Making Venture Capital work for everyone
✨Last week, you all told me you loved the new format. So I’m keeping it. Thank you to everyone that commented and reached out to give me feedback!
I’ve been thinking about venture capital and its effects on the tech ecosystem lately. In some ways, venture capital is a major miracle. People give you lots of money to go out to build your dreams. If your company succeeds, then founders, employees, investors, and shareholders can make incredible returns. The newly rich then pollinate the ecosystem with their capital, providing opportunities to others who can repeat the trick. All in all, the end result is generational wealth, well-paying jobs, and great products that advance society.
At least, that’s how it works in theory.
A discerning eye sees a slightly different story. VC is notoriously homogenous. So those dollars are highly concentrated in the hands of few. The model itself has produced dozens of great products and companies, but it has also catalyzed companies with unquantified negative externalities.
Looking at VC companies today will give us a sneak peek at tomorrow’s tech titans.
What’s wrong with venture capital?
❗️TLDR (too long, didn’t read)
There’s never been so much money in venture capital. Yet, the cheques are largely going to the same people. In 2020, a measly 3% of venture funding went to black founders. The numbers are similarly small for women (23%), LGBTQ, and other minority groups. Things are improving slowly but the public displays of support are not translating into invested dollars. The biggest opportunity in investment is finding and funding talented founders that VCs have under-estimated.
The company-building VC playbook is too focused on “getting to scale and then figuring out any societal harms later”. There’s far too little discussion or due diligence about how their creations can and should contend with unintended consequences and societal harms.
📚TSWM (too short, want more)
Venture capitalists aim to find and fund the best founders. And you could argue they’ve done a good job at this. Startups from YouTube to Moderna are possible because of the VC model and funding. But we also know they’ve missed on many people deserving of funding.
I can’t help but wonder how our tech ecosystem would be if it was created by other people. Would it be different? What other problems would we then have? If social media companies were founded by people who are familiar with online bullying, would they have created products that are more thoughtful towards these problems? Or would the persistent pursuit of monetization overcome any initial thoughtfulness?
We’ll never truly know. Unless we build this new ecosystem. But the demographics of funded founders tell us that there’s a massive sea of talent elsewhere that isn’t getting a fair crack at the whip.
😕Incentives and shortsighted defense
During the Robinhood Gamestop scandal, I watched many interviews where Robinhood investors vehemently defended their golden child. Question after question was posed, and the investors could not even fathom a world in which Robinhood had made mistakes.
Of course, I don’t expect them to go on CNBC or Bloomberg to lambast their investment. Especially during a crisis in which Robinhood had few allies and many foes.
Nonetheless, the moment crystallized the misalignment between financial incentives and societal benefits. Because of money, that sweet nectar that drives and motivates us, the investors went into defensive mode. Any critique, no matter how valid, then became a personal attack on their kids’ trust fund.
If we’re going to have a mature tech ecosystem, then we need to elevate the discussion several notches. It’s not about “attacking your investment”. Politely, it’s not even about you. It’s about critiquing products and companies based on the merits of their actions. It’s about being frank and honest about how to usher in responsible innovation. It’s about ensuring investors’ financial incentives are aligned with society’s benefits.
If we can’t criticize poorly behaving companies, and regulation doesn’t exist, and VCs don’t push back on startups, then we’re in real trouble.
🌴Growth at all cost strategies
The traditional VC model is high-risk, high reward. Moderate success is deemed a failure. Startups are encouraged and expected to pursue aggressive growth. But scaling fast isn’t the best choice for every startup. Some startups need to take things slower to build the most sustaining, most sound businesses.
VCs invest in a broad basket of companies, so the failure of each individual startup might disappoint them, but it won’t hurt them. In essence, the traditional model of VC-funded, aggressive growth-at-all cost strategy often works better for return-hungry VCs than the startups themselves.
How can we improve the ecosystem?
❗️TLDR (too long, didn’t read)
We need more Arlan Hamilton’s. We need more people dedicated to finding and funding the talented, underserved founders. Not for charity or as part of silly PR campaigns, but because there is massive unrealized potential. We need people from all backgrounds to participate in the equity-generating game. And more startups should give equity to the people who make their successes possible.
We need VC firms to take responsibility for the companies they fund. They take the plaudits when their companies succeed so they should take some heat when those companies harm society. If you pour diesel on a burning fire, you’re culpable for the resulting destruction. Moreover, VCs need to ensure that society’s long-term best interests are aligned with the success of their companies’ products.
📚TSWM (too short, want more)
🤑More people should get into private investing
Rich people become wealthy through ownership. Ownership of real estate, companies, or other productive assets. For decades, it’s been impossible for average Americans to invest in private companies due to SEC laws. Only accredited investors (aka rich people) could invest. So only rich people had access to the means of generating wealth. Does that sound fair to you?
Recently, these laws have been relaxed. Platforms like Republic and MicroVentures allow everyone to invest in private companies. You can invest in companies you believe in and can participate in the wealth generation process. If you back a company and it successfully goes public, you can cash out. Then, you can take your earned capital to fashion the world towards your worldview. You can fund your own companies, give underserved founders a fighting chance or create your own VC firm.
💸Give equity to those who made you
Uber’s chief legal officer once argued “drivers’ work is outside the usual course of Uber’s business”. Make sense to you? No, me neither.
On the other hand, when Airbnb went public, they reserved 3.5 million shares (7% of their public offering) for their hosts.
Of course, Airbnb and Uber have different unit economics. Airbnb physically needs hosts and homes for its guests to sleep in. And Uber has been testing and touting its self-driving capabilities for the last six years.
The key point here is that Airbnb is inviting its stakeholders into the wealth-generating aspect of the game. This creates an alignment between the two parties. Airbnb gets some great branding, PR, and increased partner loyalty. The hosts get the cash upside. I think we’ll see this sort of arrangement become more common over time. We need to continually reject the myth that companies succeed because of enigmatic founders, talented engineers, or other supposedly heroic figures.
🛠Responsible innovation. Focus on known harms.
If you watch or listen to enough VCs then you know that some perversely see startup scandals as a measure of “success”. The idea is that if you’re a startup working terribly fast on hard things, you’re going to screw some things up. You’re a wee little plankton in a sea of predators. You physically can’t get to everything. So you focus on building the best version of a product that your customers want. If you’re small and irrelevant, nobody really cares about your product failures. But if you’re small, and people care enough about your product that they can be angry about your product failures, then you’re on the track to greatness. Or so they suggest.
I think this framing is incredibly short-sighted.
I understand building startups is very difficult. But in any undertaking, there are known harms and unknown harms. When Ring made an internet-connected camera, any duck could tell you that creepy people on the internet would try to hack into them. So it was unwise for them to launch their product without two-factor authorization, a basic security feature. Similarly, Slack recently launched a Connect DM feature that allows users to send DMs to people they don’t work with. They made some mistakes with their product and had to retract some of its features. I don’t expect people to build perfect products. But you also don’t need to be an internet researcher to know that people will an “open messaging” feature to harass others.
When I speak about responsible innovation, I mean that VCs should push back against products that have unsolved known harms. There will obviously be unknown harms or second-order effects that will manifest later as more people start using your product. You can’t see into the future so there’s no way to pre-emptively address those. But why not address the known harms you can see? As tech companies move into healthcare, education, and banking where the margin of error and consequence of failure are higher, they need to build this muscle. They need a framework to assess, evaluate and de-risk the unintended consequences of their creations.
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Good job Tobi, I thought this was insightful and I learned a lot. Two points below:
1. I think given the fact that VC’s are motivated primarily by their profit margin, I tend to take a more pessimistic view with respect to how they deal with their obligations to the public. But I do think that the wind is changing, because VC’s are becoming prominent players in a variety of industries, (like you highlight above) from pharma, to journalism and even privately run group homes for at risk youth. As a result, people in the tech accountability space, from engineers to sociologists are holding them accountable and asking all the right questions, in terms of what their obligations are to the public. So, there is definitely room for some optimism.
2. I totally agree with you that giving equity to their labor force [if this applies] should be the ethical and moral obligation of any company. I do think that this is where regulators come in as well as having stronger labor protections. Given the asymmetric power relationship between “employer" and “employee" as well as the fact that most businesses are oriented around profit, unfortunately, I just don’t have faith in the fact that companies will do the right thing without being compelled. So, I definitely think that it’s time for regulators to pick up where the accountability folx left off.
Nice just seen new format like it. I read the TLDRs. Insightful and I pretty much align.
My theory is that we have one problem....our current design of “capitalism” and if we solve:
“Grotesquely Overrewarding proVIDERS of capital and painfully underrewarding proDUCERS of capital...” the rest of the desired behaviors have a chance of occurring organically.