VC Makes the World Better
Like it or hate it, super rich investors have made the world better.
Venture capital (VC) is one of the best things to happen to our economy in the last several decades because of investor subsidized products.
The essence of VC is that they raise a fund, invest in 10-30 businesses, and one business grows so fast that it returns the entire value of the fund. They take the money they made, pay their investors, and pay themselves.
The thing with VC is that products are largely investor-subsidized until companies can figure out monetization. Essentially, the businesses get a lot of users, figure out how to monetize, then IPO at a huge P/E or sell to an even larger business for a whole lot of money. The startups are giving a product away for free/super cheap and getting a huge crowd of people using it, then selling the crowd.
This is what Instagram did. And Snap. And Uber. And Pinterest. And Twitter. And Lyft. And Facebook. And Doordash. And Coinbase. And Netflix. And Stripe.
Most of these businesses either still aren’t profitable or just became profitable. The public businesses IPO’d before they were profitable.
In each of these cases, the consumer, often for 10+ years, got an investor-subsidized product. It's investor-subsidized because the business is looking to change consumer behavior. Businesses taking VC investment are looking to change an industry, not just be another player. It takes money to even be able to make the bet that the product or service will become the new standard, and that new product or service must be sold at a loss until a critical mass of customers is reached.
Uber is the best example. In their S-1, they even say they aren’t sure if the business can ever be profitable. Uber’s prices are so cheap because investors want even more adoption and cultural change than they’ve gotten that they continue to write checks to keep fares low. In the end, the consumer wins.
Doordash got investors to underwrite food delivery for years, allowing the consumer to win.
Stripe made credit card processing simple, allowing the consumer to win.
Netflix with original content.
In the end, especially with Uber, we have no idea if they’ll be profitable. We don’t know if Snap will make it or if Coinbase will reach market escape velocity, but in each of these cases, the end user got the best end of the deal because investors subsidized that experience in order to make a long-term profit.
With this, there’s low downside because these products were subsidized when the companies were private. If the publicly-traded companies fail, everyone knew where the companies were, financially, when they invested. If the private companies fail, the investors lose.
With it, there are even better outcomes coming.
Look at Lambda School. They’re backed by Google, Stripe, Ashton Kutcher, Y Combinator and they give students the option to get their education to be a great software developer at no tuition cost. Then, the students pay Lambda School 17% of your post-graduate salary for the first 24 months, only if the students make over $50,000.00/year.
This is venture-backed education company, and the downstream effects are huge. We have a change in education business model for a program that gets graduates high-paying jobs in a space that makes the entire economy more efficient, leading to greater wealth across the board.
It’s all to say that private investment fueling subsidized products has made the economy better.
The risk is low, and I don’t know anyone who wouldn’t rather take a taxi than an Uber, or live life without Netflix after having experienced how great the service is.
So, while there are mixed views on the VC business model, we can’t help but be grateful that our lives have gotten better because of it.