Book review: Doing capitalism in the innovation economy, by William H Janeway

An original analysis of the start-up investment business impressed John McLaren. But it's too bad about the title ...

by John McLaren
Last Updated: 29 Sep 2015
Titles are important. If Austen, Dostoevsky and Dickens had managed no better than Haughtiness and Bias, Doing Bad Stuff And Not Getting Away With It, and An Account of Dual Conurbations, I doubt they would have topped the bestseller lists so effortlessly. When I glanced at the title of my review copy of this book, I was taken aback. Was this ugly, mangled sentence a reference to something I didn't know, or could it be - as Monty Python would say - a pun or a palindrome? But no, it's just a straightforward stinker. I wince to think what ideas Janeway rejected.

I was so put off that if I wasn't being paid I wouldn't even have opened it. Which would have been a pity, because it's more readable and interesting than most business books, if a bit of a hybrid. This is because, as the author admits, he's a bit of a hybrid himself - a blend of a business practitioner and a commentator/academic.

As a practitioner (an investment banker/principal investor in tech companies), he had a successful career. Assuming that the distinguished people who have endorsed the book rank among his friends, he must be well connected and respected, and I would guess that he's likeable and interesting company. The only drawback is that most of the examples he provides of the deals where he learned his lessons and earned his spurs were a long time ago, and ain't exactly the stuff of legend anyway. BRL, BEA (not the old airline), MicroPro, SHL? Me neither. Deliberately or otherwise, the impression is left that not only was Janeway cutting his teeth through these situations, but that his experiences were seminal for the whole tech world.

He does mention the 'Four Horsemen of the venture capital ecosystem: Alex Brown, Hambrecht & Quist, Robertson Stephens, and Rothschild, Unterberg, Towbin' (one of which I once worked for), but doesn't explain why this quartet was already in existence if he himself was busy inventing the industry. Very back to the future.

This isn't just carping because, surprisingly, those parts where he recounts first-hand experience are the weaker ones. The morals of the tales are all perfectly sound, but nothing plenty of other investors haven't picked up on. His observations and analyses are a great deal more interesting, and highlights include that, firstly, venture investing has really worked only in two fields (IT/computing and biotech), where the US government first spent vast sums on the fundamental science to create a solid platform. In other sectors, such as engineering plastics, the R&D path is too long, uncertain and expensive.

Secondly, there is a major correlation between venture returns and the health of the IPO market. In periods when the IPO window opens sporadically, the average venture return is no higher than would be achieved by investing in similar public companies. When you take into account the lack of liquidity in venture capital, that makes it a very dodgy investment sector.

Thirdly, the erosion of margins dealt a death blow to most specialist tech investment banks, meaning that there are now too few players, so small to medium-sized emerging companies either cannot go public or wither on the analyst vine once they are there.

Rather sadly, there is no real commentary on the Silicon Valley scene. My understanding is that the natural rebalancing effect of lower returns has been weakened by a collective desperation not to miss the next Facebook, leading both to an unhealthy amount of social media deals getting financed (while other sectors are neglected) and ludicrously high valuations. The industry is coughing up blood.

The book also includes a breezy tour of past booms and busts, all leading to his perspective on the current economic situation. At the end of the Napoleonic Wars, Britain had a national debt equal to 250% of GDP. Rather than this causing gilts to plummet, they soared. So you can probably guess that he would have strong words for George Osborne.

One other delight in this entertaining book is the illustration Janeway uses to portray the Reinhart/Rogoff thesis that, given the opportunity, financial markets will always go to extremes. His wife once asked a medic if her cat could accompany her during an extended hospital stay. 'Can you guarantee its behaviour?' the doctor asked. 'Yes,' she replied. 'It will be bad.'

Doing Capitalism in the Innovation Economy

William H Janeway

Cambridge University Press, £22.00

- John McLaren is chairman of the Barchester Group.

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