Let Nature take its Course

Paul Kedrosky has made some waves with his analysis of the "super-seed" funds that are sweeping the investment world.

These are the funds that are spreading small seed investments over a large number of start-up firms.  Many of these funds are backed by the same angel and VC folks who are not having much luck these days with their traditional rifle-shot large investments with a very few select new ventures.  So they are trying a new business model that is based on more of a shotgun approach to venture funding.  We have a new seed fund here in Nashville called JumpStart Foundry.  We are hosting the meetings of this group at Belmont University.

JunpStart Foundry is seeing a variety of deals.  But, like most super-seed funds, we are seeing lots of "I have an app for that" start-ups or new ventures dealing with some sort of mobile gaming app.  And that is where Kedrosky seems to start wringing his hands just a bit.

"[In] the rapid rise in the number of seed-centric firms across the country, but especially in the Valley, you see a classic (eventual) overshoot going on, in ecological terms. A host of well-adapted and fast-growing organisms, perfect for the current funding environment, are emerging in a hurry, driven by need, incumbent stupidity and low marginal cost of super-angel creation, with the result, sooner or later, almost certain to be a population crash. Arguing otherwise requires you to believe that this time is different -- perhaps supply creates its own demand, or the consumer opportunity is far bigger than it looks, etc. -- and that is a tough case to make."

Relax, Paul.  It will be OK.  Remember that even the dot.com bust was really only a Wall Street bust.  The only lesson we seem to take from the dot.com period is that investors are prone to feeding frenzies that almost always lead to a market crash.  But out of the dot.cim frenzy came a lot of innovation that led to some amazing creative destruction.  And this did eventually lead to real economic growth with the few dot.com's that actually had sustainable business models (that means "profits" for those of you in Silicon Valley).

This is what free market capitalism does during times of great uncertainty.  And while from the micro investment perspective it seems irrational, or "stupid" as Kedrosky puts it, this is the fundamental force of economic transformation and growth.

Is it risky?  You bet!  Will investors lose money?  Many of them will over the short-term.  Will some of the super-seed funds fail?  Of course they will.

But out of this will come the true seeds of growth. 

We seem to think of the "seed" metaphor in the wrong way.  It is not those neatly packaged hybrid seeds we buy at the garden store that get planted in rich manure to which we add lots of water from our irrigation systems.

Instead, we should think of these seeds like acorns.  Hundreds or even thousands get dropped by an oak tree each year, but only one or maybe two will ever have everything happen just right so that they grow into a new oak tree.

But here is the thing we all should really worry about right now.  Washington through massive tax hikes and increasing regulation is talking away all of the fertile soil needed for those acorns to germinate, sprout, and hopefully grow to maturity.

We need to leave the seeds of economic creative destruction alone and let the free market do what it does best.  Then a few of these seeds will germinate.  No one knows which ones they are, but when they do it will lead us to our next period of sustainable market-based economic growth.