At Slate, Edward Ongweso Jr. treats the Silicon Valley Bank failure as “emblematic of a startup ecosystem and venture-capital apparatus that are too unstable, too risky, and too unmoored from reality to be left in charge of something as important as the direction of our technological development.” It’s fair to say there’s a considerable gap between venture capitalists’ perception of their economic role and Ongweso’s assessment of it.
Venture capitalists tout themselves as investors who take on big risks by finding value — they provide capital to entrepreneurs lacking the revenue or credit to get traditional financing, but whose big ideas promise to change the world (and make some money along the way)….
The reality, however, is that VCs are herd animals. The industry is overconcentrated — enmeshed, as Geri Kirilova at venture capital firm Laconia Group puts it — and structurally drives capital into a few well-connected hands who pile it into larger funds, cut it into larger checks, and hand it off to a tightly knit network of entrepreneurs and startups. This overreliance on established actors or social networks may seem like a shortcut when you’re risk-averse or unable (and unwilling) to vet every single prospective investment, but it has at times left venture capitalists unable to weed out well-connected or charismatic charlatans….
…But venture capital isn’t just wearing blinders. It uses capital as a weapon to crush the competition and corner a market. It works to rewrite laws and regulations, as VC-backed firms tried to do for the gig economy and the crypto industry. Sometimes that means lobbying, as the industry did in the 1970s and 1980s to achieve reforms that cut capital gains taxes, made stock-based compensation attractive, and loosened pension regulations that give VCs access to new funds (and secure a massive subsidy from the government). Being loud and emphasizing their role in creating value has worked for VCs in the past. This past weekend was another example….
…[F]or the past 10 years venture capitalists have had near-perfect laboratory conditions to create a lot of money and make the world a much better place. And yet, some of their proudest accomplishments that have attracted some of the most eye-watering sums have been: 1) chasing the dream of zeroing out labor costs while monopolizing a sector to charge the highest price possible (A.I. and the gig economy); 2) creating infrastructure for speculating on digital assets that will be used to commodify more and more of our daily lives (cryptocurrency and the metaverse); and 3) militarizing public space, or helping bolster police and military operations….
You would be hard-pressed to find another parasite that has so thoroughly wrecked the body and environment of its host, all while trying to convince the host that it is deserving of praise and further accommodation.
In short, a major part of the “innovation” provided by venture capital has actually made society worse, or degraded the quality of services that already existed. And this results from structural imperatives that are baked into the system. Ongweso cites a Yale Journal of Law & Technology article by Peter Lee, which argues that venture capital is unable to adequately perform the job of financing innovation because of “three mutually reinforcing features:”
First, social ties are critical to connecting entrepreneurs and venture capital. This phenomenon shrinks the pool of entrepreneurs with a realistic chance of obtaining funding and distorts capital allocations in favor of those with greater social capital. Second, VCs exhibit a surprising degree of herd mentality, investing in trendy technologies while shying away from truly radical innovations. Finally, the VC business model favors innovations that promise large returns in a medium time frame with minimal risk. Such criteria necessarily deprioritize large swaths of socially valuable innovations with longer, riskier development timelines.
Ongweso concludes with a call to question the structural presuppositions behind our current system of financing innovation.
It’s not obvious to me why venture capitalists should be so in control of what tech gets funded, who designs it, how it gets developed, why it gets deployed, and where the returns go. If it is simply a question of capital, we can and should explore alternatives to the privately run VC system prioritizing tech that degrades and commodifies more of our life, gambles on these developments with other people’s money, and in the blink of an eye causes regular panics that threaten to upend life for countless people. If it is a question of talent, we can and should recognize that these people are not any smarter or more talented than us—they just have more capital to throw at problems, better connections to ensure things work out their way, and less shame preventing them from pursuing what they want. If it is a question of politics, then we should ask whether a system that subsidizes a bunch of well-connected, wealthy libertarians as they enrich one another with lottery tickets is truly the only way we can and should develop technology.
If his assessment in the Slate article were insufficiently blunt, Ongweso summarizes his line of argument in much harsher terms on his Twitter account:
Venture capitalists are parasites who couldn’t be trusted with the financial institution that held up their industry, let alone the direction of our technological development. Euthanizing them is imperative if we want a better world.
VCs would rather gamble with other people’s money, enrich themselves and friends, rewrite laws and restructure markets in their own favor, and offload as many costs as possible onto the public than build anything of value.
It was this Twitter commentary rather than the article, presumably, which evoked an outraged sermon on the value of venture capitalists from Zach Weinberg, who according to his twitter bio does “healthcare & tech stuff. Founder of http://Curie.Bio, Flatiron Health (acq @Roche~$2b) & Invite Media (acq @Google~$81m).”
I mean it’s so bad it’s not even wrong, it’s kind of angry propaganda that ignores basic facts about how venture capital actually works, the insane number of companies VC has funded that you use daily to better your life and the lives of others, an entire venture category that funds new biotech innovation, about 200 healthcare co’s in the past few years alone that materially improve the lives of patients and physicians, the site you’re posting on right now, the Google machine you could have used to do some simple research, essentially every chip in your phone, also the companies that make your phone, a variety of critical satellite technology, rocket companies to launch those satellites, etc etc etc
Please attempt to go a single day without using your phone, Google, accessing the internet without a wire, paying a bill without cash, etc etc
I also assume you’d prefer to have modern medicine when you get sick?
Be able to make a phone call without paying 10x for long distance?
Talk to your family or friends without sending a written letter in a mail?
Weinberg slides right over the fact that venture capital has actually made existing things shittier, and created goods and services that are deliberately broken in the interest of collecting tribute as a condition for people being allowed to continue to use the things they paid for.
The second- and third-order impacts of startups hitting financial trouble or just slowing down could be more pernicious. “When you say: ‘Oh, I don’t care about Silicon Valley,’ yes, that might sound fine. But the reality is very few of us are Luddites,” Kunst says. “Imagine you wake up and go to unlock your door, and because they’re a tech company banking with SVB who can no longer make payroll, your app isn’t working and you’re struggling to unlock your door.” Perhaps you try a rideshare company or want to hop on a pay-by-the-hour electric scooter, but can’t because their payment system is provided by an SVB client who now can’t operate.
Well, that sounds to me like an argument not for a bailout, but for voiding the intellectual property of this tech company, opening its code, and forcibly jailbreaking it, so that users aren’t at the mercy of a dead-man switch to keep using it. As Doctorow says,
Look, if you think the fact that my Internet of Shit door-lock failed because the company that designed it made no plan to let me into my house if they went out of business would make me sympathetic to that company, you are out of your fucking mind. If that happened to me, it would make me want to tear the lock out of my door, hunt down the CEO of the company that made it, set the lock on fire, and throw it through their front window.
He’s being kind. I’d want to go to the CEO’s house and set the lock on fire, but I’d… put it through something besides their window.
The deliberate breaking of platforms that Doctorow calls “enshittification” is just an intensified version of the general capitalist tendency to manufacture scarcity and destroy value in the interest of facilitating extraction. It’s inherent in the nature of the proprietary Death Star platform: “a ‘two sided market,’ where a platform sits between buyers and sellers, holding each hostage to the other, raking off an ever-larger share of the value that passes between them.”
Most interesting to me, Weinberg responded to a comment on VCs enriching themselves with this howler: “It is impossible to enrich yourself as a VC unless the companies you fund have customers who want to buy their products.”
Of course this is technically true. It’s true of any monopoly provider who’s ever made or sold anything to a willing buyer anywhere or ever. The question is what structural conditions put a given provider, in particular, in a position to satisfy those needs, and the conditions that govern performing the function. Every social system that ever existed has provided at least some minimum necessary amount of the things people want to consume; that does not mean the wealth accruing to the classes who controlled the conditions under which those needs were met was justly earned.
Weinberg’s statement, true as far as it goes, treats the fact that the production of necessary goods and services occurs in any social system only under the conditions permitted by the ruling class, as somehow legitimizing that class. And it treats the fact that the function occurs under the control of a given class under our particular system as proof that it can only be performed under the existing institutional framework.
A number of commenters took him to task for that faulty assumption. For example @surelynotwalrus: “I’m shocked that venture capitalists believe that the system of research and development that serves their class interests is the ONLY possible pathway to progress. Shocked, I tell you.”
@dylbabe_: “I love replies like these because it assumes any innovation is because of current economic conditions rather than in spite of them. Yeah dude, I don’t want to give up what’s already been invented, I imagine all we already have being better under a different economic system.”
@DelilahGarrett: “There are no VC companies that have made my life better. None. All the ‘goods’ and ‘services’ they provide are subpar replacements for what non-distorted goods and services would look like in the absence of VC.”
Indeed, the comments from Weinberg and his supporters about all the good stuff VCs have funded (just another variation on the “What have YOU done???” challenge from Elon bros) completely miss the point.
A credit system and wealth distribution that makes society reliant on them for that function is the problem. The issue isn’t whether they perform the function; it’s why they, in particular, are in a position to do so, as opposed to any number of other possible institutional frameworks.
As Paul Goodman put it, “A system destroys its competitors by pre-empting the means and channels, and then proves that it is the only conceivable mode of operating.”
The allocation of social resources among alternative possible projects by venture capitalists is not self-evidently the most efficient system for performing that function — let alone the only conceivable one. It is the result of a number of historical contingencies — among them a concentrated distribution of wealth that is the legacy of Enclosures and the other forcible robberies collectively referred to as the process of “primitive accumulation,” and an institutional framework in which the supply of money and credit is legally restricted to the possessors of concentrated wealth.
Imagine, instead, a world where startup enterprises and R&D were financed by the credit arm of regional federations of worker cooperatives. Imagine a world where new technologies and platforms were free and open source. Imagine a growth model for startups based on horizontal expansion and modular proliferation, rather than taking the form of proprietary Death Star platforms or being bought out by giant corporations.
Such a world, I think, would be a lot more competently run than the one we live in.