an independent, distinct asset class, let alone a transformational instrument of policy, venture capitalists a whole have spent 25 years riding on the back of the greatest bull market in the history of capitalism. So Keynes’s understanding of the dependence of investment returns on speculative energy has proved to have been a critical lesson.
Finally there’s the role of the state: Over the 30 odd years since there has been a venture capital industry, 80 percent of all the dollars invested by venture capitalists in the U.S., and substantially more than that in terms of the profits earned, come in only 2 sectors: information and communications technology (ICT) and biomedicine (biotechnology and medical products and services). Now why is that? Well, it turns out that when you look at the post-war history of the U.S., those are the two sectors where the federal government committed vast quantities of resources -- not to correct the failure of the market economy, but in pursuit of missions that transcend economic calculation. The first, of course, was the Cold War, the competition with the Soviets that led to the U.S. government accounting for more than half of the research and development spending between 1933 and 1978.