Venture capital: when creative disruption becomes destructive creation
It was only when I read chapter 24 of Bruce Schneier’s highly recommended “A Hacker’s Mind” that an idea that I’d been mulling over for some time suddenly took shape: venture capital as a way of hacking a market.
The idea is simple: when an idea is presented to venture capitalists in search of an investment round, what they see is not simply an idea whose potential they have to analyze, but the potential it may actually be able to achieve if they, with their investment, are able to control until it has attained sufficient market dominance to allow it walk on its own two feet.
Let me explain: an idea can seem good or even disruptive, but be unprofitable. There are any number of examples of setups that have to be artificially sustained for years, during which time they grind down competitors working along traditional lines, and then take over their market. When that happens, venture capitalists take the company public, bring in other shareholders with generally lower profitability expectations dazzled by the company’s “success” from a competitive point of view — not its intrinsic profitability — and laugh all the way to the bank. The “portfolio effect”, which allows diversification of risk, can be a goer, provided that common sense is used in the choice of investments. Funded companies can, from the…
