Is Venture Capital Bad? | Adam Neumann vs Charles Duhigg | The New Yorker on WeWork

Venture Capital Is it good or is it bad? I'm John Coogan, and today we are finally going to get to the bottom of this pressing question. Now, obviously there's no definitive answer, but Charles Duhigg's latest article in the New Yorker criticizes the VC industry pretty heavily, so I thought it would be good to examine some of what I think Duhigg gets right, as well as some of the conclusions that I think are a bit more of a stretch. Full disclosure, I generally like both venture capital and the New Yorker. I've raised over 10 rounds of VC funding in my career, and I've also been a reader of the New Yorker for over 10 years, so I didn't immediately write off either side of the debate. And honestly, I just think it's kind of fun to see these two clashing. The core thesis of Duhigg's piece is that venture capitalists encourage recklessness by providing early stage companies with overly large funding rounds. Now, this idea is nothing new. In fact, Eric Paley, a partner at Founder Collective, penned a piece in TechCrunch four years ago warning founders about the risks of raising too much money. But while Paley focuses on the individual risks to founders, Duhigg instead focuses on the systemic risks to the American capitalist system. His worry is that the current state of venture capital is actually limiting innovation by pouring too much money into losing companies and making it impossible for the stronger company to win. This is an interesting point to debate. It's true that venture capital has grown significantly over the past decade, and it's also true that rounds of over $100 million or megadeals have grown even faster. There have also been a bunch of high profile startup failures like Theranos and Juicero, so it's worth investigating if there is a causal relationship between venture capital and failure. Duhigg focuses on WeWork as his cornerstone example of what can happen when a startup gets too much funding and flies off the rails. WeWork is a great case study because unlike Theranos, who raised money from outside of Silicon Valley, WeWork was actually backed by traditional venture capitalists. And unlike Juicero, WeWork raised over $10 billion and has now been in business for over 10 years. Juicero raised less than 1% of that before flaming out in just a few years. And Perhaps most importantly, WeWork is a salacious story. The founder Adam Neumann is clearly a crazy character, so much so that Hollywood is already planning to make a movie about the WeWork saga. And people love stories about high flying failures. Just look at the Slide Bean YouTube channel and you can tell that demand for stories about business disasters fall far outpaces any other type of content. I'll be honest, I love reading these types of accounts, and even though I already knew most of the details, I still enjoyed the way Duhigg tells the story. Most impressively, he actually managed to get one of the WeWork board members to speak on the record about the company. This is extremely rare since confidentiality agreements are commonplace and discussing company drama with the press usually only hurts your company. As a board member, you you have a fiduciary duty to the shareholders of the company. So if you say something negative to a reporter and that winds up hurting your company, you could actually be sued. But the fact that WeWork was such a disaster doesn't really indict the entire tech industry in my mind. WeWork was founded in 2010, the same year that Pinterest, Datadog and Sumo Logic were all founded. These three companies might not have been as high profile as WeWork, but all three were heavily VC backed, raised over $100 million in funding, and and are now publicly traded companies. They're all doing fine. And this underscores one of the main criticisms VCs always get. The industry is designed to place big bets on lots of companies, knowing full well that many will fail. No one has a crystal ball to see exactly what will work, so the VC industry tests many ideas in parallel. Duhigg doesn't explicitly take umbrage with the idea of diversified early stage investing as a strategy. He instead argues that VCs should be more engaged in the everyday management of the company. To illustrate this point, he cites the role Tom Perkins played in Genentech's growth back in the 1970s. Perkins not only took a board seat, but actually spent one afternoon per week in the startup's offices helping the company directly. This is a great story and Tom Perkins is obviously a legendary vc, but it glosses over some important facts about what his firm, Kleiner Perkins, was actually doing in the 1970s. The first fund posted amazing returns of over 40% per year, but not every investment was a success. One of the first companies they backed was called Advanced Recreation Equipment and they manufactured a very silly looking snowmobile motorcycle. The device was sold in the back of magazines under the brand name Snow Job. Terrible, I know. And the company got crushed when the oil embargo hit and gasoline prices spiked. If venture capital had been under the microscope back in the 70s, you could totally imagine a big article about how the Snow Job was nothing new and and a huge waste of money that could have gone to more promising businesses. But today we don't remember Tom Perkins for the snow job. We just remember Genentech. This is the survivorship bias in action, and it distorts the way we see the world. It's easy to look back and say today's VCs should be like Tom Perkins. But maybe you don't get Genentech's synthetic insulin without trying out the snow jobs. Snowmobile Motorcycle, first gen Shifting back to the New Yorker piece, Duhigg hits pretty hard on the role that late stage venture capital plays in distorting markets. He continually cites SoftBank as a major culprit, and he's right to do so. SoftBank has had some real misses lately, but while most people think of them as a venture capital firm, there's actually some debate about where the lines should be drawn. Traditionally, I think of venture capitalists as people who write checks between 1 and $100 million. Anyone who writes a check smaller than a million dollars is generally called an angel investor. And historically, investments larger than $100 million have come from private equity funds, not VC firms. To be fair to Duhigg, the VC industry is somewhat responsible for allowing these definitions to become muddled. Plenty of small angel investors brand themselves as VCs, and lots of later stage growth equity firms have started to style themselves as VCs to garner the higher prestige associated with the earlier stage industry. Additionally, some VC firms go as far as to call anyone who works for them a partner, further adding to the confusion about who is and who isn't an actual venture capitalist. In my view, we need to separate these things out. A tiny angel investor's role is radically different from a professional firm that buys nearly half of a company for billions of dollars. The scrutiny, critiques and regulations that we as a society apply to these disparate groups should all take into account the nuances involved with each of these investment phases. And that leads me to my last point, the demonization of venture capitalists. I actually don't think that the article is too hard on VCs generally, but there is one quote that is utterly hilarious. Duhigg quotes the founder of a WeWork competitor who says VCs seem like these quiet boring guys who are good at math, encourage you to dream big and have private planes. You know who else is quiet good at math and has private planes? Drug cartels. This is a pretty ridiculous comparison. When I first read Quiet good at math private Plane, I honestly thought that the guy was about to compare all VCs to Jeffrey Epstein. It's just such a blatant attempt to trash the entire industry. Why not just lean in all the way? Are some VCs terrible? Absolutely. Are some VCs great? Also, yes. At one point Duhigg calls out Founders Fund for being overly founder friendly. But Founders Fund never invested in any of the startup failures cited in the piece of so it's odd why they are being included. Maybe the founder friendly model works for them, but not for other firms. At the end of the day, Duhigg's article is still a fun read, and I think that's enough to merit publishing. Does it miss some of the nuances of venture capital? Sure, but an industry outsider will never be able to capture everything in an 8,000 word article. And hey, if it gives someone ammunition to put the brakes on the next wework before it gets too big, that's probably a good thing. Let's just make sure not to kill off the next Genentech because we're worried that it might be a snow job. But what do you think? Has the VC industry gone completely off the rails, or do you think the venture model still makes sense? Leave me a comment below, and if you enjoyed this video, please consider subscribing to the channel. Thanks for watching.