
Tim O’Reilly makes a case for why venture capital is starting to do more harm - prostoalex
https://techcrunch.com/2020/06/26/tim-oreilly-makes-a-persuasive-case-for-why-venture-capital-is-starting-to-do-more-harm-than-good/
======
kebman
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
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).

~~~
w4hirelife99
What’s that? You mean they took gambling addicts and gave them control of
humanities efforts at scale? It’s all gone wrong? Shocking! Why, a minority of
global power brokers have NEVER, in the history of humanity, used their sway
over the masses to abuse their trust.

Most financial crimes are still just plain old “paper cons”. They lie on the
paperwork.

At least in the US, regulatory agencies are so underfunded or had their
mission altered such that “paper cons” happen constantly.

Panama Papers, many of Trumps tax dodge schemes (among others, calling him out
because of viz, all those guys “do it”) etc

All very obvious, well known financial schemes.

Basically the origin of the word privilege comes from Latin “privy lege” ...
“privileged by the law”.

Humanity is still ruled by ruthless tribalists looking to conquer the globe.

Ain’t nothing changed about it except the literal “who”, and sound forms and
visual glyphs used to describe. We use a lot less Latin and romantic notions
of higher powers in the sky, but still kowtow to hierarchy based upon
scientific bullshit, convincing people “THESE annotations of the numbers are
it, boy howdy! We def got IT right this generation! Sorry about rocket cars,
but our finance scheme numbers keep going up so we did it!”

Still biologically motivated to the same ends.

~~~
dang
Could you please stop creating accounts for every few comments you post? We
ban accounts that do that. This is in the site guidelines:
[https://news.ycombinator.com/newsguidelines.html](https://news.ycombinator.com/newsguidelines.html).

You needn't use your real name, of course, but for HN to be a community, users
need some identity for other users to relate to. Otherwise we may as well have
no usernames and no community, and that would be a different kind of forum.
[https://hn.algolia.com/?query=by:dang%20community%20identity...](https://hn.algolia.com/?query=by:dang%20community%20identity&sort=byDate&dateRange=all&type=comment&storyText=false&prefix&page=0)

Also, please don't post in the flamewar style to HN. It's not what this site
is for, and it destroys what it is for. That's in the site guidelines also.

------
KKKKkkkk1
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
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
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.

~~~
plorkyeran
Zynga made a profit in 2019. They appear to be a sustainable business which
can keep operating at roughly break-even levels while hoping for another big
breakout hit that makes a lot of money. Not a great investment, but certainly
not a money pit.

------
cycomanic
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.

~~~
Gibbon1
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
What? Blockbuster operated under a franchise model. They didn't borrow money
to open stores—it was local "mom and pops" doing that.

~~~
dragonwriter
> Blockbuster operated under a franchise model.

Blockbuster had franchises but for most of it's dominant phase also had a
large number of corporate stores (some of which originated with one of the
several competing chains that it bought outright.)

~~~
Gibbon1
I could misremember but that's what I remembered seeing. They took on debt to
expand but never reaped enough monopoly benefits to pay of the rolling short
term debt they accrued.

------
kmclean
> 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.

~~~
forgot_user1234
Money is the worst proxy for optimising returns for the society. Lemme know if
you have anything better.

Greed and selfish pursuit leads to wealth creation

~~~
WalterBright
> Money is the worst proxy for optimising returns for the society.

Free markets have done far more for society than any other system that's been
tried.

~~~
sukilot
I'd say social democracy has done more.

It's easy to tally up the greatness of the free market when you redefinento
boundaries of society to exclude the huge negative costs imposed on slaves and
laborers.

~~~
WalterBright
Slavery is not a free market system.

~~~
neltnerb
Um... I agree the word "free" is misleading but once you're in a legal system
that condones slavery then of course it would be a free market. I'm having a
hard time imagining the slave trade arising without a market much more free
than the people forced through it.

Markets are amoral. That's why we shouldn't rely on them to solve social
problems.

~~~
WalterBright
A free market is one where transactions take place absent fraud or force.

Slavery doesn't remotely qualify.

------
btilly
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.

------
edw
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.

------
maltelandwehr
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
What are the other options?

~~~
langitbiru
ICO, crowdfunding, loans, patronage, government's backing, etc.

~~~
sushshshsh
>government's backing >ICO

For those of us who aren't Musk, Thiel, or Vitalik, there's only loans and
patronage and crowdfunding then :)

~~~
jonwachob91
>>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

~~~
sushshshsh
Kindly find me one startup that has gone on to have a successful exit that has
publicly stated "We took funding from US SBIR and it really made a difference"

Additionally by government's backing, I didn't mean to say loans, I meant to
imply "the government are our customers"

~~~
smeeth
“This funding allowed us to pursue several innovative programs that otherwise
would not have been possible” - Irwin Jacobs, founder of Qualcomm in testimony
to the US senate.

The government is good at a lot of things, it is NOT good at publicizing it’s
own success. Just because you don’t know about it doesn’t mean it isn’t there.

~~~
di4na
Qualcomm is also nowhere near a startup or a fledgling SMB

~~~
smeeth
They were in 1987 when SBIR gave them their first grant [0]. That's sort of
the point, parent comment asked for an example of a company that exited with
SBIR help, and I gave him a wildly successful one.

[0] [https://www.sbir.gov/node/285190](https://www.sbir.gov/node/285190)

~~~
sushshshsh
That is a very interesting example. Thank you for providing it.

------
acd
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)

------
hellofunk
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
Works fine in Safari on an iPhone 7.

Are you running any kind of ad or script blocking?

~~~
hellofunk
Ah yeah I have iOS ad blocker turned on.

~~~
lotsofpulp
Works with Wipr content blocker for me.

~~~
hellofunk
Sounds like maybe Wipr is not blocking as aggressively.

~~~
shawnz
Or maybe it is blocking more aggressively. The site works fine for me even
with both uBO and Firefox's tracking protection enabled

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

------
dustingetz
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
...and it's pretty ironic that this comment is written in a social media
website directly funded by a VC (Y Combinator)

~~~
jppope
Y/C does the seed rounds and I think they started doing series A - not really
a VC, but I get your point.

------
holidayacct
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
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.

~~~
fancyfish
This will be a growing model in the next decade and is imo much more
sustainable for founders because the core business model isn’t torn apart and
it’s easier to sell to $MED_CO or $BIG_CO as the exit.

Build a small team, grow to $20-75m valuation then ditch to a bigger co.
Easier to pitch this to some of the less unicorn-y VCs like Arrowbridge, etc.
I like to call it the bluebird strategy.

------
hevelvarik
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.

------
stuaxo
Replace "starting to do" with "does".

------
globular-toast
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
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.

------
zucker42
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.

------
DailyHN
This is old news.

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

------
LatteLazy
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...

~~~
sukilot
Vulgar language makes your comment hard to read.

