Rude VC: Rearranging deck chairs on the Titanic

Apr 24, 2012
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Pardon the overused cliché, but I figured it was appropriate to pay homage to the 100-year anniversary of the Titanic’s fatal voyage since every media outlet seems to be doing so (my favorite was The Onion’s commemorative tribute in applying its rarely-used 100-point font to the headline).

But the equivalent of rearranging deck chairs on the Titanic is what it feels like we do all too often here in France.

My favorite local neighborhood wise man and actuarial genius, Joseph Leddet, recently described the manifestation of this phenomenon in the Paris metro system. RATP employees in 9 out of 10 metro stations no longer sell tickets; they’ve been re-commissioned as “public information points.” As Leddet points out, this means that the employees in 9 out of 10 metro stations have nothing to do, because regular metro passengers have no need for “public information.” They merely need to buy metro tickets or renew their monthly pass. And now the employees can no longer render such a service; they merely redirect the passenger to the automated ticket kiosk. So, since the employees still maintain their positions in the metro stations, no cost savings are realized. Nor are they re-trained and re-deployed in other innovative areas that could, heaven forbid, actually become new revenue lines for the RATP. And since the automated kiosks are incomprensible to most tourists and incompatible with many foreign bank cards, one could argue that there’s a been a regression in the notion of public service.

Yet this phenomenon also extends to the high-tech startup scene.

I’ve written a lot about the Easy Money period and the distorting effects that tax-incentivized investment vehicles can have on France’s venture capital industry. The rearranging deck chairs metaphor comes into play when we think about the perverse impact on the efficient allocation of capital. As I’ve suggested before, tax-incentivized funds prioritize capital preservation over high risk/high reward pursuits.

High risk-taking inevitably means some bankruptcies. Bankruptcies can endanger the gravy train of intermediaries that push these investment vehicles on French taxpayers looking for a fiscal break. So rather than allocate capital to high-risk endeavours that have the chance to become the next Twitter, it is much more prudent to invest in relatively safer technology or service businesses that sacrifice growth in favor of short-term profitability. Or worse, to drip feed companies that once had a technology edge but never quite scaled when now their market opportunity has long since morphed into something else.

Happy anniversary.