I feel like it’s a common script that most good companies eventually fall to short term focused management types who are happy to shred the company as long as they get their golden parachute.
Why does this seem to be the case? If you wanted to build a company that was more immune to this sort of thing how would you go about it? Examples and counter examples of these sorts of companies would be awesome to hear about.
Eh, none of the answers you’ve received so far really explain it correctly.
“VC” or venture capital is a financial instrument by which people with millions of dollars to piss away do so by funding a series of startups. These days, those startups are usually tech/sw companies but VC funds other things, too, with similar results.
When a startup is very small, it usually only needs a little bit of VC money–such a small amount that often it’s difficult to even find a VC firm interested in buying in. But once they get seed funding, they must exchange some control over their fledgling company for that cash. They hold onto and spend that cash, losing money in the process but building their product and their team and becoming a real company that has the potential for (at first) any revenue at all, and (eventually) the potential for profit.
Then they get another round–these rounds usually have letters like “A round”, “B round”, etc. At each stage, the stakeholders in the previous round either cash out or trade up to more leverage. They start to have more of a voice, and as these rounds build up, the founders usually have less of a voice. It becomes hard for the founders to tell their funders “no”, even if they retain a majority share: if they never listen to the whims of their investors, they will have more trouble attracting new ones at each successive round. This is especially true since the higher you climb the VC ladder, the fewer players there are, and the more they all talk to each other about what kind of a business you run.
The trick, of course, is if you run a customer- or employee-focused business, they will put you in the spreadsheet marked “losers” and nobody will talk to you again. They want you to run an investor-focused business, and they’ll get their way eventually.
Most startups simply collapse quickly, of course, and you hear nothing about them.
A few make it past a couple of rounds of funding before dropping out, and you would be forgiven for ignoring them.
The few that get big enough for you to hear about them, the investors are already tucking their napkins into their shirts and getting ready to dine. These companies get a few years in the limelight looking like tech darlings, and then the investors get their dinner. In many of these, the original founders simply do what the investors ask for, whether they like it or not; no need to speculate about hiring short-term thinkers, this is the original founder doing it! In some cases, the founders are forced out by the board that runs them, and somebody new is put in. We must be clear that, while the new CEO is certainly not blameless in the fall of the tech darling they’ve been given, they’re still just a pawn of VC.
How do companies become resilient to this? Don’t take VC. Fund it yourself if you can, and then whatever you say becomes the law. Sell your product for money, and use the money to run the business. Even taking a bank loan is better than VC, if your top priority is keeping control; the bank just wants their interest.
How do companies become immune to this? They can’t. Even if you are independently wealthy and seeding your company out of your own cash, even if you are the most ethical capitalist to ever fund a business, you’ll die or retire someday, and then all bets are off.
This is the fate that will befall every for-profit company.
I’m curious what would be your reply to this? Do you think a society can regulate or educate this problem away?
The problem is capitalism, and it’s beyond the reach of education or regulation. There are other methods that could overturn it, of course, but not those two things.
Even if you established another economic system, though, that system too would be subject to corruption. I don’t know how a society regulates itself in such a way that economic systems never get corrupted by the desire for short-term personal gain.
To expand on that, even if you didn’t want to take the VC funded money and bootstrap your own business, the deck is stacked against you. If you compete in the same space, a VC funded company can do more marketing, develop the product faster, have more connections to important business partners because of large amount of money and connections they have.
And they will “outcompete” you at a loss, until the bootstrapped business goes under or settles for a tiny market share in a niche. So when they say, the economy is rigged, this is what they mean. You will need large amounts of capital to compete in the tech space. Even if you are two times smarter and work two times harder, you will never be able to compete with a VC funded company flushed with money in the same space unless you get reaaaally lucky.
Makes me wonder if a stronger system of government subsidies could replace the need for VC for some startups. The government agrees to back your expenses for X number of years until you have the means to pay back the investment, and if the startup flops in the end, the government takes the IP. If the startup is still deemed to have potential, the government continues operating the company as a state-sponsored org or folds it into a state agency to ensure the livelihoods of the startup’s employees.
End result is that startups aren’t forced into situations by VCs where they have to go public, and if they end up going under anyways by failing to pay back the government’s investment (tax payer money, basically) it is seen as a purchase of potentially valuable IP which can be made available to the public for the betterment of society and industry.