More start-ups are vocally rejecting the ideals of venture capitalists

On a sunny Saturday morning in New York a few months ago, a group of 50 start-up founders gathered in the dank basement of a Lower East Side bar. They scribbled notes at long tables, sipping coffee and LaCroix while a stack of pizza boxes emanated the odor of hot garlic. One by one, they gave testimonials taking aim at something nearly sacred in the technology industry: venture capital.

Josh Haas, the co-founder of Bubble, a software-writing start-up, told the group that he and venture capitalists “were pretty much totally on different wavelengths” about the trajectory of his business.

Seph Skerritt, the founder of Proper Cloth, a clothing company, said that the hype around raising money was a trap. “They try to make you feel inferior if you’re not playing that game,” he said.

The event had been organised by Frank Denbow, 33, a fixture of New York’s tech scene and the founder of T-shirt start-up Inka.io, to bring together start-up founders who have begun to question the investment framework that has supercharged their field. By encouraging companies to expand too quickly, Denbow said, venture capital can make them “accelerate straight into the ground.”

The VC business model, on which much of the modern tech industry was built, is simple: Start-ups raise piles of money from investors, and then use the cash to grow aggressively — faster than the competition, faster than regulators, faster than most normal businesses would consider sane. Larger and larger rounds of funding follow.

The end goal is to sell or go public, producing astonishing returns for early investors. The setup has spawned household names like Facebook, Google and Uber.

But for every unicorn, there are countless other start-ups that grew too fast, burned through investors’ money and died — possibly unnecessarily. Social media is littered with tales of companies that withered under the pressure of hypergrowth, were crushed by so-called “toxic VCs” or were forced to raise too much venture capital — something known as the “foie gras effect”.

Now a counter movement, led by entrepreneurs who are jaded by the traditional playbook, is rejecting that model. While still a small part of the start-up community, these founders have become more vocal in the last year as they connect venture capitalists’ insatiable appetite for growth to the tech industry’s myriad crises.

Would Facebook’s leadership have ignored warning signs of Russian election meddling or allowed its platform to incite racial violence if it hadn’t, in its early days, prized moving fast and breaking things? Would Uber have engaged in dubious regulatory and legal strategies if it hadn’t prioritized expansion over all else? Would the tech industry be struggling with gender and race discrimination if the investors funding it were a little less homogeneous?

Some founders have decided the expectations that come with accepting venture capital aren’t worth it. Venture investing is a high-stakes game in which companies are typically either wild successes or near total failures.

“Big problems have occurred when you have founders who have unwillingly or unknowingly signed on for an outcome they didn’t know they were signing on for,” said Josh Kopelman, a venture investor at First Round Capital, an early backer of Uber, Warby Parker and Ring.

He said he was happy that companies were embracing alternatives to venture capital. “I sell jet fuel,” he said, “and some people don’t want to build a jet.”

© 2019 The New York Times News Service