Silicon Valley VC legend Don Valentine purchased a 33% stake in Cisco decades ago for $2.5 million. Cisco is one of the many great investments made by the VCs at Sequoia Capital, and it’s worth thinking about with Cisco’s $271 billion market cap top of mind.
How did Valentine and Sequoia get so much for so little? Readers know why, or they should: before Cisco became Cisco, it wasn’t expected to survive.
To be clear, it’s the business model of VCs to invest in companies pursuing “impossible” ideas, and that fail quickly. On the rare occasion that one of the impossible ideas succeeds, it and the rare few like it more than pay for all the failures, all the while showering investors in these intrepid funds with major returns.
Which is just a reminder that Silicon Valley start-ups aren’t following interest rates when they open their doors. They aren’t precisely because there’s not an interest rate high enough to compensate an individual willing to lend to them.
Money is ruthless. It’s that simple. That equity finance is the only kind of finance in Silicon Valley’s startup world is evidence of the previous truth.
All of which rates mention as departing Washington Post columnist Catherine Rampell describes Fed Chairman Jerome Powell “as one of the unsung heroes of the U.S. economy these past few years.” What could she possibly mean?
Ok, it’s obvious what Rampell means. She believes that Powell’s willingness to stand his ground against President Trump on the matter of the Fed funds rate has been the difference between what she deems falling inflation and the hyperinflation that would surely reveal itself if Powell caved to Trump. Which is difficult to countenance regardless of one's view of Trump.
Seemingly forgotten by Rampell is that the Fed was at “zero” for how many years? Without defending this utter lapse of reason brought to us by the walking, talking economic fallacy that was and is former Fed Chair Ben Bernanke, it’s no reach to point out that the dollar didn’t collapse into nothingness in response to Bernanke’s belief that he could decree costless what the power of compounding always renders pricey. But that’s a digression in a sense.
The more pertinent response is that Rampell, “the leading econ journalist of her generation” according to economist Justin Wolfers, presumes that there’s a winning central plan. And based on this presumption, she wants us to believe Powell’s central plan for the cost of credit exceeds Trump’s so much that he rates “hero” status. That's similarly difficult to countenance.
It’s truer to say that central planning fails always and everywhere. Which means that the magic informing Powell’s rate stance is every bit as ridiculous as that informing Trump’s, or for that matter, Bernanke’s. None of them, or thousands of them, or thousands and millions of Rampells could ever possibly know what the right interest rate is.
Rampell sides with Powell in dismissive fashion toward Powell's opponent in Trump. She believes Powell knows. Actually, neither Powell nor Trump knows. They couldn’t possibly know, but since Rampell reveres the experts, she wants to believe they do.
After which, Powell wouldn’t be a hero even if he did know the proper interest rate and stuck to it. See the introductory paragraphs to this short write-up. Silicon Valley’s impact on the U.S. and global economy well exceeds that of any other U.S. sector, and nothing the Fed does has any relevance to what happens in Silicon Valley. No, Jerome Powell wouldn’t be a hero even if he knew what Rampell naively imagines he does.
