[sumuyuda]

I think the main argument that it is theft, is that they contribute nothing to the continued surplus generated after their loan was repaid. So they effectively steal the profits like a parasite.

Why should they get ownership of the business? When you get a mortgage for your house, the bank doesn’t permanently own part of your house after you pay it off.

[labcomputer]

> Why should they get ownership of the business? When you get a mortgage for your house, the bank doesn’t permanently own part of your house after you pay it off.

Because the VCs are funding the startup on extremely favorable terms?

If the startup fails, the founders can just walk away. They are not personally liable for anything. They can (and often do) subsequently form another startup, often funded by the very same VCs who funded the one that just failed!

If, OTOH, you fail to pay your mortgage, the bank takes your house. And they make hard for you to get another mortgage from any bank by reporting the foreclosure to credit ratings agencies.

You absolutely can keep the equity (and surplus) for yourself… but you will need to personally guarantee the loan. You may need to declare bankruptcy if the startup fails, and all that entails.

VCs are happy to throw away money on 99 failed startups precisely because they are entitled to the continued surplus from 1 successful startup. Banks are happy to make failure to pay extremely unpleasant for you because they are not entitled to any surplus from business loans which lead to successful outcomes.

[yogurt-male]

> VCs are happy to throw away money on 99 failed startups precisely because they are entitled to the continued surplus from 1 successful startup.

And why is this a good thing? I think the past decade and the current bubble point to this being a bug, not a feature. What I mean to say is that VCs seem far too eager to throw money at ventures with untenable business plans or that lack any edge over competing firms, which is a waste.

[labcomputer]

> And why is this a good thing?

Ok, well, I personally really like driving a car with zero tailpipe emissions, and the cleaner air that comes from it (Tesla).

I think it’s awesome having a little rectangle in my pocket that sends text messages from anywhere on earth and summons an encyclopedia (Apple, Google, Starlink, Intel).

I enjoy talking to (and seeing) my friends and family while they are thousands of miles away (Cisco, Apple, and many others).

I think it is fantastic that we continue to find new labor-saving methods of farming so that fewer people need toil in the fields (the current batch of ag-drone and ag-AI startups).

This is like asking “well, why do we need that science mumbo jumbo anyhow?”

[zanellato19]

Claiming that all of these would not exist without VC is hard to believe.

[fluoridation]

What do you mean "a bug"? A bug in what? If to someone it makes sense to pour money into an apparently non-viable business on the off chance that it succeeds, what exactly is it that you're saying is not functioning properly? The person's mind? So what do you want to do about it?

[immibis]

You're only reacting to a part of the system. You're starting from the axiom that businesses need a level of risky funding that only VCs will provide, and then congratulating VCs for swooping in and saving the day. But would it be possible to have a system where startups to require less funding? For example, by UBI, or normalizing bootstrapping?

[fluoridation]

Sorry, but your reply is so utterly disconnected from my question that I'm just going to assume you replied to me by mistake and ignore it. If it wasn't a mistake then you've completely missed the point.

[immibis]

You said this: "If to someone it makes sense to pour money into an apparently non-viable business on the off chance that it succeeds, what exactly is it that you're saying is not functioning properly?"

But this comment only makes sense when starting from a whole bunch of assumptions, which happen to be true right here and now, but are in no way universal.

Let me make a comparison: "If to someone it makes sense to carry a flamethrower to the grocery store to defend against thieves, what exactly is wrong with that?" What's wrong is a society where that kind of defense is necessary! We shouldn't be debating whether the individual should carry a flamethrower to the grocery store, we should be discussing how to improve society so they don't have to.

Also, rich people don't get to create a problem and also claim credit for solving it (with money).

Edit: much better analogy.

[immibis]

What if we created a system where startups didn't require as much funding? Is the system set up in such a funding-intensive way in order to benefit VCs, who can swoop in and save the day? If so, rich people don't get any credit for solving a problem rich people created.

[Anon1096]

For one, in a mortgage the loan is secured by the house. But more importantly: you can get simple loans for startups too! Banks provide loans that are personally guaranteed (ie if the business goes under the founder is still on the hook). But if you want more money or something that is limited in liability then your pool of people willing to give money is much smaller and they usually want a stake in the business as a condition.

[ffsm8]

The opposite argument would be that the default should behave like the house then, so ownership should switch over to the person providing the loan entirely - instead of passing on part ownership forever.

But that's obviously less desirable to the person providing the money, and they've obviously got all the cards... Hence the argument of this post.

I wouldn't call it evil myself, unless I wanted to classify capitalism as evil in it's entirety - which would feel disingenuous to me, considering the alternatives were always worse in hindsight.

[labcomputer]

You aren’t thinking this through. If a startup defaults, it is because they have no money left (which is because they do not have a viable business yet). So there is nothing of value to repossess.

This is the same reason the bank asks for an independent valuation of a house (and requires the buyer to maintain insurance) before releasing the money to pay for it: The value of the collateral needs to plausibly match the value of the loan, so that the value of the loan can be recovered in case of default.

The only way this works is for the founder to personally guarantee the loan. Which means the founder needs to have sufficient personal assets to keep the bank happy. It also means the founder risks personal bankruptcy if those assets are not enough to cover the loan if the startup defaults.

[ffsm8]

Naw, you're making a claim that's just not true.

The company will have some value left on default. E.g if it's a software company it will have the IP for the software etc pp

Now wherever that's enough for anyone to be willing to take that risk with the loan is another story and thus I could now quote my previous comment in its entirety

[labcomputer]

Meanwhile, back here in reality…

Failed startups don’t have value left at the end. They go until they run out of money. Then they liquidate the office furniture to make the last payroll. Sometimes they don’t wrap up early enough and the founder and board members are personally liable for it.

Nobody wants to buy the custom software needed to run “The pets.com for GenAI” because it would be cheaper to start from scratch than to understand the codebase and make it do what you want.

Companies like 23-and-me that accumulate valuable data while going bankrupt are the rare exception… but banks/VCs do not know a-priori which ones will be that exception! If they did, they just wouldn’t make the bad loans in the first place!

> Now wherever that's enough for anyone to be willing to take that risk

Well, but it clearly isn’t, right? So everything else you wrote is sort of irrelevant.

I mean, why don’t you lend a startup $1000 on the condition they pay you back $1500 in two years[1] if they succeed and nothing if they fail? Pass the hat around your neighborhood and I bet you could fund a few real startups!

Except that.. oh.. when it’s your money on the line, suddenly you realize those are very stupid terms. You lose the whole $1000 90% of the time, break even 5% of the time and make a +$500 profit 5% of the time. The math isn’t mathing here.

So you’ll want to very carefully vet the founders and their plan. Be very picky about who you fund. Maybe you’ll ask them to personally guarantee some fraction of the loan. Suddenly, your highly moral terms look exactly like the business loans that approximately 0% of startups use because VCs offer them a better deal.

[1] Any more than that would be usury, which is immoral, right?

[ffsm8]

Take a deep breath and reread my comment please, you're interpreting things into it that I never said, and I'm not sure how you could've gotten the impression were in there - I merely pointed out that this behavior is core to capitalism, because the people with money own said money - and are in no way responsible to create a "fair" (from the perspective of the person receiving money) playing field

[HumanOstrich]

The residual value in the failed startup will be such a small fraction of the funding. You aren't making a convincing argument.

[ffsm8]

Did either of you actually read my comment?

I acknowledged as much... In both comments even.

[godelski]

I think the main problem is that investors are investing in the wrong thing. They invest because they believe they can make a return, not because they think a valuable product will be made.

There's a subtle difference and it shows by how we even see wealth. We associate wealth with utility to society. That is, after all, why we create economies. We want to reward those who make society better.

But that's where there's been a disconnect. We figured out we could make money without pushing society forward. We'd historically refer to those people by different names... worse than that, we are focused on the short term. Silicon Valley has perfected the hype cycle. You get in cheap, pump up the price, sell, and do it all over again. It does not matter if it is vaporware, it matters that you can make a profit.

The problem is alignment. The economy is not aligned with its intentions.

Do we see much innovation these days? Is there even an incentive? No doubt there's innovation, but people are claiming it is accelerating. I'm unconvinced we're innovating faster than we did in the 90's. That decade changed society more than the 00's and 10's, even with the advent of the smartphone.

Unlike the author, I'm actually in favor of capitalism, yet I firmly believe that an economy still needs to by well regulated. There's very few economists who believe such regulation does not need to exist (we listen to partisans more than actual economists), and I've found even the most staunch free-market believers (often not actual economists) will have concessions. It's no secret that an unregulated market is not a free market. An unregulated market is a market regulated by the largest entities of the market.

It is probably no surprise that those who cannot think long term are unable to realize that the rise in popularity of socialism is due to the abuse of capitalism. Most people do not have a strong foundation in economics (why should they! They're spending years learning other skills than years reading textbooks, analyzing, and going to school). But people do know our system isn't working. Is it really more cost effective to build bunkers and buy private islands than it is to make the lives of the people better? I doubt it. But that's the same myopia I've discussed in my entire comment. The problem is how myopic we've become