When (venture) capitalism stops working

I grew up in a right-wing, capitalism-loving, American household.

Patriotism is in my blood and my entrepreneurial spirit is so strong that my friends make fun of me by yelling, “STARTUP!” whenever I start going down a tangent.

That being said, as I have looked into raising venture capital for my ‘startup’, my opinions have changed. After deeply considering applying to YC, speaking to several founders, friends who have worked in startups, my previous bosses, and investors, I’ve actually been deterred from doing something I always thought I wanted; Being a startup founder.

This isn’t new news. Historically, many investors have pushed businesses to grow at such unsustainable rates that it pushes people — and the business –– to the brink of destruction.

Cough cough, Nasty Gal.

“Nasty Gal’s circumstances are also reflective of the strained relationship between some fashion startups and their venture capital investors, who can sometimes be uninformed about the challenges of scaling a business focused on making and selling physical products.”

BoF, Nasty Gal: What Went Wrong?

So my question is: at what point does capitalism stop working for us and start working against us?

Our businesses are required to grow and grow to the point where we are replacing human jobs with robots, wondering why unemployment rates are on the rise. Yet, we’ve brought in the robots because, if we don’t drive margins down and profits up, we are deemed as failures. Society fails and we get laid off; does anyone see the irony here?

“AI expert warns automation could take 40% of jobs by 2035” — Axios

We’re creating robots to help companies be more efficient and earn more money, yet we’re laying off the people whose jobs we just automated. Business leaders want to earn more money to make investors and board members happy.

Those happy people are the ones who get the bonuses.

Ironically, most of my friends dream of getting made redundant (laid off) because they want the $10k payout so they can finally travel the world — with the hopes that perhaps they will find more purpose in their unfulfilled chained-to-a-desk life.

I get capitalism and the societal benefits of a financially stable environment. I realize that you need to grow to hire more people. And I understand that if you don’t hit your numbers, those people have to get let go. I understand the importance of growth. I’m not a socialist who simply wants to spread the wealth.

But, at what cost does growth come to our society?

As someone who has worked in a startup and has dreamt of starting her own, I am left reconsidering my views on stepping into that world. It just sounds so painful, and I can tell you from working 3 years in a startup it is.

Here are just a few of the common themes as a founder that you will experience after taking VC investment:

  1. The trough of sorrow, as displayed below.

2. Expect to encounter Cockroach mode: “Tech startups aren’t really focused on innovating on a daily basis. Rather, they’re focused on not dying.”

3. Then, the cherry on top. You’ve taken on so much investment that you have inadvertently become a complete fraud. We can see this happening from inaccurate valuations like WeWork; I wonder if the WeWork founders started out as a business who dreamt of doing something good, then money corrupted their vision.

Why are we so obsessed with building businesses at the expense of humanity? Because investors want your business to hit unicorn status within 5 years.

You’re scum if you don’t.

I’m left thinking less like the capitalism-loving-republican I was raised as, and more unsure of the society that has been created for us. I may have utopian dreams, but I can’t help but turn around and see so many of my friends miserable at their jobs, constantly dreaming of greener pastures.

When I was listening to Gimlet Media’s Startup podcast about the troublesome times of a YC alum app called Dating Ring, I found myself agape. The founder explained that she was a failure for deciding to become a lifestyle company instead of a tech company. Yet, by making the decision, it meant she could refocus her efforts on the reason why she started the company in the first place; quality matchmaking in a world of shitty online dating.

So, what happened to supporting small businesses that can provide an income to a few people or some casual workers? Why is having a ‘Lifestyle Business’ looked down upon? Because the returns can’t pay off the docking fees on an investor’s yacht. According to The Washington Post, “The top 1 percent of households have roughly doubled their share of the nation’s wealth since 1980, leaving less behind for everyone else.”

Venture firms have their own investors, and those investors have their money locked up for (up to) that 10-to-12-year period.

They (practically) can’t pull their money out even if they want to.

As a result of that illiquidity, venture firms have to return a lot of capital. The typical internal rate of return (otherwise known as IRR, which is essentially the amount per annum in ‘interest’ the investor should expect on their investment) promised is 25%. Imagine putting your money in a deposit account you can’t touch for 10 years, but it goes up at 25% each year.

Hugh Stevens, Indie, bootstrapped and lifestyle businesses: What they are, and how to fund them

I’ve found myself in a pickle, I’m an entrepreneur who is doubting the very economic system that makes — or breaks — the businesses I want to start: Capitalism. The Washington Post recently released an article outlining the UN’s World Social 2020 report, which speaks to 4 megatrends impacting inequality on our planet.

In this article, they point out some of the flaws of capitalism. CEOs have incomes of $14.5 million, while the managers who are growing said companies earn far less. But these people who sit at the top, and a younger, fiscally conservative version of myself, would have agreed with the below statement.

“Economic inequality, in this view, is simply the price of paying a fair remuneration to the people who produce the iPhones and the cool apps and the free shipping that all of us — even the less fortunate — are now able to enjoy.”

— The Washington Post, U.N. warns that runaway inequality is destabilizing the world’s democracies

But this poses a certain question, as the gap between the rich and the middle class grows: how will the middle class pay for such products? I cringe (sometimes almost cry) over the cost of an Uber in Australia — and I have a good income.

As economic conditions deteriorate in lower and middle classes, we may get to a point where a critical mass of the population can no longer afford the iPhones and cool apps and free shipping that are driving our economy, causing a recession. In the end, the trouble with capitalism may be that eventually you run out of other people’s money.

— The Washington Post, U.N. warns that runaway inequality is destabilizing the world’s democracies

Am I trying to start this startup to finally reach that $14.5M CEO level income so I can finally just relax? Or, am I caught in a capitalistic nightmare where my endeavors just make rich people richer? Where I’ll probably burn out, and remain a fool if I decide to start a small lifestyle business?

Not only am I left questioning capitalism/consumerism and its impact on our planet and our livelihood

Pathological consumption has become so normalised that we scarcely notice it.

— George Monbiot, The Gift of Death

I’m left thinking that I don’t want a big exit- I just want a job where I can have a great quality of life and live at my own pace. If having a lifestyle business means trading up money for meaning, then I will take meaning and fulfillment any day.

I have received a lot of advice for my startup.

But for me, the best advice I have gotten was to bootstrap the company so that I could earn enough money to have the freedom to be my own boss and scale it at my own pace. Because as soon as you take on investors, you relinquish that power.

So, as exciting as a seed round sounds, I think I am going to have to pass.

If you do know any human-centered angels, who invest in people, not profits. Send them my way.

These opinions were formed from reading and ingesting the following materials:

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