Do VCs help or harm Silicon Valley?
May 15, 2015 1:19 PM Subscribe
It is assumed by virtually everyone that venture capitalists are, in aggregate, a force for good in Silicon Valley and San Francisco. I suspect that VCs may be a net negative force because their relentless drive to invest in blockbuster companies to get massive returns results in a lot of human, social and capital waste. How might I obtain some reliable data to help make a reasonably accurate assessment? I'm okay with being wrong; I just have no evidence that all the VC cheerleaders are right. How do I get evidence?
In the same way that public companies focused on quarterly results do stupid things for immediate return that are damaging in the future, I see tech-based startups on the hook to VCs ramp up way too quickly, treat employees like robots and often fail because that's what startups do but also because the idea wasn't that great but it did have funding. I'm just guessing, though. Are VCs a positive thing or a negative thing in terms of quality of life, quality of community and contributions to the economy? I'm a liberal arts graduate with a calculator and that's it. Beloved hive mind, what's the best way to think about and research this topic for a potential writing project? Your help is much appreciated. Thanks!
In the same way that public companies focused on quarterly results do stupid things for immediate return that are damaging in the future, I see tech-based startups on the hook to VCs ramp up way too quickly, treat employees like robots and often fail because that's what startups do but also because the idea wasn't that great but it did have funding. I'm just guessing, though. Are VCs a positive thing or a negative thing in terms of quality of life, quality of community and contributions to the economy? I'm a liberal arts graduate with a calculator and that's it. Beloved hive mind, what's the best way to think about and research this topic for a potential writing project? Your help is much appreciated. Thanks!
Crunchbase is a good resource for funding and exits.
But this is a question like: "Is the President good for the US"? or "Should we have Wall Street in NYC"?
They are impossible questions to answer with just data....or even with subjective evidence. Any macroeconomic group of workers has many indirect effects that are not even possible to determine, since they are not known until they are removed, which is impossible in the near term.
I would suggest narrowing down your question for a research project.
posted by pando11 at 1:32 PM on May 15, 2015 [3 favorites]
But this is a question like: "Is the President good for the US"? or "Should we have Wall Street in NYC"?
They are impossible questions to answer with just data....or even with subjective evidence. Any macroeconomic group of workers has many indirect effects that are not even possible to determine, since they are not known until they are removed, which is impossible in the near term.
I would suggest narrowing down your question for a research project.
posted by pando11 at 1:32 PM on May 15, 2015 [3 favorites]
Best answer: "Are VCs a positive thing or a negative thing in terms of quality of life, quality of community and contributions to the economy?"
Yes.
You're making the assumption that all VCs are the same and follow the same strategies. That isn't true. They're extremely varied. You're falling for "misleading vividness" where you've read about specific VCs who are aggressive and predatory and assumed they were typical.
posted by Chocolate Pickle at 1:33 PM on May 15, 2015
Yes.
You're making the assumption that all VCs are the same and follow the same strategies. That isn't true. They're extremely varied. You're falling for "misleading vividness" where you've read about specific VCs who are aggressive and predatory and assumed they were typical.
posted by Chocolate Pickle at 1:33 PM on May 15, 2015
Before researching the effect of VC firms you might want to research your assumptions--I am not at all sure they are correct "I suspect that VCs may be a net negative force because their relentless drive to invest in blockbuster companies to get massive returns results in a lot of human, social and capital waste."
posted by rmhsinc at 1:34 PM on May 15, 2015 [1 favorite]
posted by rmhsinc at 1:34 PM on May 15, 2015 [1 favorite]
"a force for good in Silicon Valley and San Francisco."
Re: VCs being a force for good or for bad, you obviously need to clarify who you're talking about in terms of impact. Those geographic areas are just real estate (so what's best is lots of worms and a decent amount of rain!).
But let me end-run just about anything that could be said here. The one group of people VCs are undeniably trying very very hard to help are their investors. And the jury's out as to whether VCs are the best way - or even a good way - for wealthy people to invest their money. You can look at aggregate return on investment, but such figures are skewed by a handful of mega-successful plays (FB, Google, etc) made by a few brilliant/lucky standouts. Remove them, and....meh.
So if VCs are of dubious value to the one vanishing small and wealthy group of people to whom they're the least bit beholden, there'd need to be some fantastic serendipity to make them beneficial in the larger picture. And I don't think the world works that way.
posted by Quisp Lover at 1:40 PM on May 15, 2015 [1 favorite]
Re: VCs being a force for good or for bad, you obviously need to clarify who you're talking about in terms of impact. Those geographic areas are just real estate (so what's best is lots of worms and a decent amount of rain!).
But let me end-run just about anything that could be said here. The one group of people VCs are undeniably trying very very hard to help are their investors. And the jury's out as to whether VCs are the best way - or even a good way - for wealthy people to invest their money. You can look at aggregate return on investment, but such figures are skewed by a handful of mega-successful plays (FB, Google, etc) made by a few brilliant/lucky standouts. Remove them, and....meh.
So if VCs are of dubious value to the one vanishing small and wealthy group of people to whom they're the least bit beholden, there'd need to be some fantastic serendipity to make them beneficial in the larger picture. And I don't think the world works that way.
posted by Quisp Lover at 1:40 PM on May 15, 2015 [1 favorite]
So if VCs are of dubious value to the one vanishing small and wealthy group of people to whom they're the least bit beholden...
The two largest investors in VC funds are pensions and endowments (source).
posted by mullacc at 2:14 PM on May 15, 2015 [1 favorite]
The two largest investors in VC funds are pensions and endowments (source).
posted by mullacc at 2:14 PM on May 15, 2015 [1 favorite]
Response by poster: Thanks for all responses so far and keep 'em coming. I'm happy to question my assumptions and I'm happy to have pointers toward a more nuanced and sophisticated look at the varieties and differences among VCs, etc. So more, please, if you have it!
posted by Bella Donna at 2:34 PM on May 15, 2015
posted by Bella Donna at 2:34 PM on May 15, 2015
Best answer: You can look at aggregate return on investment, but such figures are skewed by a handful of mega-successful plays (FB, Google, etc) made by a few brilliant/lucky standouts. Remove them, and....meh.
This is really the defining characteristic of venture capital. The model relies on and expects this. It wouldn't be venture capital if it didn't; it would be more like traditional private equity (but with only minority investments), or what many modern hedge funds do. Whether VCs are the best investment -- i.e. the best ROI -- is really beside the point. People have different reasons for choosing to invest in VC as opposed to some other type of investment, and they don't always put ROI or a similar purely financial measure as number one.
OP, you make a lot of assumptions that need to be examined, as you know. Just to go through some:
In the same way that public companies focused on quarterly results do stupid things for immediate return that are damaging in the future, I see tech-based startups on the hook to VCs ramp up way too quickly,
Who's to say it's "too quickly" and what does that mean? How would one decide what is "too quick" versus "too slow" versus "just right"?
treat employees like robots
Not sure what that means, or how that is something that VCs cause (rather than a general cultural tendency). Also, note that in SV/SF, employees are free to come and go (i.e., they are not tied up by noncompetes like in other places). This tends to make employees more individually valuable, not less, and VC funding (as opposed to just bootstrapping) should allow employees to capture more of that value, and in any case gives people more freedom to try out different things.
and often fail because that's what startups do but also because the idea wasn't that great but it did have funding.
Who's to say the idea "wasn't that great"? Are you implying that only the "best" ideas should succeed? How would one figure this out?
Also, I think it's really hard to define the question itself. What do you mean by "human, social and capital waste"? There are value assumptions here that need a lot more fleshing out.
I actually suspect it's nearly impossible to answer the question anyway. There's no "control group" to compare to. Maybe you could do some sort of a historical comparative study, but I'm not sure how informative it would be, given there are so many variables.
Perhaps compare SV/SF to another tech center in the US. SV/SF startups get by far the lion's share of VC funds compared to everywhere else; Boston and NY are next in rank, but the difference in VC fund flow between SV/SF (>40%) and those two regions (maybe 10-12% each) is quite large.
posted by odin53 at 2:46 PM on May 15, 2015
This is really the defining characteristic of venture capital. The model relies on and expects this. It wouldn't be venture capital if it didn't; it would be more like traditional private equity (but with only minority investments), or what many modern hedge funds do. Whether VCs are the best investment -- i.e. the best ROI -- is really beside the point. People have different reasons for choosing to invest in VC as opposed to some other type of investment, and they don't always put ROI or a similar purely financial measure as number one.
OP, you make a lot of assumptions that need to be examined, as you know. Just to go through some:
In the same way that public companies focused on quarterly results do stupid things for immediate return that are damaging in the future, I see tech-based startups on the hook to VCs ramp up way too quickly,
Who's to say it's "too quickly" and what does that mean? How would one decide what is "too quick" versus "too slow" versus "just right"?
treat employees like robots
Not sure what that means, or how that is something that VCs cause (rather than a general cultural tendency). Also, note that in SV/SF, employees are free to come and go (i.e., they are not tied up by noncompetes like in other places). This tends to make employees more individually valuable, not less, and VC funding (as opposed to just bootstrapping) should allow employees to capture more of that value, and in any case gives people more freedom to try out different things.
and often fail because that's what startups do but also because the idea wasn't that great but it did have funding.
Who's to say the idea "wasn't that great"? Are you implying that only the "best" ideas should succeed? How would one figure this out?
Also, I think it's really hard to define the question itself. What do you mean by "human, social and capital waste"? There are value assumptions here that need a lot more fleshing out.
I actually suspect it's nearly impossible to answer the question anyway. There's no "control group" to compare to. Maybe you could do some sort of a historical comparative study, but I'm not sure how informative it would be, given there are so many variables.
Perhaps compare SV/SF to another tech center in the US. SV/SF startups get by far the lion's share of VC funds compared to everywhere else; Boston and NY are next in rank, but the difference in VC fund flow between SV/SF (>40%) and those two regions (maybe 10-12% each) is quite large.
posted by odin53 at 2:46 PM on May 15, 2015
Best answer: Here (pdf) is a link to a 2011 NBER survey of academic research on venture capital. Section 6 deals with VC's role in the economy. The bibliography might provide a good starting point.
posted by mhum at 5:44 PM on May 15, 2015
posted by mhum at 5:44 PM on May 15, 2015
This question is a special case of "is capitalism a force for good?" Which is... quite a complicated and controversial question, to put it mildly. Some people are of the opinion that "tech" (whatever that is) is some special portion of the economy that transcends all previous categories of understanding. I strongly disagree -- sure, "tech" has some idiosyncrasies, but on the whole it follows the pattern and practices of other industries.
There are a billion different ways to approach your question. One is by looking at how VCs do on their own terms, compared to other asset classes. Historically, IIRC, they're one of the worst ways for earning a good return on your money (and by "your" I mean some huge institution that might consider putting millions into one fund or another).
Another is doing some kind of global cost/benefit analysis, which is always a subjective affair (what to include? how to weight one factor vs another?). Factors to consider might be: labor, environment, urban planning, capital markets, etc... this is a big ball of wax.
Answering the question of whether VCs are a force for food basically comes down to your personal values. Do you think the Singularity is awesome? Then VCs are doing the Lord's work. Think immiserating workers and contributing to economic inequality are bad things? Then VCs might not be so great.
posted by Noisy Pink Bubbles at 6:04 PM on May 15, 2015
There are a billion different ways to approach your question. One is by looking at how VCs do on their own terms, compared to other asset classes. Historically, IIRC, they're one of the worst ways for earning a good return on your money (and by "your" I mean some huge institution that might consider putting millions into one fund or another).
Another is doing some kind of global cost/benefit analysis, which is always a subjective affair (what to include? how to weight one factor vs another?). Factors to consider might be: labor, environment, urban planning, capital markets, etc... this is a big ball of wax.
Answering the question of whether VCs are a force for food basically comes down to your personal values. Do you think the Singularity is awesome? Then VCs are doing the Lord's work. Think immiserating workers and contributing to economic inequality are bad things? Then VCs might not be so great.
posted by Noisy Pink Bubbles at 6:04 PM on May 15, 2015
I think it might be difficult to find the kind of data you are looking for. However, I did read Richard Florida's Rise of the Creative Class and he seems to be involved in many things that make a city successful and well functioning. Another point to consider is how does the government contribute as the VCs are not operating in a vacuum. Public policy can shape how VCs treat workers and other issues like housing. It might be constructive to find criticism of the Creative Class. A quick search found some articles pointing out the clustering of knowledge workers in SF/SV has not done much for decreasing inequality and having trickle down effects for the people that live in the area. I'd be interested if others have knowledge in this area.
posted by andendau at 6:18 PM on May 15, 2015
posted by andendau at 6:18 PM on May 15, 2015
Don't conflate:
"the platonic ideal of VC investment as a driver of wealth creation"
with:
"an intense concentration of VC-funded activity, in a single type of business, with high-risk and high-rewards, with low barrier to entry, where first-mover advantage is a tremendous force, in a small geographic area."
The former is just capitalism. The latter is something rather unusual in human history.
posted by Cool Papa Bell at 6:49 PM on May 15, 2015
"the platonic ideal of VC investment as a driver of wealth creation"
with:
"an intense concentration of VC-funded activity, in a single type of business, with high-risk and high-rewards, with low barrier to entry, where first-mover advantage is a tremendous force, in a small geographic area."
The former is just capitalism. The latter is something rather unusual in human history.
posted by Cool Papa Bell at 6:49 PM on May 15, 2015
Best answer: You might enjoy the writings of Michael O. Church, who seems to be a pretty well recognized detractor of the status quo in the Valley.
posted by rustcrumb at 7:01 PM on May 15, 2015 [3 favorites]
posted by rustcrumb at 7:01 PM on May 15, 2015 [3 favorites]
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I had a friend who had an idea for a product. He had a job, but started to build a prototype in his spare time. At a point when he believed it was viable, he quit and continued to work full time on it his prototype. He had savings and went into living standards that were as meager as possible to keep his burn rate down. When the prototype was done, his choices were:
1. Try to do this on his own
2. Try to convince a company to buy his technology
3. Try to get funding
1 was out because this was full time and he had no revenue. 2 was tricky because of a general "Not Invented Here" attitude in his particular niche. 3 seemed to be the best.
And right on schedule, he managed to get funding right at the point where he had to sell his car for food and rent until he could get another job.
What VC brought in was resources. Not simply capital, but also people who could handle HR. People who could do MARCOM. People with high up connections in the space where we wanted to be. People who knew how to set up infrastructure so that the company was poised to grow. Advice on how to structure stock options. Advice on legal protection. Resources for patents. This was all an ecosystem that is necessary for success and they knew how to get it into place. Unlike the company store, we had choices. We didn't have to accept any of their resources beyond capital, but we did need those resources.
And when the company went bust, we had a fire sale of equipment and some of it went to people who were in other startups funded by the same VC's.
posted by plinth at 1:32 PM on May 15, 2015 [2 favorites]