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Tim O’Reilly makes a case for why venture capital is starting to do more harm

237 points by prostoalex 6y ago

hellofunk 6y ago
I wonder why TechCrunch never seems to work on mobile. Every single time, every single article. “An error occurred with this part of the page, sorry for the inconvenience.”
- maltelandwehr 6y ago
  Works fine in Safari on an iPhone 7. Are you running any kind of ad or script blocking?
  - hellofunk 6y ago
    Ah yeah I have iOS ad blocker turned on.
    - lotsofpulp 6y ago
      Works with Wipr content blocker for me.
      - hellofunk 6y ago
        Sounds like maybe Wipr is not blocking as aggressively.
        shawnz 6y ago
        Or maybe it is blocking more aggressively. The site works fine for me even with both uBO and Firefox's tracking protection enabled
- Tarq0n 6y ago
  Techcrunch links are redirected through a tracking domain: https://guce.advertising.com/collectIdentifiers? https://guce.advertising.com/collectIdentifiers?. This breaks lots of things, especially if you're blocking ads.
- deleted 6y ago
  [deleted]
- projektfu 6y ago
  I keep a copy of Brave on my iPhone with scripting turned off by default. While this article loads fine for me in Safari, for some that don’t, I share the article to Brave and it often loads great without scripts. This article loads fine in Brave without scripting.
- DangitBobby 6y ago
  Works fine in Firefox Preview on Android 10 with uBlock Origin and PiHole
maltelandwehr 6y ago
We should all learn and accept that VC funding and bootstrapping are not the only two options. Of course VC is bad for some founders and business models. That does not make it bad in general.
- abrichr 6y ago
  What are the other options?
  - langitbiru 6y ago
    ICO, crowdfunding, loans, patronage, government's backing, etc.
    - sushshshsh 6y ago
      >government's backing >ICO For those of us who aren't Musk, Thiel, or Vitalik, there's only loans and patronage and crowdfunding then :)
      - j45 6y ago
        Canada has many programs for small startups just beginning.
      - joefourier 6y ago
        Here in the EU, government funding is available and used by businesses of all sizes, although you do have to navigate the bureaucracy and be able to handle the paperwork. Do you not have something equivalent in America?
      - jonwachob91 6y ago
        >>government's backing >For those of us who aren't Musk, Thiel, or Vitalik, there's only loans and patronage and crowdfunding then :) The US SBIR program provides up to $1.7MM per project over 2.5 years to small businesses or startups. It's a pain in the ass process that takes forever, but hundreds of start ups get funded this way every year, and it costs literally nothing to apply other than you time. sbir.gov
transitivebs 6y ago
This post by Tyler Tringas of Earnest Capital is really relevant here: https://tylertringas.com/the-entrepreneurs-new-path-of-maximum-optionality/ https://tylertringas.com/the-entrepreneurs-new-path-of-maxim...
DailyHN 6y ago
This is old news. The reason nothing has changed is because LPs prefer their money goes to the bros.
LatteLazy 6y ago
I think it’s always good to be doing something unfashionable in investment because that market is under served (so you get a better deal) and it can only become more fashionable (so you’re ahead of the curve). At the same time, we shouldn’t pretend this is novel. People have invested in Idaho (or Austin or wherever the fuck) before. Following a bit about how Silicon Valley just makes financial instruments for the rich with how you’ve made a financial instrument for people with 6 figures is sort of blind too. I hope this guy does some good and makes a profit but at best he’s just doing angle investing outside Silicon Valley...
- ghaff 6y ago
  And sometimes the crowd is mostly right. Kleiner Perkins' big bet on renewable energy pretty much flopped.
- sukilot 6y ago
  Vulgar language makes your comment hard to read.
  - anoncake 6y ago
    Then you should work on your reading comprehension.
dustingetz 6y ago
VC is fundamentally a power/money alliance which exists to further the allies' interests. Capitalism ideology says that it turns out that this is fairly optimal for consumers, given competitive forces to keep it checked and balanced. But this balance is only healthy to the extent that the homeostasis can be maintained. Unconstrained growth (prioritized above all else and with disregard for externalities) is less like homeostasis and more like cancer ("Wall Street: As long as someone wants to buy this [collateralized debt obligation], we’re good.")
- lasagnaphil 6y ago
  ...and it's pretty ironic that this comment is written in a social media website directly funded by a VC (Y Combinator)
  - jppope 6y ago
    Y/C does the seed rounds and I think they started doing series A - not really a VC, but I get your point.
  - anoncake 6y ago
    No more ironic than that everything posted under Capitalism involved stuff made under Capitalism
seamyb88 6y ago
Starting? The idea that any industry benefits from wealthy individuals skimming large sums off the top, is absurd.
kebman 6y ago
Not sure if it's completely related, but my dad will sometimes talk about the "Yuppie Time" during the 80's, when he tried to get funding for some rather big IT projects. There would be well connected "yuppies" getting funding and loans for just about anything, so they could make short-term investments, and then run away with the profits as quick as they could. Most of these guys weren't interesting in building something lasting, though, so it was important to quickly identify them, and then just turn them down no matter how much funding they promised. Not easy, as these guys would seem pretty flush with cash. Seemingly. But oftentimes it would leave companies, and also employees, ruined after such a run. The hope was to make a lasting impression on the communities they wanted to start up within, by giving people something tangible and safe to build up long-term. However yuppies would offer anything but, so while you could sit in a nice and comfy office on the one day, you'd be out on the street on the next. Think Wolf of Wall Street. Hardly a secure environment to stake your future in. And indeed, eventually it did go south for a lot of folks by the crash of '87, and also the aftermath in '89.
- seibelj 6y ago
  All sorts of these shenanigans continue in various forms. I know of one company that received an absurd valuation and funding amount from a Russian oligarch to attack a very difficult and established industry, then got acquired 2 years later by a different Russian company for a large return. They hadn’t built anything, they had leased a large office with open windows on the first floor near mine, and every time I walked by they looked dead inside. Easy answer - washed a large amount of money for the oligarch after the acquisition (clean transfer from Russian acquirer to oligarch plus its advantageous tax treatment).
  - sheeshkebab 6y ago
    Taking money from various Russian and Chinese newly rich crowd usually means dealing with mafia or governments/military (and thugs and government are much closer together in those places than elsewhere).
    - specialist 6y ago
holidayacct 6y ago
He's not saying venture capital is starting to do more harm, he's addressing where and how venture capital is being expended. He actually has a good point regarding funding of small to medium sized business with strong business models that emphasize being cash flow positive. Venture capital cannot do harm, most people don't know this but small businesses need the protection via social connections that a venture capital provides. If you don't believe that try running an independent small business and see how exhausting it is when you run into problems and don't have the backing of a VC. I grew up with people who did this and they get burned out when they don't have a larger investor who is connected enough to solve what seem like small problems. Everyone thinks they are better off being completely independent as a small business, that is always a bad idea. There are certain types of businesses that are difficult to grow due to either legal hurdles or local protectionist tactics, I've seen this growing up in different states. If you start a business in the wrong place and don't have the right connections your business is never going to succeed, it doesn't matter what your business model is. In certain states they simply do not want large multi-national corporations, interstate corporations or franchises. If you succeed on a small scale and decide to expand you're going to run into all kinds of problems because people are going to come out of the woodwork trying to slow down your expansion (yes, this is a real thing it caught me off guard when I first found out there are people who do this). There are also some types of businesses (particularly in the financial industry) that when implemented on a large scale are a nightmare to understand because there are so many rules and regulations. No one has a clue what is happening and it is easier to have hundreds of medium sized businesses with narrow focus that anyone can understand easily. Funding these types of businesses because everyone wants some sort of large IPO just makes the problem worse.
- lmeyerov 6y ago
  Most VC backed businesses fail, and less obvious, changing an operational model (= company dna) into a VC-optimized one instead of a sustainable revenue optimized one puts a company on that failure path. It is not the capital, but the associated changes for the pursuit of the next round, and dangers of not hitting it. He is pushing back against the hits based business that burns out otherwise good companies, and Bryce is focusing on alternative funding strategies for companies so they can succeed without mega-succeeding. It's pretty non-obvious. Eg, a founder yesterday in my area cited a ~$50M exit as a success example for what he is doing. Except to O'Reillys point, it may only be a success for a couple of investors, and possibly an income loss for most of the team. They looked good -- raised $2M, $10M, $23M, grew to 50-100 employees, sold for $50M after 5-9yr, helped Global 2000s and govs tackle some hard problems, probably had revenue around $5M+yr, and are now a reasonable part of BigCo's product portfolio for much more $. AND YET... if either the $10M or $23M have a 2x participation, only the VCs really made money (and less than their model needs, so a miss!), and only 0-$5M left to split with the 50+ employees who took years of reduced salary. That's the financial instrument stuff going on. On the leadership side, the hiring was fueled by funding, always more then operating revenue (otherwise no VC needed), so needed the next round or otherwise layoffs and a death spiral. (Only a few % of funded startups can choose to slow growth and switch to sustainable revenue.) There are reasons to do today's model, but a lot of nuance, and from a creator's / equitibilty perspective, fundamental room for improvement. Glossing over that is no good.
kmclean 6y ago
> It’s part of the structural inequality in our society, where we’re building businesses that are optimized for their financial return rather than their return to society. Isn't this the whole problem? If people cared about society more than money it wouldn't be a problem to invest or take investment money, because you'd all be working toward the same goal of maximizing returns to "society". The problem is greed and selfish pursuit of wealth by certain kinds of people who see that as a worthwhile purpose for their life.
- ashtonkem 6y ago
  I’m not even sure if a lot of these businesses do that. Some of them seem more like a mechanism to shovel VC money around than an actual plan on how to make a product or service that’ll make money.
- luckylion 6y ago
  > If people cared about society more than money it wouldn't be a problem to invest or take investment money, because you'd all be working toward the same goal of maximizing returns to "society". We have a hard time deciding what is best for "society" and how to achieve it. Using money as votes is working pretty well: people get to choose what they prefer from multiple offers, they clearly say what they care about the most (by spending most of their disposable income on it), which then incentivizes more people to look at solving problems in that area. Sure, we could have lots of large meetings, or 100 levels of small elections etc pp, but this works pretty efficiently and without too much coordination. Yes, it also creates some issues, but in general I think the issues are by far outweighed by the benefits.
  - minerjoe 6y ago
    A fish doesn't understand the water it swims in. Have you truly thought about what the "some issues" of money in todays society truly are. What are the true costs? What did we, as a society, lose? Here's an example. Just a few hundred years ago, many (most?) transactions were not via money, but via person to person interactions. These interactions were the binding connection points in the society. The people you would interact with , depend apon, and be depended apon, etc. These have been ripped away and we've been given a very poor substitute. It's a drug. A quick fix and a substitute for true wealth. Need a shirt, go buy a shirt with no idea how, where, when, or why it was made and no connection to the ecological damage that it most probably contributed. Acquiring a shirt, back in the day, could involve many local interactions and could help further strengthen your local economy and society.
cycomanic 6y ago
This interview resonantes with something I have been thinking for a while. Essentially the whole VC fueled hypescaling in a race to become the next unicorn especially in the "sharing economy" seems like a giant pyramid scheme. Like it's all about scaling so the value increases so that in the next round the VC of that previous round can cash in on the next VCs who hope to do the same thing in the next and so on, with the end goal of finding gullible regular investors once it comes to the IPO. All that without a sustainable business model, look at all the bike hire companies a couple of years ago, the scooter companies now etc.. Even Uber might never be profitable. All that is done on the back of society leaving burned soil in the wake. And yes it's an instrument for the wealthy, because they have the means to be among the early investors.
- realtalk_sp 6y ago
  When there's more capital available (and there's been an abundance of it in the last decade plus), the time it takes to make a new market/industry competitive enough to shred margins goes down a by lot. In recent history, this has happened before such companies can float shares in the public equities market. Great examples are ridesharing, online food delivery, and meal kits. In an environment flush with capital chasing returns, any company without a true monopolistic moat will ultimately be forced to operate at or below cost, yielding no meaningful profit. Many of these tech unicorns thought they would be monopolistic but ended up looking more like airlines.
- Gibbon1 6y ago
  I keep coming back to Block Buster. Their model was borrow money to open stores and drive smaller mom and pop rental places out of business. I'm not sure but I think when you add everything up they never made a positive return doing that. They just ended up leaving banks holding the bag when they went bankrupt. Lot of VC unicorns feel like that times 100.
  - jdxcode 6y ago
    What? Blockbuster operated under a franchise model. They didn't borrow money to open stores—it was local "mom and pops" doing that.
edw 6y ago
Tim's thoughts dovetail nicely with the Mathbabe "Microfinance is mostly a scam" story also on the front page at the moment. (https://news.ycombinator.com/item?id=23662482 https://news.ycombinator.com/item?id=23662482) Technological change always causes collateral damage, and, having been in the business for 25+ years, I can't say people were previously more tuned into the negative consequences of our creations in 1994. With every passing day, however, our power to quickly and sweepingly change the structure of physical and social reality grows, and too many investors give their ethical and moral obligations no more thought than an eight year-old does while burning ants with a magnifying glass. There's a place for thinking about the world through a spreadsheet, but before pouring tens of billions of dollars into science experiments on human civilization, as a professional and a citizen and a human, you have an obligation to pause and look around before pulling the trigger on a deal. Taking an example from some time ago, I believe Groupon was a singularly ill-conceived and pernicious business akin to payday lending. And perhaps there's a place for payday lending (or microfinance) but the ability to wave your hands and exclaim "(fin)tech start-up!" allows you to avoid the reputational damage usually associated with working in such milieus.
KKKKkkkk1 6y ago
Putting aside the important issues of diversity and inclusiveness, there's some really strong criticism of the business ethics and financial soundness of the VC model. As I said, I’ve been really disillusioned with Silicon Valley investing for a long time. It reminds me of Wall Street going up to 2008. The idea was, ‘As long as someone wants to buy this [collateralized debt obligation], we’re good.’ Nobody is thinking about: Is this a good product? So many things that VCs have created are really financial instruments like those CDOs. They aren’t really thinking about whether this is a company that could survive on revenue from its customers. Deals are designed entirely around an exit. As long as you can get some sucker to take them, [you’re good]. So many acquisitions fail, for example, but the VCs are happy because — guess what? — they got their exit.
- RestlessMind 6y ago
  Looking at some prominent examples in the last 1-2 years (Uber, WeWork, Lyft) and the recent batch of S-1 filings, I indeed see a lot of companies still operating at a loss. The analogy to CDOs and finding a bigger sucker starts ringing true. So far, the bigger suckers were Softbank and public markets. It would be interesting to see what happens going forward.
  - achillesheels 6y ago
    To that point on public markets: who on Earth is buying the equities of a Zynga or a SurveyMonkey? (no offense to any current or former employees) I get that speculators exist, but I see more and more the public listing of IT startups as “siphoning” passive index funds as part of a necessary diversified portfolio strategy - this is how VCs are exiting. I haven’t done the research, but this is merely the extension of principally why VC exists: the statistical inference of putting X% (typically less than 3) into high risk investments from 10 and 11 figure funds.
    - terminalcommand 6y ago
      I don't know about Surveymonkey, but Zynga makes profit from games. Games are addictive, people pay.
GoodJokes 6y ago
I just don’t see how it is controversial to say that VC does harm. Of course it does harm.
globular-toast 6y ago
The stock market was invented for the purpose of raising initial capital for companies that need it before they can begin trading. Initially this was mainly railways. But now the stock market is rarely used for that (is it ever?) but rather for initial private investors to cash out. I sometimes wonder if private investment should be illegal. It's completely unfair that billionaires are able to invest early in radical new companies but the general public are not.
- terminalcommand 6y ago
  There is a special type of entity that can raise money for acquiring other profitable businesses as well, they are called "special purpose acquisition companies" (SPACs). You can basically raise money out of thin air only by only using your reputation and your desire to invest in other companies.
btilly 6y ago
I am reminded of a quote from The Innovator's Solution about how to build a spinoff in a disruptive industry: Dumb money is impatient for growth and patient for profit. Smart money is impatient for profit and patient for growth. That book has a lot to say about the dynamics of why this is so. But the lesson is worth thinking about. If you want sustainable returns, focus on being profitable and let growth take care of itself. However Venture Capital has a fundamental problem that leads to their being "dumb". It is in the interests of the people running the fund to get as much money in the fund as possible (so that they can get the management fees). But then they need to invest too much money in startups. Which forces those startups to search for big enough business opportunities to justify the investment. And if along the way they happen to find a smaller opportunity, they can't pursue it. Therefore they have to look for growth, growth, growth.
zucker42 6y ago
One practice that seems relevant is when a large company buys a smaller product which many users depend on, then after a year or two proceeds to kill the product with poor or no replacement options. Some examples: https://ourincrediblejourney.tumblr.com/ https://ourincrediblejourney.tumblr.com/ This seems like a clear-cut case of market failure since it would even be better for society for the company to die and their product to be open-sourced. The fact that VCs focus on exit instead of building a sustainable business seems to at least contribute to this phenomenon.
stuaxo 6y ago
Replace "starting to do" with "does".
acd 6y ago
Often startups are being hyped that show exponential growth. There is even books “The age for exponential” but I hypothesize some may have gotten the exponential curve wrong which has impact for growth. Ie I argue that growth may follow mathematical logistic curves/sigmoid s curves and not necessarily exponential hyper growth. Ie there is not an ifinit number of customers there is natural limits to growth. Nor is there infinite number of energy for example. This put some limit on growth which may shape on logistic curves. Has there been research on which types of exponential curves some startups grow with? I think it’s sound that there is demand from investors with income revenue generation. It kind of matters which of these curves it is or other curve for that matter. And while you are in the middle of a logistic curve growth it can be confused for exponential curve. I recently confused these curves in another topic. Logistic curve https://en.m.wikipedia.org/wiki/Logistic_function https://en.m.wikipedia.org/wiki/Logistic_function Exponential curve https://en.m.wikipedia.org/wiki/Exponential_growth https://en.m.wikipedia.org/wiki/Exponential_growth
deleted 6y ago
[deleted]
hevelvarik 6y ago
Love it, smart cookie. Like every good reporter nowadays, the interviewer made it about racism right off the bat. Oreilly doesn’t bat an eye, genuflects to the racism god and make his point about the fundamental differences between the ventures within the good think context. It’s the new public relations dexterity.

237 points by prostoalex 6y ago

I wonder why TechCrunch never seems to work on mobile. Every single time, every single article. “An error occurred with this part of the page, sorry for the inconvenience.”

maltelandwehr 6y ago
Works fine in Safari on an iPhone 7. Are you running any kind of ad or script blocking?
- hellofunk 6y ago
  Ah yeah I have iOS ad blocker turned on.
  - lotsofpulp 6y ago
    Works with Wipr content blocker for me.
    - hellofunk 6y ago
      Sounds like maybe Wipr is not blocking as aggressively.
      - shawnz 6y ago
        Or maybe it is blocking more aggressively. The site works fine for me even with both uBO and Firefox's tracking protection enabled
Tarq0n 6y ago
Techcrunch links are redirected through a tracking domain: https://guce.advertising.com/collectIdentifiers? https://guce.advertising.com/collectIdentifiers?. This breaks lots of things, especially if you're blocking ads.
deleted 6y ago
[deleted]
projektfu 6y ago
I keep a copy of Brave on my iPhone with scripting turned off by default. While this article loads fine for me in Safari, for some that don’t, I share the article to Brave and it often loads great without scripts. This article loads fine in Brave without scripting.
DangitBobby 6y ago
Works fine in Firefox Preview on Android 10 with uBlock Origin and PiHole

maltelandwehr 6y ago

We should all learn and accept that VC funding and bootstrapping are not the only two options. Of course VC is bad for some founders and business models. That does not make it bad in general.

abrichr 6y ago
What are the other options?
- langitbiru 6y ago
  ICO, crowdfunding, loans, patronage, government's backing, etc.
  - sushshshsh 6y ago
    >government's backing >ICO For those of us who aren't Musk, Thiel, or Vitalik, there's only loans and patronage and crowdfunding then :)
    - j45 6y ago
      Canada has many programs for small startups just beginning.
    - joefourier 6y ago
      Here in the EU, government funding is available and used by businesses of all sizes, although you do have to navigate the bureaucracy and be able to handle the paperwork. Do you not have something equivalent in America?
    - jonwachob91 6y ago
      >>government's backing >For those of us who aren't Musk, Thiel, or Vitalik, there's only loans and patronage and crowdfunding then :) The US SBIR program provides up to $1.7MM per project over 2.5 years to small businesses or startups. It's a pain in the ass process that takes forever, but hundreds of start ups get funded this way every year, and it costs literally nothing to apply other than you time. sbir.gov

transitivebs 6y ago

This post by Tyler Tringas of Earnest Capital is really relevant here: https://tylertringas.com/the-entrepreneurs-new-path-of-maximum-optionality/ https://tylertringas.com/the-entrepreneurs-new-path-of-maxim...

DailyHN 6y ago

This is old news. The reason nothing has changed is because LPs prefer their money goes to the bros.

LatteLazy 6y ago

I think it’s always good to be doing something unfashionable in investment because that market is under served (so you get a better deal) and it can only become more fashionable (so you’re ahead of the curve). At the same time, we shouldn’t pretend this is novel. People have invested in Idaho (or Austin or wherever the fuck) before. Following a bit about how Silicon Valley just makes financial instruments for the rich with how you’ve made a financial instrument for people with 6 figures is sort of blind too. I hope this guy does some good and makes a profit but at best he’s just doing angle investing outside Silicon Valley...

ghaff 6y ago
And sometimes the crowd is mostly right. Kleiner Perkins' big bet on renewable energy pretty much flopped.
sukilot 6y ago
Vulgar language makes your comment hard to read.
- anoncake 6y ago
  Then you should work on your reading comprehension.

dustingetz 6y ago

VC is fundamentally a power/money alliance which exists to further the allies' interests. Capitalism ideology says that it turns out that this is fairly optimal for consumers, given competitive forces to keep it checked and balanced. But this balance is only healthy to the extent that the homeostasis can be maintained. Unconstrained growth (prioritized above all else and with disregard for externalities) is less like homeostasis and more like cancer ("Wall Street: As long as someone wants to buy this [collateralized debt obligation], we’re good.")

lasagnaphil 6y ago
...and it's pretty ironic that this comment is written in a social media website directly funded by a VC (Y Combinator)
- jppope 6y ago
  Y/C does the seed rounds and I think they started doing series A - not really a VC, but I get your point.
- anoncake 6y ago
  No more ironic than that everything posted under Capitalism involved stuff made under Capitalism

seamyb88 6y ago

Starting? The idea that any industry benefits from wealthy individuals skimming large sums off the top, is absurd.

kebman 6y ago

Not sure if it's completely related, but my dad will sometimes talk about the "Yuppie Time" during the 80's, when he tried to get funding for some rather big IT projects. There would be well connected "yuppies" getting funding and loans for just about anything, so they could make short-term investments, and then run away with the profits as quick as they could. Most of these guys weren't interesting in building something lasting, though, so it was important to quickly identify them, and then just turn them down no matter how much funding they promised. Not easy, as these guys would seem pretty flush with cash. Seemingly. But oftentimes it would leave companies, and also employees, ruined after such a run. The hope was to make a lasting impression on the communities they wanted to start up within, by giving people something tangible and safe to build up long-term. However yuppies would offer anything but, so while you could sit in a nice and comfy office on the one day, you'd be out on the street on the next. Think Wolf of Wall Street. Hardly a secure environment to stake your future in. And indeed, eventually it did go south for a lot of folks by the crash of '87, and also the aftermath in '89.

seibelj 6y ago
All sorts of these shenanigans continue in various forms. I know of one company that received an absurd valuation and funding amount from a Russian oligarch to attack a very difficult and established industry, then got acquired 2 years later by a different Russian company for a large return. They hadn’t built anything, they had leased a large office with open windows on the first floor near mine, and every time I walked by they looked dead inside. Easy answer - washed a large amount of money for the oligarch after the acquisition (clean transfer from Russian acquirer to oligarch plus its advantageous tax treatment).
- sheeshkebab 6y ago
  Taking money from various Russian and Chinese newly rich crowd usually means dealing with mafia or governments/military (and thugs and government are much closer together in those places than elsewhere).
  - specialist 6y ago

holidayacct 6y ago

He's not saying venture capital is starting to do more harm, he's addressing where and how venture capital is being expended. He actually has a good point regarding funding of small to medium sized business with strong business models that emphasize being cash flow positive. Venture capital cannot do harm, most people don't know this but small businesses need the protection via social connections that a venture capital provides. If you don't believe that try running an independent small business and see how exhausting it is when you run into problems and don't have the backing of a VC. I grew up with people who did this and they get burned out when they don't have a larger investor who is connected enough to solve what seem like small problems. Everyone thinks they are better off being completely independent as a small business, that is always a bad idea. There are certain types of businesses that are difficult to grow due to either legal hurdles or local protectionist tactics, I've seen this growing up in different states. If you start a business in the wrong place and don't have the right connections your business is never going to succeed, it doesn't matter what your business model is. In certain states they simply do not want large multi-national corporations, interstate corporations or franchises. If you succeed on a small scale and decide to expand you're going to run into all kinds of problems because people are going to come out of the woodwork trying to slow down your expansion (yes, this is a real thing it caught me off guard when I first found out there are people who do this). There are also some types of businesses (particularly in the financial industry) that when implemented on a large scale are a nightmare to understand because there are so many rules and regulations. No one has a clue what is happening and it is easier to have hundreds of medium sized businesses with narrow focus that anyone can understand easily. Funding these types of businesses because everyone wants some sort of large IPO just makes the problem worse.

lmeyerov 6y ago
Most VC backed businesses fail, and less obvious, changing an operational model (= company dna) into a VC-optimized one instead of a sustainable revenue optimized one puts a company on that failure path. It is not the capital, but the associated changes for the pursuit of the next round, and dangers of not hitting it. He is pushing back against the hits based business that burns out otherwise good companies, and Bryce is focusing on alternative funding strategies for companies so they can succeed without mega-succeeding. It's pretty non-obvious. Eg, a founder yesterday in my area cited a ~$50M exit as a success example for what he is doing. Except to O'Reillys point, it may only be a success for a couple of investors, and possibly an income loss for most of the team. They looked good -- raised $2M, $10M, $23M, grew to 50-100 employees, sold for $50M after 5-9yr, helped Global 2000s and govs tackle some hard problems, probably had revenue around $5M+yr, and are now a reasonable part of BigCo's product portfolio for much more $. AND YET... if either the $10M or $23M have a 2x participation, only the VCs really made money (and less than their model needs, so a miss!), and only 0-$5M left to split with the 50+ employees who took years of reduced salary. That's the financial instrument stuff going on. On the leadership side, the hiring was fueled by funding, always more then operating revenue (otherwise no VC needed), so needed the next round or otherwise layoffs and a death spiral. (Only a few % of funded startups can choose to slow growth and switch to sustainable revenue.) There are reasons to do today's model, but a lot of nuance, and from a creator's / equitibilty perspective, fundamental room for improvement. Glossing over that is no good.

kmclean 6y ago

> It’s part of the structural inequality in our society, where we’re building businesses that are optimized for their financial return rather than their return to society. Isn't this the whole problem? If people cared about society more than money it wouldn't be a problem to invest or take investment money, because you'd all be working toward the same goal of maximizing returns to "society". The problem is greed and selfish pursuit of wealth by certain kinds of people who see that as a worthwhile purpose for their life.

ashtonkem 6y ago
I’m not even sure if a lot of these businesses do that. Some of them seem more like a mechanism to shovel VC money around than an actual plan on how to make a product or service that’ll make money.
luckylion 6y ago
> If people cared about society more than money it wouldn't be a problem to invest or take investment money, because you'd all be working toward the same goal of maximizing returns to "society". We have a hard time deciding what is best for "society" and how to achieve it. Using money as votes is working pretty well: people get to choose what they prefer from multiple offers, they clearly say what they care about the most (by spending most of their disposable income on it), which then incentivizes more people to look at solving problems in that area. Sure, we could have lots of large meetings, or 100 levels of small elections etc pp, but this works pretty efficiently and without too much coordination. Yes, it also creates some issues, but in general I think the issues are by far outweighed by the benefits.
- minerjoe 6y ago
  A fish doesn't understand the water it swims in. Have you truly thought about what the "some issues" of money in todays society truly are. What are the true costs? What did we, as a society, lose? Here's an example. Just a few hundred years ago, many (most?) transactions were not via money, but via person to person interactions. These interactions were the binding connection points in the society. The people you would interact with , depend apon, and be depended apon, etc. These have been ripped away and we've been given a very poor substitute. It's a drug. A quick fix and a substitute for true wealth. Need a shirt, go buy a shirt with no idea how, where, when, or why it was made and no connection to the ecological damage that it most probably contributed. Acquiring a shirt, back in the day, could involve many local interactions and could help further strengthen your local economy and society.

cycomanic 6y ago

This interview resonantes with something I have been thinking for a while. Essentially the whole VC fueled hypescaling in a race to become the next unicorn especially in the "sharing economy" seems like a giant pyramid scheme. Like it's all about scaling so the value increases so that in the next round the VC of that previous round can cash in on the next VCs who hope to do the same thing in the next and so on, with the end goal of finding gullible regular investors once it comes to the IPO. All that without a sustainable business model, look at all the bike hire companies a couple of years ago, the scooter companies now etc.. Even Uber might never be profitable. All that is done on the back of society leaving burned soil in the wake. And yes it's an instrument for the wealthy, because they have the means to be among the early investors.

realtalk_sp 6y ago
When there's more capital available (and there's been an abundance of it in the last decade plus), the time it takes to make a new market/industry competitive enough to shred margins goes down a by lot. In recent history, this has happened before such companies can float shares in the public equities market. Great examples are ridesharing, online food delivery, and meal kits. In an environment flush with capital chasing returns, any company without a true monopolistic moat will ultimately be forced to operate at or below cost, yielding no meaningful profit. Many of these tech unicorns thought they would be monopolistic but ended up looking more like airlines.
Gibbon1 6y ago
I keep coming back to Block Buster. Their model was borrow money to open stores and drive smaller mom and pop rental places out of business. I'm not sure but I think when you add everything up they never made a positive return doing that. They just ended up leaving banks holding the bag when they went bankrupt. Lot of VC unicorns feel like that times 100.
- jdxcode 6y ago
  What? Blockbuster operated under a franchise model. They didn't borrow money to open stores—it was local "mom and pops" doing that.

edw 6y ago

Tim's thoughts dovetail nicely with the Mathbabe "Microfinance is mostly a scam" story also on the front page at the moment. (https://news.ycombinator.com/item?id=23662482 https://news.ycombinator.com/item?id=23662482) Technological change always causes collateral damage, and, having been in the business for 25+ years, I can't say people were previously more tuned into the negative consequences of our creations in 1994. With every passing day, however, our power to quickly and sweepingly change the structure of physical and social reality grows, and too many investors give their ethical and moral obligations no more thought than an eight year-old does while burning ants with a magnifying glass. There's a place for thinking about the world through a spreadsheet, but before pouring tens of billions of dollars into science experiments on human civilization, as a professional and a citizen and a human, you have an obligation to pause and look around before pulling the trigger on a deal. Taking an example from some time ago, I believe Groupon was a singularly ill-conceived and pernicious business akin to payday lending. And perhaps there's a place for payday lending (or microfinance) but the ability to wave your hands and exclaim "(fin)tech start-up!" allows you to avoid the reputational damage usually associated with working in such milieus.

KKKKkkkk1 6y ago

Putting aside the important issues of diversity and inclusiveness, there's some really strong criticism of the business ethics and financial soundness of the VC model. As I said, I’ve been really disillusioned with Silicon Valley investing for a long time. It reminds me of Wall Street going up to 2008. The idea was, ‘As long as someone wants to buy this [collateralized debt obligation], we’re good.’ Nobody is thinking about: Is this a good product? So many things that VCs have created are really financial instruments like those CDOs. They aren’t really thinking about whether this is a company that could survive on revenue from its customers. Deals are designed entirely around an exit. As long as you can get some sucker to take them, [you’re good]. So many acquisitions fail, for example, but the VCs are happy because — guess what? — they got their exit.

RestlessMind 6y ago
Looking at some prominent examples in the last 1-2 years (Uber, WeWork, Lyft) and the recent batch of S-1 filings, I indeed see a lot of companies still operating at a loss. The analogy to CDOs and finding a bigger sucker starts ringing true. So far, the bigger suckers were Softbank and public markets. It would be interesting to see what happens going forward.
- achillesheels 6y ago
  To that point on public markets: who on Earth is buying the equities of a Zynga or a SurveyMonkey? (no offense to any current or former employees) I get that speculators exist, but I see more and more the public listing of IT startups as “siphoning” passive index funds as part of a necessary diversified portfolio strategy - this is how VCs are exiting. I haven’t done the research, but this is merely the extension of principally why VC exists: the statistical inference of putting X% (typically less than 3) into high risk investments from 10 and 11 figure funds.
  - terminalcommand 6y ago
    I don't know about Surveymonkey, but Zynga makes profit from games. Games are addictive, people pay.

GoodJokes 6y ago

I just don’t see how it is controversial to say that VC does harm. Of course it does harm.

globular-toast 6y ago

The stock market was invented for the purpose of raising initial capital for companies that need it before they can begin trading. Initially this was mainly railways. But now the stock market is rarely used for that (is it ever?) but rather for initial private investors to cash out. I sometimes wonder if private investment should be illegal. It's completely unfair that billionaires are able to invest early in radical new companies but the general public are not.

terminalcommand 6y ago
There is a special type of entity that can raise money for acquiring other profitable businesses as well, they are called "special purpose acquisition companies" (SPACs). You can basically raise money out of thin air only by only using your reputation and your desire to invest in other companies.

btilly 6y ago

I am reminded of a quote from The Innovator's Solution about how to build a spinoff in a disruptive industry: Dumb money is impatient for growth and patient for profit. Smart money is impatient for profit and patient for growth. That book has a lot to say about the dynamics of why this is so. But the lesson is worth thinking about. If you want sustainable returns, focus on being profitable and let growth take care of itself. However Venture Capital has a fundamental problem that leads to their being "dumb". It is in the interests of the people running the fund to get as much money in the fund as possible (so that they can get the management fees). But then they need to invest too much money in startups. Which forces those startups to search for big enough business opportunities to justify the investment. And if along the way they happen to find a smaller opportunity, they can't pursue it. Therefore they have to look for growth, growth, growth.

zucker42 6y ago

One practice that seems relevant is when a large company buys a smaller product which many users depend on, then after a year or two proceeds to kill the product with poor or no replacement options. Some examples: https://ourincrediblejourney.tumblr.com/ https://ourincrediblejourney.tumblr.com/ This seems like a clear-cut case of market failure since it would even be better for society for the company to die and their product to be open-sourced. The fact that VCs focus on exit instead of building a sustainable business seems to at least contribute to this phenomenon.

stuaxo 6y ago

Replace "starting to do" with "does".

acd 6y ago

Often startups are being hyped that show exponential growth. There is even books “The age for exponential” but I hypothesize some may have gotten the exponential curve wrong which has impact for growth. Ie I argue that growth may follow mathematical logistic curves/sigmoid s curves and not necessarily exponential hyper growth. Ie there is not an ifinit number of customers there is natural limits to growth. Nor is there infinite number of energy for example. This put some limit on growth which may shape on logistic curves. Has there been research on which types of exponential curves some startups grow with? I think it’s sound that there is demand from investors with income revenue generation. It kind of matters which of these curves it is or other curve for that matter. And while you are in the middle of a logistic curve growth it can be confused for exponential curve. I recently confused these curves in another topic. Logistic curve https://en.m.wikipedia.org/wiki/Logistic_function https://en.m.wikipedia.org/wiki/Logistic_function Exponential curve https://en.m.wikipedia.org/wiki/Exponential_growth https://en.m.wikipedia.org/wiki/Exponential_growth

deleted 6y ago

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hevelvarik 6y ago

Love it, smart cookie. Like every good reporter nowadays, the interviewer made it about racism right off the bat. Oreilly doesn’t bat an eye, genuflects to the racism god and make his point about the fundamental differences between the ventures within the good think context. It’s the new public relations dexterity.