The U.S. is home to seven of the world’s 10 biggest companionships. How did that happen? The rebuttal may come down to two little symbols: V.C. Is venture capital good for society, or does it really assist the rich get richer? Stephen Dubner expends the time to find out.

Listen and follow our podcast on Apple Podcasts, Spotify, Stitcher, or where you are get your podcasts. Below is a transcript of the incident, revised for readability. For more information on the people and ideas in the incident, meet the links at the bottom of this post.


Vinod KHOSLA: I was 16 in India when I heard about, and in fact speak in a two-year-old magazine that I used to rent — formerly they only old-fashioned, they came to India, and you could rent them for the weekend — that Andy Grove, a Hungarian immigrant, had come to Silicon Valley and started Intel. So that became a dream for me. If that immigrant can do it, why can’t I?

Stephen DUBNER: But didn’t you start a soy-milk company in Delhi?

KHOSLA: I did try and start a soy-milk company — I never got it started. There was never any available funds. There wasn’t an entrepreneurial culture there. And I still retain vividly, I called the phone company and “theyre saying”, “Seven years to get a phone line.” I said, “I’m coming to Silicon Valley.”

That’s Vinod Khosla. He did come to Silicon Valley, and in 1982 he co-founded the technology firm Sun Microsystems. Today he extends one of the biggest venture capital conglomerates in the U.S. — and, therefore, one of the biggest V.C. houses in the world. It’s announced Khosla Ventures. Since 2004, it has invested in nearly 1,000 startup fellowships. Khosla often be invested in little more than an idea.

KHOSLA: Pat Brown was a professor at Stanford, and he came to us and said, “I want to change animal husbandry on the planet.” That was his part pitch.

Pat Brown was a very well-regarded biomedical investigate. Now he wanted to do something different. He had come to believe that the production of meat was really bad for the planet. And that’s what Brown would tell the venture capitalists.

Pat BROWN: My pitch to them was very naive from a fund-raising standpoint. I exactly told these guys, “Look, this is an environmental disaster. No one’s doing anything about it. I’m going to solve it for you.”

KHOSLA: As unbelievable as that chimed, it made us a half-hour to say, “Love the passion, love the mission, enjoy Pat’s credentials.” And we said, “We’ll back you.”

Khosla — and other V.C. houses — did back Pat Brown. After several years and more than a billion dollars in venture money, his companionship became a sensation. It’s announced Impossible Foods, and it acquires plant-based replaces for meat makes. It is still privately held, and it’s previously thought to be worth around $ 7 billion. Eventually the venture capitalists will get their money back, and much more. Now, what would have happened to Pat Brown’s opinion in another age, or a different sit — I represent, a term and target without venture capital? Access to that kind of money for nothing more than an idea is a definitely American phenomenon. If you look at the 10 biggest fellowships in the world as measured by market capitalization, seven are American and six of those parent risk capital: Apple, Microsoft, Amazon, Tesla, Facebook, and Alphabet( the mother of Google ). The seventh is Berkshire Hathaway, Warren Buffett’s holding company which essentially devours up existing houses. That is a much safer behavior to extract billions of dollars. Venture capital is inherently risky, especially at the very early stages of a startup. For every Apple or Impossible Foods, there are thousands of flops. So you need a impatience that can handle it. Vinod Khosla has it.

KHOSLA: I don’t mind a 90 percent opportunity of disappointment if the consequences of success are consequential, like changing animal husbandry on the planet or concluding fusion reactors possible. If 10 percent of the time you make a large multiple, then you’re in pretty good shape.

DUBNER: Do you think you were born with that ability, to see that losing one times your coin was really not that big-hearted a risk if the upside was 50 x, or did you learn that?

KHOSLA: I think there was a whole lot of naivete on my own part. Probably a whole knot of hubris. But naivete, hubris, trying the inconceivable is very much Silicon Valley culture. It compiles for a great story when Elon Musk constructs a Tesla in a way that General Motors can’t.

Today on Freakonomics Radio: the U.S. economy is one of the most dynamic economies in the history of the world. Is venture capital the secret sauce?

Ufuk AKCIGIT: In societies where there’s a larger V.C. asset grocery, we are going to observe more radical, risk-taking innovations.

How do venture capitalists find a signal in all that startup sound?

Bill JANEWAY: My first rule of venture capital is that all entrepreneurs lie. It’s the ones who don’t know they’re lying that really get you into trouble.

And: what’s it like to be on the receiving purpose?

Jonathan REGEV: When everything’s agreed upon, they submit a deposit to your bank account and then you have a lot more money.

Also: is venture capital good for society, or is it just about stirring rich people a bit richer? Everything you always wanted to know about venture capital but didn’t know who to ask.


We’ve been running a series of bouts lately about what realizes America so American. We’ve looked at artistic inconsistencies, political gaps, and taking into account the nature of this depict, we’ve looked at a variety of economic gaps. But if you were to ask a very basic question about the U.S. economy — something like “Why are so many of the world’s biggest and most innovative companionships American companies? ” — the answer might well circle back to two little letters: V.C. Venture capital. Imagine you have got what you think is a great business project, but you simply don’t have the money to scale it, to see if it truly operates. Consider Jonathan Regev.

REGEV: Because we didn’t have any extra capital, we were forming the nutrient ourselves, we were delivering the food, we were customer service.

You might meditate Regev started one of the many meal-kit firms you’ve heard about. But not quite.

REGEV I’m a co-founder of The Farmer’s Dog.

Which is what exactly?

REGEV: The Farmer’s Dog is an online pet-food company that attains it real easy to feed your puppy something fresh and healthy, which is entirely different from the ordinary pet meat you’d find in a retail store.

Regev started the company in 2014 with his friend Brett Podolsky. Every month or so, they send purchasers a container, jam-pack on dry ice, with the specified amount and flavor of food based on your engender of dog.

REGEV: One of the most significant parts of our wander was that decision to go from, “We’re doing this ourselves, we’re going to take it sluggish, ” to “This needs to be the highway that domesticated food duties. This needs to be an industry-changing company, and we should bring on some help.”

Which is how the Farmer’s Dog has come to raise more than $ 100 million in various rounds of venture capital financing, stimulating it one of the most successful pet-related startups in history. How does all that money determine Regev feel?

REGEV: Interesting. It felt nice and vindicating that you had sophisticated investors that understand what we were doing, that understood the possibilities of, interpreted the trajectory, heard the future in accordance with the arrangements that we construed it and were willing to go along the razz. So that side was nice. But whenever we raised a round it’s like, “Okay, you really get this increase in seriousness. Now we have a lot to do.”

Now, imagine that Regev and Podolsky had this same idea but didn’t have access to venture capital. Where would The Farmer’s Dog be today?

REGEV: That is a fun question. I think we’d be going in the same direction, time not at the gait and certainly not at the scale that we are today. I don’t fantasize every company needs to go out and grow risk capital. The big difference for us is hastened. Our quality is an aspect that we wouldn’t have been able to achieve so quickly.

AKCIGIT: Obviously, “thats a lot” of anecdotal testify showing that venture-capital-backed firms are performing very well.

That is Ufuk Akcigit, an economist at the University of Chicago.

AKCIGIT: But the question is: were they too going to perform that well if there were no venture-capital financing?

That is a question that Akcigit tried to answer in a recent article. Really, the question is this: does venture capital work? Or are venture capitalists just good at backing the companies that were already going to succeed? Akcigit and his co-authors mustered data from a variety of sources that give them equate firms that took venture capital to those that didn’t. The key was to make sure the two determineds of companies were really same. So they sorted them by point, size, manufacture, and what V.C.’s like to call “year of birth” — the year a company started, “as if its” a baby. I know, it’s a little weird. Anyway: Akcigit and his colleagues likened thousands of companies that were similar to each other except for the fact that one batch moved the V.C. itinerary and the other didn’t. So, what did their results picture?

AKCIGIT: Our upshots is demonstrating that, surely, V.C.-funded firms are performing a lot better than non-V.C.-funded houses.

The houses that got venture capital did better on several dimensions. For example: job creation.

AKCIGIT: Average employment increases by approximately 475 percent by the end of the 10 -year horizon for V.C.-funded firms, whereas growing is much more modest for non-V.C.-funded restrict group, about 230 percentage.

They too looked at how many patents the houses created, especially high-quality patents, as measured by number of cites. Once again, the V.C. houses did better.

AKCIGIT: We find that up to 60 percentage of the patent growing after the funding can be attributed to the treatment by venture capitalists.

So this evidence suggests that venture capital basically runs, that it gives young companionships a booster shot that helps them thrive. What’s in that booster shot? Money, for starters. Thirty percent of startups neglect simply because they run out of cash. Jonathan Regev again 😛 TAGEND

REGEV: First things first about wreaking on overseas investors is, it’s chiefly for fund, right? That’s the main benefit.

But venture capitalists likewise stipulate counsel.

REGEV: One of the reasons that we were roused to bring on our investors was the notion that they have been around the block.

Consider the birth of Microsoft, back in the mid-1 970 s.

AKCIGIT: Bill Gates says when they first founded the company, they were doing just fine. They didn’t need money, but they didn’t know what to do with their intuition, how to bring their company to the next level. They realized that they needed some adult admonition. So that’s why they approached a V.C. house. They never exploited that coin. But they needed the guidance of venture capitalists.

Akcigit found that this guidance also matters. And specially know-how. He and his colleagues split the V.C. houses into two groups, based on number of past events: a high-quality group and a low-quality group. The investigates then looked at patent creation for the startup firms funded by the high- and low-quality venture capitalists.

AKCIGIT: What we find is that patent stock stretches nearly fiftyfold for high-quality group, and simply by twentyfold for low-quality group.

So who are these witches, these experienced investors who can turn an financier with exactly an idea into a billion- or even trillion-dollar companionship? How, exactly, do these venture capitalists must pay? And where do they get the money to invest? Let’s start with that last question — the source of the venture capitalists’ investing funds. The amount of it comes from big-hearted institutions like pension funds, university endowments, philanthropic groundworks, insurance companies, and the like. You might easily differentiate this as the rich getting richer. And you wouldn’t be wrong. On the other hand, they are funding feelings that billions of beings may benefit from. And there is an inherent risk in funding an idea. Jonathan Regev again, from The Farmer’s Dog.

REGEV: When it comes to venture capitalists, they aren’t looking for small-scale returns. They want to invest in something that can produce extraordinary results and returns for them.

Most V.C. firms cover their operating costs by billing a 2 percent fee to their investors, those pension funds and endowments. But the big money comes, at least potentially, when the startups they’ve invested in are either acquired or go public. After the original investors are paid off, the V.C. conglomerate are usually give 20 percent of any profits. This can amount to numerous millions, perhaps even billions of dollars. That’s the happy-ending version of the floor. The world is not always so rosy-cheeked. Out of 21,000 startups funded by venture capital from 2004 to 2014, 65 percent lost coin. Another 25 percentage returned less than five times the original asset — which might reverberate pretty good, but in order to be allowed to to balance out all the losers, V.C.’s need their big winners to return 20 or 30 occasions the original financing. Merely 1 or 2 percent of startups generate this kind of return. And: it takes a while. The usual funding cycle is seven to 10 years, which is substantially longer than other sources of private funding. Jonathan Levy is an historian at the University of Chicago.

Jonathan LEVY: The culture of venture capital tends more towards having a long view of potentially disruptive or inventive firms which might not be able to make profits early on. And that offers duration for companies to develop their business simulates, to develop technology, without having to worry about immediate monetary pressures.

Levy is the author of a diary called Ages of American Capitalism: A History of the United State. It partitions American capitalism into four periods. He calls our current era the Age of Chaos. He says it’s been marked by an extreme investor preference for currency and liquidity rather than long-term investment. This can entail — as we’ve seen these past few decades — volatile sell the progress and the occasional bubble. So how does venture capital fit in? It might help to firstly think about the size of venture capital in relation to the economy. What would you guess? Considering the big upside of V.C. investing, you could imagine it would proceed trillions and trillions of giving dollars. But considering the risk, and the long time frame, you could also imagine that not many parties are willing to invest. So what’s the reality? The best approximations evidence that U.S. venture-capital houses have about $550 billion under handling. The stock market, meanwhile — the sum total of public equities — are worth an estimated $ 48 trillion. So venture capital notes for a bit more than one per cent of that asset pond, meeting it rarefied air. It’s also concentrated air: the 50 largest V.C. houses, or about 5 percent of world markets, typically promote about half of all go fund. So venture capital is not very representative of the U.S. economy. But it does dally an outsized role — specially when it comes to innovation.

LEVY: Since innovation and also invention take time, long-term investment is a necessary component of an economy that raises invention.

What’s an example of this kind of innovation?

LEVY: If you look at large-hearted tech, venture capital was willing to take a risk and to give those companies experience and seat to develop without having to worry about short-term profit criteria, the kind of criteria that stock market, ever since the 1980 s, have prioritized.

Vinod Khosla again 😛 TAGEND

KHOSLA: In the 40 years since I’ve been in the startup ecosystem, whether on the startup founders’ side or on the venture capital investing side, I have not found one gigantic innovation that came from institutions of any sort. Hyatt isn’t going to invent Airbnb, or Avis is not going to invent Uber, and Lockheed and Boeing aren’t going to invent SpaceX and Rocket Lab. No “doesnt matter where” I appeared, “they dont have” huge innovation that came from the institutional side of the members of this house. And I place this out because the rest of the world is institutionally driven. And we have this individualism culture in the U.S. You need irrational people to first not only believe something else is possible but then to go out and try it and devote their life to it.

And Ufuk Akcigit again.

AKCIGIT: So that’s why, in cultures where there’s a larger V.C. fund market, it’s much more likely that we are going to observe more radical, risk-taking innovations.

Akcigit has analyzed how different countries pursue different growth representations based on their own technological prowess — and how risk capital plays into that.

AKCIGIT: There are some countries that are at the world technology frontier, like the U.S. or many European countries like Germany, France. And there are some other countries that are very far behind. So a country should decide what kind of growth strategy it is able to accept. Will it be an innovation-based growth, or will it be an imitation-based growth? If it’s based on imitation, where you’re trying to import the technologies from frontier countries, perhaps bank financing could be sufficient, because there is less uncertainty around those technologies. But if a country wants to grow through innovation, by make path-breaking, progressive technologies that are high-risk, you do need to rely on venture capital.

What if you’ve been an imitator and you want to evolve into an innovator?

AKCIGIT: That’s a very good question. The capital markets have to change. The legal rights, the property rights, have to change. And that switching is not very easy. But do we have any example of a country that closed the crack? The rebuttal is yes. China is a recent example of that. China used to be far behind the frontier. But recently, China managed to close the gap with the frontier. And, at that point, we start to see some new technologies emerging from China.

You too have to consider the role of government in financing these progressive engineerings. In the U.S ., you’ll often hear financiers — and investors — complain that the federal government isn’t much of business partners, that it’s more fond of regulation than innovation, and therefore the best thing government can do is to get out of the highway. The economist Mariana Mazzucato, at University College London, does not see it like that.

Mariana MAZZUCATO: What I say to those who say that we need little mood in order to be more innovative, more dynamic, I say, “Well, let’s look at one of the most innovative parts of the U.S. economy, which is Silicon Valley. Did that come from the free market or from an active, perceptible entrust: the government? ”

We spoke with Mazzucato a few years ago for an episode called “Is the Government More Entrepreneurial Than You Think ?

MAZZUCATO: My point is actually the state was involved in almost everything in Silicon Valley. Not to eliminate the role of the private sector — of course, we all know the very important companies in that area. But the capacity that public actors played was really throughout the whole invention chain.

DUBNER: So you’re talking about agencies like DARPA and NASA and the National Association of Health and so on, yes?

MAZZUCATO: Exactly. I’m talking about agencies that do basic research like the National Science Foundation, but also agencies more downstream doing referred experiment like DARPA, The National Organization of Health, which continue to spend more than $ 30 billion a year in the most radical, ambiguou, high-risk research. These public organizations have absolutely co-created price.

Mazzucato also argues the government should be getting a bigger share of the return on these financings, especially when you consider the reach of government-funded engineerings like the microchip, G.P.S ., the Internet. That said, there is nothing new about the U.S. government funding large-hearted, high-risk projects.

JANEWAY: This begins with the canals and railroads of the first Industrial Revolution, increases through the construction of the electricity grids of the second Industrial Revolution. And then, of course, goes on to the Internet and the computer networks that define financial room today — creating a platform for industrialists and venture capitalists to dance on.

That is Bill Janeway. He is a longtime venture capitalist who now learns at Cambridge University. Like Mazzucato, Janeway points out that startup business funded by venture capital have the comfort of innovating on top of the scaffold technologies that were often state-funded. In the 2010 s, approximately 30 percentage of U.S. patents could be linked to research funded by the federal government. Back in the 1970 s, that crowd was roughly 10 percentage. But that direction may be slowing, or even switching. Government funding of R& D has been falling — from about 1.2 percent of G.D.P. in the 1970 s to only 0.8 percentage now. If this trend continues, venture capital will become even more important as a driver of innovation. Janeway annoys this won’t be sufficient, and that the government needs to show more interest in some key areas.

JANEWAY: I’m talking about the dark-green revolution that we urgently need in time to respond to climate change. Once upon a occasion, 15 years ago, a few heading venture capitalists — to me “the worlds largest” noteworthy was Vinod Khosla — tried to promote a dark-green bubble, and there was a little surge of venture capital investing in the mid 2000 s. It failed. It flunked because authority was missing in action. There was no state support for the programs — the projects that would have created the programme, as the Defense Department had done for I.T ., as the National Academy of Health had done for biotech. That’s what we need now.

So it may be that the government doesn’t ever focus on the most pressing problems. But the same could be said for venture capitalists. In one recent time, there is indeed over 1,500 V.C. investments in software startups. And how many in renewable-energy startups? Forty-seven. Ufuk Akcigit again 😛 TAGEND

AKCIGIT: Venture capitalists do contribute, but I should also mention that, while they are contributing to the innovativeness of the startup they are funding, this does not necessarily mean that this is good for the society. It’s highly likely that this is good because they are funding progressive technologies, but economy is a different question. So this does not mean that venture capitalists are providing the right amount of money into the right sectors.

Coming up after the escape: venture capitalists are okay with los, but what’s the difference between failure and fraud? And: how did an overshadow change to pension rules facilitate drive the V.C. thunder in the first place?


The notion of risk capital — utilizing investors’ money to fund large-hearted, risky theories — is as old-time as investing itself. The modern history of risk capital, meanwhile, has two remarkable birth times, both of which took place in Massachusetts. The Harvard Business School professor Tom Nicholas, in a recent bible on the history of venture capital, marks its inception to the New England whaling industry in the late 1700 s. Whaling was a dangerous and difficult endeavor that required a lot of upfront uppercase. It too carried gargantuan upside. A successful expedition could produce, in today’s dollars, about$ 3 million in whale oil, sperm petroleum, and whalebone. To hedge against the risk, individual investors — mainly affluent doctors and advocates — would pool their resources and invest in a share of every navigate, relying on the few successful trip-ups to cover the costs of all the outages. Well over a century later, back on acre, a Harvard professor worded Georges Doriot exploited a same risk-sharing model to create a new kind of company. This was 1946, in Boston. The fellowship was called the American Research and Development Corporation, or AR& D. It made in fund from institutional investors like endowments and family estates and it funded early-stage companies with the promise that one or two mega-successes would, again, balance out all the failures. This clear AR& D the first modern V.C. firm.

JANEWAY: If it hadn’t been for Digital Equipment , nobody is actually recollect AR& D, because it wasn’t very successful.

That, again, is the longtime venture capitalist Bill Janeway. He’s too the author of a volume announced Doing Capitalism in the Innovation Economy.

JANEWAY: But it displayed the enormous skew in returns because Digital Equipment Corporation, the minicomputer make, was such a huge success.

But, again, it took a while. In 1957, AR& D generated Digital Equipment $70,000 to start building computers; this gave AR& D virtually 80 percentage ownership of the company. It was more than 10 years before Digital vanished public. That $70,000 share was eventually worth more than $ 350 million — a nice little 5, 000 percent return on the original speculation. AR& D had shown that one successful cruise could indeed cover the costs of multiple shipwrecks. But the venture-capital industry was still really a blip.

JANEWAY: When the National Venture Capital Association was founded, you could probably have had everyone around the dining room table. There were only about 25 members.

That was in 1973. A few years later, things started to change.

JANEWAY: In 1979, intense lobbying from the venture capital industry had led to amendment of the regulations of the Employment Retirement Security Act — ERISA — which granted fiduciaries to meet their obligations all there is putting a portion, a small portion, of their resources into the high-risk financings represented by venture capital.

DUBNER: In other terms, it is now law to make some pensioners’ pension funds and send them to parties like you, venture capitalists.

JANEWAY: Exactly, to belief with them.

Before 1980, pension regulations included a so-called “prudent-man rule.” This required pension-fund managers to act with “skill, discretion, and diligence, ” or be held personally liable for losings. As you can imagine, an investment in venture capital at the time wasn’t considered super-prudent. But as Bill Janeway told us, the V.C. industry’s lobbying got the Department of Labor to shift the regulation so that welfare managers could expend as much as 10 percentage of their money in riskier resource classifies. This meant that pension overseers could settle as much as 10 percent of their money into risk capital and still comply with federal ERISA regulations. But the loosening of the “prudent-man rule” was hardly the only factor that amped up interest in venture capital.

LEVY: If you look at the 1980 s economy there’s a boom that makes confidence back into financial markets, and you start to see money and financing moving across resource grades and moving across marketplaces in ways that you hadn’t seen before.

That, again, is Jonathan Levy, the historian of American capitalism.

LEVY: Every date, trillions of dollars are slogging around the world digitally.

Really, merely slopping? Where do I put under my pail to grab some?

LEVY: “Slosh” is probably the wrong word.

Oh, okay. Still, all these trillions, looking for somewhere to territory. There were a number of factors driving this. In 1978, Congress had steeply chipped the taxes paid in respect of financing gains.

JANEWAY: That’s what happened in Washington.

Bill Janeway again.

JANEWAY: What happened in Wall Street was that when the Volcker Shock terminated, inflation was overcome. Interest proportions came here to.

The Volcker Shock was Fed chairman Paul Volcker’s campaign to tame inflation by thrust interest rates to as high as around 20 percent. But now, with interest rates down, investors were looking for other ways to make money. For instance: initial public offerings, or I.P.O.’s — where a corporation first sees their shares available for sale to the public.

JANEWAY: In 1983, the I.P.O. grocery opened up. And there was a backlog of really good corporations that had grown up quietly. In 1980, there were two I.P.O.s that pointed the method before Volcker smashed the market. One was a company called Apple Computer and the other was a company called Genentech — I.T. and biotech. And there was a hot I.P.O. sell in’ 83, and venture capitalists started recognise these gains, then there was a flow of fund. But it’s worth noting that even 10 years later, in the early 1990 s, venture capital was a very small segment of the financial system. It was the great tech Internet dotcom bubble of the second half of the’ 90 s that turned what was still a reasonably negligible activity into an manufacture. In 2000, $100 billion was invested in risk capital firms.

One year later, the dotcom crash would drive down U.S. venture-capital investment to around $16 billion. But a culture had been established — a culture that were started the spurt we is today, especially in Silicon Valley. Vinod Khosla 😛 TAGEND

KHOSLA: Silicon Valley is a culture that gives you permission to try things and says it’s okay if you miscarry — we’ll fund you again. That culture has been well-established now in creating very large phenomena. It so happened that in Silicon Valley, you is not simply had the inventors with crazy notions — they could scale because investors were pleasant with this paradigm.

These were investors who is not simply spurred but basically compelled a certain level of boldness. Jonathan Levy 😛 TAGEND

LEVY: You could never tell V.C. guys you’re going to be profitable in three years. I mean, anyone who actually says they’re going to be profitable apparently doesn’t have a bold enough hypothesi, right? You must say, “We’re never going to make any money. That’s how progressive and crazy our meaning is.”

JANEWAY: At the territory, progress is made by trial and error and flaw and correct.

Bill Janeway again.

JANEWAY: Tolerance of lapse is essential. An exclusive chase of effectivenes is the enemy of invention. That’s often why big companies neglect. It’s what happened to IBM. Where we have been very good in the United District, over a long period, has been in reaching gap for the entrepreneur, whose characteristics are, first of all, immense force, which may or may not be well-directed; a willingness, when actuality repudiates the see, of going with the eyesight, against current realities. That’s why my first rule of venture capital is that all inventors lie. It’s the ones who don’t know they’re lie that really get you into trouble.

DUBNER: Every entrepreneur, you’re saying, has a reality-distortion field similar to Steve Jobs?

JANEWAY: Or to make efforts to. Some are more successful at projecting it.

Consider Theranos, a health-technology company that conjured more than$ 1 billion in private money, some of it from the most difficult epithets in venture capital. Here’s CNBC’s Jim Cramer 😛 TAGEND

Jim CRAMER: For the last few years, Theranos has been viewed as a progressive busines — the C.E.O. has been acclaimed as the next Steve Jobs, the company has been quality as much as$ 9 billion.

That C.E.O ., Elizabeth Holmes, predicted a new method of blood testing that sounded more good to be true.

Elizabeth HOLMES: We’ve manufactured it possible to run extensive laboratory tests from a minuscule test, or a few drops of blood, that could be taken from a finger.

But the Theranos story was in fact too good to be true. Jim Cramer again — this was in 2015 😛 TAGEND

CRAMER: And merely this morning, the Wall Street Journal raced a fairly scathing commodity about the company — alleging that the company’s proprietary testing maneuvers may be inaccurate, and basically accusing Theranos of misleading practices.

Holmes and Theranos have been in trouble ever since — with the S.E.C ., with the Centre for Medicare and Medicaid Business, and Holmes is currently on trial for fraud. Jonathan Levy again:

LEVY: Traditionally in a capitalist economy, we think of the market as training companies that can’t prove the merit of their existence by making profits, right? That capital business have a training gist. Portion of the story of venture capital to me, which is admirable, which is the willingness to make long-term risks in startup fellowships that are innovative but can’t consequently show profits — at what point does access to capital along those lines continue to prop up corporations that don’t have a viable business representation? If you could wear the turtleneck sweater the right way, talk the talk, move the walking, you might be able to get access to capital.

Historically, risk capital has been a heavily American pursuit. 20 years ago, the U.S. accounted for approximately 80 percent of world-wide risk capital, with the vast majority in the San Francisco Bay area, New York, and Boston.

LEVY: So if you’re a startup company that’s appropriately socially networked in Silicon Valley and have some individuals who went to Stanford, there’s inexhaustible access to capital, but you go to the other side of the trails , not so much.

The field is also particularly, extremely male. Start-ups with alone female benefactors took in barely 2 percent of V.C. fund in the U.S. in 2020. This was likely one reason that so many investors were so eager to believe in Theranos and Elizabeth Holmes. It’s rather most diverse on the other side of the table: about 12 percent of decision-makers at V.C. conglomerates in the U.S. are women, up from really under 6 percentage in 2016. And this deepen will likely mean more funding for female benefactors as well, since female investors are much more likely to invest in female benefactors. An even bigger change is the amount of venture-capital activity now outside the U.S. The 80 percent share from 20 several years ago has since fallen to about 50 percentage. Now, again, is Vinod Khosla.

KHOSLA: Shanghai’s done a very good job in China.

China now accounts for approximately 25 percent of global risk capital, up from less than 5 percent in the early 2000 s.

KHOSLA: Europe hasn’t done well because it is too submissive of institutions. And you need much more disrespect for authority. I find numerous European start-ups, if they have a big idea, they get was transformed into a decent suggestion as opposed to amplify it and say, “Go for the moon.”

Khosla himself is definitely the type to go for the moon. Besides patronage Impossible Foods, his firm has money a variety of bleeding-edge engineerings in healthcare, online security, and finance. One of his current obsessions is nuclear fusion.

KHOSLA: While there’s a world institutional effort to spend $30 billion over 30 or 40 times, we think we can prove it in five.

His firm is backing a company called Commonwealth Fusion Systems. They recently announced they’ve procreated the most powerful magnetic field ever recorded on Earth, and magnet engineering is seen as one of the biggest overcomes to shaping fusion power a reality. The hope of synthesi is that it could flawlessly cause enough energy to supremacy a small city in a design the size of a shipping container. Commonwealth hopes to build a demonstration device by 2025.

KHOSLA: If I said to you, “Our 15 -year goal is to change all animal husbandry on the planet or build a fusion reactor in 10 years instead of 50 with one-fiftieth of the resources–.”

DUBNER: “You’re crazy, ” I say. “You’re nuts.”

KHOSLA: Society in general depends on five per cent of the people doing things at the edges of culture where most change happens. So, I do contemplate enabling more of those people to lead society in good tendencies is a very good thing — while increasing the social-safety net at the same time.

DUBNER: So, do you have any advice for someone who’s listening to this and says, “I’m clearly in the 95 percent. I would much rather be presented at the 5 percent.”

KHOSLA: You have to be inspired by talks like this, by podcasts. Why am I on this podcast? And I said this in the talk I contributed at Stanford Business School in 2015. There were 500 M.B.A.s in the public. And I said, “I’m not speaking to 95 percent of you.” “The only reason I’m going to see trash an hour of my time” — and that could apply to this podcast — “is because I’m going to trigger some people to get enough self-confidence to go try this other world of innovating, forming things happen that you believe in, driving civilization , no matter how hard it is or how difficult it is.” Your goal is to go from absurd to unreasonable to possible to probable to making it happen. In fact, I’d like to tell your audience, really hard things are the only things worth trying. And they’re the ones that most contribute to society because most things that are easy are either not worth doing or somebody else has already done it.

Khosla’s “really hard thing” was creating Sun Microsystems, which wound up attaining him a personal fortune.

KHOSLA: In my 40 s, I recognise I was way most successful and had more resources than I could possibly have imagined even 15, 20 times earlier. And so, what I got was the freedom to indulge myself. Now, I can get a yacht or a region in south of France, but I was always driven by learning. And I said, “Now, cool technology is great. What else “d be nice”? ” And I gratified Professor Yunus and decided privation was a pretty interesting problem to take over, largely because it was hard.

He’s talking about Muhammad Yunus, the Bangladeshi economist and inventor who won a Nobel Peace Prize for wreaking microcredit to industrialists too small and poverty-stricken to get a standard bank loan.

KHOSLA: Hard troubles are more interesting than easy difficulties. So, it’s the exact opposite of coming a yacht. And I retain when we started our house, I actually knew somebody who’d spent $100 million on their yacht. And I said, “That’s a good ship for them. For me, 30 $ 3 million stakes is my yacht.” The beings I want to play with, learn lessons from, explore projects, propagandize them to think bigger — and so, poverty was one, and the other thing I started looking at was climate. And so, in a certain sense, taking on nearly impossible problems manufactured things most difficult, which “ve been meaning to” me more amusing. And so, they were both impossibly hard problems. Neither one of them is solved today, but we are making progress on both.

Is venture capital the best vehicle for making progress on hard problems? Vinod Khosla certainly feels so, and it’s hard to doubt his sincerity. Others may view different opinions. Others may feel that venture capitalists may talk a righteous game but that in the end, self-interest will win out, and in the end, it’s merely another speculation canal that changes the richness of the already prosperous. That it focuses too much on glossy brand-new products and services at the expense of some of the less-exciting problems our civilizations need to solve. What do you think?


Freakonomics Radio is produced by Stitcher and Dubner Creation. This bout was produced by Ryan Kelley. Our staff also includes Alison Craiglow, Greg Rippin, Zack Lapinski, Mary Diduch, Jasmin Klinger, Eleanor Osborne, Emma Tyrrell, Lyric Bowditch, and Jacob Clemente. Our theme song is “Mr. Fortune, ” by the Hitchhikers; the rest of the music this week was composed by Luis Guerra. You can follow Freakonomics Radio on Apple Podcasts, Spotify, Stitcher, or wherever you get your podcasts.

Here’s where you can learn more about the people and ideas in this episode 😛 TAGEND


Vinod Khosla, co-founder of Sun Microsystems and the founding fathers of Khosla Ventures. Pat Brown, founder and C.E.O. of Impossible Foods. Jonathan Regev, co-founder of The Farmer’s Dog. Ufuk Akcigit, professor of financials at the University of Chicago. Jonathan Levy, prof of biography at the University of Chicago. Mariana Mazzucato, prof of economics at University College London. Bill Janeway, senior advisor and managing director of Warburg Pincus and professor of fiscals at Cambridge University.


Ages of American Capitalism: A History of the United Position, by Jonathan Levy( 2021 ). NVCA 2021 Yearbook, by the National Venture Capital Association( 2021 ). “Value of Venture Capital Investment in the U.S. 1995 -2 020 ,” by CB Insights( 2021 ). “More Opportunity Than Capital: Venture Dollars Spread Throughout the U.S . ,” by Chris Metinko and Gene Teare( Crunchbase News, 2021 ). “The U.S. V.C. Female Founders Dashboard ,”( PitchBook, 2021 ). “Venture Capital’s Role in Financing Innovation: What We Know and How Much We Still Need to Learn ,” by Josh Lerner and Ramana Nanda( Journal of Economic Perspectives, 2020 ). “More Women Are Top V.C. Decision-Makers, but Parity is a Long Way Off ,” by Dan Primack( Axios, 2020 ). “Women V.C.s Invest in Up to 2x More Female Founders ,” by Collin West and Gopinath Sundaramurthy( Kauffman Fellows, 2020 ). VC: An American Record, by Tom Nicholas( 2019 ). “Federally Funded Research Drives Nearly One-Third of U.S. Patents, Report Discovery ,” by Brittany Flaherty( STAT, 2019 ). “Synergizing Ventures ,” by Ufuk Akcigit, Emin Dinlersoz, Jeremy Greenwood, and Veronika Penciakova( NBER Working Papers, 2019 ). “Synergising Ventures: The Impact of Venture Capital-Backed Firms on the Aggregate Economy ,” by Ufuk Akcigit, Emin Dinlersoz, Jeremy Greenwood, and Veronika Penciakova( VoxEU, 2019 ). “Tracking Investment by Sector ,”( The Wall Street Journal, 2018 ). “U.S. Share of Global Venture Capital Fell More Than 20% in 5 Years ,” by Anna Hensel( VentureBeat, 2018 ). “Rise of the Global Startup City ,” by Richard Florida and Ian Hathaway( Center for American Entrepreneurship, 2018 ). “The Top 20 Grounds Startups Fail ,” by CB Insights( 2017 ). “Where Do Venture Capital Dollars Actually Come From? This Visual Explains ,” by Lee Hower( NextView, 2014 ). Doing Capitalism in the Innovation Economy: Markets, Speculation and the State, by Bill Janeway( 2012 ). “Venture Capital Funds- How the Math Works ,” by Basil Peters( Angel Blog, 2008 ).


American Culture series by Freakonomics Radio( 2021 ). “The Future of Meat( Ep. 367 ) ,” by Freakonomics Radio( 2019 ). “Is the Government More Entrepreneurial Than You Think?( Ep. 348 ) ,” by Freakonomics Radio( 2018 ).

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