Is Venture Capital Harming Entrepreneurship More Than Helping?
11 days ago
7 min read

Is Venture Capital Harming Entrepreneurship More Than Helping?

Handing an entrepreneur millions of dollars surely helps their business, right?

Well, when over 80% of those venture-backed startups fail, we have to wonder if all that funding is doing more harm than good.

Let's question some assumptions, think critically, and in the end, hopefully have a deeper understanding of VC's impact.

First, why do startups chase VC at all? Isn't bootstrapping better?

The Allure of Venture Capital

Startups choose VC funding because it turbocharges growth. An influx of millions empowers bold strategies like:

Essentially, VC funding lets startups do in 2 years what might take 10+ years of incremental bootstrapping.

While bootstrapping provides independence and resilience, VC-backing signifies your business has "made it" to the big leagues. As Nasdaq put it:

In addition to the injection of capital, startups see VC backing as a stamp of approval.

This validation, network access, and rapid growth is why many founders hunger for VC over bootstrapping.

But VC money has strings attached. And it shifts risk heavily to the entrepreneur.

VC Funding Distorts Startup Priorities

Investors want a large exit (IPO or acquisition) within 5-10 years. Your priorities shift from sustainably building an evergreen business to chasing aggressive, often risky growth.

As Paul Graham of Y Combinator wrote:

Venture funders are driven by hitting a home run, not base hits...Customers will put up with you if you’re awkward but honest. VC-fueled marketing hacks usually feel dishonest...and worrying about them saps your morale.

VC forces you into a narrow, high-stakes game. But playing with so much investor money stacks the odds against you.

Quit or Get Rich Trying

Imagine your startup raises $10 million. That money must be 5-10x for your VC to hit Return targets. If you wanted $50 million in pure profit from a SaaS startup, it would likely take 30+ years of grind.

But VCs need a liquidity event within years. So they push management towards huge risk and endless scaling costs to shoot for $250+ million valuations.

Rather than build sustainably over decades, VC necessitates you play high-risk poker with your startup's life.

This poker usually busts. Let’s discuss why failure rates are so high.

Why 8/10 VC-Backed Startups Fail

Taking VC money allows you to expand fast. But growing too fast dramatically increases risk across domains like:

  • Team cohesion/culture.

  • Service quality.

  • Technical debt.

And while some founders optimize to appear successful and raise more funding, their metrics mask shaky fundamentals like negative Unit Economics.

Ultimately over 80% of VC-backed startups fail. Reasons include:

  • Running out of cash and failing to raise more capital. VCs typically invest enough for ~18 months runway. But scaling costs often exceed expectations.

  • Failing to find Product Market Fit before money dries up. Features customers don’t want or need.

  • Losing to rivals that iterated smarter with less cash. Outspent into oblivion.

  • Imploding under the weight of unsustainable scale. Growth costs exceed revenue.

As Sam Altman of Y Combinator wrote:

The most common mistake I’ve seen is...companies try to grow really fast...before they achieve product-market fit. Ultimately, this is self-defeating.

For every unicorn success, dozens of look-alike startups overextend and collapse. Like red shirts in Star Trek, they’re simply VC rocket fuel.

Okay, VC is risky. But doesn’t VC yield the greatest businesses ever created?

Questionable Value Generation

VCs sell founders on FOMO—you don’t want to miss creating the “next Google.” But how much value do these VC-backed juggernauts truly create?

While Big Tech is unfathomably huge, you could argue earlier success came mostly from improving infrastructure, not end-user value. Arguably, follow-on value diminished over time.

House Wins with Bigger Bets

As Tren Griffin wrote, when VC entered consumer tech:

”The house (VCs/founders) did not win because they created products that provided overwhelmingly more value to people compared to what already existed. The house won because as the bets available to make became larger, making bets became progressively more important [to VCs] than outcomes for end users.”

In this view, loss-leader plays for platform power and scale outweigh product innovation benefiting end users. Things feel circular—not additive.

For example, Netflix employs thousands of brilliant engineers. But if Netflix vanished tomorrow, would society meaningfully regress? It feels unlikely. Our best engineers optimize ad clicks over curing cancer. Because that’s where outsized VC payouts lie.

Big Corporate Environments Quash Innovation

Even for uniformly beloved tech companies, the perpetual scale may harm innovation over time.

Basecamp Founder Jason Fried suggests after startups reach ~150 employees, innovation and invention risk declines in ultra-large corporate environments. Process trumps invention. And middle management prefers "looking productive" over building radically helpful tools.

VC necessitates gigantic tech corporations. But are they still moving fast and breaking things 10+ years post-IPO? The graveyards of early innovation at Big Tech firms suggest otherwise.

Okay, VC fuels risky scale and questionable value generation. But isn’t VC essential for breakthrough innovation like SpaceX?

VC Follows More Than Leads

SpaceX has exceeded rocket technology progress over the past few decades combined. Surely it demonstrates the irreplaceable value of VC funding our most ambitious ideas?

Perhaps. But note SpaceX didn’t lead its industry with VCs. Elon Musk largely self-funded SpaceX until it built history's first privately developed liquid-fueled rocket to reach orbit on a ~$100M budget. Only then did SpaceX raise $1 billion+.

VCs followed Musk's early vision and progress rather than taking early risks to enable it.

Revolutionary Progress Often Preceeds VC

This pattern repeats across history. For example, personal computing pioneers like Steve Wozniak and Steve Jobs built early Apple computers while surviving on leftover food from Hare Krishna temples. VC arrived years into their crazy endeavor only after signs of massive progress.

Visionaries make revolutions on starvation budgets. VCs then pile onto winners late.

Risk-taking capital enables scaling innovations like SpaceX, Tesla, and Apple. But arguably the spark behind such world-changing companies often precedes VC, rather than light because of it.

VC follows more than leads.

Okay, VC has downsides. Still...don't VC-fueled startups create tons of jobs?

Do VC-Backed Startups Increase Unemployment?

Firms like Google and Facebook add lots of employees. So VC must meaningfully boost job growth overall, right?

However, we need to ask if these jobs represent net economy gains rather than shifts. When billions shift purchasing away from small businesses to ad-driven big tech mega platforms, jobs may relocate more than increase overall.

VC ultimately seeks to fund business models with near zero marginal labor costs for the highest equity returns. On-demand home cleaning startups like Handy once hired all cleaners as W2 employees. But under VC pressure for a faster scale, they shifted to classifying cleaners as contractors without benefits.

Network Effects Drive Winner Takes Most

Due to VC scale acceleration, each platform winner can take most of a sector, stifling job growth elsewhere. Does Netflix expand total at-home entertainment spend—or shift wallet share from Blockbuster video clerks towards streaming engineers?

VC fuels business models thirsty for endless runaway growth in a few vertical category winners. Rather than sustain jobs widely, jobs concentrate in a shrinking group of tech mega-corps. And unemployed 40-somethings lack software engineering skills to participate.

Rather than add jobs, the unprecedented scale and winner-take-most nature of VC-fueled business models likely harm net employment.

Yikes. Still...doesn’t VC fund the cutting edge innovation improving life everywhere?

Improve All Lives or Enrich Technocratic Elites?

Peter Thiel noted how little innovation helps ordinary people:

"We wanted flying cars, instead we got 140 characters."

Rather than sci-fi wonders, VC-backed innovation often optimizes at growth, ads, and Wall Street influence rather than broadly enriching lives.

Crazy New Technology...Benefiting Whom?

How much better is normal life thanks to Uber? They used brilliance trying to socially hack employment law rather than develop tech benefiting humanity. Does billionaire Jeff Bezos getting drone delivery truly claim equal status in improving lives as medical advances?

Much emerging technology tries to answer the needs technocratic elites uniquely face rather than society broadly. For example, self-driving car engineers fix the frustrations of commuting from Silicon Valley to San Francisco rather than malnutrition in Appalachia.

Maybe VC Should Serve More Than the 1%

Venture capital historically focused on California's wealth; Boston's education elite; and New York finance wizards rather than everyday lives across America's heartland.

Perhaps policy nudging could better align VC & startups towards sustainable innovation benefiting the many rather than simply enriching the technocratic few. Surprisingly little emerging technology feels designed with ordinary people and community needs in mind.

Wealth and skills concentrate narrowly despite broader technological progress. Have we failed to channel our innovative capacity more broadly? Perhaps VC priorities contribute here.

Wrapping Up

While VC has downsides, massive funding pools can empower society to advance breakthroughs. Though gains increasingly concentrate upwards, the overall pie expansion matters.

We must acknowledge VC pitfalls alongside their upside too. Through thoughtful debate of capitalism's excesses, my hope is we course correct towards sustainable abundance and equitable opportunity ahead.

  • As founders consider funding sources, perhaps more should default to bootstrap patience rather than rush at VC scale's peril. Slower and smaller often reaches farther.

  • As consumers, we might question philanthropic theater from companies like Amazon and instead favor local alternatives a bit more. Outsized greed anywhere harms community everywhere.

  • And as policy makers, perhaps we should better incentivize leveling the innovative capacity across education tiers rather than perfection at prestige institutions. Bring access to the many rather than further privilege the few.

Better aligning VC to responsible innovation could prevent capitalism overreach from hijacking so much gain upwards.

The race ahead likely goes not to the biggest or fastest, but rather those building thoughtfully, sustainably, and for broad rather than narrow benefit above quick buck and exit.