IP: Edited VERSION of Crisis in Venture Capital and National Security

[Dave Farber <dave () farber net>]

------ Forwarded Message
From: Newmedia () aol com
Date: Wed, 3 Jul 2002 14:50:29 EDT
To: dave () farber net
Subject: Edited VERSION

Crisis in Venture Capital and National Security

One of the perhaps overlooked fallouts from the DOT.BOMB collapse is the
lasting impact of what is turning out to be a very deep and long-term crisis
in the Venture Capital industry.

Simply put, there is virtually ZERO money available for early-stage
innovative computer/networking technology company formation in the U.S.
today.  This crisis really must be seen as a potential threat to national
security, given the technological world in which we now all live and our
current dependence on systems which are inherently INSECURE.

How did this happen?

The "madness" (actually a sort of secularized MILLENNIAL madness) of the
late 
1990's dramatically distorted the venture business . . . almost beyond
recognition.  What was originally a named for a shortened version of
"adventure capital" and what was originally composed almost entirely of
"family offices" (i.e. Rockefeller, etc.) investing for what might be
multi-generational "returns" became a matter of "alternate asset allocation"
in which every pool of capital was expected (actually compelled) to
participate.  

As a result, tens of BILLIONS were raised from the wrong people with the
wrong set of promises attached.  Limited partners (the source for most
venture funds) were effectively promised low risk through rapid exit
liquidity strategies . . . dependent on an endless stream of "greater-fool"
IPO sales of questionably valued securities.

This money overwhelmed whatever actual VENTURE capital might have been
available and - due to the mechanism of paying venture managers a fixed
management fee from TOTAL capital committed - those who should be managing
much smaller "true" venture funds are TRAPPED (by their own paychecks) into
shepherding much larger (mostly frozen) PRE-PUBLIC money funds.

At the same time, the generally terrible performance of corporate venture
funds (at Intel, Sun and elsewhere) has simultaneously taken these players
off the field, at the same time that their own innovative R&D is in sharp
decline.

Ultimately, the low-level of understanding about the processes involved and
the general interest in KEEPING QUIET about what really happened - few want
to "give back" the money that is paying them millions annually for doing
relatively little or to admit past mistakes - has left those who might step
up to fund actual venture investments (as well as those who might leave
academic and other labs to start companies) dazed and confused . . . and,
therefore, mostly sitting on the sidelines.

Ironically, perhaps, at just the moment that the CIA famously launched their
venture-arm, In-Q-Tel - which in many ways is an "adjunct" to the legendary
Kleiner-Perkins - is exactly the moment when the collapse of the venture
business overall has most weakened the defense and intelligence communities'
access to new "breakthrough" computer science.

Unless we rapidly develop and deploy new systems -- which have been designed
from the beginning to be worthy of TRUST - we will be locked into trying to
place bandaids on what is, in fact, a massive open WOUND.  Security cannot
ultimately be guaranteed with current systems . . . radically new
ARCHITECTURES are required.  There is no option.

But our only means to achieve widespread development and deployment of these
future SECURE systems is by traveling down the venture capital avenue . . .
which is now shutdown for long-term "road repairs."

It is this author's firm belief that Moore's Law reflects itself in
macro-economic terms with a CYCLE of ups and downs as new PLATFORMS are
launched, attract tens of thousands of people's attention, sell billions
worth of new systems and, eventually, reach market saturation.

The period of this TECHNO-ECONOMIC cycle is eight years and there have been
exactly five of them over the past 35+ years.  (See www.markstahlman.com for
further details.)

We are now at the beginning of a very significant new cycle (possibly even a
new multi-cycle ERA), which will begin the commercialization of a sweeping
set of capabilities which have been bubbling up from the labs over 20 years
or more.

We are on the verge of building what MIT's Michael Dertouzos called
"Human-Centered Computing" (see his "The Unfinished Revolution" for an
excellent description of what lies ahead) . . . and in the process of
solving 
what IBM correctly calls a "crisis in complexity" in existing systems (see
IBM's "Autonomic Computing" manifesto for further details).

Pointedly, we are going to SCRAP much of today's installed-base - along with
the massive SECURITY problems inherent in these designs - and replace these
systems with radically improved architectures.

The "inventions" are there and so are the "inventors."

But, where is the CAPITAL?

It doesn't exist.

This is one very serious crisis, indeed.

Mark Stahlman
Director
New Media Laboratory
New York City
newmedia () aol com
(212) 645-5444


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