How Venture Capital is Saving Capitalism from Destroying Itself
A rational response to the New Yorker’s irrational piece titled: How Venture Capitalists Are Deforming Capitalism
By Stephan Dolezalek
Charles Duhigg’s November 23rd criticism of Venture Capital, WeWork, Benchmark Capital and Softbank makes for great reading (How Venture Capitalists are Deforming Capitalism), but misses the mark as to what is wrong with capitalism. His piece correctly points out the charismatic requirements of a CEO like Adam Neumann, the scale at which funds like Benchmark, Softbank and other VC’s are throwing money at young companies, and the cutthroat nature of the competition between those companies and more conventional startups that attempt to grow rationally and with an appropriate level of capitalization and board oversight. But it misses two hypercritical points — that this behavior is rewarded because it succeeds and that much of this behavior is necessary to succeed.
How do CEO’s like Adam Neuman, Elon Musk, Travis Kalanick, and Mark Zuckerberg succeed in building transformative companies when they behave in such countercultural ways? Are they nothing more than today’s version of Jeff Bezos, Bill Gates, Steve Jobs or Michael Dell? But the latter group of founders seem downright boring compared to today’s crowd. Both sets brought to their businesses a singular vision of the future, a relentless focus on winning, a willingness to disregard the status quo, and some degree of willingness to break rules (or certainly norms) to succeed. Statistics indicate these levels of focus, obsession, disruption do create real and oversized returns for their investors — somewhat legitimizing the behavior of the venture firms backing them — and those are required to bring about the process of creative destruction that keeps capitalism alive. But the current crowd goes so much further in breaking norms and bending rules. Before dismissing their behavior and the cult-like attractions as irrational, consider the behavior of the current occupant of the White House — was his behavior all that different or any less successful (until it wasn’t)?
Why have the largest venture funds gotten so much larger and increasingly are emulating the behavior of Softbank? They have and they do because that is what it takes to succeed in today’s short-term focused, sound-bite, media-centric, and larger-than-life-persona centric, capitalist world. Having the capital to grow rapidly, make mistakes and recover, bridge periods of intense competition and high risk where those with less capital stumble or are held back for perfectly rational reasons is not only a way to reduce one of the biggest risks young companies face in a world with hundreds of copycat competitors — capital formation — it represents a very significant competitive advantage in a world where big money can drive big success.
In fact, without this combination of half-crazed, highly charismatic, visionary and endlessly ambitious and focused founders, and very large amounts of venture capital willing to let them make astounding gaffes as long as they are on their way toward a world-changing levels of success, we might not have many of the technologies that have changed our world for the better.
That is where the New Yorker story gets it wrong. Rather than focus on why this is what it takes to succeed, the article focuses on all that is wrong with this behavior — suggesting this behavior threatens capitalism — when all it really does is reflect the current state of capitalism. In that world, as irrational and undesirable as this behavior seems, is actually saving capitalism from itself.
What I mean by that is that this combination of money and behavior is what it takes to break through large corporate incumbency and to drive change for good. As much as we find Adam Neumann’s personal behavior distasteful and inappropriate for a corporate CEO, there is no question that WeWork has upended how we think of office rentals and, despite the challenges of a Covid-threatened business real estate world, the WeWork business model is much more likely to be how our offices are configured in a post-Covid world than what the big conventional real estate firms have offered us.
Very much the same can be said of Travis Kalanick’s behavior, but there is no doubt that Uber has dramatically changed how we get around in urban environments. Without an Elon Musk, does anyone think we would be where we are now headed in terms of electric vehicles (or for that matter space travel)? Without Zuckerberg, would Facebook have so entire changed not just how we communicate, but news, media and advertising more generally?
We have created and reinforced a capitalist world in which this behavior and this amount of capital is the only way to break through the entrenchment of the existing corporate giants who control various industries. Just how certain are we that what Uber and Lyft have done on their way to success is any worse than what a deeply entrenched Taxi industry has done to individual taxi drivers or the quality of service that industry served us as consumers? If we plan on doing something about climate change, do we really think that we would see the big car companies current conversion toward electric without Elon Musk’s charismatic and perhaps reckless enthusiasm and the amount of money he was able to draw in to allow Tesla to become the game changer it has?
Our current rules on antitrust, on corporate advertising, on corporate money in politics, on corporate lobbying, etc. have all tipped so far in favor of big entrenched interests that the very behavior the New Yorker article decries, is the only behavior that can break through the current levels of corporate entrenchment. This level of creativity, focus, charisma, hutzpah, and capital is required to achieve change for the better.
But, and there is a huge but, when this is the behavior it takes to succeed, it also makes the new entrants as dangerous as the incumbents they unseat with respect to their actually delivering all of the benefits we were hoping capitalism would bestow on us. As much as we benefit from Google, Facebook, Amazon, Uber and Tesla, we also have allowed each of them to get away with behavior that isn’t good for society as a whole. At the CEO level, the misdeeds of their CEO’s are relatively harmless in the larger scheme of things, certainly when compared to the damage their predecessors at big oil and coal companies, at the big car companies, at big utilities, at big food, big agriculture, and big pharmaceutical companies have presided over, all of whom are inflicting real damage on us, their consumers, in pursuit of staying at the top of their giant industries. By maintaining a system that protects and coddles these giants, we are allowing the newcomers to break through and drive change, but we are also allowing them to inflict lasting damage on society.
Many argue we need bigger government to keep tighter rein on these giant companies. That easily devolves to a liberal vs. conservative, republican vs. democrat, red state vs. blue argument that misses the point.
The reality is we need to reinstate a much stronger support of the process of creative destruction. If we don’t allow giant industries to entrench themselves and make their own rules, we will also see a greater ability of creative newcomers to change the status quo for the better; but without the rock star CEO and Softbank-sized checkbooks being a necessity. What we would get in such a world would also be a greater degree of diversity, a healthy competition between large, but not dominating businesses/industries. That same greater diversity would also help protect us from pandemics, be they of the biologic type or of the business, political and economic variety that we have increasingly seen in a world where we have allowed the big to get too big for their own good (“too-big-to-let-fail”).
So, do not blame charismatic CEOs or venture capitalists, blame the system that has created a situation under which they are the only way to break through and effect change. It is the same monolithic system that first Obama backers and then Trump backers longed for — make government smaller; unfortunately, they didn’t recognize that much of what was funding those same campaigns was big corporate money trying to keep itself entrenched. If you really want less government, then you first need to have less power in the hands of big business.
That is what venture capital was built to do. Unfortunately, we kept changing the rules so that succeeding as a VC today means being as big as the companies we once intended to disrupt.