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In short, this article can be summarized: "VC used to fund R&D-heavy startups like Genentech and Intel, now it's used to make startups grow as fast as possible

In short, this article can be summarized: "VC used to fund R&D-heavy startups like Genentech and Intel, now it's used to make startups grow as fast as possible at any cost, just like cancer". Mostly agree with this.

_rpd 7y ago
For greenfield plays, the benefits of being market leader are so extreme that "grow as fast as possible" is almost always the right strategy.
- mox1 7y ago
  Benefit to whom? There are at least 3 parties involved in every VC funded startup, the company, the investors and the customers. Growing as fast a possbile and becoming a market leader benefits 1 perhaps 2 of those. I would argue usually benefits 1.
  - SpicyLemonZest 7y ago
    I think it’s hard to argue growing fast doesn’t benefit customers. Becoming a market leader means almost by definition that a lot of customers are convinced you’re selling the best thing on the market.
    - gbear605 7y ago
      From another perspective, becoming the market leader might mean that a lot of consumers are convinced you’re selling the best thing on the market because you’re the only thing on the market because you bankrupted all the other choices. The venture capital growth-at-all-costs model results in monopoly or near-monopoly conditions, which is horrible for consumers. If your business doesn’t have competition, you’re probably hurting your customers.
      - SpicyLemonZest 7y ago
        I suppose I can imagine the scenario, but have any VC-backed companies actually grown big in that way? Doordash is the closest example I can think of, but unless you're considering restaurants rather than end users as their customers, it seems pretty uncontroversial to say that it's been good for customers. Alternatives exist, and both Doordash and the alternatives have significantly expanded the range of foods most people can get delivered.
        throwaway2048 7y ago
        uber's model is/was essentially putting their competition (taxis) out of business with VC subsidized rides.
        SpicyLemonZest 7y ago
        Taxis are still in business in every city I’m personally familiar with. Are there other cities where they’re gone?
    - ssalazar 7y ago
      Medium comes to mind, who quickly gained popularity but then introduced user-hostile features when they realized they needed to tighten their business model. Evernote is a similar example. Even Facebook/Instagram/Google before they had advertising. Having a finite VC-funded runway means eventually having to convert market share to profitability, such as by raising prices, and that’s not always a great result for customers.
    - AlexandrB 7y ago
      Or it means that you're selling $2 of goods and services for $1 of cost to the customer. In traditional markets, this kind of predatory pricing was considered a form of anti-competitive behaviour, but usually only large near-monopolies with deep pockets had the money to pull it off. VC allows a startup - that can't possibly be considered a monopoly - to price a product/service at below-cost for years to grow its user base regardless of ultimate sustainability. See also: Groupon, Movie Pass, WeWork, and maybe Uber. In the end it's often the VCs that choose the market leader, not the customers. Competitors that enter the market without VC backing are forced to be profitable from the start and have no way to compete on quality or price. This is especially apparent with "gig economy" startups where offering subsidies/incentives to the service providers increases the quality (timeliness, availability, coverage) of the service for the customer. In many ways it resembles a command economy, with a small number of VCs deciding what "the next big thing" is ("oh, looks like everybody wants scooters, let's pour all our capital into scooter companies").
- bordercases 7y ago
  It's because software is primarily a means of rent-extraction on existing industries than providing massive amounts of new value, with the potential exception of cases where inferential computing is being used. The market thinks it needs more software when what it needs is good software in the right place. But then the belief that an industry needs more software creates a problem – a lack of software. This comes with the host of other software-specific intractables which spurs on the growth of software-focused labor. But in the process of converting an industry into one that is software dependent, you can capture massive market-share while gaining slightly greater efficiencies on the services provided by that industry but then introducing a whole new host of software-specific problems. Which grows software's demand. The thesis that payoffs for VCs are so substantial in software startups come specifically from the scaling of software across an industry capturing industry-specific assets rather than improving the productivity of that industry per se. If it were just about outsized productivity more specific bets that resulted in critical efficiency improvements would be more common. But instead we see broad-based bets that serve to get rid of minor consumer inconveniences, then adding more inconveniences to produce an incentive to raise consumer prices.
  - bpt3 7y ago
    > It's because software is primarily a means of rent-extraction on existing industries than providing massive amounts of new value, with the potential exception of cases where inferential computing is being used. How is software rent-extraction, and why would inferential computing be an exception to this? Software generally reduces the cost of performing some task while increasing speed, accuracy, and efficiency. > The market thinks it needs more software when what it needs is good software in the right place. But then the belief that an industry needs more software creates a problem – a lack of software. This comes with the host of other software-specific intractables which spurs on the growth of software-focused labor. Successful companies are looking for ways to increase their margins, which software generally does for the reasons I listed above, not inventing ways to integrate software into their business that serves no purpose. > But in the process of converting an industry into one that is software dependent, you can capture massive market-share while gaining slightly greater efficiencies on the services provided by that industry but then introducing a whole new host of software-specific problems. Which grows software's demand. Software generally is able to produce massive efficiency gains, not minor ones. > The thesis that payoffs for VCs are so substantial in software startups come specifically from the scaling of software across an industry capturing industry-specific assets rather than improving the productivity of that industry per se. If it were just about outsized productivity more specific bets that resulted in critical efficiency improvements would be more common. But instead we see broad-based bets that serve to get rid of minor consumer inconveniences, then adding more inconveniences to produce an incentive to raise consumer prices. Again, I question why you're saying that software doesn't produce large productivity/efficiency gains, and would add that VCs are interested in software companies because of the high margins, short production cycles, and past successes with software companies (among other reasons). You seem to be focused on a few specific types of companies (I think social media apps would fit your description, though I'd be happy to get specific examples of what you have in mind) that are neither the norm for the software industry or VC ecosystem in my experience.
spamizbad 7y ago
Eh there are still R&D heavy startups being funded but most of the "growth" in VC has been in less capital-intensive startups. And this might be a good thing. Lots of the modern VCs, some even by their own admission, don't have the acumen necessary to fund a Genentech or Intel. So while I'm not happy with the current situation, I don't see the point of scolding VCs for NOT doing things they're not qualified to do.
- invalidOrTaken 7y ago
  This kind of begs the question, though: "Then why shouldn't we fire you and hire someone who is qualified?" Of course, the purpose of VC isn't to fund innovation so much as make money for the LP's, so this really speaks to "What marketing pitches work on LP's?" But at some point they'll get tired of funding Uber vs. Lyft wars and look for a way out of Hobbesian struggle.
  - spamizbad 7y ago
    I think you answered your question! And it's probably a lot easier to convince an LP to open their purse for the next Uber/Lyft than the next Applied Materials/Lam Research. Theranos is an example of the dangers of investors that lack the expertise necessary to evaluate "hard problem" startups.
jiveturkey 7y ago
From your summary, I would understand VC to be a case of fractal finance. It used to exist to fund research-heavy startups, that maybe governments would otherwise have to fund but maybe where governments shouldn't be sticking their paws in (in democratic countries anyway). But now it has become an industry of its own. Just like finance at large.
aaavl2821 7y ago
This article (like most articles about VC) doesn't mention biopharma VCs. Biopharma is the 2nd largest sector of VC after software -- $14B invested in 2019 [0] (disclosure: source is my site) -- and all they do is fund R&D heavy startups like Genentech [0] https://www.baybridgebio.com/startup_database.html https://www.baybridgebio.com/startup_database.html
tempsy 7y ago
Everything about this article is designed to elicit outrage. Why be fooled by that kind of journalism?
- ptcampbell 7y ago
  It sounds like you just disagree with its contention. I don’t see anything gratuitously provocative here at all.
- mateus1 7y ago
  What point are you trying to make?
  - tempsy 7y ago
    Don't waste energy being made angry by journalism that is purposely designed to make you angry?
philshem 7y ago
“Growth for the sake of growth is the ideology of the cancer cell.” —Edward Abbey

_rpd 7y ago

For greenfield plays, the benefits of being market leader are so extreme that "grow as fast as possible" is almost always the right strategy.

mox1 7y ago
Benefit to whom? There are at least 3 parties involved in every VC funded startup, the company, the investors and the customers. Growing as fast a possbile and becoming a market leader benefits 1 perhaps 2 of those. I would argue usually benefits 1.
- SpicyLemonZest 7y ago
  I think it’s hard to argue growing fast doesn’t benefit customers. Becoming a market leader means almost by definition that a lot of customers are convinced you’re selling the best thing on the market.
  - gbear605 7y ago
    From another perspective, becoming the market leader might mean that a lot of consumers are convinced you’re selling the best thing on the market because you’re the only thing on the market because you bankrupted all the other choices. The venture capital growth-at-all-costs model results in monopoly or near-monopoly conditions, which is horrible for consumers. If your business doesn’t have competition, you’re probably hurting your customers.
    - SpicyLemonZest 7y ago
      I suppose I can imagine the scenario, but have any VC-backed companies actually grown big in that way? Doordash is the closest example I can think of, but unless you're considering restaurants rather than end users as their customers, it seems pretty uncontroversial to say that it's been good for customers. Alternatives exist, and both Doordash and the alternatives have significantly expanded the range of foods most people can get delivered.
      - throwaway2048 7y ago
        uber's model is/was essentially putting their competition (taxis) out of business with VC subsidized rides.
        SpicyLemonZest 7y ago
        Taxis are still in business in every city I’m personally familiar with. Are there other cities where they’re gone?
  - ssalazar 7y ago
    Medium comes to mind, who quickly gained popularity but then introduced user-hostile features when they realized they needed to tighten their business model. Evernote is a similar example. Even Facebook/Instagram/Google before they had advertising. Having a finite VC-funded runway means eventually having to convert market share to profitability, such as by raising prices, and that’s not always a great result for customers.
  - AlexandrB 7y ago
    Or it means that you're selling $2 of goods and services for $1 of cost to the customer. In traditional markets, this kind of predatory pricing was considered a form of anti-competitive behaviour, but usually only large near-monopolies with deep pockets had the money to pull it off. VC allows a startup - that can't possibly be considered a monopoly - to price a product/service at below-cost for years to grow its user base regardless of ultimate sustainability. See also: Groupon, Movie Pass, WeWork, and maybe Uber. In the end it's often the VCs that choose the market leader, not the customers. Competitors that enter the market without VC backing are forced to be profitable from the start and have no way to compete on quality or price. This is especially apparent with "gig economy" startups where offering subsidies/incentives to the service providers increases the quality (timeliness, availability, coverage) of the service for the customer. In many ways it resembles a command economy, with a small number of VCs deciding what "the next big thing" is ("oh, looks like everybody wants scooters, let's pour all our capital into scooter companies").
bordercases 7y ago
It's because software is primarily a means of rent-extraction on existing industries than providing massive amounts of new value, with the potential exception of cases where inferential computing is being used. The market thinks it needs more software when what it needs is good software in the right place. But then the belief that an industry needs more software creates a problem – a lack of software. This comes with the host of other software-specific intractables which spurs on the growth of software-focused labor. But in the process of converting an industry into one that is software dependent, you can capture massive market-share while gaining slightly greater efficiencies on the services provided by that industry but then introducing a whole new host of software-specific problems. Which grows software's demand. The thesis that payoffs for VCs are so substantial in software startups come specifically from the scaling of software across an industry capturing industry-specific assets rather than improving the productivity of that industry per se. If it were just about outsized productivity more specific bets that resulted in critical efficiency improvements would be more common. But instead we see broad-based bets that serve to get rid of minor consumer inconveniences, then adding more inconveniences to produce an incentive to raise consumer prices.
- bpt3 7y ago
  > It's because software is primarily a means of rent-extraction on existing industries than providing massive amounts of new value, with the potential exception of cases where inferential computing is being used. How is software rent-extraction, and why would inferential computing be an exception to this? Software generally reduces the cost of performing some task while increasing speed, accuracy, and efficiency. > The market thinks it needs more software when what it needs is good software in the right place. But then the belief that an industry needs more software creates a problem – a lack of software. This comes with the host of other software-specific intractables which spurs on the growth of software-focused labor. Successful companies are looking for ways to increase their margins, which software generally does for the reasons I listed above, not inventing ways to integrate software into their business that serves no purpose. > But in the process of converting an industry into one that is software dependent, you can capture massive market-share while gaining slightly greater efficiencies on the services provided by that industry but then introducing a whole new host of software-specific problems. Which grows software's demand. Software generally is able to produce massive efficiency gains, not minor ones. > The thesis that payoffs for VCs are so substantial in software startups come specifically from the scaling of software across an industry capturing industry-specific assets rather than improving the productivity of that industry per se. If it were just about outsized productivity more specific bets that resulted in critical efficiency improvements would be more common. But instead we see broad-based bets that serve to get rid of minor consumer inconveniences, then adding more inconveniences to produce an incentive to raise consumer prices. Again, I question why you're saying that software doesn't produce large productivity/efficiency gains, and would add that VCs are interested in software companies because of the high margins, short production cycles, and past successes with software companies (among other reasons). You seem to be focused on a few specific types of companies (I think social media apps would fit your description, though I'd be happy to get specific examples of what you have in mind) that are neither the norm for the software industry or VC ecosystem in my experience.

spamizbad 7y ago

Eh there are still R&D heavy startups being funded but most of the "growth" in VC has been in less capital-intensive startups. And this might be a good thing. Lots of the modern VCs, some even by their own admission, don't have the acumen necessary to fund a Genentech or Intel. So while I'm not happy with the current situation, I don't see the point of scolding VCs for NOT doing things they're not qualified to do.

invalidOrTaken 7y ago
This kind of begs the question, though: "Then why shouldn't we fire you and hire someone who is qualified?" Of course, the purpose of VC isn't to fund innovation so much as make money for the LP's, so this really speaks to "What marketing pitches work on LP's?" But at some point they'll get tired of funding Uber vs. Lyft wars and look for a way out of Hobbesian struggle.
- spamizbad 7y ago
  I think you answered your question! And it's probably a lot easier to convince an LP to open their purse for the next Uber/Lyft than the next Applied Materials/Lam Research. Theranos is an example of the dangers of investors that lack the expertise necessary to evaluate "hard problem" startups.

jiveturkey 7y ago

From your summary, I would understand VC to be a case of fractal finance. It used to exist to fund research-heavy startups, that maybe governments would otherwise have to fund but maybe where governments shouldn't be sticking their paws in (in democratic countries anyway). But now it has become an industry of its own. Just like finance at large.

aaavl2821 7y ago

This article (like most articles about VC) doesn't mention biopharma VCs. Biopharma is the 2nd largest sector of VC after software -- $14B invested in 2019 [0] (disclosure: source is my site) -- and all they do is fund R&D heavy startups like Genentech [0] https://www.baybridgebio.com/startup_database.html https://www.baybridgebio.com/startup_database.html

tempsy 7y ago

Everything about this article is designed to elicit outrage. Why be fooled by that kind of journalism?

ptcampbell 7y ago
It sounds like you just disagree with its contention. I don’t see anything gratuitously provocative here at all.
mateus1 7y ago
What point are you trying to make?
- tempsy 7y ago
  Don't waste energy being made angry by journalism that is purposely designed to make you angry?

philshem 7y ago

“Growth for the sake of growth is the ideology of the cancer cell.” —Edward Abbey