How to save capitalism? Ditch venture capitalists

The Big Tech Svengalis have outlived their usefulness after a string of bad bets that left the rest of us to pick up the bill

I‘Their secret was to see the need to create a dream that investors could buy into’

s Adam Neumann the luckiest man on Earth? When the Wework founder walked out of his company for the last time, he must have been whistling a happy tune. During his tenure in charge of the co-working office company, he’d built up his own multimillion dollar portfolio of swanky property. The exit deal he negotiated was even sweeter. It let him cash in as much as $1bn (£794m) of stock while also pocketing a $185m consulting fee. Thousands of Wework employees who were made redundant got rather less.

Perhaps Neumann got lucky because he is handsome and charismatic. Perhaps he possesses brilliant business insights. Or perhaps his success came because he was indulged by investors whose cynicism trumps their good judgment or morals. Without the venture capitalists, Neumann would surely be teaching yoga on a Thai beach, or flogging a cryptocurrency.

His amazing luck continues. Last year, VC firm Andreessen Horowitz announced it was writing Neumann a new cheque for $350m. It valued his latest proposition, Flow, at $1bn overnight. It will apparently do for residential accommodation what Wework did for offices. Neumann was “a visionary leader who revolutionised the second largest asset class in the world, commercial real estate, by bringing community and brand to an industry in which neither had existed,” the VC’S co-founder Marc Andreessen explained.

While he was clearly smitten, Neumann has brought rather less joy to other investors. When Wework filed for bankruptcy last November, it was worth just $121m, a far cry from its peak valuation of $47bn before the bubble burst.

Backing Wework and Neumann isn’t the only poor call that Silicon Valley’s money shamen have made. Sequoia Capital swooned over Sam Bankman-fried as he explained over Zoom how you could use FTX to buy a banana. “I LOVE THIS FOUNDER” one partner responded to the pitch in an article Sequoia has since removed from its website. FTX would go on to become one of the biggest bankruptcies in recent US history. And when the VCS’ favourite lender, Silicon Valley Bank, collapsed last year, it sent shockwaves throughout the entire global financial system ( just as Credit Suisse did). VCS have been the rock stars of capitalism for two decades, the swaggering masters of the universe. They were credited with spotting, and bankrolling, worldtransforming companies such as Apple, Google and Meta. Now, however, the glamour of high-risk technology investing looks distinctly tainted. A string of duds and weariness with what has been called the “enshittification” of technology has many questioning whether we need this industry after all.

VCS now struggle to raise funds, Pitchbook Venture Monitor observed in its review of 2023. Stateside, VCS raised less than half of what they did in 2022. The sector saw a flurry of activity in 2021 – the year The Economist magazine optimistically heralded a “bright new age of venture capital”. But that now looks like a dead cat bounce. Meanwhile, the IPO market that VCS rely on to cashout has dried up. “Half of VC firms will be gone in four years,” predicts Josh Wolfe the founder of Lux Capital, itself a backer of entrepreneurs. He disdains techno utopianism embraced by the most prominent VCS, which prescribes that all the world’s ills can be solved by some new-fangled software. Instead, he focuses on more tangible industries, such as biotech and defence, which he believes can prove both useful and lucrative. (Our cluster of technology and biotech companies in Cambridge also takes a more sober, deep technology perspective.)

Wolfe is a reminder that not all VCS are carnival barkers like Marc Andreessen, who included an “enemies list” in a manifesto he published last year. Wolfe believes the VC industry is in a downward spiral because investors increasingly prefer to place money elsewhere. Private equity firms and hedge funds now do more high-risk investing. So do high net worth individuals, while entrepreneurs can call on crowdfunding, as well as friends and family.

For entrepreneurs, all of this is no bad thing. Choice is deeper and richer than ever. Some no longer want to deal with VCS. Take the example of Obsidian, a small but well-loved notes database. Chief Steph Ang has always turned down VC money: they’re focused on making a quick “exit” and insist on features being added that users don’t really need, he believes.

“It is now possible for tiny teams to make principled software that millions of people use, unburdened by investors,” he writes in the company’s anti-vc manifesto.

Remarkably the collapse of confidence in tech venture capital has taken place alongside the explosion of interest in AI. CHATGPT set the record for the shortest time taken to receive 100m site visitors. Google boss Sundar Pichai has compared AI to the advent of fire or electricity. How inept do you have to be to fail to make money from the invention of electricity?

Only a handful of companies can afford to run large AI engines and capture value from them, chiefly the MAMAA (Microsoft, Amazon, Meta, Apple and Alphabet). So, there may be no AI gold rush for investors. You need a lot of front to succeed in the fake-it-until-you-make-it tech venture sector. That was Bankman Fried’s secret, he recognised the need to create a dream that investors and public alike could buy into. But after so many flops, VC investors are less needed than ever. If venture capitalism is to survive, it needs a different kind of capitalist: one seriously devoted to creating value and growth, rather than today’s noisy hustlers.