
Why venture capital doesn’t build the things we really need - agomez314
https://www.technologyreview.com/2020/06/17/1003318/why-venture-capital-doesnt-build-the-things-we-really-need/
======
dang
This is a longer and more interesting article than I expected, but the title
doesn't exactly reflect its contents. Is there a sentence in the article that
could serve as a more representative title?

The primary profile subject is Ophelia, which is a YC-funded startup trying to
address the opioid crisis. They did a Launch HN back in March:
[https://news.ycombinator.com/item?id=22570133](https://news.ycombinator.com/item?id=22570133).
(I hope it helped!) The article tells how they successfully raised $2.7M at
Demo Day. But the way the article is framed, titled, and mostly written, you
actually expect a different outcome while reading it.

(Edit: I found one spot where the author describes the question she was
interested in exploring. That seems more representative, so I've changed it to
that for now. Better suggestions welcome.)

(Edit 2: since now people are reacting reflexively to the question "Is venture
capital producing the kinds of inventions society needs?" in the title, I've
reverted the edit. If someone can suggest an accurate and neutral title, we
can change it again. The current title is both misleading and linkbait, which
are both of the reasons why the HN guidelines ask for a title to be changed.)

~~~
jlbnjmn
Ironically, the underlying issue addressed seems to be, "why are VCs the only
people investing in research?"

Software investors are going to invest in software.

What's Wall Street investing in?

What are the Fortune 500 investing in?

This article was almost so good. I wish they would have kept asking questions
and looking at research spending in general.

~~~
runarberg
Too me it seems like the private enterprise is not the right place too look
for funding for meaningful research, at least not in the current economy.

~~~
vikramkr
I think the problem is that there isn't really anywhere to look for funding
for meaningful research. The public sector isn't really picking up the slack
right now.

~~~
runarberg
Well, many government agencies offer funding for research. That seems like a
good system.

------
vikramkr
"Other ideas he’d considered earlier were more like moonshots—hotels for
homeless people, for example."

I'm curious to know whether those moonshots were ideas he decided to not
pursue himself, or if he was talked out of those ideas by VCs? I've noticed a
trend of some founders I know starting with big ambitious ideas and then,
after getting into an incubator or talking to a few investors, somehow coming
to the realization that [generic software company] is the idea they're
actually really passionate about pursuing. Also happens after they talk to
some professors, but professors at wharton are likely not representative of
academia in general I think. It seems even within the circle of people that
have access to VC and such opportunities, even if they aren't originally
representative of your standard software startup, they tend to be pushed
towards that, maybe explicitly, maybe implicitly, i really don't know.

~~~
notahacker
Is 'hotels for homeless' even a moonshot? The concept of providing short term
accommodation for homeless people is hardly a novelty: it's just that since
homeless people are hardly flush with cash it's mostly been the preserve of
social enterprises, charities and local authorities

The only thing about it that might be a 'moonshot' is trying to persuade VCs
they can build a billion dollar business from the concept, but that's because
it isn't a billion dollar business idea and it shouldn't really need a
conversation with VCs to figure out they're not the funds you should be
pitching if housing the homeless is your priority.

~~~
rjkennedy98
> hotels for homeless

you mean like homeless shelters?

~~~
notahacker
Yep. In the Covid era homeless people are even being sheltered in regular
hotel chains.

------
hypewatch
This critique, which annoyingly has little to do with the headline, is a
regurgitation of many of the surface level critiques that have been made of
VCs for years. Nothing novel about it.

It also wonders off to random topics, like Elon’s new baby’s name. I have a
lot of respect for Elon, but a) I don’t care what his baby’s name is and b)
what in the world does that have to do with the article’s main topic??

I usually enjoy articles from this publication and was looking forward to
reading it but was sorely disappointed by the end.

Reader beware.

------
robot
The answer is pretty simple: "Capitalizm". It doesn't fix all the problems. It
fixes them for creating profit, and not every serious problem promises profit
when solved.

~~~
hypewatch
~Capitalizm~ Capitalism is purely a theoretical idea. Free markets as
capitalism defines them are impossible. Perfect information, competition,
price taking, ect, which are baked into the economic theories of capitalism
are simply not feasible.

Often our critiques of capitalism are not critiques of capitalism at all. In
fact they’re criticisms of monopolies and oligopolies in our modern society,
which are antithetic to capitalism.

The American economy is an aristocracy. VCs, the big ones at least, are
members of that aristocracy. Many of which are filled with smart good hearted
people. But there are some incentives baked into their position of power that
we need to be cognizant of.

Edit: “free-market capitalism” would probably have been a better term. Clearly
that was not the point I was making.

~~~
gotostatement
> Often our critiques of capitalism are not critiques of capitalism at all.

While this is superficially true, the structure of capitalism arguably makes
such concentration of wealth and power inevitable, so the phenomena of
monopoly and oligarchy are intrinsic features of capitalism. Not free markets,
but capitalism, i.e. the system where individual, private citizens own the
means of production.

I'm not sure yet whether I think that capitalism can ever be made work for the
people (including the underclass that our society currently consumes as human
fuel to keep the status quo). I think it's quite possible that it will foil
all attempts to reform it. But we'll see.

~~~
hypewatch
I’d argue that free markets are a requirement of the definition of capitalism,
but like the term “communism” the definition has become squishy.

I agree that your definition inevitably leads to income inequality.

Either way, I think we agree on the nature of these problems.

~~~
notahacker
'Capitalism' was a term conceived by Marx and despite Marx and many other anti
and pro-capitalist economists having much more to say on the subject, has
always had a pretty straightforward definition of being an economy
characterised by capital owners hiring wage labourers to generate returns on
their capital. A definition sufficiently succinct to describe both the
excesses of Silicon Valley and the grim poverty of the Industrial Revolution.

The definition relies on the assumption the distribution of capital is
sufficiently unequal for workers to need/want to work for capitalists to earn
wages and the market sufficiently free for it to be possible for capitalists
to hire workers to generate returns. But both the Marxist arguments that
capital must inevitably become so concentrated that capitalists won't need to
pay workers above subsistence levels [until it leads to revolutions] and the
free market economist argument that competition will resolve this [and pesky
social democrats will ruin it] are firmly in the 'squishy' parts of the
definition.

('Communism', which had competing definitions before Marx started writing
about it, has always been a bit squishy...)

~~~
hypewatch
Fair enough. I learned - in an American college - that “capitalism” was a term
coined by Adam Smith in “Wealth if Nations”, which apparently was an incorrect
conflation made by my Econ professor.

The term “free-market capitalism” is used often by politicians and economists,
but apparently that term is conflating two distinct concepts by your
definition.

That illustrates my point that the term’s meaning has morphed since it’s
coining. Even the Wikipedia page’s disagrees with both of us!

> The initial use of the term "capitalism" in its modern sense is attributed
> to Louis Blanc in 1850

> Marx did not extensively use the form capitalism, but instead capitalist and
> capitalist mode of production, which appear more than 2,600 times in the
> trilogy Capital

[https://en.m.wikipedia.org/wiki/Capitalism](https://en.m.wikipedia.org/wiki/Capitalism)

What a rabbit hole! We’re officially lost in the minutia of term definitions.
Time to log off of HN for the weekend haha

------
WalterBright
> But where was the cure, or the better protective gear, and why hadn’t
> venture capital—the financial engine of innovation—funded those ideas?

> the cure

Doing anything medical is very risky because of the enormous cost of FDA
approval.

> protective gear

The surge in demand for masks is likely to be temporary, meaning if you build
a huge factory to crank them out, the demand is likely to dry up before the
factory is completed.

~~~
RestlessMind
> because of the enormous cost of FDA approval.

Then one would expect some other country, with better costs for regulatory
approval, to be a hotbed of medical innovations. Are there any examples?

~~~
WalterBright
Good question. I expect many countries don't have a regulatory approval
process at all, and simply rubberstamp FDA approval.

Nevertheless, medical tourism is a thing to get non-FDA approved treatments.
For example, "60 Minutes" ran a segment a few months back on a Cuban cancer
treatment unavailable in the US due to the FDA, and I've read about a Thai hip
replacement procedure that is not FDA approved, but lots of Americans go there
for it.

I also don't know what US law has to say about a US company developing a drug
for non-FDA use outside the US. Certainly, it would not be a good public
relations move, and may be a legal and liability minefield. Would you be
willing to risk your investment capital in such a venture?

------
jlbnjmn
Software is made in the image of it's funders.

Separately, individuals in the United States prefer to consume the majority of
their income rather than invest it.

We have restaurant delivery because the people with money like getting their
food delivered.

Can anyone name a problem that VC money could solve, that would generate the
required 100x return to cover the failures, that would satisfy the "common
good" requirement?

~~~
tlb
Preventing or curing every disease. Carbon-free energy. Self-driving cars with
>10x lower accident rate. Many more at
[https://www.ycombinator.com/rfs](https://www.ycombinator.com/rfs)

None of them are easy, but many of them will happen soon enough to invest in
today.

~~~
codr7
We're not going to cure all diseases, being sick is part of being human.

There is no such thing as carbon-free energy available for investment.
Batteries have to be constructed, charged and disposed of etc.

Reliably self-driving cars won't happen without a major leap in AI, machine
learning by itself is not capable of solving the problem.

It's bedtime stories for adult children.

~~~
hairytrog
Curing disease is not likely to make more money.

Carbon-free energy: nuclear, storage??

Self-driving cars: just keep throwing money at it, eventually something will
cross the threshold of good enough

~~~
strgcmc
Curing disease is actually a much better illustration of "why won't
VC/capitalism fund the 'right' things?"

It is much more profitable to charge recurring "subscription" payments for
treatments to keep you healthy-ish, rather than to give you a one-time cure
that actually fixes you or removes the disease entirely. This already is a
thing: [https://www.cnbc.com/2018/04/11/goldman-asks-is-curing-
patie...](https://www.cnbc.com/2018/04/11/goldman-asks-is-curing-patients-a-
sustainable-business-model.html)

There is simply no way to align healthcare with capitalism, without creating
perverse incentives around every corner.

~~~
Mirioron
> _There is simply no way to align healthcare with capitalism, without
> creating perverse incentives around every corner._

I think there is and we already have it. The combination of every drug needing
FDA approval with 20 year patents aligns coming up with new treatments with
capitalist funding. Regardless whether you come up with a cure or
"subscription model" treatment others can provide it cheaper once your patent
runs out. That's why generic drugs that cost a lot of money to create end up
costing cents later down the line. Aspirin costs very little at this point.
People just expect every new treatment to immediately be available at low
cost.

Where it turns perverse is in mostly 2 points:

1\. Regulation changes. It's sometimes easier to lobby for rule changes that
allow you to repatent a treatment than it is to come up with a new one. An
example of this would be asthma medication.[0] The price of inhalers
multiplied in 2008 in the US. Inhalers used chlorofluorocarbons (CFC) as
propellant. CFCs were banned to protect the ozone layer, but inhalers got an
exception. In 2008 this exception was removed, which meant that drug
manufacturers needed a new propellant. They ended up using hydrofluoroalkane,
but this is considered a new treatment when it comes to patents. As a result
the drug company could charge higher prices because there wasn't as much
competition anymore. This is an issue with how patents are granted.

2\. Single manufacturer. When a patent expires for a drug anyone can make it,
which drives down the price. However, for some drugs there is only one
manufacturer that can keep the price low, so nobody else is interested in
making that drug. It then becomes possible for that company to increase the
price and people will have to pay it. This was the case with Daraprim (Martin
Shkreli).

Despite these two problems, we've never had as many options in healthcare and
it is steadily improving. Conditions that were a death sentence just a few
decades ago, such as HIV, are now manageable with treatments. I don't think
that this shows that the system is irredeemably broken.

------
rdlecler1
People often forget that VC is a for-profit industry and that VCs invest money
on behalf of investor who are looking for a return on their investment (Like
pension funds) and where there are lots of places they can put their money to
work. With that in mind, 2/3rd of VC backed companies will fail despite the
best wishes of the founders and VCs, which means that to get a market rate
return 1/3rd of your portfolio must generate a 10x return after multiple
rounds of dilution. What this means is that most opportunities are not venture
backable because 10x returns are hard. You can invest in a company at a $10m
pre and you need a company to get to at least a $200m valuation (again
multiple rounds of dilution). The kind of growth prospects you need to command
that are extremely high. VC can address some problems, but not all problems
because the risk eclipses the reward. That’s okay. At least it can do
something which most industries can’t do.

~~~
beambot
Exactly. And VC is tiny relative to other asset classes. It's important to
match the company's model & expectations with its financing. VC isn't the only
game in town: Private Equity, Debt, Bootstrapping, etc. are all viable options
too.

VCs are targeting hypergrowth companies with multi-billion dollar addressable
markets that can plausibly see liquidity within the fund's structural 10-year
lifetime. If this doesn't describe your company, then VC probably isn't a good
structural fit.

------
renewiltord
Did not find this article interesting. Very long, not insightful into the
reasons behind the title.

It's mostly an intro into VC, YC, KP, and some of the other players and
there's some human interest stuff in there along with a comparison to how
little money other groups get.

------
mindslight
> _Software and technology are only one corner of the innovation playground,
> and the US has been so focused on the noisy kids in the sandbox that it has
> failed to maintain the rest of the equipment._

This about sums up the topic. The article itself even spends most of its time
pondering this alluring idea that the VC ecosystem could somehow be reformed
to solve societal problems.

The problem isn't an insular background of potential founders. It's that a
business can only achieve outsized returns by operating on scalable things -
such as computing technology or casual replaceable labor. There is no Uber for
<concern of marginalized people>, because marginalized people are an input
which those services require to operate! Nobody is delivering groceries during
a pandemic from a place of options.

> _[Nikki King is] in a constant scramble for money, relying on grants,
> donations, and Medicaid reimbursements._

The money funding an organization that directly helps people is coming from
government and charity. There is no monetary profit in this - if there were,
Ms King would now own a successfully bootstrapped cashflow positive business.
Instead she continues to scrape by.

Ultimately we've got the best society money can buy. Our assumptions of
mutually beneficial transactions in a free market creating distributed wealth
are not panning out. Instead we've gotten an ever-growing wealth imbalance,
with the main goal of the wealthy being to perpetuate themselves. There are
many theories on why this has happened or what to do about it, but suffice it
to say as long as it continues our problems will only get worse.

------
neonate
[https://archive.vn/YIqby](https://archive.vn/YIqby)

------
rjkennedy98
Am I the only one here that hated this article?

If the point is we should invest more in things - we agree. We all agree.
Pretty much everyone with any sense agrees. Even people on the right like
Julius Krein have been pushing for nothing but this. The only ones that don't
are our bought and paid-for politicians and their corporate cronies...but no
mention of them.

But what does that have to do with private capital investment. Seriously?
Where is the connection.

Why is it necessary to call out venture capital and "white male culture".

So far as I can tell this article was nothing but a bunch of crass and nasty
attacks.

It starts all the way from white males nerds who "have no social lives". He
thankfully teaches us that:

> In the white male culture ... those cultures are extremely narrow. For women
> and people of color, those cultures are much more expansive.

He then (wonderfully) quotes a failed start up by a black woman to have better
substitute teachers that only failed because of lack of Andressen's money.
That's some pretty powerful evidence right there.

He then goes on to more directly attack Andressen for the (absurd) notion that
a software start up incubator did not help with COVID.

> I revisited the Andreessen Horowitz portfolio, which includes dozens of
> software winners, like Facebook, Box, Zynga, and Github, but not many
> companies building things that would have been useful in tackling the
> pandemic.

Of course anyone who works in tech knows that github and plenty of his
startups are used for remote work every single day. But no matter they didn't
cure covid, which is his test for good investment. I would love to hear what
he thinks qualifies as we literally have no solution for COVID right now
except to stay home and wear cloth over our face.

Then he goes on to quote his daughters making fun of Elon Musk and another
unnamed executive.

> He doesn’t seem to realize he’s the Once-ler,” she said, referring to the
> character in Dr. Seuss’s The Lorax

And

> “Who would do that to their kid?” asked Quinn.

> “Don’t worry,” Lillie said. “X Æ A-12 Musk will be able to pay other kids
> not to bully him.”

I guess that's a good example of the "expansive" culture of women that we
desperately need more of.

Of course most of this this article revolves around Ophelia a software startup
trying to help with the opiod epidemic.

No where is it mentioned that the opiod epidemic is not a natural phenomenon,
but was manufactured in the most heavily regulated industry in America:
healthcare. It came from as far a place from Silicon Valley as you can get.

It was pushed by Big Pharma, their associations, and with the blessing of
every government and non-government medical institution.

...but god I hate those Silicon Valley bros and their successful startups.

------
aaron695
I think the fact is was Musk who 'chose' the baby name evidently and not
Grimes, who I guess is just a house wife, sums up the article succinctly.

The writer could have written this without consistently insulting people,
especially coming from a place of ignorance.

Musk's Starlink will change medicine in the poorest regions of the world, were
at _minimum_ Médecins Sans Frontières can certainly afford it.

But whatever, it's all about the click chasing.

------
philipkglass
Clean-tech was a hot investment area for VCs, for a while.

 _Weathering the Storm: Kleiner Perkins and the Tragedy of Clean-Tech Venture
Capital_

[https://digital.hbs.edu/platform-
rctom/submission/weathering...](https://digital.hbs.edu/platform-
rctom/submission/weathering-the-storm-kleiner-perkins-and-the-tragedy-of-
clean-tech-venture-capital/)

The article above shows some of the numbers but it's not quite pointed enough.

The problem with investing in e.g. solar power isn't that it's a dead end
technology. Just the opposite. It is a technology that is still rapidly
improving on price:performance. But any technology rapidly improving on
price:performance, without significant barriers to competition, demands
ongoing investment and offers low returns on capital invested. VCs want
significantly higher returns than they could get by investing in established
manufacturing businesses.

There's too much competition in clean tech. Invent a better mouse trap for the
energy sector and in 5 years you'll be competing with Panasonic, General
Electric, Siemens, LG, and 4 Chinese companies you never even heard of before.

The same thing happened with the hydraulic fracturing revolution. Competition
is too robust to deliver respectable returns, and the capital requirements are
high.

 _Chesapeake Energy starts bankruptcy countdown_

[https://www.marketwatch.com/story/chesapeake-energy-
starts-b...](https://www.marketwatch.com/story/chesapeake-energy-starts-
bankruptcy-countdown-2020-06-15)

 _Former EQT CEO: Shale Gas Revolution an ‘Unmitigated Disaster’ for
Investors_

[https://www.oilandgas360.com/former-eqt-ceo-shale-gas-
revolu...](https://www.oilandgas360.com/former-eqt-ceo-shale-gas-revolution-
an-unmitigated-disaster-for-investors/)

"The technological advancements developed by the industry have been the weapon
of its own suicide."

There are some non-software businesses that have significant barriers to
competition, like medical imaging. But those barriers also hinder capital-lean
scrappy upstarts. Invent a better MRI machine, and again you're competing with
General Electric, _plus_ you need to go through a regulatory gauntlet before
selling your first unit.

After rejecting sectors where competition is fierce, sectors with barriers to
competition that also hinder startups, and sectors where people can't/won't
pay much (e.g. anything based on serving unmet needs of low-income people),
there's not a whole lot left but software businesses and software-mediated
platform businesses.

------
hogFeast
There are many things wrong with this article. The 16-year old daughter
opining about what is wrong with VC is perhaps the most telling though.

None of the article is based on any deep understanding of the issues. It is
generalizations about people (alarmingly, with the implication of race and
gender) and an industry that the author doesn't seem to know (if you are using
The Code as your source, stop...think about what you are doing).

As an example, people don't understand that SV benefiting from government
research money is not the same thing as proving that research money was the
cause. In fact, lots of other countries did this, and no-one else got
anywhere. The UK, in particular, was entirely convinced by the notion that the
govt could save the economy in the 1960s...nothing worked, and this attitude
triggered one of the most severe crisis in British economic history (much
worse than the Great Depression). The rest of the article continues in the
same way: pointing to specific examples but failing to see that they don't
generalize (the stuff comparing Nordic/South America/US is actually shocking
to read as someone who studied economic history, willfully false).

I think the world is going to see more of this. People in tech are always
wrong. Their identity is wrong. They aren't "like us". But saying that they
fail to innovate is...insane. I am not a fan of tech people or SV at all...it
is a hotbed of charlatanism...but that is the point of capitalism, that is why
we don't like in wood houses anymore. No-one knows what is going to work ahead
of time. The system must be decentralized, and we must not have people like
the author trying to say that certain innovations are more valuable than
others.

(Btw, one of the big issues that tech has is that lots of young people
actually don't understand the real world isn't like the Lorax. There isn't
this group of people who are automatically evil, and are causing all the bad
things. Life is ambiguous, and people who often end up doing bad things have
intentions...life isn't a movie).

------
agomez314
Found this to be a pertinent article that shows the bytes vs atoms debacle
going on.

~~~
binaryfour
> bytes vs atoms

I really like this

------
imagetic
Because the things we need don't sell for 1 billion?

------
cs702
Betteridge's "Law of Headlines" suggests this headline was written in the form
of a question in order to answer it in the negative:

> "Any headline which ends in a question mark can be answered by the word
> 'no.' The reason why journalists use that style of headline is that they
> know the story is probably bullshit, and don’t actually have the sources and
> facts to back it up, but still want to run it."[a]

[a]
[https://en.wikipedia.org/wiki/Betteridge%27s_law_of_headline...](https://en.wikipedia.org/wiki/Betteridge%27s_law_of_headlines)

~~~
smnrchrds
Is the title editorialized or has the publication changed it? As of now, the
publication's title is _" Why venture capital doesn’t build the things we
really need"_, but the submission's is _" Is venture capital producing the
kinds of inventions society needs?"_.

~~~
dang
I changed it for reasons I explained here:
[https://news.ycombinator.com/item?id=23655803](https://news.ycombinator.com/item?id=23655803).
The article title is misleading.

However, since now it's triggering the Betteridge reflex, and people are
reacting purely to the title, I've reverted the edit. If anyone reads the
article thoughtfully they will see that the answer to the question can only be
"yes and no", but we can't expect that.

~~~
cs702
> triggering the Betteridge reflex

Sorry about that. Won't do it again.

~~~
dang
Oh no worries! but thanks for saying so.

------
_bxg1
[https://en.wikipedia.org/wiki/Betteridge%27s_law_of_headline...](https://en.wikipedia.org/wiki/Betteridge%27s_law_of_headlines)

------
mattmaroon
No

------
valuearb
By definition, yes.

~~~
AnimalMuppet
No, by definition it's producing the kinds of inventions society _will pay
for_. That's not the same thing.

------
cocktailpeanuts
I know a lot of people on HN hate VCs, but it is not the role of VCs to invest
in companies who build things "the society needs".

They invest in things the society didn't even know it needed.

Of course there are huge flops and failures and near-scams, but I think it's
good that these businesses exist, and I disagree with people who stigmatize
the entrepreneurs who build the "stupid" startups and the VCs who fund them.

Imagine a world where everyone was building things that everybody already knew
they needed. It would be a dull world and very deterministic. Not a world I
want to live in.

~~~
jackyinger
Oh give me a break; no one is saying that we shouldn’t innovate.

And I don’t think people are hating on VC as a whole, this site is run by VCs
after all.

Do you really want to live in a society where people go after businesses to
make a quick buck no matter the consequences? I know that I self censor some
of my ideas on the basis that I wouldn’t want to live with the results if they
were wildly successful.

We all have an obligation to create a world that we (not the royal we) would
like to live in. And that means constructing things with real, broad societal
value. Think renewable energy rather than uber for liquor.

~~~
cocktailpeanuts
this is like saying art should not exist. I'm likening these companies to
artists (no value judgement attached).

Artists make stuff they want to make, and it provides value to the world in
some way. Otherwise they shouldn't exist. Artists don't deliberately make
things with "real broad societal value".

