How ‘Sand Hill Rd VCs’ Are Contributing To A New Type Of Economic Risk


In the process of writing and researching these topics, I kept stumbling on the same question: why does every successful online platform look the same? Putting aside the good or service they provide (rides on Uber or room bookings on Oyo), it seems like the majority of these companies have built business model replicas in different verticals, and across different geographies. Some would argue that these companies are simply putting in practice a proven model that benefits consumers, but others are now starting to ask whether this is fuelled by outside interests.

Last week I read a great piece in the New York Times that captures what I’ve been trying to put into words. The SoftBank Effect: How $100 Billion Left Workers in a Hole

The authors tell a great story that is too often ignored. The online platforms we use every day are built on unsustainable economic models that eventually pit these companies against their stakeholders, for the long term benefit of their shareholders.

The piece in the New York Times highlights a few examples of how SoftBank has seemingly been complicit in tactics that have fuelled artificial growth in some of its portfolio companies to inflate valuations, ultimately leading to a massive misalignment between these platforms and their stakeholders who are trying to earn a living on their respective markets.

Although not a symptom of the same problem of overcapitalization, even organically growing and profitable platforms are starting to fall into the same short-term thinking that will see them become the antagonists in the markets they’ve created, all for the sake of “growth”. Take the recent news of Shopify Email launching – a directly competing product to MailChimp – only 6 months after MailChimp was pushed out of the Shopify marketplace.

Although the New York Times article singles out SoftBank, this is a deeper-rooted issue that is seen in many of the world’s leading tech investors.

This was well summarized in Chamath Palihapitiya’s 2018 letter to investors at Social Capital.

Over the past decade, a subtle and sophisticated game has emerged between VCs, LPs, founders, and employees. Someone has to pay for the outrageous costs of the growth described above. Will it be VCs? Likely not. They get paid to allocate other people’s (LPs) money, and they are smart enough to transfer the risk. For example, VCs habitually invest in one another’s companies during later rounds, bidding up rounds to valuations that allow for generous markups on their funds’ performance. These markups, and the paper returns that they suggest, allow VCs to raise subsequent, larger funds, and to enjoy the management fees that those funds generate.Chamath Palihapitiya

Of course, over a short enough period, these tactics lead to exactly the types of growth metrics investors in both private and public markets are looking for. That said, throughout a company’s life, this house of cards eventually starts to wobble.

Does this end in a foregone conclusion?

As in any market, competition leads to better outcomes for consumers. The unique challenge in Silicon Valley is that companies are creating brand new markets all the time, and as such are effectively monopolizing their economics. It’s not difficult then to imagine the motivation of a company to protect and grow such a monopoly.

Unfortunately, this behavior leads to the very real (although mostly hidden) risk that consumers and creators alike will eventually flee towards the markets that give them more choice – markets that are more open and encouraging of competition.

Where do you think the future e-commerce merchant will house its business? Where will the future gig-economy worker make its living? Where will advertisers choose to connect with consumers? Where will app developers build their new features?

As creators and consumers, we need to demand more from these companies building our future. We deserve markets that lead to better outcomes for everyone.

VCs need a new model that aligns them to healthy outcomes for the markets they’re investing in, rather than the short term metrics of the companies in their portfolios.

Although not the way that most people think of blockchain protocols, this industry has created a mechanism for economic alignment to an open market, rather than to a closed platform. Investing in the right protocol’s asset – be it Ether, Aion, DOTS, or others – effectively aligns investors to successful outcomes for all stakeholders operating in the markets built on top of that protocol.

Some investors have started shifting their behaviors with significant investments in blockchain protocols, but we still have a long way to go before the problems facing these platform economies are addressed by this new market.

VCs hold an important responsibility in this transition, seeing as they often lead new markets in thought leadership and consumer behaviors. We should demand more from this highly influential group effectively deciding what our future will look like.


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