Venture Capitalists Versus The World

How VCs are taking capitalism for a ride to nowhere.

Mid last year, Santa Clara Valley Water District board members — who regulate water usage in Silicon Valley among other parts of northern California — declared a water shortage emergency. In a public statement the head of the board, Tony Estrema, said that the county “will be calling for a mandatory 33% reduction in water use and is planning to rely almost entirely on groundwater.”

This move puts them in a perilous position. If too much groundwater is tapped, the ground will sink, endangering the homes and infrastructure of Silicon Valley’s growing local population, as well as those of tech giants like Apple and Amazon. And the more the ground sinks, the more exposed the region becomes to the tectonic time bomb of the infamous San Andreas fault.

“In a place where we have some of the largest companies in the world, that’s not really acceptable,” said Estrema. But there’s more than just tech executives filling the corner offices of drought-stricken Santa Clara County. Another industry is booming, and around 90% of it calls this area home. And although you may not know their names, they’re the firms and people behind just about every post-70s tech company you can think of.

They are the venture capitalists, known widely as VCs.

During the first half of 2021, on average just over one billion dollars of capital was invested in private companies every single day. Most of this money came from venture capitalists, and most of it was funneled towards tech. But VCs and tech startups are linked by more than capital. If you ask anyone in the business, they’ll say the two are practically joined at the hip.

VC firms have cemented themselves as one of capitalism’s vital organs: hearts that pump resources out to its pioneering extremities. So why are more and more founders looking elsewhere for funding?

According to people close to the matter, the world of venture capital is taking a turn for the worse. Steve Blank, an entrepreneur who currently teaches at Stanford’s engineering school, is one of those people.

“I’ve watched the industry become a money-hungry mob. VCs today aren’t interested in the public good. They’re not interested in anything except optimizing their own profits and chasing the herd, using money which could’ve gone to innovation that actually helps people.”

This isn’t to say there aren’t firms out there making positive contributions to the world. VC funds are backing humanitarian efforts in areas like sustainable energy and safe drinking water. But there’s a divide growing between what’s best for the big firms of Silicon Valley and what’s best for everyone else.

Tom Perkins of Kleiner Perkins — a VC that backed key research leading to the invention of synthetic insulin in the 70s — is equally critical of the industry, describing it as being increasingly avaricious and “dominated by a few dozen firms, which, collectively, control hundreds of billions of dollars.” And while the power of VC capital is cause for concern, the Silicon Valley’s VC firms have newfound influence. Influence over the future of technology itself.

In the world of tech — where turning a profit can take years and many millions of dollars — raising money from VCs can often be the only avenue founders have for getting their ideas off the ground. But the relationship between VCs and startups is changing. These days VCs no longer pick winners, they make them. VCs are playing a new type of game; a game in which they win at the expense of everyone else. “It’s a clubby industry,” Steve Kraus, of Bessemer Venture Partners.

This is illustrated nowhere better than in the examples of WeWork and Uber. The two startups succeeded not on the merit of their value propositions, but because of the billion-dollar-deep pools of capital handed to them by VCs. With a seemingly endless supply of money propping them up, each were able to undercut their competitors and run at multi-million-dollar losses, year after year, in a race to the bottom only they could win.

When the coworking startup WeWork was founded in 2010, they set out to expand fast. By 2014, they had hundreds of locations across America, often cropping up next to other co-working spaces and intentionally undercutting them, even offering signing bonuses for switching from a competitor.

Jerome Chang, the owner of LA-based Blankspace, told The New Yorker, “My average rate was five hundred and fifty dollars per desk per month, and I was just scraping by. Then WeWork arrived, and I had to drop it to four hundred and fifty, and then three hundred and fifty. It eviscerated my business.”

By 2019, WeWork was running at an average $219,000 an hour loss, only made tenable by the $12.8 billion their eccentric CEO helped raise from investors. And for the VCs that invested — firms blinded by the successes of Apple, Tesla, and Google and iconic figureheads like Steve Jobs — their bets turned out to become self-fulfilling prophecies. Because in the world of startups, the more money one has, the longer one can continue to bleed the competition dry.

This is the dark side of success in the 21st century. Startups succeed by killing everyone else. WeWork wins by becoming co-working, Uber wins by becoming ridesharing. You no longer web search, you Google.

But with every win, the truth is brought closer to the light. A 2018 paper argues that “money-losing firms can continue operating and undercutting incumbents for far longer than previously”, highlighting firms that are “undermining sound rivals — and creating disruption without social benefit.” In his New Yorker article titled “How Venture Capitalists are Deforming Capitalism”, Charles Duhigg succinctly summarizes the problem with this change, writing “in the traditional capitalist model, the most efficient and capable company succeeds; in the new model, the company with the most funding wins.”

There is a silent war of attrition going on between the local and the global that the global will invariably win. If things stay the same, the prize is set to head into the pockets of a handful of Silicon Valley executives, while local business owners board up their shops to make way for shiny new franchises and taxi drivers become all but extinct.

This is a look into a microcosm of a much bigger problem, one that has no easy solution. Communities around the globe are being displaced, a problem you can see all-too-visibility down on the ground in the streets of Santa Clara County. Silicon Valley native Leanna Moreno describes seeing her predominantly Latino neighborhood change from a lower working-class area to a middle class suburb in the span of about 10 years. This demographic shift means that low-income workers are being pushed out with “familiar faces replaced by young tech-workers flocking vacant homes converted into Airbnbs.”

Meanwhile, rising housing insecurity consequential to the area’s increased price of living is forcing people to move neighborhood, city, county, and even state — while others still are being forced to “double up” with friends or family or move out onto the street.

The battle between the local and the global rages discretely at a global scale. In Silicon Valley, the goals of tech companies and their darling VCs and the citizens of Santa Clara County and the world, continue to diverge. Here, the changing climate of venture capital is sucking the well dry, and both those who benefit from the status quo and those worst affected by it are all standing together on the same ground. And just like in Santa Clara County, it’s sinking beneath their feet.

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