Most Venture Capitalists Are Not Capitalists
If the word “capitalist” means “businessperson” then most of today’s venture capitalists are not capitalists. For that matter, many of the “businesses” funded by technology venture capitalists are not businesses.
A business is something that provides value and makes money by getting paid more than it cost to create that value. “Makes money” means exactly that: money is created when net value is created. National treasuries may print money to represent that created value, but the money is not created by the treasury. Money is created when a business creates net value and gets paid for it. Don’t take my word for it, look it up in your Intro to Economics textbook.
Something that creates the appearance of value without actually creating value, with the intention of selling itself to an acquirer before the public catches on to the fraud; and where the acquirer itself is playing the same game with the intention of foisting itself on the unsuspecting public with an IPO, is not a business. It’s a Ponzi scheme.
A real business intends to create value on an ongoing basis, and as the public becomes more and more familiar with the brand that represents that value, they continue to buy that value from the people who created that value. (Young people tend to confuse the brand with the creators of the value, while older folks usually understand that brands are regularly bought and sold.)
Venture capitalists tell startups, “You don’t wanna die with your boots on. What’s your exit strategy?”
Translation: “What’s your plan for foisting your thing off on an acquirer or on the IPO investing public before they realize you just put a label on some open source stuff and charged so much for it that you can afford a bunch of tasseled loafers to sell it as a shiny new ‘security product’ to school departments around the country? I don’t wanna hear about ongoing value creation, I want one big payday before the suckers wise up.”
Now that I have ensured that there is no danger of a venture capitalist coming around and seducing me with visions of sufficient money to ruin my life and the lives of everyone around me, let me burn another bridge.
Critics of capitalism do not understand any of this. I don’t know what else to say other than: if you want to make the world better, first learn the facts about what’s wrong with it. If “what’s wrong with it” is that you’re jealous of rich people then please go away.
Most critics of capitalism are uninformed about capitalism. Capitalism that was borne of the digital revolution has less integrity than is imagined by those accusing it of lacking integrity.
This rant was precipitated by a LinkedIn profile of an advisor seeking to help startups raise money. I sent this to the advisor:
The ARR hunt
“Thanks for the interesting note about ARR on your LI profile. There are big changes afoot that are going to profoundly affect the VC and PE worlds. What happens when the focus turns from exit strategy to sustainable, permanent, forever earnings streams? Like, instead of the big acquisition or IPO, doing what VCs used to disdainfully refer to as ‘dying with your boots on.’ This is the ethic of a part of the open source world (real open source, not fake open source) that is growing fast.”
The advisor replied with
“Hi Wes, thanks for sharing! Completely agree that looking for sustainable growth is a great option too.”
I hope she means it.