‘Venture capital is killing more value than it creates.’
A conversation with Catherine Bracy, author of ‘World Eaters: How Venture Capital Is Cannibalizing the Economy’
Catherine Bracy is a civic technologist and community organizer whose work focuses on the intersection of technology and political and economic inequality.1 She is the founder and CEO of TechEquity and the author of World Eaters: How Venture Capital Is Cannibalizing the Economy, which will be published on Tuesday, March 4.2
This conversation has been condensed significantly and edited for clarity and accuracy. To listen to our full 50-minute conversation, head here, or search for “Reframe Your Inbox” wherever you get your podcasts.
ADAM: A lot of people have heard of venture capital. We associate venture capitalists with the tech bros and big tech. But what is venture capital, and how does this economic system work?
CATHERINE: It’s short for “adventure capital,” which I think says a bit about what it is. It came about in its current form in the middle of the 20th century. There was a recognition by the elites in finance and government that there wasn’t enough capital ready and willing to take risks on startups or technological breakthroughs that didn’t have a track record yet, and that this was holding the economy back.
There were all these technological developments that came out of World War II that could have commercial or market potential, but there wasn’t enough capital to put into them to see if that was true. The traditional financial players were not willing to take the risk that would be required to find out. They were usually very capital-intensive because this was hard technology.
This group of, at the time, very marginalized, avant-garde financiers who were almost hobbyists, decided that they would be willing to be the ones to start taking those risks. Some firms started appearing first in Boston, then later in Silicon Valley, that were pioneering that adventure capital approach to financing breakthrough technologies and risky innovations.
That’s what it has meant. It is supposed to be risk-tolerant capital that will fund startups that are bringing technological innovations to market. It has evolved in various ways.
Unlike bank financing, which would be a loan or debt where the bank gives you money and then you pay back that money with interest, [VCs] buy an equity stake in the company, so they own a piece of the company, and they do well when the company does well. The value of their stake goes up as the value of the company goes up. The thinking is that the investors and the people who are running the company have aligned incentives to build this thing in the best way possible.
Incentives are a theme in this book. One of the core arguments you make is that the incentives of venture capital crowd out pretty much any other type of capital investment and demand, as you call it, “hyper maximalist growth at breakneck pace.” Can you talk about how incentives are at play here?
I interviewed [venture capitalist and Open AI CEO] Sam Altman for the book. He said—I think he was quoting [the late business partner of Warren Buffett] Charlie Munger—If you show me the incentives, I will show you the outcome. There is definitely a sense in Silicon Valley that incentives are driving everything.
One thing that might be helpful to clarify is how we got from that 1950s adventure capital to where we are today. The way they structured the investments was to take a bunch of companies and spread money around. They’re basically hedging their bets, knowing that a lot of them are going to fail. But if there are some big breakthroughs, ultimately they’ll come out ahead because those few breakthroughs are making up for the companies that fail.
That structure of organizing their money is really important. They call that a portfolio. [An] organic outcome from investing in these types of companies is that at the end of the day, the distribution in these portfolios looks like a “power law” distribution, and not a normal distribution, [because of] these huge outliers.
Can you explain what a power law curve looks like and what that means?
Let’s say there [are] 20 companies that a venture capital fund has invested in. At the end of the day, when all the companies’ valuations have played out, you’re plotting them on [a graph].
There are going to be a couple of values that are high and to the right—they’re very outsized performers. There are going to be a lot of values that are much closer to the bottom of the [vertical] axis. So when you look at it, it looks like a hockey stick, as opposed to a normal distribution that looks like an anthill, where most of the values are sort of clumped around the average.
So a very small number of companies are delivering the overwhelming proportion of financial returns.
Traffic on the internet is also power law distributed: A very small number of sites drive a large percentage of the traffic. The population of the planet is mostly in these small number of cities. You see this kind of distribution in a lot of other natural phenomena.
It is a natural outgrowth of investing in risky technologies that the distribution in your fund is much more likely to look like a power law than a normal distribution. But what has happened over time is that investors started looking at these distributions of the earliest funds and saying, My goal is to reproduce that distribution, not, My goal is to find the next breakthrough technology.
That change of approach is what has broken everything, from my perspective. That shifts the incentives. They’re now chasing these outsized financial returns. The incentive is to hedge your bets [with] those companies that you’re putting into the portfolio. Nobody knows which ones are actually going to be that outsized performer.
So, [as] one of the VCs I interviewed for the book said, they underwrite every company in the portfolio to be that outsized returner. Which means they are pushing all of the companies that they invest in to fit that mold, without really knowing if those companies have the ability to fit that mold.
That causes a lot of harm. When you’re saying, We don’t know what your real potential is. Your real potential might be that you’re a $500 million company—that’s the market that’s available to you. That’s what your customers are asking you to be. That’s the value you’re creating for society. But we [VCs] don’t want a $500 million outcome. We want a $5 billion outcome. So we’re going to ask you to make all of these decisions along the way that put you more on track towards a $5 billion outcome.
A lot of tensions emerge. The founders are forced to make decisions that maximize profit at every decision point, [regardless of] whether it’s best for the customers or society or the company.
Not every company can be a billion-dollar company.
The vast majority of companies, yeah.
And the ones that don’t make it—in most cases, it’s not for lack of entrepreneurial skill. It’s that the market doesn’t exist.
By definition, [if] you’re looking for breakthrough technologies, there aren’t going to be that many of them every year. There’s way more money investing in venture capital than there are actually companies that naturally have the ability to be that big.
Not knowing which companies are going to be that [big] at the point at which venture capitalists are investing in them creates this casino mentality. They’re putting their chips down on this portfolio. Everyone knows that they’re most likely not going to be the winner, but FOMO, the idea that they might hit a jackpot, is driving a lot of the decision-making. It’s why we see bubbles in venture capital. It’s why we see what from the outside looks like really irrational behavior.
The worst consequence is that all of these bets they’re making aren’t worthless. There is actual value there [in these companies and ideas]—[but] they aren’t getting the care and feeding that they need in order to bring those valuable but smaller-financially-returning things into society and the world.
That’s where I think this structure is broken. Not that we don’t need venture capital, but that we need something else to fund the 99 percent of the companies that get started every year that are not going to be unicorns.
You have some heartbreaking stories in the book of companies—maybe they’re a $50 million company. But they get pushed into the $50 billion model that doesn’t work for them, and the company goes bust. This is not the classic “creative destruction” that is the engine of capitalism. This is taking what could have been a sustainable business model, which could have delivered a lot of value to humanity, and now it doesn’t exist. It’s not like it goes somewhere else. It just vanishes.
I think people could look at the cover of the book or the subtitle and think that this a screed, an anti-technology, anti-capitalist point of view. It’s really not. To your point, the central tragedy of the book is that venture capital, in my view, is killing more value than it creates.
I’m starting to develop some ideas of why smart capitalists are leaving that much money on the table. Because if everybody’s going after the one percent, couldn’t [an investor] make a lot of money going after the 99 percent of companies that aren’t getting this value tapped?
That’s a really interesting human psychology story about why those companies aren’t getting the attention they need. And I think the VC mindset or ideology is starting to become apparent in the way that it’s playing out in our politics right now.
I was thinking about venture capital while reading the book as a worldview. Literally, it’s an economic system—a way of making money and providing capital for companies. But it’s sort of like capitalism itself: It is a way of organizing an economy and a society, but it’s also a way of seeing the world.
Can you talk about how venture capital has gone from being a way to finance investments and an economic system, into a way that a very powerful and wealthy cohort of people see and understand the world—and also see and understand how human beings operate in it?
The way I put it in the book was that [venture capital] feels more like late-stage American capitalism’s id. It’s the most distilled, unleashed, unchecked version of that.
That’s partly what it is supposed to be. There’s this term called “alpha” in the finance world: the amount over the average market return that somebody is earning in their portfolio. This quest for alpha is what every institutional investor is looking for. The financial system sees venture capital as a very critical component of achieving alpha in a portfolio. So there’s this internalization in the VC world that that’s who they have to be. It is a bit more of a distillation of that capitalist identity.
But now the way I think about it—and this [came] into shape as the election played out—[is] that the development of Silicon Valley mapped the rise of the neoliberal economic order. And it feels more like it is the perfect instantiation of neoliberalism in a financial system than broadly American capitalism.
Then [venture capitalist and Trump advisor] Marc Andreessen helpfully said the quiet part out loud, pretty explicitly, when he went on the podcast circuit and started talking about what he would call “the deal.”3 The way he laid out the deal was, We—meaning venture capitalists, Silicon Valley—were going to make all these amazing new technologies to make the world a better place and create all this financial value and be really awesome and disrupt all these old staid institutions and bring the world into the 21st century and increase the standard of living. In exchange for that, you were going to call us heroes and basically leave us alone. And you broke the deal.
It’s very clear that he internalized neoliberalism in that way, as a deal that somebody—I don’t know who—made with him and his ilk, and now that deal is falling apart. That’s what they’re raging against at the moment.
It’s amazing how many chapters of human history can be attributed, at least in part, to wealthy, powerful men not feeling appreciated enough.
Exactly. I spent a lot of time thinking [how] I don’t get some of this behavior from a “rational economic actor” perspective. If money is what is driving you, then it wouldn’t make sense to make big tech the target. Like, what’s going on there?
And then it became clear: Actually, this doesn’t have anything to do with money. This is an [identity] thing. I don’t know if that’s less scary or more scary.
There seems to be a sense among VCs that not only are they benevolent, but they’re gifting us with their innovations and their disruptions, and it’s on us to be grateful. And if we’re not grateful, then of course they should throw in with Trump.
I mean, in fairness to them—I don’t know who Marc Andreessen thinks this deal was with, but society did give them the message that that was enough, and that being a good person in business was creating all this value [and] was a good thing. There was a moral goodness [to it]. That’s kind of the fundamental tenet of neoliberalism.
That they can’t deal with the fact that that era is dying is now everybody’s problem. Even more than the election of Trump, [there is] no bigger indicator that the end of neoliberalism is upon us than the fact that they are freaking out in the way that they are freaking out right now.
One more thing about the ideology of Silicon Valley is that it is also this hyper-masculine worldview, which is another reason why I think they align so much with Trump and why that is such a seductive political system for them.
The term “alpha” is [not just] this financial extra. [I asked] one of the entrepreneurs I talked to, why would they leave money on the table? Why would they not see this financial opportunity to create portfolios of companies that are doing a little bit less, still creating value, [but] hitting doubles and triples, not grand slams?
[What] he said to me—this is probably, like, top one or two things that will stick with me from researching and writing the book—was, They see that as too beta. Venture capital is an alpha male industry.
That rings so true to me now in the world we live in. I had that conversation maybe a year or 18 months ago. Seeing how all of this is playing out in the rise of Trump 2.0—yeah, this is about alpha male dominant energy, and that aligns with who they think they are.
One way in which that manifests is what you describe as their “dripping disdain” for what they call “lifestyle companies” or “lifestyle businesses.” Can you talk about what lifestyle businesses are, and why the alpha VCs think those are so beta?
It’s a term that is common in Silicon Valley and [the] startup space. A lifestyle business is one of those companies that is smaller and not trying to do the venture scale thing. [It is] a business that works perfectly fine and makes money and is growing, but doesn’t necessarily need huge amounts of VC getting funneled into it in order to scale to the gargantuan size and take over markets and become monopolies. That’s not the intention of these businesses.
“Lifestyle business” is a pejorative to refer to companies that allow the people that work for them to live a decent lifestyle because they don’t have to work 90 hours a week and eat only ramen noodles or never see their family or sleep in the garage. This dripping disdain [is], Why would you only want to do that kind of business when you could be trying to be the next Uber? It’s seen as, You’re not trying hard enough, you’re not man enough.
I think it reveals a deep self-consciousness among VCs because when a company is a lifestyle business, it means that they don’t need to rely on venture capitalists for their survival. They found a way to be profitable on their own. They’re generating revenue that they feed back into the company, and that’s how they develop and grow. They don’t need your money.
It’s a threat to the VC ecosystem. When a company that a VC is invested in at the seed stage or very early on decides, Yeah, I don’t want to be this super-big scale-up. I found a niche, it’s growing, there’s something here, and this is the market I want to meet—that ruins the valuation of that company for the VC. And so they do everything they can to discourage that mindset from taking hold. It reflects deep down [an] understanding that lifestyle businesses are a threat to the venture capital business model.
That gets at a point you make about the impact of venture capital on labor, on workers’ rights, on the relationship between companies and their employees. Efforts to classify gig workers as employees are not just a threat to company profits—which is how I’d always seen it—but a threat to the identity of this ecosystem.
A lot of people have probably heard about Proposition 22 in California and the hundreds of millions of dollars that tech companies poured into this ballot measure to make sure that they did not have to classify the people who worked for them as employees. Can you give a bit of context? Then we’ll get into why you argue this effort was so threatening.
[In 2019] the California legislature passed a very controversial bill, which basically encoded into law a [state] Supreme Court decision that made the classification structure about who was an employee and who was a contractor much clearer. [It] also [put] a bunch of people that were working in the gig economy into that bucket of “employee.”
This law passes. Uber and Lyft and the gig economy industry saw this as a real threat to their business model and went nuclear. The companies [put] forward a ballot initiative that would carve them out of this new legal structure so that they could continue to classify their drivers as contractors, not full-time employees.
They spent $200 million, which was the most expensive ballot measure in California history. It clearly was seen as an existential threat. And the common understanding in the labor community and in the way the tech media was talking about it was that the reason this was such a threat was because it would cost them more money to employ these workers rather than keep them as contractors.
While that is true, I don’t think that’s the full explanation for why it was seen as such a big threat to the companies. It wasn’t just that they would have had to reclassify these employees. By reclassifying them as employees, it [would have] changed the entire identity of what these companies were.
[They] had described them and pitched them to investors and staked their values on the fact that they were not taxi companies, not delivery companies, not transportation companies—they were platforms. Software platforms that connected drivers, who are independent business people, with their customers. And that’s all they did.
That’s important because if a company is a taxi company or a transportation company, they are much less valuable. Their market opportunity is much smaller than if they are a platform on which all these people can do business and connect with each other.
You cite a book that Reid Hoffman, a big VC and founder of LinkedIn, co-wrote called Blitzscaling, which, you note, was named after a Nazi war tactic.
He probably regrets that, I would imagine.
Hoffman is also a huge Democratic donor, which I think is worth keeping in mind given how much we’re associating the VC mentality and VC power with Trumpworld right now.4 In Blitzscaling, they describe employees as “growth limiters,” which I found incredibly telling to what you’re saying about how classifying workers as employees goes to the heart, in an existential way, of what these companies are.
In the New Deal era we thought of workers as assets for a company. A valuable input to the production cycle and a critical resource. I think it is an example of the neoliberal view of the world that [employees] are just a necessary evil we need to have around to keep the lights on. What is the bare minimum to make this company work? How do we keep it as light as possible?
The way that the term “growth limiter” is used in Blitzscaling is, Of course everybody would agree with this. It’s not a controversial statement. It’s not even said with disdain in the way that it’s written. It’s just like, Obviously, from a business perspective, your workers are limiting your ability to grow because you have to pay them and there’s all these laws that you have to follow. To your point, this being a Democratic donor is also very telling. This is a non-controversial thing in Silicon Valley, that workers are seen in this way.
We see this exact same pattern playing out in the way that AI is going to be employed. That “growth limiter” mindset is front of mind for these companies in the way that they think not just about how they’re going to automate other industries and make it easier for other industries to operate with fewer workers, but how they think about their own workforce. It’s no coincidence that the first jobs that are getting automated away are coding jobs.
You note in the book that the threat from this VC mindset is not just a tech thing. You use the analogy of Ronald Reagan breaking the air traffic controllers’ union: Yes, that was a huge attack on labor, but what was more consequential in some ways was that it set a precedent for doing this in industry after industry.
I found that part of the book very ominous. Labor protections have been attacked relentlessly for decades, but the expectation that an organization provides for its workers has mostly held since the New Deal. But there is now a model for how to separate a company from its workforce. There’s precedent for it that can be applied to industry after industry.
They’re moving the Overton window, changing the conception of what is possible. I don’t know if you’re a Game of Thrones fan?
I’m one of those who hasn’t even dabbled. Your judgment is fair.
I’m actually jealous of you. I have watched the entire series of Game of Thrones at least three times.
Hopefully I find an audience for this analogy, because I’m very excited about it. There’s a scene at the end where they’re having the climactic war against the White Walkers, the zombie army. Fire kills the zombies, and so one of their defenses is that they create this moat around the fort where they’re having their last stand. They light it with fire so the army can’t cross.
Then the army realizes that they could sacrifice a few of their zombies in the fire to build a body bridge across this moat. You can see the zombies, in the moment, realizing what’s happening, and the dawning on both sides of what this actually means.
I kept coming back to that visual as I was writing. This is a moment [where] tech is putting those bodies down in the moat of fire so that the rest of industry can walk across.
Is it a good thing to be compared to who tech is being compared to in this analogy?
No!
It makes me think of a book that I have behind me [on my bookshelf], like a lot of tech bros—The Power Broker by Robert Caro, which was about Robert Moses, who built many of the bridges and parks and roads that make New York City what we know it as today. The book was a giant warning about the abuse of power. It was a warning. And, of course, it became popular in Silicon Valley as, like, a how-to manual.
Exactly. That doesn’t shock me.
Is there more that you wanted to say about the threats to labor—not just organized labor, but to workers, to human beings, from the precedent that the tech industry has been setting?
This is one of the reasons why I called the book World Eaters. It comes from a Marc Andreessen essay from 2011 that is very famous in Silicon Valley. He says, “Software is eating the world.”5 What he meant by that was, Silicon Valley isn’t just a software industry. It’s an everything industry.
That’s what I think is happening in the labor market as well. What happens in tech doesn’t stay in tech. They’re applying this playbook that was built for software businesses into a variety of other spaces, some of which are really not right for a software approach to building.
The title of the book, World Eaters, is really about how this mentality is taking over the economy and being so influential in the way that the economy develops, not just for tech businesses but for all businesses.
A lot of us think about the problems with big tech being the tech companies themselves. You argue that the root of the problem is not necessarily the companies, but the economic system that is driving them. You write, “It was the economic forces that were conjured and unleashed by investors, not engineers, that drove Silicon Valley’s incursion into every corner of the economy.”
When we think of tech, we think we think of the engineers, the founders, the companies, the brands. But your point here is that it is at least as much the investors, the VCs, the people driving those companies to do what they do. Am I saying that right?
The only quibble I would have is with “at least as much.” It is unequivocally about the money and not the technology.
What I tried to do in the book was look at examples of the exact same technology entering the exact same market, and the difference in the outcomes of those two approaches being the [type of] capital that was wrapped around the technology. Those technologies behaved so differently and had such different outcomes for people in the world based on not anything fundamental to the technology itself, but the money.
As someone who came up in the world where the internet was still open and free and the idea of the internet was “it can’t be controlled by corporations,” the tragedy [is] the way in which the internet has been co-opted and all of the technologies being built on top of it are having exploitative outcomes, not lowering barriers to entry and creating broad-based economic opportunity.
That’s a tragedy of how internet-based technology has evolved over the last 40 years. And I think a central aspect of that development is not anything intrinsic to the technology. It is about the money that came in to influence the growth of the industry.
One of the hopeful points you make is that venture capital is not the only way to finance innovation and technology. There are lots of other ways to finance exciting and genuinely disruptive companies and organizations, and there are lots of people who are trying to do that.
The ultimate project of this book is to create the space for those people to feel like they are empowered. The vast majority of startups are not venture scale, and the vast majority of venture capitalists are not operating in the way that Marc Andreessen is operating.
If we can create the conditions where they have the permission to do something differently—maybe move the Overton window and make it okay to be a “beta” operator and not an “alpha” operator—that would be the best outcome. Not just for the book and what I’m trying to do here, but for all the problems we need to solve that need innovation, like housing and climate and these things that need our best and brightest minds.
Right now that’s not happening. They’re all doing crypto or some speculative AI company, and a lot of the good stuff that we really need is not getting brought to market.
I’m going to watch Game of Thrones.
Actually, it’s very helpful for this moment. I lean on lessons from Game of Thrones a lot—like, it can get worse, but it can also get better. And we will persevere.
📚 Catherine’s book recommendations:
Hope in the Dark: Untold Histories, Wild Possibilities, by Rebecca Solnit
The Rise and Fall of the Neoliberal Order: America and the World in the Free Market Era, by Gary Gerstle
The Gift: How the Creative Spirit Transforms the World, by Lewis Hyde
The Guarantee: Inside the Fight for America’s Next Economy, by Natalie Foster6
Recoding America: Why Government Is Failing in the Digital Age and How We Can Do Better, by Jennifer Pahlka
Automating Inequality: How High-Tech Tools Profile, Police, and Punish the Poor, by Virginia Eubanks
https://techequity.us/people/catherine-bracy. Thank you to previous “Reframe Your Inbox” guest Natalie Foster for connecting me with Catherine.
https://www.penguinrandomhouse.com/books/723091/world-eaters-by-catherine-bracy
https://www.theverge.com/2024/7/24/24204706/marc-andreessen-ben-horowitz-a16z-trump-donations
https://www.cnn.com/2024/07/26/business/reid-hoffman-kamala-harris-ftc-khan/index.html; https://prospect.org/politics/2024-08-04-harris-campaign-officials-event-reid-hoffman
https://www.wsj.com/articles/SB10001424053111903480904576512250915629460
https://adaml.substack.com/p/sunday-conversation-natalie-foster