Is venture capital hurting the tech industry?

Maybe.

So many of the ethical lapses in the tech industry (think Facebook or Uber) seem to be driven, in part, by the need to grow as rapidly as possible. From where does that need come? At least part of it comes from the venture capitalists (VCs) who provide the early funding for those companies.

VC firms work by throwing a little money at a lot of companies, and throwing more money at the companies that are doing well, in the hopes that they go public or get acquired. Then the VC firms get big ol’ paydays. The nature of business is that most companies fail, so in order to keep going, the VC firms need the successes to be really big successes. Grow as fast as you can, profit and ethics be damned, until someone buys you for oodles of money.

To make themselves attractive to venture capital firms, fledgling companies will sometimes go for the flashy new technology. They’ll think about how they can disrupt industries with blockchain-based crypto-cloud-crowd-AI-machine-learning whatever-whatever-whatever. Everything has to scale exponentially. Throw in all sorts of sensors and have the device do local inference. Even if all they need is to put a stick-shaker on a steering wheel.

But this growth comes at a cost. Scaling a company culture is hard. Scaling it as fast as you can spin up a new AWS region is impossible. Free-flowing capital allows companies to build out quickly, but quickly isn’t always the same as well. Having restricted capital available is a constraint that can help a company make focused and deliberate decisions.

I’ve been thinking about this a lot recently. Not just because of my experience at a local pitch night, but because it’s just past the two year anniversary of Microsoft acquiring Cycle Computing. Jason and Rachel Stowe founded Cycle Computing in 2005 on their credit card. Apart from a debt round in 2016 (if I remember correctly), the company existed for 12 years on revenue.

It wasn’t always easy. There were times when I took a far-too-early flight because it would save the company fifty dollars. We had to be careful with our expenses and we couldn’t hire as fast as we wanted. But when we did spend money, it was because we thought it was the best thing for the company’s success, not just because it was there to spend. But that also meant that when the big payday came, the employees got a nice windfall — there were no VCs to pay off first.

Companies, particularly software and consulting companies that don’t need much equipment, can succeed in low-capital mode unlike anything we’ve known in the past. You don’t need office space because your employees can work remotely. You don’t need data centers because you can run on cloud services. Pay your employees and give them laptops, and then you’re off to the races. Capital infusion can help, but often it can make it worse. If you’re in business to run a successful business (as opposed to making big money), then maybe venture capital is not the answer for you.

As an industry — and a species — we’ve grown to love big, flashy numbers. But it’s important not to mistake valuation for value.

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