Venture capital in a disrupted digital world
Author: Marissa Dean, Caribou Digital Investments
The digital tide rises globally. People everywhere are now interconnected, not just by infrastructure but also by platforms like Amazon, Alibaba, and Uber. For emerging markets some of this development is rightfully called progress — it’s good for livelihoods that a handbag maker in rural India can now sell her products throughout the country on Flipkart, and equally so that a software engineer in Nairobi can code or test software for Fortune 100 companies on Upwork. At the same time, some of the effects of digital platforms have been undesirable in both the Global North and the Global South. That digital platforms structurally change power structures in societies and economies is an accepted fact — and both governments and users themselves are becoming more aware of this fact’s implications.
Against the backdrop of a rapidly changing digital world, the venture capital industry that has fuelled the digital explosion has largely been celebrated. Headlines like “Startup raises $250M on $2.5B valuation” garner praise and acknowledgement across social media and news outlets. And accelerators, like Y-combinator, that unlock the secret door to large raises from angel and VC investors are oversubscribed with aspiring unicorns.
What’s wrong with this picture? Three basic questions keep popping up in my mind:
(1) Do VCs actually make money with this approach, or is this just money changing hands? Some of this curiosity was answered by CB Insights’ recent article evaluating whether large rounds led to bigger outcomes. (Spoiler alert — at IPO, most highly funded startups underperform startups who raise less, the companies that raise the most almost uniformly struggle to create long-term growth, and the biggest exits backed by the deepest pockets are returning less and less.)
(2) Are large raises that are seemingly blind to profitability KPIs good for startups? Several of my peers have commented recently on whether this approach works in Africa. Eline Blaauboer, Manuel Koser, and Lauren Cochran make very good points concerning the market and current challenges. For instance, after outlining the issues, Cochran concludes that “CEOs should adopt long-term thinking and seek out investors that acknowledge and understand reality, forget the ego-boost of big rounds and press releases, and double down on building businesses that work.” Maurizio Caio and Andreata Mufuro’s justification for Twiga’s $40M round, based on Twiga’s fundamentals and management team, should sit well with this camp. (Indeed, Blue Haven invested in Twiga’s Series A.)
Finally, Mike Quinn’s modification of Cochran’s conclusion — he suggests that investors, not CEOs, “should proactively seek out and back entrepreneurs with long-term thinking and positive unit economics” — hints at my most recent question: (3) Why is so much attention being paid to startups raising capital while so little attention is paid to the investors’ placing wild bets?
Hidden behind every $100M Series and IPO unicorn are venture capitalists and private equity executives holding board seats and influencing decisions that affect company leadership (including who should be CEO) and strategy. For instance, Uber’s board includes the Managing Director for Saudia Arabia’s Public Investment Fund, which at $45B is the largest investor in SoftBank’s $100B Vision Fund. Similarly, VC/PE investors hold the majority of board seats at WeWork, all of which have piled in capital, and over half of Facebook’s Board are VC/PE investors, including Marc Andreessen and Peter Thiel.
This level of influence absolutely matters — particularly because the platforms in which well-endowed VCs like SoftBank have invested are creating tremendous ripples that affect economies and social fabrics across the globe. Growth at all costs, a strategy employed by many platform startups funded by Silicon Valley VCs and SoftBank, hasn’t worked for the middle class or the poor — or the planet. At the same time, the system of fund economics keeps pushing VCs to gun for their portfolio companies to achieve global market dominance. This situation is unlikely to change anytime soon because VCs are raising larger and larger funds to fund ever more supergiant deals.
Were VCs simply clueless and unabashed about how the companies they funded would affect economies and society? Maybe. Maybe we’re just living with unintended consequences. Regardless, the disrupted digital world we live in demands immediate correction and reimagining capitalism is part of the solution. Mike Kubzansky hits the nail on the head when he says that “upstream structural power, rules of the game, mindsets and beliefs about underlying systems . . . are at the root cause of a lot of distress and income inequality . . . in the world today.” In both their investment choices and rudder direction on boards, VCs should be more accountable. This needs to be more apparent — to investors themselves, to startups, to the development community, and, frankly, to everyone delivering food through Uber or selling goods on Jumia.
Do you agree? Get in touch with me and let’s chat more about what we can do together.
About Caribou Digital Investments
Caribou Digital Investments is a venture and advisory company sponsored by Caribou Digital providing capital and other support to early stage digital companies in emerging markets. CDI builds and invests in early stage digital technology companies that improve agency, dignity, prosperity, inclusiveness, and well-being in emerging markets. CDI also periodically publishes insights and provides company and market analysis. For more information, please contact info@caribouinvestments.net.
