Venture incentives, tariffs, and who owns Trump?
Welcome to Cautious Optimism, a newsletter on tech, business, and power.
📈 Trending Up: Tariffs … TikTok, right? … DoD AI spending … data center resource concerns … tech layoffs … Ukraine aid, for now … labor productivity … front-running tariffs … private prison stocks …
📉 Trending Down: Social media access in Australia … crypto regulation … Bumble’s stock after earnings … Adyen’s stock after earnings … US-China relations … China-India relations …
Do big funds break venture incentives?
Jamin Ball is one of my favorite investors. Not because I think that he’s better than his peers — he might be, but that data is locked in data rooms, so, who knows — but because his blog is very good. Clouded Judgement tracks valuation norms in the SaaS world, and occasionally dips into broader commentary on the state of venture. (Ball spent time at Redpoint before joining Altimeter, so his experience is more than sufficiently material to warrant paying him mind.)
Benchmark’s Bill Gurley said that one of his recent pieces outlined “the single most important issue for the entire VC landscape.” So, what is it? Here’s Jamin:
If we rewind the clock 15-20 years, fund sizes were significantly smaller. The 2% (annual management fees) part of the equation was nice, but if you wanted to “get rich” it was all about maximizing the 20%. […]
Today - the equation is changing. Fund sizes have ballooned significantly. […] In the past, to “get rich” as [an] investor it was all about maximizing the 20%. Today, with fund sizes where they are, many are instead looking to optimize for the 2%. This means raising as much as possible, and deploying as much as possible (as quickly as possible). […]
In the past, the only path to “get rich” for GPs ALSO resulted in a “get rich” path for founders. Today there is a “get rich” path for GPs where the outcome of the founders is irrelevant. Doesn’t matter how the underlying companies in a fund perform, you collect the annual management fees regardless.
ZIRP turned venture investing into a lifestyle business, and it has yet to recover. This is at once ironic, and troubling.
Why worrisome? Because the misaligned incentives above reward VCs for deploying lots of capital quickly and working to ensure that they have more total bets, than rewarding the hard work of helping laggard investments survive. Ball makes that point more eloquently, but it’s not hard to grok.
A fun question to ask yourself is what fraction of current AI-related venture investment is predicated on 1. Backing breakout companies that will scale to the public markets or 2. Venture folks having found an enormous cash-sink to fire cash into, allowing them to raise another huge fund to leech cash from?
Not that I think 2%ing off sky-high AUM doesn’t make sense. It most certainly does, if you are a conservative index-fund type like myself. I would follow that path. But is it venture capital, or just baby PE wearing jeans and a vest instead of slacks and a jacket?
Who owns Trump?
Yesterday CO looked at the market reaction to Trump’s electoral victory (positive), contrasting it to many of Trump’s stated policies and their expected business impacts (negative). Our question was simple: What explains the dissonance between market expectations and Trump campaign pledges?
Our takeaway was thus: “The only answer that I can summon is that, despite his campaign pledges, the market expects Trump to not do what he has promised to do.”
Newcomer also wrote about this issue, and I can’t recommend Eric’s piece enough.
After shipping that post I got on the podcast with Jason Calacanis, who had spent the previous day hosting a livestream with the cast of his other show, All In. Something that I appreciate about working with Jason on This Week in Startups is that several times each week I get to put questions to someone who is close with a number of the people in technology who put up their personal, political, and financial capital to back Trump.
It’s useful in helping me understand what tech folks who do back Trump expect from him. So I put the same question CO looked at to him:
Alex: But the thing that I don't understand, Jason, is the dissonance between everyone in the business community not wanting extreme tariffs on Mexico, China, and the world at large — and the Trump policy to do that. And so what I don't understand is: Was Trump lying the whole time, or do your friends on the inside think that he's actually going to do these very inflationary tariff moves right away as promised?
The entire conversation is worth your time — timestamped link here — but to save space, let’s cut to the end. Given what Jason knows personally and hears from his pro-Trump friends, where does he handicap expected deportations and high-skill immigration changes under the incoming admin?
Jason: I think with immigration, he's going to deport people who beat up police or who are fentanyl dealers or criminals, and then let the other 14.x million of the 15 stay here. […] I think the reality is they're not going to deport 15 million people. That would not go well.
Later on:
Jason: So let's just [set the] deportation over-under [at] 1 million, I'm taking under a million. What would you take?
Alex: Gun to my head? I'll say over.
Jason: You take it seriously. Okay.
Alex: Well, 15 million would be taking it seriously. Listening to Bannon would be taking it seriously.
The thing that I struggle with with Trump is that when people contextualize his behaviors, promises, and actions [their view often] comes down to ‘I think that the people who know him will influence him in a certain direction.’
And while I do think that your friends —Sacks, Chamath and so forth — will have influence, so, too, will the more reactionary right. The less pro-business right. Bannon said in that clip [that] he doesn't care about [losing] 1 percent GDP. 1 percent GDP is a lot of money. And so I'm curious to see who Trump will actually listen to.
Jason: I'm going to guess it's going to be the business people, but I could be wrong.
Jason also expects a 25% gain in high-skill immigration during the Trump admin. Why? In part because he expects Trump’s business background to trump — sorry — his other views:
Jason: So what would be in [Trump’s] best interest? To have incredible relationships with the business community? And I think the MAGA community — [what] I'll call the hard MAGA, not financial MAGA, but Steve Bannon MAGA, isolationist MAGA — I think that that's going to wane. I think that's going to be less [of a] priority.
I think he uses those people and that shtick to get into office, just like he used the evangelicals, you know, in the abortion issue to, to win the primaries the first time around.
Yesterday, Reuters reported that “Donald Trump is expected to mobilize agencies across the U.S. government to help him deport record numbers of immigrants, building on efforts in his first term to tap all available resources and pressure so-called ‘sanctuary’ jurisdictions to cooperate, according to six former Trump officials and allies.”
There’s a lot of people who have bets still out that Trump’s words to them are worth more than his words to others. We’ll see.