How venture capital is hurting the economy

Anthony Mirhaydari : pitchbook – excerpt

“Arguably, these firms are destroying economic value. This new dynamic has social consequences, and in particular, a drive toward disruption without social benefit. Indeed, in some cases, they may be destroying social value while also devaluing labor and work in the enterprise.”

 

This is a golden age for venture capital and the startup ecosystem, as illustrated by PitchBook’s latest PitchBook NVCA-Venture Monitor. So far this year, $57.5 billion has been invested in US VC-backed companies. That’s higher than in six of the past 10 full years and is on pace to surpass $100 billion in deal value for the first time since the dot-com bubble…

Signs of success (or is it excess?) are everywhere you look. On the surface, delivering a resounding verdict that the Silicon Valley startup model not only works, it works well and should be emulated and celebrated.

But what if that’s all wrong? What if this is another mere bubble and the VC industry is in fact storing up pain, not unlike Miami mortgage brokers and small-cap tech analysts during the last two cycles? Not just for itself, but for the economy at large?

That’s the question posited by Martin Kenney and John Zysman—of the University of California, Davis, and the University of California, Berkeley, respectively—in a recent working paper titled “Unicorns, Cheshire Cats, and the New Dilemmas of Entrepreneurial Finance?“…

Or in the case of bike/scooter sharing companies, the current VC flavor of the month, a parking lot of abandoned dreams.

The problem is that this cycle has been marked by easy capital and a fetishization of the early-to-middle parts of the tech startup lifecycle. Lots of incubators and accelerators. “Shark Tank” on television. “Silicon Valley” on HBO. Never before has it been this easy and cheap to start or expand a venture…

Why is this a problem? Because, in the view of Kenney and Zysman, the VC industry lacks discipline, seeking disruption and market share dominance without a clear path to profitability. You see, VC-fueled startups aren’t held to the same standard as existing publicly traded competitors who must answer to investors worried about cash flows and operating earnings every three months. Or of past VC cycles where money was tighter, and thus, time to exit shorter…

“Arguably, these firms are destroying economic value. This new dynamic has social consequences, and in particular, a drive toward disruption without social benefit. Indeed, in some cases, they may be destroying social value while also devaluing labor and work in the enterprise.”

The wealth associated with the startup boom hasn’t been widely shared outside Silicon Valley and its backers—mainly institutional funds and wealthy accredited investors…

The thing is, many VC investors don’t care. The rise of secondary market activity in lieu of the liquidity of an IPO, as represented by Uber’s SoftBank raise, gives early investors and insiders a way to sell their stakes at higher valuation multiples to late-stage VC or PE investors before market dominance and sustainable profitability is achieved. If it ever is.

You know, because “Greed is good.” Which you expect from East Coast cutthroats; not West Coast idealists in one of the most liberal cities in America... (more)