Venture Capital Is a Mad Dash To a Local Maximum

VC and innovation are ultimately incompatible

Imagine someone in a mythic past came up with a new labor innovation: dedicated kitchens for food preparation. Some people prepare Food, some people do other things and buy the prepared Food. Kitchens are a hot new trend. How will this trend make its way through our economy?

Let’s think about how would this play out in a world with venture capital. Hundreds of Kitchen Startups would rush into this hot new space. They would compete to get the most funding to scale and expand the fastest. They would start in New York, San Francisco, Beijing, Singapore, London, and other urban centers, then rapidly spread out. Any Kitchen that failed to grow would find an attractive exit, being bought up by a Kitchen with more VC dollars. Ten years later, having saturated every market, they would be competing with each other. This competition would lead to attempts at differentiation: you can order Food(TM), Food Extra, Food Lux. The startups would be international, but different regions would see different winners. As the market matures, they would consolidate. We would have choices: there would be as many as two or three different kinds of Food in each region. 20% of every Food purchase would be paid to the Bay Area as tribute.

Let’s contrast the VC model with a decentralized capital model. In this model, capital doesn’t come directly from large capitalists in urban centers; it is dispersed through local credit grantors. Upon learning about the Kitchen idea, millions of people around the world strike out to start their own ventures. The fortunate ones would have access to credit due to previously successful ventures or because they own collateral. These Kitcheners would try millions of different concepts, each influenced by their regional cultural context. Successful Kitcheners could apply for more credit and expand to other locations, spreading that food culture over time. In a given region, hundreds of different Kitchens might serve dozens of different kinds of Food, each Kitchen doing things slightly differently.

This is a silly example, but even in the food industry we can see how the creations of centralized megacapital compare against the diverse food cultures created over time, at human scale, throughout the world. Think Chipotle versus every kind of Latin American-influenced food available in Texas or California. PF Chang’s compared to a local restaurant started by an immigrant. Chains are fine, but I don’t want a world with only chain restaurants. Given access to a large supply of capital and the fierce market such access engenders, capital creates inescapable centralizing effects. Frothy global capital can make Panera Bread. Can it make your favorite restaurant?

VC Is Poor At Innovating

I have observed these axioms in the Silicon Valley mindset:

  • The Venture Capital model drives innovation

  • No other model drives innovation as well as VC

I can’t overstate how much I hate this. Being the most charitable I can be, I’d restate these axioms:

  • The Venture Capital model drives some innovation sometimes

  • There are many models of innovation worth exploring but currently disregarded due to the ascendancy of for-profit investing, particularly VC

I think of the VC approach as a mad dash to a local maximum. Lately the highest-profile venture investments race each other (and race regulation) to achieve a monopoly that will finally make them profitable. This is the model of ride hailing (monopolize transit), scooters (same), and WeWork (own all property on earth). When you think of the bright scifi future of your dreams, do you imagine a ton of cars driving people around? Uber’s monopoly dreams necessarily put it at odds with efficient human-scale transit, blocking our path to the future.

The scooter craze, about to go down in flames, provides the clearest example. There is almost certainly no business model for rental electric scooters in cities. Yet the VC model forces massive expansion before product-market fit. Suppose a scooter company wants to postpone scaling until it hones its strategy in one neighborhood in one city, making a solid product with a sustainable business behind it. The VC model says that competitors will have expanded before them and closed off other markets. Today, every scooter company is overextended and they are all about to fail. With this much capital sloshing around, the “discipline of the market” doesn’t seem to be working, and any benefit that is supposed to be captured via a competitive market system is beyond reach. It’s a local maximum, and the dominance of VC prevents us from getting out of this rut.

Paths Forward

Eventually I plan to write about alternative visions of building the world that don’t rely on monopoly capital. This newsletter is called venture commune, after all, and the venture commune is itself a successor to venture capital. Mainstreaming our alternatives will necessarily involve starving the beast of capital; chipping away at the power of capital markets while building cooperative structures for managing the world. I appreciate your patience while I work through my disdain for VCs.

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