Venture Capitalists Are Deforming Capitalism
newyorker.com
newyorker.com
This is clearly written by someone that has little to no startup experience. As someone that has spent 15 years as a founder I can tell you that the opposite is true: I have seen startups racking in seemingly endless funding only to be beaten by much smaller / less well funded competitors that happened to have better strategy or execution. The examples are endless, more recently we heard about Quibi ($2B funding!) failing, Yik Yak, WeWork etc
There are markets that are capital intensive, and others that are really commodity spaces where winner takes all (Uber comes to mind) but for the most part, the smartest VCs in the industry will tell you that you should worry about strategy and execution, not raising a ton of cash which creates a bunch of problems on its own.
Nobody but you has that idea. The article is a story about other companies who have maybe shown indications that some can "run amok" with an influx of capital, at the expense of all other stakeholders, including the user.
This article is not a story about you or the non-corporal entity you are birthing and even pretending for a minute that it is, is just silly.
Also, even if we assume WeWork is an aberration, "beat" here is on a long timescale, after all. There are by now plenty of tech companies that have been around more than a decade having never made a profit. At some point you have to accept that the market dumping these firms are engaging in, does in fact lead to less well capitalised firms being unable to compete.
There are laws to regulate it, but they aren't enforced because Washington is both incompetent and corrupt.
But what if they'd not been allowed to do this and been forced to charge for web search from day one? With no ad network and without being allowed to take VC money to build up traffic, they'd not have been able to establish a market for ads and thus, would have had to rely entirely on revenue from search appliances, which was tiny. Search would have ended up dominated by their competitors simply because they could never bootstrap themselves to the point where they'd be interesting to advertisers.
So this stuff is complex and even though there seems to clearly be a problem here with VC money subsidising broken businesses forever that suck all the oxygen out of the room, it's unclear that governments effectively setting prices is better (after all, setting price floors is a form of price control). SoftBank will eventually run out of money unless Son finds another Alibaba. Government controls don't run out like that.
Thanks, you made me think. You might be right. An unsubstantiated part of me wants to think that oil being pegged to the dollar and the dollar being pegged to nothing is the ultimate root cause. What allows western aligned funds like Softbank to accumulate so much mis-managed money that WeWork is even a thing. I feel like this whole thing will collapse and Bitcoin will look honest in comparison.
SoftBank is something of an aberration caused by the growth of China. Son would have lost all his wealth in the first dotcom bubble but he sprayed so much money around he got in on Alibaba early, and it turned into the Chinese Amazon. Or at least, that's the uncharitable view. The charitable view is that placing a lot of bets on a lot of firms and hoping one gets huge is a perfectly valid strategy to create wealth, and Son reaped the rewards. However, the risk involved is huge. Lots of people lost lots in the dot com bubble because they sprayed money around and did not find that magic lottery ticket.
The usual rags-to-riches feel-good story.
Reality is more nuanced, and "worst-run startup can beat competitors if investors prop it up" is true most of the times.
It seems like the opposite cliché of "Endless VC funding leads to success over better alternatives" is just as much of a fantasy.
After all, people with little marketing experience on Hacker News often believe a marketing budget is the only thing that separates huge success from complete failure.
As you say, reality is more nuanced.
And, well, if your competitive advantage is access to legislators to carve out special legal exemptions for yourself [0], good luck competing with that, mom-and-pop startup.
[0] https://ballotpedia.org/California_Proposition_22,_App-Based...
This is something we tend to take for granted with already-successful companies, but there was a time when everyone — even Uber and DoorDash — were struggling in obscurity to build something people would use.
While yes, they have some benefits that people like, but it's not clear that those services would have been able to compete against existing services without heavily subsidizing to undercut existing market players.
"In a special election held on October 10, 1911, California became the 10th state to adopt the initiative process. That year, Governor Hiram Johnson began his term by promising to give citizens a tool they could use to adopt laws and constitutional amendments without the support of the Governor or the Legislature. The new Legislature put a package of constitutional amendments on the ballot that placed more control of California politics directly into the hands of the people. This package included the ability to recall elected officials, the right to repeal laws by referendum, and the ability to enact state laws by initiative."[0]
[0] https://www.sos.ca.gov/elections/ballot-measures/how-qualify...
The special carve-out in this scenario was AB5, which was specifically designed to target Uber & Lyft (effectively every other industry you can imagine was made exempt from it).
And the "access to legislators" was non-existent, that is literally the point of ballot propositions. Apparently these companies tried to work with legislatures first but they were unwilling to compromise. But anyone with a few signatures can put up a ballot prop in California without any special connections, and that's what they did. It was then approved by a majority of voters, it's hard to frame that as some kind of shady backroom deal.
Lastly, it's pretty hard to imagine a mom-and-pop startup this might hurt. It hurts the legacy taxi industry but that is the very type of intrenched interest with their own special rules and special access to legislators that we're better off without. Any new rideshare or delivery app competitors get all the benefits of prop 22 that incumbents do.
I've been working with startups part or full time since 1991 and am amazed at how disruptive they are to the markets in which they participate. Getting a huge pool of money and then spending it to achieve dominance in the shortest possible time does lots of damage to markets, in particular in makes the bootstrapping path nearly impossible since customers can't compete with investors.
Government interference in the market isn't socialism, it's regulation. It's not socialism when the government ensures that companies have to compete fairly amongst eachother, minimise environmental hazards, safety test pharmaceuticals or respect labour laws. Even anti-trust laws or price controls aren't socialist. They're collectivistic, because they look after the greater good, but so are charities, some churches and , ideally, the justice system. None of those are "socialist".
Socialism (and only the statist variety, at that) is when government owns (part of) the means of production, and not even always in those cases, either. The US postal service isn't "socialist", it's a state-run public service. NASA isn't "socialist", it's a government agency funded with public funds.
The ecosystem it creates, however, doesn't matter whether it's the former or latter. It drives out competition because VC's can make up the difference in a lack of profit.
To be fair, in recent years, a lot of dumb money has entered into the VC scene. Again, mostly from traditional incumbents attempting to emulate without understanding the bigger picture.
Include non professional investors and you get successes like George Forman and a ton of far less successful athletes etc. which on net also under preform the market.
Does anyone understand this?
I really like Ben Evans, but he's ignoring the main thrust of the article and nitpicking about definitions.
That's rarely a sign of someone who has a strong argument against a piece.
That's rarely a sign of a piece that makes a strong argument.
I know its against the guidelines, but did you read the article?
> Benedict - thanks for your tweet. I'm a fan of your newsletter. Although VC might have a specific and limited definition in your book - as a certain kind of professional - it has a pretty common use in the vernacular: People who invest in start-ups, at a variety of stages, in the hopes that company will prosper. You may not respect the people who invested in Theranos, and you might not consider them part of your industry, but they were VCs. They were acting like VCS. They were investing in a start up in the hopes the company - and their investment - might prosper. They were evaluating companies and making bets. And while I would never call you or anyone else 'lazy', I've always appreciated the intellectual rigor you've brought to your writing. If you'd like to engage, I'm absolutely willing to do so. Calling me an intern or lazy, however, seems beneath us all. (Besides! There are some great interns!)
Source https://twitter.com/cduhigg/status/1330894337090015232
So I'll take the opposite side. Does "acting like VCs" by "evaluating companies and making bets" make you a VC? That kinda just seems like investing though right?
Is Bill Murray in "What About Bob?" really a sailor because he was duct-taped to the mast?? (https://www.youtube.com/watch?v=YrbY4hsNh64&ab_channel=jooki...)
What is the VC industries understanding/definition of VC then? The tweet thread doesn't leave me clear on it.
Wikipedia says "Founded in 2003 by 19-year-old Elizabeth Holmes, Theranos raised more than US$700 million from venture capitalists and private investors." Google theranos venture capital you can find plenty more references. Evans suggests it's a "straight fuck-up by fact-checkers" to do so, which seems overly-defensive and just plain odd to me.
The same cannot be said for many other types of power.
If you look at any list of the truly rich, it is almost all 'new money', of those that are beneficiaries, the money was inherited relatively recently (such as the Walton family).
There are a bunch of other things to consider, for instance diversification of wealth has fundamentally transformed since the early 1900's and wealth management is on a completely different level than even 20 years ago, let alone 120 years ago. Not to mention the legal innovation to protect estate value that has been going on.
I'll also point out that the people on that list are generally not using Fidelity, Vanguard, or Hancock as their wealth management services. They are using private family offices or firms like PDT Partners that are directly accountable to those families.
> There are a few of them because wealth concentrates upwards.
Is your argument really that all wealth is already owned by some dynastic elite and that's why nobody else can get to that level? That is nonsense.
Wealth outside these is gigantic. We constantly see economic growth that creates wealth, and new fortunes for people. Somebody in tech should really understand this, and these new rich often actually more influential and richer then some of these dynastic elite.
> Their mere existence as dynastic families proves that wealth does not always flow downwards
That's not what me or parent argued, nice straw-men.
In 2016 the family's net worth was estimated at 11 billion total. Sure that's significant but nothing compared to what it was.
Chinese has a great saying for this: 富不過三代 (Wealth does not pass three generations).
And pitchforks.
What kind of investor puts their money into a business which has a decade long track record of losing money and no profits in sight? In a system which is notorious for incentivizing short term gains... It doesn't add up.
Amazon took 20 years (mas o menos) to turn a profit. Tesla took 15ish or so?
A lot of people have clearly latched onto something Jeff Bezos said a long time ago in an interview, which was, "Get big fast." The whole goal with Uber is to utterly crush all competition until they're the only game in town. The only other explanation for Uber is that they're banking on self-driving cars and are hoovering up data from the app towards that goal.
Uber only has one way to win, no matter what, beat every other taxi company. They either do that by running every other taxi out of business, or find their Holy Grail of self-driving taxis.
Do investors have the stomach to fund Uber until either of those things happen, though?
Softbank's Vision Fund basically exists to invest with that thesis. That an extremely well-funded and basically competent team will outlast all competitors and eventually own the market. Then they will have monopoly pricing power and become extremely profitable.
It hasn't worked out that way for them.
The article is no so much wrong as it is an oversimplification.
The current system that we have is a miscarriage of Capitalism, where the HOPE of future profits is more valuable than the skill and competence to make a profit out of the gate, the way, you know, a grocery store has to before it goes under in two months.
Basically it's a giant pyramid scheme. A bunch of VCs throwing companies around like hot potatoes until the biggest idiot ends up with an overvalued load of crap.
Want to hear about my morning routine?
> A venture capitalist (VC) is an investor who provides capital to firms that exhibit high growth potential in exchange for an equity stake.
How does this not describe Murdoch and DeVos in this situation?
I have a friend who invested $10k into another friend's startup. Is he a VC now? If you want a term that refers to all investors we already have one - it's "startup investors".
VCs are mercenaries - they invest someone else's money and they are responsible to return the money in 10 years or bust. They take board seats, they try to drive when things get tough, they try to push companies to the breaking point because 10 years are fast approaching.
This sets them apart from FFFs or Angels, for example. Or even from Investment Bankers.
The distinction you're making is between institutional and individual investors. It's worth talking about the difference between institutional and individual investors, but it's all venture capital.
And Tim Draper, at least, invested in Theranos. Theranos isn't as much an indictment of Silicon Valley as news articles say, but it's still a bad look.
It didn't feel different than any other VC experience I've seen as an employee, whether that was A16z, Sequoia, etc. If it looks like a duck...
I think (and hope) this era of unfettered partying and bro-culture capitalism is finally coming to an end (with the WeWork debacle and even a bit of Theranos finally permeating the public view). And of course, Rona forcing everyone from line engineers to hedge fund managers to take stock of their lives (and finances).
This was Wall Street banks before tech. I think the culture will just shift to something else.
Concentrating a lot of wealth in the hands of few people who then have complete power over what human endeavor gets funded, and potentially given insane financial advantages over more virtuous competition, to obtain monopolistic positions.
It turns out : this is bad, empirically. Of course any analysis a priori would have also netted this result.
Monopolies of all kinds are bad. Including monopolies of government.
Capitalism is supposed to reward people that were able to succeed from previous ventures, or alternatively allow people to voluntarily pool more modest amounts of capital together. Everything gets distorted in the real-world, of course.
It doesn't need to be a false dichotomy between what it is now and stalinist Russia comunism.
Note: the blood suckers is not the whole of the capital market of course, they produce value. The problem is some players and some practices..
Giving things way to people for less than they are worth may not be good idea, but I don't think I would call that parasitic.
Instead, that is closer to charity.
I would not use the word "parasitic" to describe a situation where good and services are very cheap and good.
The point of the article is that it is this Kool-Aid thinking which deforms actual capitalism.
This used to be called dumping, and was a crime.
The new part is that the companies don't even make any money at their core business.
Take Hailo, an uber-like startup that operated a franchise model. They made money, were expanding slowly and profitably, and followed the laws.
They were driven out of business by Uber who still (ten years later) have not made any money, and have been subsidised by deluded pension funds looking to juice their returns.
Whatever that is, it's not capitalism, which at base is a system designed for people to invest money in the hope of getting more money back in the future.
Hailo was capitalistic, Uber is some kind of weird mishmash of communism and hipsterism. It's like the performance art of capitalism; all of the trappings and none of the substance.
(For Uber, substitute your least favourite unprofitable unicorn).
You can't take "well this is happening but it's not real capitalism" even though everyone's calling it capitalism. It's capitalism. Capitalism is busted and rewards greed and concentration of wealth.
It doesn't take a galaxy brain super genius to figure out that an economic system that relies on infinite growth doesn't exactly pan out in the long run, and what we're seeing in America today is just the late effects of the capitalist system that we allowed to run rampant because apparently any amount of socialism is communism and scary because reasons I guess.
Rewarding greed would indicate that the companies would be making money in some unwholesome way (e.g. selling formula milk to mothers in countries where there is no decent water, leading to the deaths of babies). Ditto concentration of wealth.
What I'm giving out about is the opposite, where money is thrown at these deeply unprofitable ideas which keep expanding on the basis of the greater-fool theory.
That's a really big departure from what capitalism used to mean, and I think it's worth calling this out.
The bed was made, and now we all get to sleep in it.
So you're not engaging with my argument, and just spouting off anti-capitalistic talking points (which I would agree with, if they were any way germane to the points we're making here).
I'm not sure there's much point in engaging further with you. Have a great day :)
Capitalism always had a cyclical nature presumably because humans are cyclical. Things go wrong and then they go right and then they go wrong in an endless cycle. It's like an engine that breaks down every now and then. You can fix it and you should.
>It doesn't take a galaxy brain super genius to figure out that an economic system that relies on infinite growth doesn't exactly pan out in the long run
Capitalism doesn't rely on infinite growth. It drives growth by rewarding increased productivity and innovation. However, since it does so through monetary rewards it is entirely possible that government policies make it easier to acquire money through non innovative or unproductive means. QE and low interest rates are a pretty good example of this. That money can be used to acquire competitors or simply stay alive for much longer.
I still maintain that structurally unprofitable companies are an abberation caused by negative interest rates, and I don't think it would be recognised as capitalism by time travellers from the 70s.
Not if all the businesses are monopolies. The concentration of wealth allow for an ever greater capture of markets as well as the government that would reign in their monopolistic behavior. This should be obvious with what just happened with Uber, who successfully bought legislation to defend their unprofitability but movement towards monopoly, and has large executive overlap with the former Obama/soon-to-be Biden administrations.
>I still maintain that structurally unprofitable companies are an abberation caused by negative interest rates, and I don't think it would be recognised as capitalism by time travellers from the 70s.
Maybe its not an "abberation," but fiscal policy put in place to further the wealth and power of existing Capital owners? It's also irrelevant in practical terms what people 50 years ago called something versus today. Countries, businesses, religions, ideologies etc both persist and change, regardless of whether they remain recognizable to anyone at a given point in time.
Are you joking?
You seem to be making some kind of corruption argument around large companies, which I think is fair. That's not what I'm saying though.
I am saying that if company A earns $90 and spends $100, then the extra $10 must come from somewhere (normally further investment).
As a thought experiment, I noted that this would not work if every company spent 10% more than they earned, because where would the money come from? You seem to say that this doesn't happen because the businesses are monopolies.
Can you clarify your argument on this specific point further, as I really don't understand it?
okay.
There's a transfer of capital to service users and employees (and definitely executives), but this is dependent on the infusion of external capital (as the company does not produce enough capital to fund its own activities).
I feel like either I have gone crazy, or the world has.
Occam's Razor time: capitalism doesn't work!
And for the rest of us, well, wages won't go up to match the freshly created dollars, but prices will.
https://news.ycombinator.com/newsguidelines.html
https://hn.algolia.com/?dateRange=all&page=0&prefix=true&sor...
People literally have to go insane to get by in this insane system. The industries which are closest to the money printers are incoherent and have nothing to do with capitalism.
AKA: people were misled.
Remember what Google's overarching goal is supposed to be? "Organize the world's information," IIRC, with the subtext of "... and monetize it." This is literally what gmail is to email.
The American identity is under siege... being told where you can and can't go, and under what conditions (mask / no mask), is totally alien to an American, and I don't know why it would shock anyone, anywhere, that understands even the slightest bit about our culture to hear this.
And that's just one small aspect of the cultural component of this pandemic.
No... 2020 is going to change the entire world, or more accurately, COVID-19.
EDIT: Oh yeah, Morgan Stanley is already issuing guidance that 2021 is going to be a commercial real estate bloodbath, lol, so, you know... there's that.
Not to mention the huge influx of people into flyover states once they realize New York is only a nice place to be if you can actually go out and do shit. If you can't do any of the shit that New York is known for, why would you live there?
What a fucking wake up call they got, eh?