How Venture Capitalists ruin Innovation

My apologies Fred Wilson, Paul Graham, Mark Andreessen, Peter Thiel and the rest. I respect and admire you all, and your colleagues. You have all built, guided, exited and mentored great companies. If not for you, we probably wouldn’t have half of the services and products that we all love and use everyday. So thank you. But I want to take a more critical look at the downsides of all of this venture capital. Yes, you guys have to back many losers to get to that one golden winner. Yes, you guys are creating jobs by funding companies that can then go and hire people. I get all that. But there is a downside. It has to be experienced to be understood.

The “Startup Culture”

Pitch. Early Stage. Pre-money. Valuation. Valley of Death. Seed Money. Angels. Bootstrap. Face time. MVP. Tech Founder. Active Users. Hockey Stick. Series A. Freemium.

Once upon a time, probably before my time, a startup was any company that was well… starting up. It could be a tiny little computer company born out of a garage in Los Altos, California or a diner down the street. But somewhere along the way, a culture emerged. Yes, this is a beautiful thing to have a subgroup of people that can bond over shared difficulty and success. Whether you’re starting a diner or a computer company, you’ll face similar challenges. That could be why words and phrases started entering the vocabulary of those embedded in the “culture.”

Now, the startup culture is overwhelming. Go to any “pitch event” (yup, a phrase describing events where people pitch their startup) and you’ll see typically young-ish people excited about their company / product and how it’ll change the face of [whatever]. The excitement is palpable. It’s commendable. It’s even enviable! I’ve been at that phase myself. Having gone through a number of startups and pitch events, I’ve experienced my fair share of the highs and lows that come with it all. In fact, in an earlier pitch at the famed NY Tech Meetup, I was even booed off stage!

This is not universally true as I, myself, know many passionate founders that care only about the strength and prosperity of their business. But it seems that many founders are in it just to be a part of the culture. Their goals seem to be to hit some arbitrary milestone to achieve the next “level” in the startup game instead of focusing on increasing revenue and / or decreasing cost.

Seeking Funding, not Profit

That first level that these startups generally aim for is funding. There’s classes, blogs, websites, and even college courses dedicated to “startup funding”. Research analysts study the cycles of funding, give opinions and write all sorts of fancy reports.

Startup Financing Cycle

This latest breed of founders — again, not all of them — seem to focus on the metrics necessary to obtain Seed Funding or a Series A round. We all know of startup people that keep that as their goal, instead of viewing funding as a step towards their goal. So, you venture capitalists, with your ever increasing investments, have changed the objective for many would-be innovators.

Venture Capital Returns

Yes, it’s true, we are not near the all-time highs of the late 90′s and early 2000′s, but we’re still an order of magnitude above the past 20 years. I don’t blame you — you’re just looking to make a healthy return, which… well… it looks like you’re not doing =(. But that’s a story for another day. You’ve made it so appealing and appetizing for startups to court you. You’ve become very vocal and opinionated. Instead of sitting in the background funneling money to awesome startups, you drop $40 million into Color Labs. I don’t mean to make enemies with you folks — who knows, I may need funding myself — but another photo sharing app that does [whatever] is not particularly innovative.

Me Too Ideas

In February of 2011, Instagram was valued at a whopping $25 million. That’s pretty impressive for an app that has no revenue model, and just under 6 months of existence under it’s belt. But you VC’s threw money at it. Lots of it. It had a rockstar team, and after all, you bet on the jockey, not the horse, right? The idea was so deceivingly simple that scores of founding teams decided that they could do it as well or better. It’s just a square image with a bunch of fancy — but not intrinsically complex — filters.

A promising startup named “Viddy” launched in April of 2011 and less than a year later in February of 2012, was already raising money, tons of it. By the time Instagram was acquired by Facebook for a cool billion dollars, Viddy went on to raise even more money at an insane $370 million valuation as of April 2012! What did Viddy do that was worth more than a third of a billion dollars? Videos with filters! That’s it folks, they just copied Instagram, threw some video in there and bam — raised more than $30 million. Chasing capital can lead to less than stellar ideas. Instagram had something going for it that none of it’s competitors did — ridiculously excellent execution. Copying that is not easy, as Viddy and the merry band of “me too” companies have shown, with an acquisition of $15 million, less than the VC’s had originally invested.

Incubation or Extermination?

Paul Graham’s wildly successful Y-Combinator led the way. Many companies chosen for the YC program have had incredible successes, with roughly 14% having successful exits. However, the overall return is largely skewed since venture capital lives in extremistan and 2 successes — AirBnb and Dropbox — account for a disproportionately large percent of the portfolio’s value.

There are “food tech” incubators, startup incubators, ed tech incubators, university-led incubators and the list goes on. They have fancy names and unique business models. Some are coworking spaces, others take equity in your company in exchange for a small “living wage” for a few months. Others are “accelerators”. They’re in New York, San Francisco and just about every place in between. When one opens up in a smaller town, not known for it’s startup culture, it makes news.

Joining an incubator has become a rite of passage and founders tout it as a badge of pride. They’ve been redeemed and validated! But is it necessary? No. Definitely not. The greatest startups that we know of today never had incubation. David Rose, the legendary angel investor said it best:

there are a few thousand startups each year that receive funding from venture capital firms, and more than 60,000 that receive funding from angel investors, so participation in an accelerator is certainly no requirement for funding.

It can have other downsides as well. Being in a comfortable environment can stifle that creative urge and isolation needed for success. Intense focus helps build intense products. Maybe being secluded isn’t all bad?

Everyone’s a Coder

I’m all for people learning new skills. I think that coding is a critical skill to have. I also don’t believe that it can be learned to a professional level within 3 months. I agree with Chris Coulten, in his article titled “No three-month course can teach you how to code”:

Since getting funding seems to be the goal for so many startups, they try hard to teach themselves to code. It’s admirable. I even wrote an article outlining how best to teach web development to n00bs. But learning to code should be decoupled from raising funds. If you want to learn to code, do it because you enjoy challenges, want a solid career, want to build an incredible tool or product. Not so that you can build the next “me too” product to get accepted to some incubator so that you can work towards getting 40,000 people on your beta list to attract a solid Seed Round.


There’s something to be said about struggling. Not having any cash and having to work hard to make your main source of cash your customers can really help propel a business forward. When playing with other people’s money (you fantastic VC’s), the incentive is reduced to care as much. So, yes, in many cases VC’s help grow a business and bring it to the next level. But these business tend to have “founder’s love” with them. Those founders see the infusion of money as a tool to get to the next level, not the next level itself.

3 thoughts

  1. Hi, I liked your view on this incredible trend of the tech culture :P.
    It’s good to know that there are critics for every trend out there,
    because you made me just a bit wiser right now.
    Thanks!

  2. Another comment:
    In your analysis of various companies (Viddy for example), you don’t take into account how the size of their user base affected their valuation.
    A crappy product with lots of users is definitely successful (see SnapChat).

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