Is venture capital eating the world?

Summary

POLITICO Tech Podcast Summary

Episode: Is Venture Capital Eating the World?
Release Date: March 5, 2025
Host: Stephen Overlea
Guest: Kathryn Bracey, Civic Technologist and Author of World How Venture Capital Is Cannibalizing the Economy

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Introduction

In this episode of POLITICO Tech, host Stephen Overlea delves into the pervasive influence of venture capital (VC) on the modern economy and technology sector. The discussion centers around Kathryn Bracey’s new book, World How Venture Capital Is Cannibalizing the Economy, where she challenges the long-held notion that software, as posited by Marc Andreessen in his seminal essay "Why Software is Eating the World," is the primary force reshaping the economy. Instead, Bracey argues that it is venture capital itself that is the true disruptor.

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The Power of Venture Capital

Bracey begins by dismantling the concept that software alone is consuming the economic landscape. She posits that the real driver is venture capital, which imposes specific business models and growth expectations on startups, often leading to unsustainable practices and economic distortions.

• Key Concept: The Power Law in Venture Capital
  Bracey explains the power law as the cornerstone of VC investment strategies. Venture capitalists (VCs) invest in numerous high-risk startups with the expectation that a few will yield extraordinary returns, compensating for the majority that fail.

  Kathryn Bracey [02:51]: "With a lot of agnosticism about what the companies were that they were actually investing in...forcing startups to fit the power law outcome instead of pursuing breakthrough technologies."

• Misalignment with Market Needs
  This pursuit leads VCs to invest indiscriminately across various sectors, including those not inherently suited for VC funding, such as direct-to-consumer mattress companies or fast-casual restaurants. The misalignment forces these companies to prioritize rapid growth over sustainable, market-driven strategies.

  Kathryn Bracey [02:51]: "VC in direct to consumer mattress companies and fast casual restaurants... distort themselves out of their real market opportunity."

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Implications for Politics and Government

Bracey extends her critique to the political arena, highlighting how VC influence has permeated government structures, particularly during President Donald Trump's administration. She warns that the infusion of VC-driven ideologies into government can lead to detrimental policies and governance practices.

• VC Influence in the White House
  The presence of venture capitalists in key White House roles has, according to Bracey, introduced a growth-at-all-costs mentality that mirrors Silicon Valley’s approach, potentially jeopardizing public welfare for private gains.

  Kathryn Bracey [11:48]: "Workers are in and of themselves... holding us back in some way... bulldozing our way into a winner's take all market opportunity."

• Risks of Overregulation and Stifling Innovation
  Bracey cautions against regulating at the technology level, arguing that it is the underlying business models fueled by venture capital that need scrutiny to prevent stifling innovation.

  Kathryn Bracey [05:01]: "The technology itself is valueless... the business model that is wrapped around it... is creating the harms."

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Solutions and Policy Recommendations

Addressing the challenges posed by venture capital, Bracey offers several solutions aimed at realigning investment practices with sustainable economic and technological development.

• Encouraging Smaller Fund Sizes
  She suggests that reducing the size of VC funds can decrease the pressure on startups to achieve outsized returns, allowing for more diverse and realistic growth trajectories.

  Kathryn Bracey [07:31]: "Having fund sizes that are much smaller... incentivize funds to be smaller."

• Government Intervention
  Bracey advocates for government actions to create different incentives and reporting requirements for smaller funds, similar to regulations applied to smaller banks under Dodd-Frank.

  Kathryn Bracey [07:31]: "Government could offer different kinds of incentives to fund managers who had smaller funds."

• Alternative Investment Models
  Proposing more flexible capital structures, Bracey envisions term sheets that accommodate both high-growth startups and those with modest growth potential, thereby preserving diverse business models.

  Kathryn Bracey [07:31]: "A term sheet that actually the investor will make money if you're not going to grow that large."

• Eliminating the Carried Interest Loophole
  Highlighting policy changes, Bracey emphasizes the removal of the carried interest loophole as a means to reduce economic inequality perpetuated by VC.

  Kathryn Bracey [10:20]: "Getting rid of the carried interest loophole would be the best solution to address inequality that venture capital has created."

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VC Mentality in the Trump Administration

Bracey expresses deep concern over the Trump administration’s embrace of a venture capital mindset, characterized by "blitzscaling" and aggressive growth strategies that often disregard public safety and ethical considerations.

• Blitzscaling and Government Efficiency
  She critiques the application of blitzscaling within federal bureaucracy, arguing that it prioritizes rapid growth over thoughtful governance, which can lead to systemic failures and public harm.

  Kathryn Bracey [11:48]: "The optimal number of workers is the lowest possible number to keep the venture going... bulldozing our way into a winner's take all market."

• Negative Externalities
  Bracey warns that the unchecked expansion of VC-driven policies in government will result in significant negative externalities, including potential loss of lives and economic instability.

  Kathryn Bracey [11:48]: "All of the sort of negative externalities will be worth it when we are profiting at the end."

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Future Outlook and Final Thoughts

In contemplating the future, Bracey expresses a sense of urgency and apprehension about the trajectory influenced by venture capital. She emphasizes the need for a proactive approach to shaping a post-VC-dominated economy that prioritizes sustainable growth and societal well-being.

• Building a Vision for the Future
  Bracey underscores the importance of envisioning and constructing a world that mitigates the adverse effects of venture capital dominance, ensuring that technology and business practices serve the broader public interest.

  Kathryn Bracey [16:18]: "We have to ... build something in its place when the dust has cleared."

• Optimism for Change
  While acknowledging the challenges, Bracey remains hopeful that through policy interventions and a shift in investment philosophies, the economy can evolve to support a more equitable and diverse technological landscape.

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Conclusion

The episode concludes with a poignant reflection on the pervasive influence of venture capital in shaping not only the technology sector but also the broader economic and political frameworks. Bracey’s insights call for a reevaluation of investment models and government policies to foster a more sustainable and inclusive future.

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Notable Quotes:

• Kathryn Bracey [02:51]:
  "With a lot of agnosticism about what the companies were that they were actually investing in... forcing startups to fit the power law outcome instead of pursuing breakthrough technologies."

• Kathryn Bracey [05:01]:
  "The technology itself is valueless... the business model that is wrapped around it... is creating the harms."

• Kathryn Bracey [07:31]:
  "Having fund sizes that are much smaller... incentivize funds to be smaller."

• Kathryn Bracey [10:20]:
  "Getting rid of the carried interest loophole would be the best solution to address inequality that venture capital has created."

• Kathryn Bracey [11:48]:
  "Workers are in and of themselves... holding us back in some way... bulldozing our way into a winner's take all market opportunity."

• Kathryn Bracey [16:18]:
  "We have to ... build something in its place when the dust has cleared."

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This comprehensive discussion in the "Is Venture Capital Eating the World?" episode of POLITICO Tech offers a critical examination of the role venture capital plays in shaping the economy and technology landscape, urging stakeholders to reconsider and reform investment practices for a more balanced and equitable future.

Transcript

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[Stephen Overlea]

Hey, welcome to Politico tech. Today's Wednesday, March 5th. I'm Stephen Overlea. Back in 2011, the venture capitalist Marc Andreessen penned an essay called why Software is Eating the World. And he argued that Internet companies would eventually take over the US Economy. Well, in the years since the rise of Google, Meta, Amazon, TikTok and more suggests he had a point. But civic technologist Kathryn Bracey is challenging that premise in a new book released this week.

[Kathryn Bracey]

You know, I say in the book, it's not software, I think that is eating the world. I think it's venture capital.

[Stephen Overlea]

Katherine moved to the San Francisco area back in 2012 to work on President Barack Obama's campaign. And since 2016, she's been the founder and CEO of Tech Equity, an advocacy group focused on the ways the tech industry disrupts labor and housing markets. Now she's written a book called World How Venture Capital Is Cannibalizing the Economy. It examines the way so many Silicon Valley companies are funded by wealthy venture capitalists who give startups money, shape their business models, and then expect massive returns. Catherine argues that funding model is actually responsible for a lot of tech's problems.

[Kathryn Bracey]

Now we're seeing that spread even further to our political arenas and to government. And I think that the fallout will be equally bad, if not more so.

[Stephen Overlea]

President Donald Trump's second term has been heavily shaped by venture capitalists, including many in top White House roles. On the show today, Catherine tells me why she thinks venture capital is eating the world. And Washington, here's our conversation.

[Politico Tech Host]

Welcome to POLITICO Tech.

[Kathryn Bracey]

Yeah, thanks for having me.

[Stephen Overlea]

So I just finished reading your new book, what are the perverse incentives, if you will, that are created by the venture capital business model and that perpetuate some of the inequities we see attributed to the tech industry.

[Kathryn Bracey]

Yeah. So, you know, I think listeners who are familiar with the tech industry and with VC will be familiar with the concept of the power law, which is really the central tenet of vc when you were investing in risky breakthrough technologies that were untested. This is the idea that most of them will fail, but a few will hit it big and more than make up for those failures to the extent that they will even outperform public markets. And that had changed from a natural outcome of this approach of investing in risky startups to really the driving goal that venture capitalists were optimizing for. And really with a lot of agnosticism about what the companies were that they were actually investing in. So that's how you get VC in direct to consumer mattress companies and fast casual restaurants and places that aren't really VC type businesses. But this was a result of VCs trying to sort of shapeshift all of those companies to achieve a power law outcome instead of pursuing breakthrough technologies. And of course there are just aren't that many breakthrough technologies. Right. And there's way more VC now than there are companies that really need that kind of money to capitalize and bring their technologies to market. And so what happens is all of these other companies that end up pursuing VC end get forced to kind of fit that mold, even if they aren't naturally able to grow in that way. And when they are distorting themselves out of their real market opportunity and what the customer is actually asking for in order to meet investor demands, that's where all of these various harms come from that I describe in the book.

[Politico Tech Host]

Got it. So not every company is a unicorn, as they say. Right. But every company doesn't need to be at the end of the day to still be kind of a viable, worthwhile business. What is it that Washington, you think is missing by not looking at this business model, by not looking at the way venture capital works and just focusing on these tech companies and their own outcomes.

[Kathryn Bracey]

Yeah. And I mean, this has been frustrating for me as someone who both loves technology and works on policy advocacy that it feels like trying to control at the level of the technology is a problem for a couple of reasons. First, because there always seems to be something new around the corner. I mean, even since I started writing the book in 2021, how many crypto boom bust cycles have we been through since then? And generative AI was not even a thing. And now we're talking about quantum computing on the horizon. So there's always a new thing. And we all know, I mean, I'm sure your listeners know that policymakers are often several steps behind. So by the time they catch up, it's on to the next. And at the same time, I think there is a real risk of overregulating or regulating the wrong thing. When you are regulating at the level of the technology, it is possible to stifle innovation. And the technology itself is valueless. Like, what is actually infusing the technology with its ability to do harm or create opportunity is the business model that is wrapped around it. And so I think it's more important for us to be thinking about that structural element that the business model or the capital incentives around the companies that is creating the harms that the technology is sort of embodying in the world. And if we are able to do that, I think we end up solving a lot of the problems that we ascribe to the technology. So, I mean, I think a good example, speaking of section 230, is if Facebook had decided in its early days that it was going to have a subscription model instead of an advertising model, what would that have meant for the development of the company? It might have been smaller, it might not have grown as quickly. But I also think we wouldn't be having the same conversations about how bad social media is for us if that choice had been made. And that choice was driven in large part by investors.

[Politico Tech Host]

And so in terms of solutions or ways to amend this kind of business model, which is now synonymous with tech in Silicon Valley and its rapid growth. In the book, I know you outline some changes that venture capital firms or the limited partners who fund them can make. I wonder if you think expecting industry to sort of change on its own is realistic or whether there's a need for government intervention here.

[Kathryn Bracey]

I am not a free marketeer by any stretch of the imagination, but I do think in this particular case, there is a long way we can go towards solving the problem by just people changing the way they approach investing. And I think there is a role for government to craft markets for innovation and create different incentives that change the calculus. So one example might be, I mean, I think you could go a long way just by having fund sizes that are much smaller than they have become over the last five to 10 years. When funds are smaller, you don't need the big outcomes in the fund that are going to carry the fund to be as big. And so there are more companies that can actually achieve that, be the outliers in those funds when the funds are smaller. So there are things government could do to incentivize funds to be smaller. One thought is in the same way that Dodd Frank treats bigger banks differently than it does smaller banks. You could have a different set of reporting requirements or transparency requirements for smaller funds than you did for Larger funds, you could offer different kinds of incentives to fund managers who had smaller funds. And then the other thing is startups really need. And what I came to believe by the time I had finished writing the book was that venture capital, it wasn't about the companies that they were investing in, it was about the companies that they weren't investing in or the ones that they were you forcing to shift out of their natural market opportunity. I think we're missing a lot. I think venture capital is in some ways killing more value than it's creating by not finding the right aligned capital for the vast majority of startups that have much smaller growth opportunities. And if we could find a way to create different methods or more flexible capital that aligns with early stage companies, that can say we're going to give you a little while to see if you're actually a venture scale company. And if you're not, that's okay because we've got a term sheet that actually the investor will make money if you're not going to grow that large. But if you are, then great. There's a whole ecosystem of future stage investors that can take you there. Government can play a role in sort of being the first capital into some of those funds or to catalyze that market to get more private investors in.

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[Politico Tech Host]

Edu There was a statement you made in the book that getting rid of the carried interest loophole would be the best solution to address inequality that venture capital in this business model has created. That's something that President Donald Trump has actually talked about is getting rid of that loophole. Why would that make such a difference?

[Kathryn Bracey]

Well, actually I think this might be one of those levers you could use to incentivize smaller fund sizes. So for example, the carried interest loophole only applies to managers of funds that are below a certain size. And if you decide you want to have a mega fund, fine, but that loophole is going to be closed for you. Just from a general fairness of the economy perspective, I think it would be a Good idea to get rid of it altogether. I was proposing these solutions in time and place where that seemed quite unlikely. Maybe Trump can get it done. We'll see. But you know, I worry about what other, what other impacts he would have on the economy at the same time that might obviate the gains that we would get from that.

[Politico Tech Host]

Right. You know, and it's frankly an interesting proposal because his administration is full of so many of these world eaters, you know, as you call them in the title, these venture capitalists. And it includes even folks like Vice President J.D. vance, who worked for a few years at a Silicon Valley venture capital firm affiliated with Peter Thiel. Are you seeing signs from this administration of a venture capital approach to government?

[Kathryn Bracey]

Yes, I'm seeing that and it is terrifying, frankly. So I don't think it's a good thing. What Elon Musk is currently doing, what the Doge team is currently doing, is basically blitzscaling their way across the federal bureaucracy. And you know, Blitzscaling is name of a book written by Reid Hoffman in 2017 which kind of laid out a very popular methodology for growing venture scale businesses. It reads very dystopian these days. One thing that really jumped out at me from that book is that he calls workers growth limiters. And I think that is a good example of how the VC mindset is playing out right now as applied to government. Workers are in and of themselves, regardless of what they are doing, holding us back in some way. And our optimal number of workers is the lowest possible number to keep the venture going. And it also sort of prizes an intentional thoughtlessness that we can break stuff. And it's fine because the ultimate end that we're getting to is going to be this billion dollar outcome. We're going to sort of bulldoze our way into a winner's take all market opportunity. And all of that will be worth it. All of the sort of negative externalities will be worth it when we are profiting at the end. And that approach is applied to government is going to cost lives, I really believe. And it will be a big mess to clean up. I do think that there are ways to incorporate technology into government that can make government work better. And it's certainly less efficient than it should be. I worked at Code for America for three years. I really do believe in that approach. But all of the civic technologists that I know that have gone to work in government in good faith, faith have come to learn very quickly that 90% of the job has nothing to do with technology. I really worry that thinking that we can just feed all of the Social Security data into AI and it's going to solve all of our problems is the worst version of the mindset that I describe in the book.

[Politico Tech Host]

There's, I think, some evidence, it seems, of this happening in tech policy specifically as well, I think, about the way that this administration is so far approaching artificial intelligence and is approaching cryptocurrency. Perhaps not surprisingly, the White House AI and crypto czar, David Sachs is himself a venture capitalist. But this administration seems to lean very heavily into sort of the build, build, build and rapid growth around technology with fewer considerations for safety or negative consequences, which was the focus of the last administration, many would argue.

[Kathryn Bracey]

Yeah, I mean, I kind of take issue with that build framing. I mean, honestly, what they're doing is destroy, destroy, destroy. I mean, it seems very deconstructive. And I dedicated World Eaters to the builders. And of course I did that. I was writing that was finished eight months ago. I could not have foreseen where we were. But I think that dedication at the time, I didn't just mean technology. I meant relationships, I meant communities, I meant building momentum, I meant building movements. And that seems the opposite of what this mentality is. And I think it's really important for us, as we start to envision what could be next, what could be different, how we could build something that is, you know, more efficient and a more effective use of technology and government, that we do have a conversation about how we capitalize technology. We can't just be against tech. We can't just be about trying to stop it from developing. We have to have a vision for how we can be constructive. We can build something positive that realizes the market opportunity that exists in the vast majority of startups that get created every day. I mean, I had some very poignant conversations with entrepreneurs whose stories are in the book. And it's a real tragedy how much of their talent and energy was wasted by investors who didn't think they had the ability to be sort of that winning lottery ticket. And I think there's a way we can do that differently.

[Politico Tech Host]

Have you gamed out then, kind of how this continues to play out? I mean, if venture capital keeps eating the world, if there aren't sort of interventions like you talk about in the book, what that future looks like for the economy and for our government?

[Kathryn Bracey]

I mean, at 4 in the morning when I'm laying awake and when my mind goes to the darkest places, I don't know that it could get much worse than it is. Right now. Right. So we have to be, I mean, I don't know what's coming. I know that something is going to break. I don't know what it's going to be. I don't know when it's going to happen, and I don't know what the cost will be. I know that the rest of us are going to pay that cost. I don't think David Sacks or Marc Andreessen is going to pay that cost. And the only way I know how to prepare for that is to think about the world that I want to exist after this is all over. I mean, it will be over at some point, and we will need to build something in its place when the dust has cleared.

[Politico Tech Host]

Kathryn, thank you for being here on Politico Tech.

[Kathryn Bracey]

Thanks, Steven.

[Stephen Overlea]

That's all for today's Politico Tech. If you enjoy Politico Tech, please subscribe. And for more tech news, subscribe to our newsletters, Digital Future Daily and Morning Tech. Also, sign up for POLITICO's newest newsletter, California Decoded, about how the Golden State is defining tech policy and politics within its borders and beyond. Our managing producer is Annie Reiss. Philip Frobos helped produce today's episode. I'm Stephen Overle. See you back here tomorrow.