Let's keep praying for fewer and fewer regulations, it's going great!
I didn't know that VCs were ever "not cancer", I've always known them like that. Also my experience with startups is that it is a big scam for employees, but I understand it's not always the case (maybe it depends on where in the world?). I have been an early employee in multiple startups that got the founders rich, and what I got from the stocks didn't compensate for the low salary while working there.
Do I understand correctly that when VCs invest, they dilute the employees and somehow the founders can get away without being diluted? That's the only way I could explain the difference between what the employees get and what the founders get if the startup is successful.
And young people are super excited to work in startups because of old stories like "early employees at Google/Facebook became rich", I guess.
Startups define different classes of stock. The class A shareholders are the founders and investors. Everyone else gets class B shares. The A class shares don't get diluted, and they are inherently worth more anyway.
So fundamentally, "everyone else" is scammed. Unless the class A scammers get so, so rich that everyone else gets rich as well. In which case it's still a scam, but the "everyone else" are happy anyway.
Why is that a scam? Nobody ever promises you any specific valuation or fraction of the company. When I joined a company relatively late but well before IPO, some funny number of shares at 12 cents or whatever each did not even enter my calculation any more than "oh and they also give me a free lottery ticket". In my case depending on when one sold after IPO they would have been in the range centered around about compensating for the salary differential I think, but nobody promises you they'd ever be worth more than Monopoly money
> Nobody ever promises you any specific valuation or fraction of the company
Would you mind asking before saying what I have been promised?
Also it feels like you have never been in a startup. The whole language of growth everywhere, the "billion-dollar startup", the "becoming a unicorn", this is all suggesting that "you're part of it and it matters to you if it becomes a unicorn". But it doesn't, really. Because you get diluted.
> But it doesn't, really. Because you get diluted.
At this day and age, if you don't understand dilution before you join, it's entirely on you.
This isn't a new concept - it was the case decades ago. Even when I left school over 15 years ago, the standard advice when trying to get a job with a startup was "Get a good salary and value the equity at zero."
And class A vs class B isn't even a rich vs everyone else thing. I have class A shares in an LLC, where even the (richer) founders are class B. The operating agreement is that we class A folks are "guaranteed" a fixed rate of return on our investment, and the class B folks don't get anything unless we get at least that rate of return. This is very normal in that industry.
> At this day and age, if you don't understand dilution before you join, it's entirely on you.
I don't know what to tell you. Young graduates get an offer to work at a startup, nobody tells them how it works. They are just excited, as I was. And they don't think about "what happens if the startup is successful" because they do know it probably won't be.
And when the startup is successful (happened to me) is when they realise that they got scammed. But all they can do is see their founders become rich and tell everyone why THEY deserve it because it was THEIR idea and THEY are the best.
> the standard advice when trying to get a job with a startup was "Get a good salary and value the equity at zero."
That does not say AT ALL that the founder gets rich when you get nothing. It says "be careful, most startups fail, so make sure you get a salary". Usually that salary is subpar.
I was given a very large number of very low value shares. The company was about 60 people iirc and I think the hr guy said well we won't IPO soon but when we do, these shares might be worth a lot! Companies often aim for shares to be worth 10, 20, 50 dollars at IPO! Something like that. But it's obviously just vague pep talk. They also sometimes say everyone is there to make the world a better place...
It would be a scam if they promised you 0.2% of the company but then it was diluted to 0.1%. and nobody prevents you from asking i think. Otherwise it's no more a scam than a lottery ticket commercial showing the guy who won a Ferrari.
It’s strange, every startup offer either is obviously a horrible scam or comes from a place of fairness and is sold like a total scam.
I guess being honest brings about too many opportunities for people who don’t understand the finances to make (or be perceived to make ) promises they can’t keep. So you might as well just get into a race to present the most ridiculous stuff possible.
It is a scam to me because they imply "if the founders get rich, we all get rich" because "we're on the same boat". And it's not the same boat at all: the founders may get rich, the employees most likely not.
This is not standard. Normally founders and employees get common stock and investors get preferred stock. Founders may get more stock issued in a round, and VCs/founders can pretty much rework the cap table to their liking if they really want to. The difference in return between founders and employees is down to percentages. Founders get 25-75% where employees get 0.01-1%, maybe a bit more if they're lucky.
> Founders get 25-75% where employees get 0.01-1%, maybe a bit more if they're lucky.
So that's a scam by the founders to the employees, in my book. It's fine, it's just that I am not sure young professionals joining a startup know that.
Said differently, if you join a startup, you should not work too much without compensation, and you should not care about making it super valuable, because you don't benefit from it. If you have a super good idea or realise you have expertise that would make the startup valuable, you should leave and become a founder yourself.
VCs get preferential shares. Preferential shares have economic rights to protect the investors, but more importantly they usually have extra control rights like veto abilities, board seats, IPO control, or ability to sack the founder (which may even cut out the founder's voting rights by sunsetting their class A common into class B common shares).
Employees get a third tier of stock (e.g. options that convert to non-voting class B common shares).
After IPO the preferential sheets becomes common shares. The dual A class may be removed or have sunset clauses because large public investors prefer one plain common share class.
Not a VC - so take above as written by a student. Founders in zero sense have the same voting control as VCs.
I got the details about classes of shares and preferential stuff technically wrong, it’s true. I still got the gist of the arrangement correct: VCs and founders get the pizza, everyone else gets the crusts
Pref shares do get diluted, they are however senior to common stock so they get money FIRST if there’s not enough to go around. There is some cap on this and sometimes it’s pretty high. Huge pref overhangs are, indeed, a problem.
Pref shares with a 1x preference are still worth like 10x common stock in early stage companies and it’s common for employed to get fucked by this.
Founders don’t get preferred shares (I think it’s really, really rare). There is founder pref stock, which is somewhat different. It’s common for founders to cash out some shares along the way, though.
Founders that take a pay cut from a high paying job should demand preferential shares to the value they are giving up.
If they were in job where they were saving $50k a year, then after becoming a founder they should be getting $50k worth of preferential shares per year because they are investing that much in the business.
Not that I've actually ever heard of founders getting preferential shares to match their dollars invested.
Everything which is not your salary is completely speculative, and should be valued at near-zero. That you wanted to gamble on that was your own decision and your own fault. You have nobody to blame but yourself. If you had gotten rich from the stocks you wouldn't have complained here.
If you want to go with that tone... I wonder if you did not understand my English or if you lack basic logic?
I did not say that I felt scam because of my low salary. I said that I felt scam because the founders got rich and what I got didn't compensate the low salary.
Said differently, the founders got rich and I didn't get much at all. When I say "not much", it means "not nothing, but not a lot".
You took a gamble on a lower salary with the expectation that it would be compensated by your company stock going up in value.
I told you that there is no such guarantee, the only thing guaranteed is the salary you agree on. Everything else is speculative = gambling. Which is your decision, but don't cry later that you got scammed and that VC are cancer and so on.
But there's no reason for me to teach you, because you already learned it the hard way.
> You took a gamble on a lower salary with the expectation that it would be compensated by your company stock going up in value.
I did not. I joined a startup as a young graduate without thinking about what stocks meant at all.
> Which is your decision, but don't cry later
My decision was "let's join an exciting startup, probably those stocks won't ever have any value". I don't even care about the fact that I did not get more than I did: I never counted or even hoped for it.
But what wasn't clear to me back then was that I was being abused by the founders.
VC General Partners (managers of the VC fund) are already fiduciaries with responsibility to the fund's Limited Partners (people and institutions which invest in VCs). Their fiduciary responsibility is to maximize return on investment.
Speaking of accountability, if you look around and see the tech enshitified you have no one else to blame but the biggest investors in the vicinity. Like it or not they are building your future and more often than not it's just a byproduct of whatever the hell they think they're doing, not a deliberate milestone, which makes it even worse.
The root of the problem I think was caused by allowing institutional funds to invest money in VC firms. You combine that with the majority of the value being generated before they go public and you have a stock market which no longer works as a way to raise money for the company but as a way for VC´s to exit their positions and offloading companies on the public and funds.
yea but part of this is the consolidation of funding too. Standards to raise seed capital are soooo lofty now compared to 3 years ago. If you are in your in, if not good luck.
While Anil makes a lot of great comments about how VC has shifted towards institutional PE, the legal aspects he harps on are insignificant.
Until 2012 or so there was no legal concept of "venture capital". Around that time, the SEC adopted some new rules in response to the GFC. In those rules came the "venture capital adviser" exemption. To be a "venture capital adviser", a firm needed to avoid doing a lot of things that looked like private equity investments or hedge fund management. The only consequence of falling awry of the new "venture capital adviser" definition was registration as an "investment adviser" with the SEC.
The important anti-fraud provisions of the Advisers Act still apply to "venture capital advisers" even though they aren't registered (i.e., because they fit the "venture capital adviser" exemption), and most big VC shops would have probably been pushed to register for other reasons anyway.
We need something like an open source model or guild for VC, where successful people can put money into a pool that is generally accessible to anyone, with little friction. The idea would be to join the guild and gain access to funding, with a contract to contribute back some percentage of gross revenue and/or net profit, depending on how many people game the rules.
Honestly, wealth inequality has reached such epic proportions, that if someone came up with an alternative funding model, they could make VC lock-in obsolete. This is simultaneously extremely easy and extremely difficult to pull off. Money talks yes, but sometimes saying "your money's no good here" is more empowering.
There is something like this with crowdfunding called Reg CF (Regulation Crowdfunding) but it comes with many limitations. Ultimately the worry is that less wealthy people will invest their life savings in a scam and be rugpulled. Groups of accredited investors can, and definitely, do this. The problem is that these large funds have lost their scruples and it's hard to compete against a large fund that can outspend and out market a smaller one.
The article does not mention or address an important contributor to the current state of VC. The increase in regulations, post GFC, made it impractical/impossible for small companies to go public. And, until recently M&A was actively avoided. The alternative was to stay private longer offering higher returns for private investors wanting to capture a (previously non-existent) illiquidity premium. The co-dependency of companies and growth VC fueled an entirely new asset class (that many still call VC). As well as 100s of overfunded zombie unicorns.
Today, the AI boom is a perfect storm of opportunity to put $Ts to work in frontier model AI Cos.
"In recent years, as private markets inflated, the default behavior switched to remaining private and absorbing more capital (to justify more VC fee income). This has resulted in fewer IPOs, and worsening prospects post-IPO for venture-backed companies."
The issues raised in this article are very real but even aside from that, you end up enabling a class of zombie companies that have no pressure to succeed. Their founders raise and end up as advisors and LPs themselves eventually while employees at these companies receive equity that will never be liquid and will rarely be worth anything. At best the equity in these companies will be realized at steep discounts as the lack of liquid markets makes it very easy for private companies to claim that a company was valued at a certain amount at a certain time with avant certainty of what happens next. Companies stay unprofitable and private for decades, relying on private markets to stay solvent.
Pre-GFC plenty of undisciplined, unprofitable companies would IPO. While some did take public money then eventually go under, most just made their underwriters lose money. With pressure to trade publicly and put sunshine on company books, losers lost and winners won.
The result is a K-shaped economy. Private capital appreciates on paper and private capital holders take out loans on the inflated value of their equities. Meanwhile public markets are more discriminating and fiscally tight by necessity. A private company may eventually go under but cheap loans collateralized on private capital may be paid back before there's any financial reckoning.
> The increase in regulations, post GFC, made it impractical/impossible for small companies to go public.
Care to be more specific? "Regulations bad" is a pretty common platitude around here but you've stated your main thesis, here, without a hint of support to back it.
My observation is that the glut of available private credit has meant for at least 15 years there's been no need to go to public markets for funding, and that's the ultimate reason IPOs have become less common.
This hasn't made it "impossible" for companies to go public. It just eliminated the need. If you can raise billions of dollars in a G round why go to the public markets at all?
There's no strong consensus, but there's weak consensus that post-GFC regulation is a factor behind but is not causal in any way, for the decrease in IPOs. Here's a paper [1] (well it's the paper author discussing his paywalled paper lol) exploring SOX regulations and their effects on IPOs. There's other papers and I think a good survey will help you on this topic. I don't think there's consensus on regulations being the causal factor, but it is one of many.
I thought GP was modest in calling it out as simply a contributing factor. Regulation is complicated and reaching for it should be something done with care.
(Also FWIW, I think you're being a bit cheap by appealing to culture war talking points.)
Sure. SOX reg sec 302 and 404. Section 302 is a 100% dealbreaker for most companies, so I stand by my 'impossible' threshold. My comment was simply shorthand for all the upfront and downstream costs of going public, combined with fewer exit alternatives. Auditor/directors increased/personal liability, litigious shareholders, time and attention of management, etc. And, to your point, the lower cost of capital from growth investors. But that wasn't always the case. Certainly not true during the dot-com bubble (pre-SOX). I'll leave it to the academics to try to and isolate causality.
Sarbanes-Oxley passed in 2002 and the number if IPOs climbed between then, in the wake of the dot-com crash, and the GFC six year later, while the median age didn't change much:
If your claim was true you'd either expect a decline in IPOs or the age of those companies going up and neither is true during that period.
Now to be clear I'm not saying changes in regulation had no impact. Rather my claim is that regulations plus monetary policy and other macro effects fundamentally changed the structure of the market itself, thereby deincentivizing going public, rather than somehow acting as a break or barrier to IPOs.
Seriously? The "you can't knowingly lie in your financial statements, and you have to make an actual effort when compiling them" section?
If that's a "100% dealbreaker" to you, nobody should ever invest in your company, because you are literally complaining about not being able to defraud them!
I reject that for simple reasons of linear time. The GFC happened in 2008 and Dodd-Frank passed in 2010. Since then, there have been no large, notable regulations passed and Dodd-Frank was watered down a bit in 2018.
While Sarbanes-Oxley did make it substantially harder for small companies (market cap <$1B) to go public, there was a wave of very affordable and notable IPOs throughout the 2010s - Tesla at $2B, Shopify at $1B, Square at $3B, LinkedIN at $4B, etc. All of these have now grown substantially since their IPOs, with Square (absolute dog) being worth 10x their IPO. So yes, SOX killed micro-IPOs, but GFC/Dodd-Frank did not kill affordable IPOs.
Now, you're right that IPOs have grown a lot more expensive over time, but you're absolutely wrong to attribute it to increased regulations post GFC. The actual answer is much more closely related to what the article is talking about - VCs realized how much growth and returns they were leaving on the table and there has been substantial pressure on firms to stay private as long as possible, as well a huge increase in larger rounds and private credit. In fact, rather than increased regulations, there has been a loosening of regulations that allow investors to use SPVs (and SPVs of SPVs, and SPVs of SPVs of SPVs, a veritable matrioshka of SVPs) to get around the maximum number of shareholders a private company can have.
I have seen this first-hand - part of my investing strategy was to blindly buy cheap tech IPOs and that got me some great returns, but this strategy no longer works, because the VCs have effectively managed to hoover up any decent returns retail investors could get. Today you gotta be on AngelList or other platforms (only qualify investors, obviously, more exclusion) buying secondaries if you want decent returns.
Don't want to split hairs here, but SOX was pre-GFC, so I'm not attributing it to only post-GFC. My first-hand experience discussing personal liability with a BoD lasted about 3 seconds. LOL.
Yeah, I did barely cover the shift in dynamics around IPOs. I originally had a lot more on that, but cut a lot out. I think what you point out is absolutely a huge factor.
I think privatization is always a metric of the functionality and thrust level in a society. Cohesive, honest society, socialized health care.
Messy, parralell society ladden mess, private healthcare. Basically the thrust that was in a society gets moved into a smaller parallel privat society.
Sarbox is a drag, but another issue is the rise of the securities plaintiffs bar. Public companies are subject to Rule 10b-5 claims on each statement they make because the market can "rely" on that statement. This means every public interview, press release, and even tweet needs to be scrutinized by lawyers or risk subjecting the company to expensive lawsuits because the founder's "misstatement" moved the stock price by 45 cents.
I've never run a public company, but my bet is the mechanical filings, etc are way less of a burden than shareholder litigation.
The principle is simple. VCs are soccer stars, but founders play basketball.
Basketball and soccer share much in common. For instance, both involve teams dribbling, passing, and shooting a round ball. But successful abilities and traits in one may not translate to the other.
Think of each profession as a different sport. Venture, growth, and value investing all differ from each other, and all differ from founding.
VCs are all driven and highly intelligent, but so are lawyers, bankers, and consultants. Talent isn't the issue.
Capital confers authority, but not expertise.
Based on resume alone, 90% of VCs would not earn board seats at their portfolio companies. Their experience and skills, much like consultants and value investors, were honed on a field different from the basketball arena where founders compete.
To clarify, great VCs are absolutely worth the premium and can reshape a startup's trajectory as all great advisors can. If you find a great VC, do not haggle. Strike a deal, and return to building.
The greatest VCs exhibit the same pattern, understanding their role on the startup team as advisors, not alphas. They are often understated and work tirelessly on behalf of their clients.
The worst VCs exhibit the inverse pattern and imagine themselves as the alpha, not appreciating how a talented peer could have replaced them without changing the exit. They are loud on social media and assume accomplishments from finance or FAANG map to the startup arena. These VCs should run funds on Wall Street, not advise founders in Silicon Valley.
How do we surface good VCs without unfairly spotlighting bad ones? Many good VCs, as with many good advisors, prefer subdued profiles and dislike self-promotion. This is the challenge.
The original idea was to flag bad VCs, but such a system grants founders too much power to levy unjust charges and settle personal feuds.
After all, many disputes are legitimate and stem from bad founders. Founders, like all professionals, sit on a spectrum. The surge of big money has spawned plenty of bad ones who, sadly enough, do not represent the best of tech and innovation but rather greed and self-aggrandizement.
The Pincus post sparked a cleaner iteration.
The proposal is a public page/spreadsheet where only founders can post, only after an outcome or a certain number of years, and only with affirmative assessments. Nothing negative, nothing anonymous. Posts must certify no quid pro quo or other VC prodding.
Topics could include responsiveness, support during dark days, absence of alpha syndrome, and other key considerations.
Over time, good VCs should reveal a clear pattern and attract new founders: founders trusting them again with repeat business and consistent high marks across the portfolio, not only unicorns. Arguably, the strongest signal will radiate from the worst outcomes.
Critically, this system won't incite mob justice or expose VCs to unfair accusations, but can still suggest who to diligence more deeply.
The purpose is to highlight good VCs who advance innovation and startups over time, letting their body of work rise to the top and garner proper recognition.
Of course, it penalizes newer investors and is vulnerable to gaming like any system, but it plugs a small gap. Founders want to find good investors based on historical data, but good investors dislike boasting.
I think tech founders need to think smaller. Build software for a few thousand people and make a profit from it. Something niche. Something that is sustainable with a small team.
VC eats up everything that's becoming bigger. And they will kill it. Their goal is not to run a healthy business that serves their customers. They try to take out as much money as possible and then trash it.
This is it. Sustainability. Not everything has to be about more money quickly. You don't even need VCs for that. More win to bootstrappers! I see a lot of folks bootstrapping in the LLM era, but that can be defeaned in the VC noise.
Exactly. And the dangerous mindset tends to be worse than just "more money quickly": it's far too commonly "if this can't become the next Facebook/iPhone/ChatGPT, it's not worth doing." The only options are "take over the world" or "fail"; there's no room (in many people's heads) for a product that makes a decent, steady profit and continues to do so over the course of many years.
There is, is just different capital for those companies (debt, growth equity, angels, grants) and less attention. There’s far more of these types of companies too.
They don't give a shit about making a good product, the literal only thing any of these ghouls care about is line going up in the short term, because if line goes up they can dump their investments and move on to the next entity that they can get their greedy claws on and devour.
This is becoming more and more of a problem. For a small software company it could become an asset. Tell customers they are privately owned and small, and therefore won't be acquired by VCs.
Traditionally big vendors were more trustworthy and stable, that's no longer the case.
Edit: I'm not talking about end users, most commercial software is licensed by companies.
In that environment the founder has no hope or reason to go public, making equity in the company worthless.
VC used to push to public exits in order to maximize the founders and VCs stake which turned employees equity to a liquid asset. Truly aligning everyones interests, nowadays not so much.
You're forgetting about dividend, and off-market trade.
If a company is worthless if it isn't public, then IKEA would be absolute garbage. Quite strange for a company making hundreds of millions in profit for its owners.
The insane valuations for selling a dream are what make VC worthwhile.
TSLA would be worth crap if it were a private company giving off dividends. It is really truly about the insane valuations driven by collective delusion.
Because you still need a good sales and product team. Speak with potential customers, understand their problems. Building the software was never the hard part.
I think the current gold-rush of nearly all money into GPU Datacenter and frontier LLMs is essentially starving the economy of innovation.
Academics and founders who might work on developing practical products using NN / ML / RL techniques to solve a realworld problem in engineering/logistics/medicine are not getting investment money. VCs and most people are blind to the fact there is AI outside of LLMs, despite the fact that we have seen AlphaGo and AlphaFold as evidence of non-LLM AI progress in hard domains.
This is perhaps a sub-problem of a larger issue - hyper-inequality means that capital is not allocated to talent [ capital is localized, talent is more widely spread throughout the population ].
We are not getting money to things that will grow our future such as :
- small innovative startups
- university science research
- people who are young enough to have kids, being able to afford them
- new garage bands / authors / musicians / photographers
- public works / infrastructure / libraries
- local retail : bookshop, artisanal bakery, cafe
My thesis is that during the 70s-90s we had higher tax, lower inequality, lower median income to median house price ratio, higher levels of innovation and more original art, literature and music being made.
AI could be a golden age of human flourishing - but thats not where we are heading, what we are seeing is a territory rush by the megacorps.
I've been feeling this for years. From my perspective, the purpose of VCs was to:
- Waste my time filling out forms to participate in incubators they would always reject me for.
- Fund my competitors so much as to drive up CPC for any given keyword as to make make ROI on ads impossible.
- Monopolize all tech markets through a variety of ways including contributing to the culture of making it taboo for companies to purchase solutions from small vendors who aren't funded by them. My friend who did get into the club described the ecosystem as 'incestuous'. The circular deals we saw going on with AI companies and hardware companies recently are not new; just the same thing they always did, on a bigger scale.
I entered the industry in 2012 so for me it has always been like this.
The 2 groups getting fucked with the stay private longer trend are the LPs and the startup employees.
We should insist on public policy forcing public money into only public assets. It's the obvious sensible rule.
And company safes need to start including a clause where all classes of vested equity are offered buyouts in equal proportions. So VCs can't keep paying founders/each other on the way up while zeroing out common stock and eventually selling company IP for around the liquidity preference to some "totally unrelated" entity. Realistically this will only happen if YC gets onboard but I doubt Garry tan is the guy who can show this kind of spine.
A huge chunk of the demand is already fake. It's why there are so many auto-enabled "helpers", blinking nag buttons, and popups begging you to pleasepleaseplease use their new AI feature. The vast majority of people are simply ambivalent about the vast majority of AI integrations, so companies have to take increasingly-desperate measures to artificially keep their MAU up and pretend that they haven't wasted a huge amount of money. And all of that is before we get into the heavily-subsidized LLM subscriptions for the people who do want to use it.
User base and demand are irrelevant when it comes to a bubble. People invest because Line Goes Up, which in turn makes Line Goes Up, convincing people to invest. As the saying goes: markets can remain irrational a lot longer than you and I can remain solvent.
It was already great when I first read it ~10 years ago. And his linked post about VCs writing extremist manifestos from 2023 is arguably better than this one. But this post is amazing as well.
I wonder how many iterations it takes to remove all the extra words and reach this 0% fat state.
Both articles also brought me to a peak / cliff hanger type of place. The post from 2023 doesn’t even have a follow up!
Though I didn’t like the repetition of the phrase (“cancer capital”) he clearly wants to coin. It’s Trump-like. More importantly, it’s the kind of thing simpletons do. Or people who think of their audience as simpletons.
> This is how brazen, how toxic and destructive, we’ve allowed the industry formerly known as venture capital to become. We must understand that it is no longer a financial machine that is used to fund startups, but a political and social machine focused on dismantling democracy and civil society. And it’s time to act accordingly.
Its at least heartening to see a broad recognition across many circles and communities of how insane wealth/power concentration, corruption and insane laws like Citizens United are dismantling democracy today. But a16z and others are still pushing their own techno-utopia anti-doomer message that a lot of useful idiots buy into, even though it serves to detract from the political and social root causes of our problems today and instead says even more technology will fix it all.
Reminds me of this post from earlier in the year (from a VC, Michael Dempsey) titled "VC-Backed Startups are Low Status"[0], which I'm inclined to agree with, having been in the industry for over 15 years now and witnessing how the vibe shifted from "techies are good" to "techies are bad" over this period.
I graduated into a tech workforce that was a celebrated part of society (i.e. "high status") to one that is decidedly not (and I'd say it's grown to deserve this disrepute).
The first main wave of the vibe going negative (at least at the heart of the 'imperial core' in the SF Bay Area) was around ~2013/14 (the 'tech co bus protests'), then again around ~2018 ("don't call SF General 'Zuck General'"), and now it's kicked into a much higher gear during this current AI wave. It spans big tech co's to startups to everything in between. Anil's post speaks to this too, when he says:
> Politicians and media still look at VC as if it works like it did 10 or 20 years ago, and cheer them on ... when their primary goal is concentrating power and wealth
It's not just VC per se, but the 'managerial class' within tech rotted into mostly career-climbing types that were a far cry from impassioned creative technologists aiming to 'do good' with tech. It became the same status-bound competition you'd find on Wall Street and elsewhere (which the Dempsey post describes well).
I have a mentality and overall life orientation that is aligned with Anil and celebrates the open web, public interest technology, and so forth, and many of my peers in tech (often from elite universities and backgrounds) look at me as a strange creature. I'll bring up the need to increase awareness about Public AI and boosting AI literacy among citizens, and I hear, "Wow, you like, really care about like, people. That's so interesting." It's unbelievable, I wish I was kidding.
Thanks for writing this Anil. I wish for better days.
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[ 0.21 ms ] story [ 28.2 ms ] threadI didn't know that VCs were ever "not cancer", I've always known them like that. Also my experience with startups is that it is a big scam for employees, but I understand it's not always the case (maybe it depends on where in the world?). I have been an early employee in multiple startups that got the founders rich, and what I got from the stocks didn't compensate for the low salary while working there.
Do I understand correctly that when VCs invest, they dilute the employees and somehow the founders can get away without being diluted? That's the only way I could explain the difference between what the employees get and what the founders get if the startup is successful.
And young people are super excited to work in startups because of old stories like "early employees at Google/Facebook became rich", I guess.
Would you mind asking before saying what I have been promised?
Also it feels like you have never been in a startup. The whole language of growth everywhere, the "billion-dollar startup", the "becoming a unicorn", this is all suggesting that "you're part of it and it matters to you if it becomes a unicorn". But it doesn't, really. Because you get diluted.
At this day and age, if you don't understand dilution before you join, it's entirely on you.
This isn't a new concept - it was the case decades ago. Even when I left school over 15 years ago, the standard advice when trying to get a job with a startup was "Get a good salary and value the equity at zero."
And class A vs class B isn't even a rich vs everyone else thing. I have class A shares in an LLC, where even the (richer) founders are class B. The operating agreement is that we class A folks are "guaranteed" a fixed rate of return on our investment, and the class B folks don't get anything unless we get at least that rate of return. This is very normal in that industry.
I don't know what to tell you. Young graduates get an offer to work at a startup, nobody tells them how it works. They are just excited, as I was. And they don't think about "what happens if the startup is successful" because they do know it probably won't be.
And when the startup is successful (happened to me) is when they realise that they got scammed. But all they can do is see their founders become rich and tell everyone why THEY deserve it because it was THEIR idea and THEY are the best.
> the standard advice when trying to get a job with a startup was "Get a good salary and value the equity at zero."
That does not say AT ALL that the founder gets rich when you get nothing. It says "be careful, most startups fail, so make sure you get a salary". Usually that salary is subpar.
That one is covered under the standard advice of "comparison is the thief of joy".
>Usually that salary is subpar.
If it was subpar, then the salary would not have been accepted.
Turns out it was. Young graduate excited with the mission, and all that bullshit.
It would be a scam if they promised you 0.2% of the company but then it was diluted to 0.1%. and nobody prevents you from asking i think. Otherwise it's no more a scam than a lottery ticket commercial showing the guy who won a Ferrari.
I guess being honest brings about too many opportunities for people who don’t understand the finances to make (or be perceived to make ) promises they can’t keep. So you might as well just get into a race to present the most ridiculous stuff possible.
So that's a scam by the founders to the employees, in my book. It's fine, it's just that I am not sure young professionals joining a startup know that.
Said differently, if you join a startup, you should not work too much without compensation, and you should not care about making it super valuable, because you don't benefit from it. If you have a super good idea or realise you have expertise that would make the startup valuable, you should leave and become a founder yourself.
VCs get preferential shares. Preferential shares have economic rights to protect the investors, but more importantly they usually have extra control rights like veto abilities, board seats, IPO control, or ability to sack the founder (which may even cut out the founder's voting rights by sunsetting their class A common into class B common shares).
Employees get a third tier of stock (e.g. options that convert to non-voting class B common shares).
After IPO the preferential sheets becomes common shares. The dual A class may be removed or have sunset clauses because large public investors prefer one plain common share class.
Not a VC - so take above as written by a student. Founders in zero sense have the same voting control as VCs.
Pref shares with a 1x preference are still worth like 10x common stock in early stage companies and it’s common for employed to get fucked by this.
Founders don’t get preferred shares (I think it’s really, really rare). There is founder pref stock, which is somewhat different. It’s common for founders to cash out some shares along the way, though.
If they were in job where they were saving $50k a year, then after becoming a founder they should be getting $50k worth of preferential shares per year because they are investing that much in the business.
Not that I've actually ever heard of founders getting preferential shares to match their dollars invested.
Duh.
> That you wanted to gamble on that
What makes you think I gambled at all?
You could have worked somewhere else instead for a higher salary if you weren't gambling.
Or if nobody would have hired you for a higher salary somewhere else, then maybe your salary at the startups wasn't so low after all?
I did not say that I felt scam because of my low salary. I said that I felt scam because the founders got rich and what I got didn't compensate the low salary.
Said differently, the founders got rich and I didn't get much at all. When I say "not much", it means "not nothing, but not a lot".
I told you that there is no such guarantee, the only thing guaranteed is the salary you agree on. Everything else is speculative = gambling. Which is your decision, but don't cry later that you got scammed and that VC are cancer and so on.
But there's no reason for me to teach you, because you already learned it the hard way.
I did not. I joined a startup as a young graduate without thinking about what stocks meant at all.
> Which is your decision, but don't cry later
My decision was "let's join an exciting startup, probably those stocks won't ever have any value". I don't even care about the fact that I did not get more than I did: I never counted or even hoped for it.
But what wasn't clear to me back then was that I was being abused by the founders.
We need an equivalent of the "Fiduciary" word for financial advisors ... but applied to VCs.
"Are you an Artisanal, Free-Range, Fair-Trade™ VC?"
Until 2012 or so there was no legal concept of "venture capital". Around that time, the SEC adopted some new rules in response to the GFC. In those rules came the "venture capital adviser" exemption. To be a "venture capital adviser", a firm needed to avoid doing a lot of things that looked like private equity investments or hedge fund management. The only consequence of falling awry of the new "venture capital adviser" definition was registration as an "investment adviser" with the SEC.
The important anti-fraud provisions of the Advisers Act still apply to "venture capital advisers" even though they aren't registered (i.e., because they fit the "venture capital adviser" exemption), and most big VC shops would have probably been pushed to register for other reasons anyway.
The legal stuff is nearly irrelevant here.
Honestly, wealth inequality has reached such epic proportions, that if someone came up with an alternative funding model, they could make VC lock-in obsolete. This is simultaneously extremely easy and extremely difficult to pull off. Money talks yes, but sometimes saying "your money's no good here" is more empowering.
Today, the AI boom is a perfect storm of opportunity to put $Ts to work in frontier model AI Cos.
"In recent years, as private markets inflated, the default behavior switched to remaining private and absorbing more capital (to justify more VC fee income). This has resulted in fewer IPOs, and worsening prospects post-IPO for venture-backed companies."
https://x.com/credistick/status/2092259921177804930
So, maybe more regulation is not the answer.
The issues raised in this article are very real but even aside from that, you end up enabling a class of zombie companies that have no pressure to succeed. Their founders raise and end up as advisors and LPs themselves eventually while employees at these companies receive equity that will never be liquid and will rarely be worth anything. At best the equity in these companies will be realized at steep discounts as the lack of liquid markets makes it very easy for private companies to claim that a company was valued at a certain amount at a certain time with avant certainty of what happens next. Companies stay unprofitable and private for decades, relying on private markets to stay solvent.
Pre-GFC plenty of undisciplined, unprofitable companies would IPO. While some did take public money then eventually go under, most just made their underwriters lose money. With pressure to trade publicly and put sunshine on company books, losers lost and winners won.
The result is a K-shaped economy. Private capital appreciates on paper and private capital holders take out loans on the inflated value of their equities. Meanwhile public markets are more discriminating and fiscally tight by necessity. A private company may eventually go under but cheap loans collateralized on private capital may be paid back before there's any financial reckoning.
Care to be more specific? "Regulations bad" is a pretty common platitude around here but you've stated your main thesis, here, without a hint of support to back it.
My observation is that the glut of available private credit has meant for at least 15 years there's been no need to go to public markets for funding, and that's the ultimate reason IPOs have become less common.
This hasn't made it "impossible" for companies to go public. It just eliminated the need. If you can raise billions of dollars in a G round why go to the public markets at all?
I thought GP was modest in calling it out as simply a contributing factor. Regulation is complicated and reaching for it should be something done with care.
(Also FWIW, I think you're being a bit cheap by appealing to culture war talking points.)
[1]: https://corpgov.law.harvard.edu/2009/09/21/the-effect-of-sox...
Sarbanes-Oxley passed in 2002 and the number if IPOs climbed between then, in the wake of the dot-com crash, and the GFC six year later, while the median age didn't change much:
https://site.warrington.ufl.edu/ritter/files/IPOs-Age-of-Com...
If your claim was true you'd either expect a decline in IPOs or the age of those companies going up and neither is true during that period.
Now to be clear I'm not saying changes in regulation had no impact. Rather my claim is that regulations plus monetary policy and other macro effects fundamentally changed the structure of the market itself, thereby deincentivizing going public, rather than somehow acting as a break or barrier to IPOs.
If that's a "100% dealbreaker" to you, nobody should ever invest in your company, because you are literally complaining about not being able to defraud them!
While Sarbanes-Oxley did make it substantially harder for small companies (market cap <$1B) to go public, there was a wave of very affordable and notable IPOs throughout the 2010s - Tesla at $2B, Shopify at $1B, Square at $3B, LinkedIN at $4B, etc. All of these have now grown substantially since their IPOs, with Square (absolute dog) being worth 10x their IPO. So yes, SOX killed micro-IPOs, but GFC/Dodd-Frank did not kill affordable IPOs.
Now, you're right that IPOs have grown a lot more expensive over time, but you're absolutely wrong to attribute it to increased regulations post GFC. The actual answer is much more closely related to what the article is talking about - VCs realized how much growth and returns they were leaving on the table and there has been substantial pressure on firms to stay private as long as possible, as well a huge increase in larger rounds and private credit. In fact, rather than increased regulations, there has been a loosening of regulations that allow investors to use SPVs (and SPVs of SPVs, and SPVs of SPVs of SPVs, a veritable matrioshka of SVPs) to get around the maximum number of shareholders a private company can have.
I have seen this first-hand - part of my investing strategy was to blindly buy cheap tech IPOs and that got me some great returns, but this strategy no longer works, because the VCs have effectively managed to hoover up any decent returns retail investors could get. Today you gotta be on AngelList or other platforms (only qualify investors, obviously, more exclusion) buying secondaries if you want decent returns.
I've never run a public company, but my bet is the mechanical filings, etc are way less of a burden than shareholder litigation.
The principle is simple. VCs are soccer stars, but founders play basketball.
Basketball and soccer share much in common. For instance, both involve teams dribbling, passing, and shooting a round ball. But successful abilities and traits in one may not translate to the other.
Think of each profession as a different sport. Venture, growth, and value investing all differ from each other, and all differ from founding.
VCs are all driven and highly intelligent, but so are lawyers, bankers, and consultants. Talent isn't the issue.
Capital confers authority, but not expertise.
Based on resume alone, 90% of VCs would not earn board seats at their portfolio companies. Their experience and skills, much like consultants and value investors, were honed on a field different from the basketball arena where founders compete.
To clarify, great VCs are absolutely worth the premium and can reshape a startup's trajectory as all great advisors can. If you find a great VC, do not haggle. Strike a deal, and return to building.
The greatest VCs exhibit the same pattern, understanding their role on the startup team as advisors, not alphas. They are often understated and work tirelessly on behalf of their clients.
The worst VCs exhibit the inverse pattern and imagine themselves as the alpha, not appreciating how a talented peer could have replaced them without changing the exit. They are loud on social media and assume accomplishments from finance or FAANG map to the startup arena. These VCs should run funds on Wall Street, not advise founders in Silicon Valley.
How do we surface good VCs without unfairly spotlighting bad ones? Many good VCs, as with many good advisors, prefer subdued profiles and dislike self-promotion. This is the challenge.
The original idea was to flag bad VCs, but such a system grants founders too much power to levy unjust charges and settle personal feuds.
After all, many disputes are legitimate and stem from bad founders. Founders, like all professionals, sit on a spectrum. The surge of big money has spawned plenty of bad ones who, sadly enough, do not represent the best of tech and innovation but rather greed and self-aggrandizement.
The Pincus post sparked a cleaner iteration.
The proposal is a public page/spreadsheet where only founders can post, only after an outcome or a certain number of years, and only with affirmative assessments. Nothing negative, nothing anonymous. Posts must certify no quid pro quo or other VC prodding.
Topics could include responsiveness, support during dark days, absence of alpha syndrome, and other key considerations.
Over time, good VCs should reveal a clear pattern and attract new founders: founders trusting them again with repeat business and consistent high marks across the portfolio, not only unicorns. Arguably, the strongest signal will radiate from the worst outcomes.
Critically, this system won't incite mob justice or expose VCs to unfair accusations, but can still suggest who to diligence more deeply.
The purpose is to highlight good VCs who advance innovation and startups over time, letting their body of work rise to the top and garner proper recognition.
Of course, it penalizes newer investors and is vulnerable to gaming like any system, but it plugs a small gap. Founders want to find good investors based on historical data, but good investors dislike boasting.
https://x.com/search?q=from:markpinc%20israel&src=typed_quer...
VC eats up everything that's becoming bigger. And they will kill it. Their goal is not to run a healthy business that serves their customers. They try to take out as much money as possible and then trash it.
Traditionally big vendors were more trustworthy and stable, that's no longer the case.
Edit: I'm not talking about end users, most commercial software is licensed by companies.
VC used to push to public exits in order to maximize the founders and VCs stake which turned employees equity to a liquid asset. Truly aligning everyones interests, nowadays not so much.
If a company is worthless if it isn't public, then IKEA would be absolute garbage. Quite strange for a company making hundreds of millions in profit for its owners.
TSLA would be worth crap if it were a private company giving off dividends. It is really truly about the insane valuations driven by collective delusion.
These days, it can be sustainable for a tiny team, named Claude and Luna.
Why doesn't every engineer have a side project or three for small market things of this caliber in 2026?
Academics and founders who might work on developing practical products using NN / ML / RL techniques to solve a realworld problem in engineering/logistics/medicine are not getting investment money. VCs and most people are blind to the fact there is AI outside of LLMs, despite the fact that we have seen AlphaGo and AlphaFold as evidence of non-LLM AI progress in hard domains.
This is perhaps a sub-problem of a larger issue - hyper-inequality means that capital is not allocated to talent [ capital is localized, talent is more widely spread throughout the population ].
We are not getting money to things that will grow our future such as :
My thesis is that during the 70s-90s we had higher tax, lower inequality, lower median income to median house price ratio, higher levels of innovation and more original art, literature and music being made.AI could be a golden age of human flourishing - but thats not where we are heading, what we are seeing is a territory rush by the megacorps.
- Waste my time filling out forms to participate in incubators they would always reject me for.
- Fund my competitors so much as to drive up CPC for any given keyword as to make make ROI on ads impossible.
- Monopolize all tech markets through a variety of ways including contributing to the culture of making it taboo for companies to purchase solutions from small vendors who aren't funded by them. My friend who did get into the club described the ecosystem as 'incestuous'. The circular deals we saw going on with AI companies and hardware companies recently are not new; just the same thing they always did, on a bigger scale.
I entered the industry in 2012 so for me it has always been like this.
What is it that Anil Dash thought the purpose of these firms was?
We should insist on public policy forcing public money into only public assets. It's the obvious sensible rule.
And company safes need to start including a clause where all classes of vested equity are offered buyouts in equal proportions. So VCs can't keep paying founders/each other on the way up while zeroing out common stock and eventually selling company IP for around the liquidity preference to some "totally unrelated" entity. Realistically this will only happen if YC gets onboard but I doubt Garry tan is the guy who can show this kind of spine.
- stop using claude
- stop using open AI
- guess what happens?
- user base drops to 0
- demand drops to 0
- both companies go bankrupt
- no need for data centers anymore? see its that simple
- in the first step, convince all the HN guys to cancel their subscriptions
User base and demand are irrelevant when it comes to a bubble. People invest because Line Goes Up, which in turn makes Line Goes Up, convincing people to invest. As the saying goes: markets can remain irrational a lot longer than you and I can remain solvent.
It was already great when I first read it ~10 years ago. And his linked post about VCs writing extremist manifestos from 2023 is arguably better than this one. But this post is amazing as well.
I wonder how many iterations it takes to remove all the extra words and reach this 0% fat state.
Both articles also brought me to a peak / cliff hanger type of place. The post from 2023 doesn’t even have a follow up!
Though I didn’t like the repetition of the phrase (“cancer capital”) he clearly wants to coin. It’s Trump-like. More importantly, it’s the kind of thing simpletons do. Or people who think of their audience as simpletons.
Its at least heartening to see a broad recognition across many circles and communities of how insane wealth/power concentration, corruption and insane laws like Citizens United are dismantling democracy today. But a16z and others are still pushing their own techno-utopia anti-doomer message that a lot of useful idiots buy into, even though it serves to detract from the political and social root causes of our problems today and instead says even more technology will fix it all.
I graduated into a tech workforce that was a celebrated part of society (i.e. "high status") to one that is decidedly not (and I'd say it's grown to deserve this disrepute).
The first main wave of the vibe going negative (at least at the heart of the 'imperial core' in the SF Bay Area) was around ~2013/14 (the 'tech co bus protests'), then again around ~2018 ("don't call SF General 'Zuck General'"), and now it's kicked into a much higher gear during this current AI wave. It spans big tech co's to startups to everything in between. Anil's post speaks to this too, when he says:
> Politicians and media still look at VC as if it works like it did 10 or 20 years ago, and cheer them on ... when their primary goal is concentrating power and wealth
It's not just VC per se, but the 'managerial class' within tech rotted into mostly career-climbing types that were a far cry from impassioned creative technologists aiming to 'do good' with tech. It became the same status-bound competition you'd find on Wall Street and elsewhere (which the Dempsey post describes well).
I have a mentality and overall life orientation that is aligned with Anil and celebrates the open web, public interest technology, and so forth, and many of my peers in tech (often from elite universities and backgrounds) look at me as a strange creature. I'll bring up the need to increase awareness about Public AI and boosting AI literacy among citizens, and I hear, "Wow, you like, really care about like, people. That's so interesting." It's unbelievable, I wish I was kidding.
Thanks for writing this Anil. I wish for better days.
[0] https://mhdempsey.substack.com/p/vc-backed-startups-are-low-...