( obligatory table of contents post for context: https://cohost.org/NireBryce/post/1425246-the-book-seems-good )
Food delivery apps rely on an unsustainable business model. In 2020, a pandemic year when most of us stayed home, DoorDash lost $139 million and Grubhub lost $156 million. It’s hard to find numbers for Uber Eats, but Uber itself lost $6.8 billion—and that’s better than its $8.5 billion loss in 2019. And it’s unsustainable for individual investors, too; food delivery doesn’t work for anybody. The drivers—gig workers with no benefits or job security—are poorly paid. The services hurt restaurants: they’re not profitable for a whole bunch of reasons, they don’t bring in incremental sales, and a restaurant’s reputation suffers when the delivery service screws up. Even the customers don’t fare well: they’re hit with service fees and higher prices and suffer all sorts of delivery problems. The only reason that this market even exists is that venture capital firms like SoftBank are willing to pour tens of billions of dollars into it, hoping that someday they might capture enough restaurant industry profits to turn a profit of their own. This investment strategy is a hack: market capitalism is supposed to use the uncoordinated collective wisdom of buyers to influence sellers. Venture capital funding prevents that from happening; it inhibits buyers’ agency.
Venture capital (VC) as a funding model traces its origins back hundreds of years but didn’t really take off until the 1980s. It was a key player in the rise of early tech companies and in the inflation and burst of the dot-com bubble in 2001. And it’s grown steadily since then: in 2010, the global venture capital market was $50 billion; in 2019, it was $295 billion. I have personally benefited from venture capital; I sold my first VC-backed company to BT in 2006, and my second to IBM in 2016.
Venture capital itself is not a hack. The hack is when unprofitable companies use VC funding to ignore the dynamics of the market economy. We don’t want some central planner to decide which businesses should remain operational and which should close down. But this is exactly what happens when venture capital firms become involved. The injection of VC money means that companies don’t need to compete with each other in the traditional manner, or worry about the normal laws of supply and demand. They can do what would normally be crazy things—give away their products, pay extravagant salaries, sustain enormous financial losses, provide a service that actually harms people—because of that external funding source. It’s basically central planning by elite investors, something that would be called communism if the government did it.
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These examples are not the same as bad investments or even fraudulent bad investments. Quibi was a venture-backed company that secured over $1.75 billion in funding pre-launch, touting the concept of ten-minute-or-less episodes of content, but shut down just six months after launch after minimal adoption. Elizabeth Holmes founded and ran Theranos on venture capital without ever creating a successful product, and eventually fleeced investors to the tune of $1 billion over several years. Those are both examples of the market working normally, albeit with buyers—in this case, investors—making bad buying decisions and in the Theranos case out-and-out fraud.
As a whole, the VC system subverts market capitalism in many ways. It warps markets, allowing companies to charge prices that don’t reflect the true cost or value of what they’re selling. It permits unprofitable enterprises and unsustainable business models to thrive and proliferate. It also warps the market for talent—employees—especially in the tech sector. And finally, it warps entire market categories, like transportation, housing, and the media. Uber and Lyft, for example, have created an unsustainable market for hired-car rides by charging artificially low prices that do not accurately reflect the value of drivers’ labor.VC funding is also a hack on innovation. By favoring financial returns over substantive product improvements, it prioritizes certain kinds of innovation and ignores others. To a VC-funded company, all that matters is return on investment. So if one of the goals of a market economy is to incentivize innovation, VC funding subverts that goal. VC investors expect to recover their investment in ten years or less, and that’s how they steer their companies.
Similarly, VC culture only rewards endeavors that realize a very high rate of return. Investors bankroll hundreds of companies with different ideas and business models, knowing that almost all of them will fail—and that the few wild successes will more than pay for the rest. So VC-funded managers are motivated to “swing for the fences” rather than grow sustainable, long-term businesses. This is why VC-funded companies can lose so much money, doing all sorts of societal damage along the way. Those losses are paid for by the successes: “unicorns,” in VC-speak.
Private equity allows for another hack, and that’s debt financing. When private equity firms take on a majority stake to acquire companies, they can use less of their equity and rely on debt. They can use this to saddle the firms they acquire with debt, extract money from them, leave them with more debt, then sell them for even more profit—with all the debtors left holding the (empty) bag. Consider the case of Greensill Capital, which collapsed spectacularly in 2021. Its unsustainable expansion over the course of ten years—from supply-chain finance startup, to multinational middleman with a $4.6 million debt load, to insolvency—was accelerated by investments and loans from SoftBank, who made millions in funds available in spite of the company’s increasingly fishy accounting. There’s nothing illegal about any of this. VC funding and private equity are such a normal part of our economy that it might seem odd to call them hacks. But they are; they’re hacks of pretty much everything the market is supposed to do. No one calls it a hack; everyone just calls it “disruptive” and “innovative.” That it’s both legal and accepted doesn’t change the fact that money and power decide what behavior is accepted and who gets a seat at the gaming table.
