TechEquity's Catherine Bracy On What Venture Capital is Doing to our Economy
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From KQED in San Francisco, I'm Alexis Madrigal. Over the last decade, the tech industry has been blasted by many people in the Bay Area and beyond. Tech has been blamed for moving too fast and breaking too many things. In a new book, author Catherine Bracey argues that the real problem lies upstream of the startups and software. It lies in the financing model for tech businesses.

That is to say, it's venture capital that bears the responsibility for the rapaciousness and carelessness of the tech companies. The book is World Eaters, How Venture Capital is Cannibalizing the Economy. And Bracey joins us right after this news. Welcome to Forum. I'm Alexis Madrigal.

Venture funded startups raising hundreds of millions of dollars are such a part of our world that you might imagine it's always been this way. But it has not. Google raised only about $26 million before going public. Uber raised $13.2 billion or 500 times as much money.

The venture capital business, which has deep roots in Silicon Valley, has become a massive engine of not just startup growth, but many of the socially destructive behaviors that tech critics have pointed out over the years.

In a new book, World Eaters, How Venture Capital is Cannibalizing the Economy, Catherine Bracey provides a compelling history of the industry's growth and transformation, highlighting the ways that venture-backed companies don't just wreak havoc themselves, but warp entrepreneurs' plans and crowd out other businesses that might work better in the long term.

It's a book, in other words, that's quite sympathetic to the company founder and quite pointed in its criticisms of the vaunted structure of Silicon Valley's financial culture. Thanks so much for joining us this morning, Catherine. Thanks for having me.

So having read this book, you're making an argument that's super interesting to me that it's not just tech per se or entrepreneurs as a group who are responsible for some of the problems created by the tech industry, but this VC funding model. So what's wrong with venture capital and the way that it works? And how did you get on to this as being kind of the most important problem?

Yeah. So I run an organization called Tech Equity, where we work on issues at the intersection of tech and economic equity, in particular housing and labor, the areas of the economy that are most impacting the lives of everyday people and where tech is having an outsized influence.

And really, to make a long story short, you know, along the last eight years of building tech equity and working on those issues, it became clear to me that something else was going on here. It wasn't just about the technology, that actually the technology itself was valueless. And the thing that made it either helpful to somebody's life or harmful to it was really the business model that was wrapped around it. And that business model is defined by the economic system itself.

that creates the tech industry, which is VC. And it just doesn't get enough attention when it comes to how we think about the way that technology impacts our lives. Let's give people a little primer on how VC funding works. Say you're an entrepreneur. You scratch together some money from friends and family, and you've got some little thing going. You've got the seed of an idea. Who knows what it could be? You go out, and you want to get funding so you can grow, and you go to venture capital. What happens?

Well, I think it actually might be helpful to talk about what happened before venture capital, because VC, which originated sort of in the middle of the 20th century, came about to solve a real problem, which was that there wasn't capital for sort of risky startups that were mostly building breakthrough technologies, trying to commercialize them, bring them to market. And a set of sort of civic and business leaders saw that need and decided,

sort of started experimenting with models that would benefit financially if and when they were investing in these risky breakthroughs.

And they settled on a model that is sort of the portfolio approach where VC funds spread money around across a few dozen companies in order to hedge their bets. Right. So this is high risk, high reward business. They know that because they're so risky, most of them will fail. A small number will succeed in those small numbers will exceed a lot. Right. More than making up for the most. And that's a concept known as the power law. Yeah.

And that's really like the fundamental principle of VC. So when an entrepreneur is going out to raise money, they're going to a venture capitalist who is thinking about, is this the kind of company that is going to help me achieve a power law distribution in my fund as opposed to just a normal distribution where most of the values are clumped around the middle? Yeah.

And that means or that means they are pushing the risk factor. Like if there's a bunch of dials on how you might grow a business, they kind of, as you said, it's a high risk, high reward business, but they want the highest risk. And therefore the highest reward too. Yeah. And over time, there was sort of a subtle mindset shift from...

the investors pursuing these breakthrough technologies and realizing that as a result of that, they would achieve power law distributions to now it being about the power law distribution, starting from that point and trying to reverse engineer power.

all of the companies that they invest in to fit that financial model. And then they are agnostic to what the company is that they're actually investing in. And so then when they're making these bets, they are not really looking at, is this a breakthrough technology? They're looking at, can this help me achieve the financial return that I want to achieve? And so then they start pushing every company they invest in, since they're not sure which of those companies will be the outsized winners at the end.

to follow the same path that would make them as big as possible, even if they don't have a natural ability to become that big. And when those companies are, you know, that kind of pressure is put on those companies, they start cutting corners and skirting regulations and exploiting workers and pushing the burden and the risk onto customers and society. And there are, you know, myriad stories, you

that have been in the headlines over the past few years about what happens when venture-backed companies do that. Yeah. We're talking with Catherine Bracey, Executive Director and Founder of TechEquity. She's got a new book, World Eaters, How Venture Capital is Cannibalizing the Economy. You know, we'd actually love to hear from you if you're an entrepreneur out there who has experience taking venture capital or, who knows, even turning it down. Maybe you're a VC yourself and you want to defend the industry or you feel like...

Some of these critiques are on the money. You can give us a call. The number is 866-733-6786. That's 866-733-6786. You can email your comments and questions to forum at kqed.org or, of course, Blue Sky Instagram or KQED Forum.

Why don't you give us an example? Maybe you want to do Good Eggs. Maybe you don't have a company that seems like they have a business that could work, but maybe it wouldn't work in the way that a venture-backed startup would work. Yeah, maybe I'll... I mean, Good Eggs, since you suggested it, it's a Bay Area company. Yeah.

It's actually the first company I thought of when I started thinking about not just the big sort of VC flameouts like Theranos or WeWork or FTX, but really the companies that I felt like could have been really great businesses but for.

Venture capital and good eggs, which is the sort of farm to table, I guess, grocery store business is one of those examples. So the founder who had started a software company before sold it to Google. So he's very successful and had a pedigree that was attractive to VCs.

decided he wanted to use software and the efficiencies that software created to help, you know, expand the sort of healthy local food ecosystems. And he thought that they could achieve, you know, 10 percent of the food system being from locally grown or local producers if this worked out.

Which would obviously have had a huge benefit, not just, you know, a financial benefit, but also a huge benefit to society, the environment, public health, all of that.

And so he did what I think most entrepreneurs in around 2010 did, all they knew to do, which was to go pitch to venture capitalists that, hey, we can turn this business into basically a software company, this thing that had been sort of brick and mortar. Now software is eating the world. And that's a quote from Marc Andreessen from 2011, which is sort of what the book title references, that software is coming into all of these companies.

businesses that are traditionally sort of more physical world businesses.

and going to create efficiencies and all this value that couldn't have been created before. And, you know, very long story short, I think he found out very quickly that bringing the methodology of VC that had worked in software did not work as well in these other areas. And that's where this sort of world-eating mentality starts to fall apart. And if you think about some of the worst examples of...

you know, VC in the world, you know, WeWork, Theranos, Juul, Uber. I mean, these are companies that were trying to bring that methodology to an area that's very physical world. And so, you know, what he told me was, yeah, we thought we could just run this playbook and

in for a grocery store business, but like the margins aren't the same. And like the people are different. If we need to pivot our business, which software companies do all the time, the cost was much higher to the people who are working for $15 an hour in the warehouse or it's the farmers who can't

turn on a dime and, you know, change what they're producing. And that has fallout all the way down the line. And, you know, he said something to me that stuck with me, which was like,

What we were trying to do was take this methodology and apply it to just any problem without thinking about whether that was the right tool to solve that problem. And instead, we should have been either focusing on the problem that we were trying to solve and evaluating what the right tool was to address it, or if what we wanted to build was software, then finding a problem that had a software-sized solution.

solution hole that could have addressed it. And instead, and that I think is really gets to the crux of what's wrong with VC is like, it's not the solution. Software is not the solution to everything. And it doesn't scale in every industry the way it does in the software industry. Yeah.

And scaling really is the thing that I feel like at least I most associate with venture-backed companies that they're – particularly in the era of the last, you know, say 10 or 15 years, just like get as big as you can as fast as you can regardless of – even whether you're making money, whether like the business is good for the city or the nation or the world. Yeah.

And we're going to talk a lot more about where that idea came from, about the importance of scale and how it ties into venture capital.

We're talking with Catherine Bracey. She's the executive director and founder of Tech Equity that's based in Oakland. She's got a new book out called World Eaters, How Venture Capital is Cannibalizing the Economy. And we want to hear from you if you've had an experience in the tech world as an entrepreneur or maybe you're on the

venture capital side, you know, how has this sort of ecosystem of venture capital affected your life or your business? You can give us a call. The number is 866-733-6788.

That's 866-733-6786. You can email your comments or questions about the venture capital world to forum at kqed.org. You can find us on social media, Blue Sky, Instagram, etc. We're KQED Forum, or you can go on the Discord. I'm Alexis Madrigal. We'll be back with more right after the break.

In the current climate, too many companies are just waiting to get to the other side. At IDEO, we partner with audacious leaders to build more courageous futures that take organizations from basic growth to real innovation. Discover more at IDEO.com. That's I-D-E-O dot com.

Xfinity Mobile was designed to save you money. So you get high speeds for low prices. Better than getting low speeds for high prices. Jealous? Xfinity Internet customers, get a free unlimited line for a year when you buy one unlimited line. Bring on the good stuff. Welcome back to Forum. I'm Alexis Madrigal. We're talking with Catherine Bracey, executive director and founder of TechEquity, about her new book, World Eaters, How Venture Capital is Cannibalizing the Economy.

We're going to hear from some of your experiences as well. Let's talk about scaling and what I think it was Reid Hoffman, if you might have heard him last week, called blitz scaling and how that's kind of different from how companies tried to develop a business before.

Yeah. So there are many. The thing about VCs is they like to talk about their work in public a lot. So there are many different playbooks that different VCs have written about how you should approach trying to build a venture scale company. And one of the most famous is called Blitzscaling by Reid Hoffman.

who is, of course, a very successful entrepreneur and investor. And I mean, you know, it's called blitzscaling. So a lot of what you need to know about it. Right there on the tin. Yeah. Yeah. Yeah. I mean, it's quite something to name a growth strategy after a Nazi military technique. But, you know, here we are. Yeah.

You know, it's basically the idea of VC, to get the scale that VC companies need in order to achieve that power law distribution, you really need to like attack whole markets. And it is, you know, sort of the goal is to create monopolies by taking over markets as quickly as possible and vanquishing your competition. I mean, it's very sort of domination coded. And blitzscaling really is...

is a handbook in order to do that. Like, how do you become as big as possible as quickly as you can in order not to give any competition a foothold to challenge you so you can just like stake out your ground and like gain as much of the profit that's available here as possible. And it really highlights like

hammer, not scalpel approach to doing this. And there's sort of like the negative externalities or the collateral damage is all feature, not bug. You know, those things are a sign that you're doing it the right way. It's really about like intentional thoughtlessness. And he says like you want...

To hire good enough people and let fires burn and like treat customers poorly. And he calls workers growth limiters. So like, you know, get to as big as you can as quickly as you can with as few people on the payroll as possible. Yeah.

which honestly I think is at the root of a lot of the labor exploitation that happens in VC-backed companies. And that, you know, I don't necessarily want to pick on that one methodology. It just happens to be very evocative, but it's the way they all do it. Yeah, and it was really easy to throw money at the problem in the zero interest rate range.

realm of the pre-inflation period, right? Because you could just literally spend as much money as possible trying to take market share without ever having to turn a profit, right? And I feel like Uber really became kind of the figurehead of this kind of growth strategy. Yeah.

Yeah. I mean, if you think about the way that Uber grew, it was blitzscaling. I mean, in the book, it's held up as sort of the prime example of how to do this right. And I think we all know the Uber story pretty well at this point. You know, they obviously saw the taxi business and Lyft and other sort of rideshare companies as the competition that needed to be vanquished. And they took

very ethically and sometimes legally questionable approaches to achieving that sort of market share. But that was all part of the strategy. That was all, again, like seen as a positive way to grow your business, not a negative way. And we all kind of had to deal with it. I mean, I don't know if long-term it really...

Is going to work out for them. They seem to be doing quite well right now, but in part that's because they realized that that sort of like ask forgiveness, not permission approach was hurting them. Like, I'm not sure if they had taken a different approach that, you know, Lyft got a lot of business because Uber didn't like or people didn't like the way that Uber is operating. So, you know, there's some questions there about that.

what kind of business it could have been. But there's no question that the people who invested in Uber early made a lot of money, right? So they didn't have to be responsible for any of those bad actions. They didn't pay a price for it. There was no cost to them. So there's really a moral hazard here too in venture capital, which is that the short-termism allows the people who are in early to make a lot of money and not have to pay the price. Let's bring in Ryan, who's had some experience with VC. Welcome.

Hey, guys. How are you? Hey, doing well. Thanks for calling. Yeah, my pleasure.

Oh, go ahead. What's your story? Yeah. Should I just kick it off? Yeah, yeah. Go for it. I guess I'm calling in support of venture capital. So I moved to San Francisco from Florida and I pursued a very ambitious idea of putting a satellite in orbit to stream back to VR headsets around the world. And so I raised about $2.5 million in venture capital for that. And I never would have been able to do that. And

anywhere else in the world. And so I think venture capital is a great thing. And even the nine of the 10 that fail, I mean, we learn so much in this sort of scientific experimentation process. And even Theranos, the example everyone likes to use is a bad VC. I mean, her goal was to do a blood scan and detect 10,000 diseases in every person, which if she would have succeeded,

is a beautiful thing to have in the world. And there should be a hundred other companies pursuing that goal. But, you know, it's kind of, I mean, Ryan, for me, it's a little bit like, you know, turning lead into gold would be an amazing idea, but it's not possible, right? And that's kind of what ended up happening with Theranos. I mean, right? Because so much of it becomes, you know, as Catherine was saying, this narrative-driven idea, right? So, I mean, here's my question for you as someone who took money from VC, though, right? Like, did...

Did you feel like you could actually manage the company in the best way of actually pursuing the ultimate goal? Or did you feel like you had to try and grow the business in a way that was not healthy? Or how did the actual thing work out as opposed to the idea of it?

There's different types of VCs. When you're talking about this sort of hyperscaling software paid subscriber version, that's a little bit of a different animal. For us, we were launching a satellite into space and streaming it back to VR. Those are capital-intensive things. The average person can't buy a rocket launcher or satellite.

without investors. And it was a very large fund that came in to support us. And yeah, I mean, it's kind of amazing that's even possible. Yeah.

Oh, go ahead, Catherine. Yeah. I mean, so a couple of things. First, you know, I don't know that. Well, I don't know if Theranos is a good, great example here or the bad example, but like she did commit fraud. Right. And I do think that, you know, regardless of what her intention was for the actual technology, right.

She committed fraud. She broke the law and she defrauded investors. The other, you know, that makes the point that like part of what is in one entrepreneur told me.

when I was interviewing them that investors ask us to lie to them in very specific ways. And that is gets to this like fake it till you make it culture that VC since nobody knows what company is at. You know, these are early stage startups. No one knows where they're going. Right. And so if you can spin that

compelling enough tale about what the potential growth is, then you can raise a lot of money. And so this is a place that it's a kind of world that attracts people who are grifters and charlatans and frauds. I mean, it just does. I don't think that's the majority of people. But to Ryan's point also, I mean, I know we'll probably get to this. I don't want to leave people the impression that I think venture capital is

a bad thing full stop. I think the way that venture capital has come to be practiced in part fueled by this extremely long period of zero interest rates is

is the thing that is causing harm. And for a company like Ryan's that is doing something that is a breakthrough technology, then yes, that is what the original intention of VC was supposed to be. And I think VC should come back to that and be that. But it doesn't need to be funding fast casual restaurants like Kava. It doesn't need to be funding sneakers stores. It doesn't need to be funding mattress sellers.

I mean, these are all the things that feel like it doesn't need to be funding grocery stores that are trying to fix the food ecosystem or housing companies.

These are places where, you know, the problem is that VC has become a monoculture and crowded out every other kind of capital that could fund those other businesses. And that's, you know, the bigger harm here is not what VC has funded. It's what it's not funding or what it's what it's funding and then forcing to shift away from its true market potential and the cost to the economy, you

for the rest of us. Like I have really come to believe that VC is killing more value than it creates by avoiding those, you know, other kinds of markets or in innovating itself on the methodology it uses to fund companies or in how it pulls entrepreneurs away from solving the problem that they really wanted to solve in the first place. Yeah. I feel like having known a lot of startup entrepreneurs, it oftentimes seems like they want to do one thing

But then they tell the VC that they could do something else so that they could get the investment to try and do the thing that they actually want to do. Well, that's the... Yeah, that's what I think this person meant when they said that they asked us to lie to them in very specific ways. Like, you're going into...

dozens of pitch meetings and every pitch meeting you go in and do your pitch and you're going to get a little bit of feedback, you know, from that no or, you know, that then shifts you subtly towards actually shaping this to be something that will get you VC funding. And then all of a sudden you're doing something completely different. You know, super important question that you address in the book. Listener on Blue Sky writes, wondering if Ms. Bracey would comment on if VC has affected traditional investors in the Bay who might invest in local businesses but don't.

I feel like this is highly underrated because if you're competing against companies that can pour in all this cash to scale and you're trying to be a normal business that has to turn a profit so that you can pay your employees and keep the lights on, it actually erodes the ability for all kinds of businesses to work. Right, right, right, right. I talked to, there's a story in the book that compares a couple of companies that were sort of Bay Area companies

home cooking startups, one called Josephine and one called Food Gnome, to a VC-backed, more traditionally VC-backed company that was doing the same thing called Chef.

And, you know, they the Food Gnome and Josephine models are much more oriented around the home cooks who are marginalized in the economy, usually don't speak English as a first language, are immigrants of color from other countries and are trying to get a foothold in the economy to, like, build a following so they can have a brick and mortar restaurant. And, yeah.

And they wanted to like create companies that supported those chefs in building their own businesses. And Chef wanted to be more like Uber for home delivery, which sort of, you know, variety of ways, like was a more exploitative model.

And because Chef had a story to tell about scale, they raised tens of millions of more dollars, right, than Food Gnome or Josephine could. And just by having a competitor that had tens of millions of more dollars than them, there was no way. I mean, like before Food Gnome and Josephine could even really get out of the gate, it was...

They were already dead in the water because they couldn't compete with Chef. And so if we had other models that could show like, hey, there's capital available that's aligned with this longer term, slower growth approach, it's still going to make investors money. And I think in the long term can probably compete with VC. Yeah.

But it can never really get off the ground. And then people tell me, well, see, it doesn't work. Because if it worked, then you would see these companies thriving. But, you know, it's sort of hard to prove the negative in that way. I think we need to, you know, try more. And we're going to talk about some of your ideas later in the show, too, for other forms of putting capital together to fund new businesses. A couple of comments from listeners about their experiences are,

in this world. Chris writes, "Around 2009, my partner and I applied to Y Combinator. Our company, Citi Data Services, was in its nascent stages. Our software company was built for cities and counties for comprehensively managing grants and loans.

They, that is to say Y Combinator, refused us. We went on to provide excellent systems to over 50 cities and counties in California. I came to believe that we were too hands-on, too personal for scaling for Y Combinator and some of their colleagues, i.e. Salesforce, Oracle, etc., shared the same lane. We're still better. Chris writes, Francesca writes,

We had an energy efficiency startup that got a lot of early attention. We reluctantly agreed to VC investment when they told us all the right things about how we would be in charge of the company and they would be like helpful coaches. It was the worst experience of all of our lives. Like your guest says, the VC board members applied software thinking and pushed us to hire 10 times the staff we'd budgeted to accelerate growth, as if putting nine pregnant women in a room for a month would result in a baby. When we ran out of money, they withheld approval to raise new funds until we handed the company over

over to them, a total disaster. And we've cautioned all of our colleagues not to accept VC investment unless they have the perfect fit for the VC business model. How much blame do you put, Catherine, on entrepreneurs...

who know perhaps in their heart that they are not going to be able to scale the way the VCs want it, but they also want the money to try and grow. And so they take it and end up in this Faustian bargain. Yeah. I mean, if I'm apportioning the pie of blame here, I mean, the vast majority of it goes to limited partners who are actually the investors who put money into venture capital funds. So it's not even really...

the VCs all the time that I blame the most, they're responding to a set of incentives that institutional investors create for them. And I'm happy to talk more about how that structure works.

You know, founders have some power here. It's more of a collective action problem, though. Like one founder can't say back to the whole VC ecosystem, like, no, I'm not going to I'm not going to take, you know, do this for you.

that they can get off the VC treadmill at some point. Very few of them ever do. It's like, you know, I've heard so many stories from entrepreneurs who sounded like reformed gamblers, you know, who are just like, I thought if I just won the next one, you know, like we could be profitable. We'd be able to not have to raise another round of funding. And no, the casino always wins. And that's because basically funding is...

it's doled out in these sort of rounds. You have this kind of seed round, A round, B round, C round. And people think, oh, well, okay, I'll get to the A or the B and I'll be profitable. I can pay back the investors and then I'm free of this, right? But actually oftentimes it's rarer than they think. Well, the last comment, they take the money and then the investors push them to do things that they maybe wouldn't have done otherwise. And

Then they're in a place where they've got all these costs and they can't get to the next stage without another capital infusion. And, you know, the investor's interest is not in proving that this is actually a good business. Their interest is improving to the next round of investors that this thing is a more valuable company than it was when they invested in it so that the next round of investors can put a higher price tag on it. And then that the first round of investors can go back to their limited partners and say, see,

My company is more valuable than it was 10 weeks ago or 10 months ago. Give me more money to raise, you know, to go invest in more companies. And that's sort of the incentive structure there. The investors are selling to other investors. They are not selling to the market. Right. Super quick. Alan writes in to say, for those of us on the outside of all this, how are venture capital funds different from hedge funds?

You know, I don't actually know that much about hedge funds. I can say... They hold a bunch of different kinds of investments, right? I mean, they're not just investing in startup companies. They may have timber. They may hold publicly traded stocks. They may hold all the... But venture capital funds, right, tend to focus just on these kind of early stage companies. Yeah. And, you know, they're most akin to private equity. So...

Private equity is sort of structured in the same way as venture capital, but venture capital is focused on these earlier stage riskier companies that are unproven, don't have a track record and are usually doing something in the tech world or that is tech enabled. Yeah.

We're talking with Catherine Bracey, executive director and founder of TechEquity. She's got a new book. It's called World Eaters, How Venture Capital is Cannibalizing the Economy. It examines the effects of venture capital in the broader economy. We're going to get to a bunch more of your calls. You have a bunch of great calls and comments. You might want to try forum at kqed.org. You know, with your stories about interaction with venture capital, defending venture capital,

or critiquing the industry. You can also find us on Instagram and Blue Sky, we're KQED Forum, or head on over to the Discord. I'm Alexis Madrigal. We'll be back with more right after the break. Welcome back to Forum. I'm Alexis Madrigal. We're talking with Catherine Bracey. She's got a new book. It's called World Eaters, How Venture Capital is Cannibalizing the Economy. She's the executive director and founder of TechEquity. Let's bring in Michael in Petaluma. Welcome.

Thanks. By way of background, I actually am pretty well recognized globally for teaching investors how not to make mistakes in due diligence. You started to touch on what I was here to talk about, so I'll try to weave it through, which is ultimately where the problem. As you just pointed out, the

The pension funds are among the largest limited partners. Their role is to get the highest return on our retirement funds, and a percentage of that portfolio is venture firms to have some level of risk to produce a higher return and a higher overall percentage. Now, you take that backwards.

And you look at what venture firms need to do for the pension funds, which is what they need to do for us, which is the flip side of how do you produce the fastest return possible is what if you don't?

So the seed, the Series A, Series B, all the way up to the potential IPO, if the venture capitalists don't perform, then the money that comes after that they need becomes more expensive. Provisions actually not only is valuation lower, but the potential –

onerous provisions that bees can put on the seeds and seeds on the bees and so on. It's pretty bad. It lowers the return of the highest risk takers that are taking the most risk, which once again are taking that risk for us, the three of us on this call and everybody listening.

In the sense that pension funds and other places are invested into these places. And I take that. I take it, Michael, and Catherine, I want to come to you on this. I thought a lot about this in the book. Just the role that the big money plays as the investors in these venture funds when, I think you say in the book, it's something like less than 10% of most of these LPs portfolios are actually in venture funds, right? But they're there, as Michael said, to...

provide the upside, basically. Yeah, I think I described it as like the salt in a meal. You're going to know if it's not in there, right? It's a very important component, but you don't pay a lot of attention to it, like sourcing it in the way that you might source your meat or your produce, right? So you just kind of throw it in there. It's salt and don't think much about it, but it's a really important component to the meal. But that means since, you know, these...

big LPs are not thinking that much about venture capital. They haven't questioned the methodology in a very long time. And, you know, there are some of the big funds. I mean, the VC industry is power law distributed as well, whereas like the vast majority of the profits from VC comes from like

you know, the top 1% of the firms. And there's only so much money that those firms can raise. And so the rest of the LPs are chasing the lottery ticket, basically. Their money is chasing funds that don't perform as well and can't perform as well because there just aren't that many companies out there every year that are going to be as big as Stripe or, you know, Uber or whatever the...

the big deck of corn is of the day. But then they force all these, the long tail of VCs to try to be that even when it's not possible to achieve those kinds of returns. And in their portfolios, I mean, I think if you ask most of them,

the ones who are not able to get into, you know, Sequoia's highest performing round or Andreessen Horowitz's highest performing funds, you know, they would probably tell you that like VC isn't performing that well in comparison to their other assets. And maybe there's another reason to keep it in the fund. My argument is like, fine, keep sending your money there. It's not that much. But like, maybe you also want to add a

a few other spices besides just salt to the mix and see if that changes the flavor. Like, I think that there are different approaches to funding innovation that can produce...

results that are at least on par with average venture capital results, if not outperform the average venture capital fund, if they are given the oxygen to really go out and prove that there are new methodologies, new innovative approaches to funding innovative startups that don't need to be push everybody to achieve a power law return in order to succeed. Let's get another VC story before we talk about some of your prospective fixes. Isaiah in San Francisco, welcome.

Hi. Yeah, I think listening to this conversation, the one thing I would add, though, is that I've raised a lot of venture capital money, and I did it pretty quickly. And I've had nothing but amazing experiences with most of the people I've worked with. At the end of the day, they're mostly just people. And although they do want returns, they also do actually want to change the world by and large.

And I think that San Francisco is one of the last places you can show up and sleep on floors and end up becoming someone who can build something amazing. And venture capital is a pretty small blip in the world of finance. And I think to take that opportunity away would actually be to harm the innovators and the people that want to build the future at a massive scale. And that's not to say there's not bad people in venture capital. There is, but

I do think it is one of the last places where truly the American dream can be found and built. And Isaiah, did you have an idea that fit into that model pretty naturally? Like you didn't feel like it was something like a software business designed to scale?

Well, I think actually, interestingly, when we got into Y Combinator, I asked them, you know, did you invest because of our idea? It was in health tech. And they said, no, we invested in the people. And never once did they pressure us to pursue an idea or do anything besides what we thought we could solve a problem for. And sincerely, that's really the only messaging I've ever heard. That's interesting. Isaiah, I'm glad it has worked out for you. You know, it's great when it works.

Well, can I just say, I don't want to leave anybody with the impression that I think he sort of said something about like getting rid of venture capital. That is not at all what I'm suggesting. I'm suggesting that VC play the role that it should play and needs to play that we need it to play in the economy, which is to pursue the technological breakthroughs. Like when...

when Genentech got its investment back, you know, I don't know, 30, 40 years ago now, that money made the world a better place. I mean, they produced mass scale insulin. And, you know, before they were sort of like harvesting it from pigs. That's a huge technological breakthrough that is hard science. We need investors who are willing to take this big invest. Celebrated by pigs everywhere. Yeah. We do not need venture capital to fund

mattress companies or, you know, good eggs. A lot of the stories that I talk about in the book where entrepreneurs believe that raising VC is a sign of success in and of itself and that that's the only way to pursue entrepreneurship and that there is just an ecosystem of investors and others around them that reinforce that belief.

This will kind of start to take us into some of the solutions that you offer up here with listener rights. I work at Miller Center for Global Impact at Santa Clara University. We work with social entrepreneurs across the globe to help them find better to help them better their business models in order to scale responsibly with greater impact. It's always a struggle trying to find investors that are willing to back companies like these worldwide.

What can they do to get a leg up and become a stronger force in the ecosystem of social entrepreneurship and investing? Or how can we find impact investors that we can funnel towards the entrepreneurs we work with? Yeah, I mean, this is a trap that I keep falling into is where people think that what I'm describing is impact investing.

And it's not actually impact investing to like use the baseball metaphor that is very popular to describe VC. I mean, if what if what the power law return is seeking out are grand slams and that's what they say, like this is a grand slam business. What I'm suggesting is that we need like you can also win a baseball game by hitting doubles and triples. Right. Or single home runs. You know, you don't always need a grand slam. Right.

And, you know, the odds are better with doubles and triples as well. That's just worth noting that is completely antithetical to the current VC world. Right. I mean, they think about it essentially in the opposite way. It is definitionally like if you are trying to do that, hit doubles and triples, you are not a venture capitalist.

And what I see as impact investing is like a totally different game altogether. It's more like in the charity bucket. And that's a challenge for these entrepreneurs who are like, I have a real business. It doesn't really have like I'm not a social impact investor. I'm not leading with a mission statement.

It's just that my market opportunity is smaller than a decacorn company. Right. But it's still a good business that could make somebody a lot of money. And then by not having to skirt regulations or exploit workers or cut corners or make choices that sort of take the hammer approach instead of the scalpel approach and be thought, you know, thoughtlessly reckless. Right.

They avoid all these harms to society that I think is why we see a lot of these other venture-backed companies doing things that we don't like in the world. And it's just smaller markets with, I think, more aligned, organically aligned outcomes that create value, other kinds of value than just financial value for investors. Yeah.

You know, Patrick writes, these sorts of books that tell people what's wrong with the system, they should promote the new opportunities that open up as the VCs drift into a new space. The current VCs are doing it wrong. She should lead by showing how to do it correctly, make a lot of money along the way. And you do. Well, funny you should mention, Patrick. Yeah. You do try and bring people who are trying to do it a different way, right? And that's what I start with. I mean, I start by saying, like, I started out with the idea that this was going to be a book about everything that was wrong with VC and, you know, and the...

the bad outcomes from these companies that it had invested in and what it turned into was a book about

what we were missing by VC not investing in all of these other companies. Right. And so what's the opportunity we miss? And I thought, I think, I hope like it's, it ends up being a very optimistic story about what entrepreneurship can and should be. And I dedicated it to the builders because, you know, I started a thing myself. It's not a VC backed thing, but it is a startup. And I, I know what it feels like to have an idea and,

and pursue it. And it, you know, people look at you like you have three heads or, you know, treat you like you're crazy and tell, you know, 999 times out of a thousand. And, um, what it, how, um, tragic it is when then that gets killed by an investor who thinks instead of selling to government, you should still sell to real estate or whatever. Um,

Because on paper, that might look like a bigger market. Because that looks like the bigger market, yeah. Or the faster path to growth. And so I came to really empathize with and relate to the entrepreneurs, the people who are trying to build these companies. And so many of them I talked to

had ideas that were really great ideas that don't exist in the world now. And we will never know the scale of that loss. And I try in the book to pull those stories out as much as possible. But ultimately, this is a story about how we can have more innovation and entrepreneurship in the world.

Not less. This isn't about tamping down VC. It's about creating even more opportunities to fund companies in a way that is aligned with their actual market opportunity. I love the example that one of your sources used in the book of A24, the movie distributor, said.

Right. Because there's all these big like Hollywood studios kind of doing this stuff over here that sure, they're going to spend $100 million. They might make $120 million or something. But what if you spend $2 million and you make 10? That's still a pretty good business. Even if like it's not enough for a...

a big Hollywood company, you're kind of making the argument, where's like the A24 of this venture world? Yeah, yep. And there's an investor that I highlight in the book. His name is Bryce Roberts. He runs a fund called Indie VC. And he's the one who actually, I stole that metaphor from him. He has a blog post up about it if you want to read more. But it's basically what he's saying is like the business model for the large Hollywood studios doesn't allow them

to fund a movie like Everything Everywhere all at once to see where that might go or to fund different kinds of stories. They have to do Marvel 8 or whatever, like remakes of movies that are... There's no new good ideas. And I think that's true in tech in a lot of ways. I think there's a critique that's started going around now that nobody's invented anything really that cool, at least in the consumer internet side, for movies.

And so we need more sort of innovative methods for identifying those different types of breakthroughs. And if it's just VC pursuing the power law returns and they're raising, you know, $5 billion funds where they need their outcomes to be, you know, double, you know, double the amount of money they need to be able to do that.

digit billion dollar outcomes in order to achieve their returns, then you're going to miss all of that really cool stuff that's further down the line. Let's bring in Srivan in Berkeley. Welcome. Yes, hi. Can you hear me? Yes, sure can. Go ahead. Yeah, my question slash comment is that the

The problem with VC funding is just a symptom of a larger problem, which is capitalism, where we are in AI, we frequently talk about the alignment problem. I think capitalism also has an alignment problem where the only goal is to maximize return for investors.

I think we need a different kind of funding setup. Perhaps the government needs to step in and fund things that are for the greater common good, that are good for users, for employees, rather than just maximizing returns. Yeah.

Yeah, I think that's right. And I get this question a lot. Isn't this just capitalism that you're describing? And before the 2024 election, it was fair enough. Like, yeah, you're right. I don't mean this is a more concentrated version of capitalism. But yes, you see this kind of behavior across capitalism after the election, though, and in the wake of like Silicon Valley moving to the right and seeing a lot of venture capitalists sort of

run to Trump. My sense is actually what we're seeing is like the death of like the free market economic era. And it's sort of in order to sort of bring in, I don't know, more populist era and what those VCs are doing.

sort of signaling with their, I think, sort of desperate move to MAGA is that they know that's ending. And their approach to investing was so closely aligned with the sort of, I guess, neoliberal economic order, if you will, to be wonky about it, but like this free market era of

VC is like the perfect representation. It's the mascot of that era of capitalism. And I think, I hope that like what comes next, I don't know when it's coming or what the world is going to look like when it gets here, but it's like, it's a different kind of capitalism that,

appreciates different types of value. And whatever that economic order is when we get there, we're going to need a methodology for funding technological breakthroughs. That's still going to be true. And I think this is a moment when interest rates are higher or whatever, that there's some freedom to innovate with what those new things might look like. And I hope folks will engage with the ideas that I put forward in the book for how we might do that. Yeah, it's fascinating too. I mean, I think

And the historians of capitalism, I think, are such an interesting crew because they always like point out, sure, there's capitalism like writ large, but then there's all this change in the structures underneath. And I think that's one of the things this book is so good at pointing out. It's like, yeah, it's capitalism, but the details kind of matter too for the exact things that get funded, the way that our cities look, the types of businesses that exist and

And all of those things. Last couple listener comments here. Noel writes, it's about time that this book came out. I've heard about vulture capitalism, yet it seems that our culture accepts it since we're conditioned to believe corporate capitalism is the best system ever. It is not. David also writes, the pursuit of wealth to the exclusion of all other considerations always benefits those who make the money and may or may not ever benefit anyone else.

Something we won't get to is just, yeah, other types of governance structures for companies that might insulate them from some of the pressures of venture capital.

We have been talking with Catherine Bracey. She is the executive director and founder of Tech Equity. The new book is World Eaters, How Venture Capital is Cannibalizing the Economy. Catherine, thank you so much for joining us this morning. It's been a pleasure. Thanks for having me.

Also, really appreciated listeners calling in with their experiences of venture capital and entrepreneurship. Always so interesting to hear those calls and comments. I'm going to be out for a week talking about a new book I have coming out. You'll hear about it soon enough. But, you know, our guest host will take care of you. I'm Alexis Magical. Stay tuned for another hour of Forum Ahead with Mina Kim. Thank you.

Funds for the production of Forum are provided by the John S. and James L. Knight Foundation, the Generosity Foundation, and the Corporation for Public Broadcasting.

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