How Venture Capital Warps the World

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Catherine Bracy is a civic technologist and community organizer whose work focuses on the intersection of technology and political and economic inequality. Justin Hendrix spoke with her about her new book, World Eaters: How Venture Capital is Cannibalizing the Economy. In it, she suggests how the venture capital industry must be reformed to deliver true innovation that advances society rather than merely outsized returns for an increasingly monolithic set of investors.

What follows is a lightly edited transcript of the discussion.

Justin Hendrix:

Good morning. I'm Justin Hendrix, editor of Tech Policy Press, a nonprofit media venture intended to provoke new ideas, debate, and discussion at the intersection of technology and democracy. In our ongoing effort to understand the motivations of actors in Silicon Valley and what they want for the world and for the future, we've hosted a range of experts on this podcast. Today's guest is a civic technologist and community organizer who's written a book about the pernicious effects of venture capital.

Catherine Bracy:

I am Catherine Bracy. I'm the founder and CEO of TechEquity, and I'm the author of World Eaters: How Venture Capital is Cannibalizing the Economy.

Justin Hendrix:

Catherine, before we get into this book, I just want to give the listeners a sense of your background. You've done a lot of things. You've been involved in politics as director of Obama's technology field office in San Francisco. Back in 2012 you worked for Code for America, you founded TechEquity. Where did you get your start in civic tech?

Catherine Bracy:

Well, before the Obama campaign, I was at the Berkman Center, and now it's the Berkman Klein Center, at Harvard, the Berkman Klein Center for Internet & Society, for folks who aren't familiar. I was there in basically the decade of the 2000s, which was obviously a very auspicious time to be working on internet issues. And we had a front row seat for the rise of the social web, and this was really the "don't be evil" era, and this was the time when our conceptions of who the baddies were was more governments than tech companies. And I think this idea that the internet could usher in a new democratic era where opportunity was widespread and the barriers to entry were much lower to things like cultural production and the economy and democratic participation. That was all the truth. We really believed that's what the internet would do.

And so I came up in a very optimistic time, I think like probably many of your listeners, and have evolved over the course of that time. But what hasn't changed is that I still think the internet can be a force for good, for democracy, for opportunity, but it isn't going to get there on its own. And the major force that is working against that is not government but industry. And so I think that evolution of my point of view about the role of the internet in the world and our role in shaping it is really what led me to starting TechEquity and writing this book.

We work on issues at the intersection of tech and economic equity. We focus on housing and labor issues because we think those are the two aspects of an everyday person's economic life that have the most impact on their access to opportunity, and we focus on raising awareness about these issues. I think a lot of people who are working on tech policy are not focused on the economic impacts of the tech industry, at least not the economic impacts as they impact the lives of everyday people. So we're really shining a light on those intersections, raising awareness about them, but then also doing policy advocacy in California because we think California is a very strategic place to be making tech policy. As goes California, so goes the nation, as they say. So yeah, right now most of our work is sort of AI advocacy, bringing the voices of people who are affected by AI into the conversation about how to regulate the design, development, and deployment of the technology.

Justin Hendrix:

We'll talk a little bit more about housing as we get into the book, but you're inviting the listener, the reader, to think about some things that feel like they're tectonic plates in how we organize ourselves as a society around the development of technology, the commercialization of technology. You're asking some big questions. What is growth? What is good for society? How do we go about matching capital with technological innovation? You've got this title, World Eaters. You're invoking Marc Andreessen, this idea that software is eating the world. Can you just state the thesis that you're working with here that you've arrived at after all the interviews you've conducted?

Catherine Bracy:

The shortest possible version is, it's not the technology. It's the capital. And the slightly longer version is for those of us who are working on tech policy, I think we tend to focus on the technology layer itself as the place to do the regulating or to focus on the impacts. And the conclusion I have come to in doing that work is that is too far downstream to be really focused on or it's not a wide enough lens on the problem. And if we are just focused on that narrow downstream point of impact of the technology in society, I think we miss a lot. I think we have the potential to actually do harm.

I think this focus on Section 230 could have a lot of negative unintended consequences if we rolled that back, but also it leaves out this whole other part of the ecosystem, the venture capital that infuses the technology with its values. And it's a real blind spot, I think, for us in the community, the political economy community. Anybody who cares about how tech is impacting our lives and wants tech to be a better influence, to not understand the role that venture capital plays is a huge miss. So that's really the thesis of the book, that we need to understand it. And I come to a few conclusions about what that means once we understand it, what does it mean for our work?

Justin Hendrix:

So I don't think many of my listeners are going to be terribly opposed to concern about short-term time horizons, hypermaximalist growth, all the kinds of externalities that come with the venture-backed model. But for anybody listening that isn't terribly familiar with the underlying, quote-unquote, science of venture capital, what do they need to understand?

Catherine Bracy:

The power law is the most characteristic, I guess, of VC concept to understand. And basically a power law is a distribution of data where in a data set, a very small number of values are dragging up the average so that you have a couple of very large values and then in a much larger number of very small values. So when you plot it, it looks like a hockey stick. And that is how typically early-stage venture capital funds, once they are all said and done, usually look like power law distributions.

And a power law distribution, the hypothesis when venture capital was being invented was that these were risky bets that the only way to attract capital to them to show that there was a money-making opportunity here was to take a portfolio approach and hope that a few of the investments would be outsized returners more than making up for the much larger number of investments that would be failures. And that turned out to be true and was replicated by many of the early venture capitalists.

At some point along the way, probably in the '90s or 2000s, it evolved away from being about pursuing breakthrough technologies and letting the power law distribution emerge as a natural outgrowth of that style of investing, reverse engineering the power law distribution. So people started with the goal of creating power law distributions in their fund and then backed every company they invested to into that model. And that practice, I think, is really the crux of what's been really harmful in the tech sector over the last 15 to 20 years.

Justin Hendrix:

One idea that you get onto here, which I find a little counterintuitive, is that venture capitalists actually create risks for their portfolio companies. What do you mean by that?

Catherine Bracy:

I think there's been this mythologizing about failure and risk in Silicon Valley. Anybody who's been around Silicon Valley over the last 10 to 20 years knows that failure is lionized, and of course you're not going to need to break a few eggs to make an omelet kind of thing. But the idea that every company needs to... if you're not taking those risks, you aren't or you haven't approached failure, experienced failure, you aren't really doing entrepreneurship, has become ingrained in Silicon Valley culture. And part of that is because, as I said, when venture capitalists are trying to reverse engineer all of these companies to fit the power law mold, they need to optimize not just for really big returners, they also need to optimize for a bunch of failures.

And so in order to get their companies to hopefully be the ones who are making that big return, and remember, they don't know necessarily when they make these investments which of those companies it will be, they force all of them to go as fast as possible to load up on as much risk as they can to push as hard as they can to get to that moonshot grand slam return. And if that kills them, if that kills the company, that's a feature, not a bug.

And those companies, many of them, that risk is not natural or inherent to the business that they were building in the first place. So they're doing one thing, that business works, there may be an opportunity to go into another market or grow faster or cut a corner on a product development or skirt a regulation. Those things, that's the risk that I'm talking about venture capitalists putting onto the companies in order to get them to accelerate faster. And oftentimes, I talked to a lot of entrepreneurs who ended up paying the price for that, oftentimes society pays the price for it. Almost never does the venture capitalist pay the price for it. So there's this moral hazard in the entrepreneurial ecosystem that makes it risk-free for the investor to push these companies to behave in this way. But all of that risk then falls to us and to the entrepreneurs.

Justin Hendrix:

So a lot of this book is really about how ideas attract capital, about how people get money to build the things they want in the world. There are a lot of characters in this book. There are of course names like Marc Andreessen, names like Sam Altman, the many corporate brands that folks will recognize. But you also get into some lesser known characters, including a few I've come across in the course of my career that I think in some ways illustrate some of your points very well.

One name I saw here, someone I've known is Corey Ford who ran Matter VC. In my prior role, back when I ran New York City Media Lab, we ran an entrepreneurship program for early-stage teams that were essentially trying to build businesses in the media space, often journalism-related projects, trying to take advantage of new technologies. And Matter, Corey's program, was one of the ambitions of those teams. They were the types of teams that were just beginning to form some kind of nucleus and normally the best they could hope for out of the very early stage program that I and my colleagues at the Media Lab ran was to get into a program like Matter which could potentially introduce them to other forms of capital and other types of opportunities.

So I wanted to ask you maybe to comment on what you learned from Corey. It seems to me looking back that his experience is a good kind of case study for exactly why it's hard to operate in this space that's somewhere aligned to the social interest and a market that has experienced a form of failure amid the dynamics and the incentives of the big tech economy. So many startups that go into that area are in a danger zone almost.

Catherine Bracy:

Sorry. It's funny you call it the danger zone. I would think of that as the sweet spot, purgatory, no man's land. It's somewhere I think that this is really a book about the companies that are in the middle, between. They're not social impact companies and naturally, they're not venture scale in the sense of being like Stripe or OpenAI or whatever, but they're really solid businesses.

And that's actually one of the conclusions I came to and the thing I came to believe most strongly is I maybe started this book thinking it was a book about the companies that had been funded by VC and gone terribly wrong, WeWork and Theranos and Juul and FTX and all of these. It actually ended up being a story about the companies that VC wasn't funding or that VC was funding but shouldn't have been funding. And those are the companies that get all of that extra risk placed on them to have them shape-shift to look more a venture scale company when it's not.

And Corey and Matter, I think probably the whole media startup digital space would get slotted into that doubles and triples zone. It's just the kind of market where unless you're doing social media, was not going to be naturally a grand slam business. And I think Corey exemplified the risk and the, maybe risk isn't the right word, the lost opportunity and the actual functional brokenness of the innovation ecosystem, the capital ecosystem that supports innovation.

These were solid businesses that he was investing in. They did not have a natural opportunity to become grand slams, but they could have made somebody a lot of money but there was no ecosystem. Like when you graduated from Matter, if you didn't try to sell yourself to a mainstream VC, there wasn't any money for you. You could maybe get the Knight Foundation to give you some money or a social impact fund, but then you get bucketed into this thing that's also not really what you are. And if you then took money from VC, they're driving you to do things that aren't natural to the business.

And ultimately, the argument that I'm making is that we should have a capital ecosystem that fits for those companies and right now we don't. And the fact that we don't is a huge loss to society, the economy, culture, and we're not just losing out on the financial gains that those companies could create. I think we're also missing a chance to solve some of the bigger challenges, like the media ecosystem is a problem that there should be business models to address. I write about housing in the book. That's another area where the venture capital model does not work well. And so what do we lose when we don't have money that can align with those business models as they naturally exist to meet those market opportunities?

Justin Hendrix:

It's almost like the argument is venture capital, which was intended to be this thing that brings us the riches of technological innovation, it's like you're saying now things have gotten out of balance, out of whack, and in a way that's a drag on actual innovation.

Catherine Bracy:

Yeah. I call it a monoculture and I think that's where the true harm is. There's nobody as innovative as VCs think they are as outside the box as they like to classify themselves. There is almost no innovation going on within venture capital itself. Everybody is taking that power law approach and that's the methodology that gets used, and a lot of them would like to do it differently, might try. They have investors who are expecting them to show up and be Andreessen Horowitz or Sequoia, and they won't be able to raise funds if they don't promise to deliver those kinds of returns or to operate in that way. So I think there's a lot of structural challenges in the system that are preventing this diversity that we desperately need to come to fruition.

Justin Hendrix:

You talk about housing, you talk about other types of distortions for instance in the gig economy, but you also try to tell us about some investors, companies that are challenging the power law doctrine. What are some good examples out there of folks you think are taking a swing at this?

Catherine Bracy:

The person I write about in the book is Bryce Roberts, who runs a fund called Indie VC, and I wanted to focus on Bryce because he is a venture capitalist. He's not doing that. He's not an angel investor. He's not a social impact guy. He is a venture capitalist and has identified from that seat. He's trying to make money. He's trying to return alpha, as they say. He's trying to outperform the public markets. And he has identified that there's this huge opportunity with companies that are not naturally venture-scale companies. I think even Andreessen Horowitz estimates that every year, only 12 or 15 companies are truly venture-scale that are founded. And all of VC is hunting for those few unicorns. And there are thousands of companies that get started every year, thousands of funds chasing those 15 companies.

Bryce said, "Why don't I just try to build a methodology that can make an outsized return by investing in all the rest of those companies, the not 15. That seems a lot easier than trying to find the needles in the haystack. Why not just create something that can make money from the vast majority of companies that get started every year?" And so that's what he set out to do, and I don't want to go into too much detail about his methodology, but he has specific tools that give more flexibility to the companies to figure out who they are before they're forced to take this venture path.

I guess that's one thing I should be fair to VCs and founders about is they don't know. They are hopeful that their company could be a unicorn, but they don't necessarily know. They're telling a story but there's no track record. So they don't know if it's going to be a venture-scale success or a double or a triple, necessarily. And so maybe they just need a year or two to do the work, build the product, find the market to have a better sense of what the real opportunity is. And then at that point, take the path that is best suited for what the company naturally is. And Bryce makes money either way, so he doesn't need to force those companies to take the profit-maximizing path at every turn or to load up on risk so he can try to achieve a power law. He's going to make money either way, so his incentives are aligned with the incentives of the founders and the companies that he's investing in.

Justin Hendrix:

You spend a bit of time on what government can do to change this environment, change this ecosystem. I'm talking to you on the day the FTC has opened its case against Meta in court over the acquisition of WhatsApp and Instagram. Antitrust is one of the things that government can pursue or should pursue vigorously in order to shape the environment and shape incentives. But what else can government do? You talk about things that it could do through the SBA, things it could do through the tax code.

Catherine Bracy:

Antitrust is good, and yes, I'm a Lina Khan stan. But in many ways it's too late. Once you're talking about antitrust, the horse is out of the barn, right? So you're cleaning up the mess after it's clear what happened, unless we're talking about somehow figuring out how to bring venture capital itself into the conversation about antitrust, which I think there are some creative ways you could do that.

Mostly what I think government can do is what our friend Chris Hughes calls market crafting, and he's coming out with a book imminently, I think, called Marketcrafters. It's essentially the way I think of it. I don't want to represent his ideas. I haven't read his book yet, but it's essentially, in my mind, industrial policy for the innovation space in the way that you might create an incentive structure for companies to operate in a certain way that is helping you achieve a policy goal. I think government can act as and create incentives to draw investors into investing in the way that Bryce does. Have more of them do that. And I think as you have more investors operating in that way, you create more data that can show that actually this method of investing competes with the larger style or it's its own asset class, and that's a value in and of itself and that will attract other more traditional capital to that space. I think that's the most promising thing that government could do to support the thing I'm talking about in the book.

Now, at the same time, I do still think that there is work we need to do on holding VC as it is currently practiced and will continue to be practiced more accountable than it is. They should have to carry some of the risk that they create. And there are ways to use the enforcement power of the government to create that accountability. Do I think that's realistic in the next four years? No, I do not. It's possible to talk about some of those ideas, but let's be clear that it's not... We're living in a different kind of world right now where that kind of conversation is a little bit even maybe even tone-deaf given where we are.

Justin Hendrix:

This phrase, "world eaters," part of the imagination I have for the moment we're in with folks like Marc Andreessen, their interests, their policy prerogatives now very much represented in the White House.

Catherine Bracy:

It's a little unclear to me. It changes every day, but it seems like they might be losing the battle between populism and oligarchy at the moment.

Justin Hendrix:

Well, you could argue you've got a vice president who was a venture capitalist at least thinks in some ways in similar terms. But I doubt the ideas you put forward here will necessarily find purchase in the near term, but eventually some of your concerns might rise to the level of urgency, particularly as we watch the social and environmental impacts of where we're at at the moment. Things have gotten very out of whack. It strikes me that the kind of tech, the kind of AI that this amount of capital that's being thrown towards, particularly artificial intelligence, quote-unquote, innovation, the enormous amount of resources that are required to see through the ambitions of startups like OpenAI, I don't know, it feels to me like world leaders takes on another meaning at that point.

Catherine Bracy:

For sure. I'm very concerned about the evolution of AI. I interviewed Sam for the book before he got fired, and at the time he told me that, he was very frank about this, he told me that OpenAI... I was asking him. The whole reason to interview him was because both OpenAI and Anthropic had created these bespoke governance structures and that decision was framed as necessary to protect the technology from the whims of capital and investors. And when I talked to Sam, I thought he might be cagey about that, but he wasn't. He was very frank that the decision to do that was to protect the technology. This was not the kind of technology that he thought should be influenced by investors.

And here we are, I don't know, 18 months later, however long ago that was, almost two years, and they're on the express train to converting from a nonprofit to a for-profit that will be done before the end of the year. And I haven't had a chance to talk to him since then, but I'd be curious to know if he still thinks that what he would say about the fact that this technology is now fully influenced by the whims of investors and what impacts on society he thinks that could have. That's very worrying to me.

I think one of the major plot lines or themes to the second Trump administration when all is said and done, whenever that is, will be this tension between populism and oligarchy as represented by the tech oligarch class, right? And as we're talking, having this conversation on April 14th, 2025, who knows? By the time people are listening to this, things may have changed, but it seems to me that who's winning, at least right now, is the populist side of the House. And I think that Marc Andreessen has been conspicuously quiet really since inauguration, but certainly in the face of these tariffs that I think are really going to harm tech and entrepreneurship and certainly innovation and VC. And I'm not sure what they're getting out of it.

What it makes me think, and of course things could change, this could all shift back the other way in an instant, but what it makes me think right now is about a book I read right after the election called The Rise and Fall of the Neoliberal Order about how these long sweeps of history, these economic systems that span multiple administrations and of Democratic and Republican administrations and that these administrations or presidents are not powerless, but they're operating within this context that is constraining them. And my sense was that neoliberalism, which was the most recent economic order that we lived in, was dying. I think that's very clear and started probably in the wake of the Great Recession. Something else is coming into its place, and neither Biden nor Trump... Both of them reflect that, their governing styles reflect that death and where does that leave tech? Where does that leave the oligarchs who thought that they were going to get what they wanted out of the Trump administration?

I think that's an open question still, I think, but that for me is super interesting to think about where Elon Musk, who's now is on the outs apparently, is leaving the administration in May, which is more than a year earlier than he was planning to leave, with Marc Andreessen silent, David Sacks silent. All of these voices that would have been for unfettered growth and capitalism are now seem to be in the background. That's very interesting to me, and I think it'll be very interesting to see how that plays out over the next couple of years.

Justin Hendrix:

This book does concern itself largely with the American venture capital model and environment. You don't get much onto Europe or other parts of the world where I think it's fair to say everybody would love to have a Silicon Valley. They would love to have a venture capital model that looks like the US. But what would you tell other governments that might be thinking this through? You've had the Draghi report in Europe, the general sense that the Europeans need to get their house in order to create a different type of environment there. What would you potentially say to them?

Catherine Bracy:

I want to be careful and answer with the appropriate level of humility here. I don't know enough about the European context to feel like I could give advice in context, put it that way. But my initial thoughts would be when I mentioned earlier that there is a risk of overregulating or in having unintended and negative consequences when you are solely focused on regulating at the level of technology, I think Europe is an example of that where they are focused on the tech and the companies. And there's some market stuff, but again, if you're doing competition and antitrust stuff, you're way too late. The horse is out of the barn.

My sense is that if you invested in the way that Bryce Roberts invests, if capital markets were perfectly aligned with the actual business opportunities that the innovation ecosystem produces, then you would see a lot less bad behavior in the tech sector that you would need to regulate in the first place. One thing I like to think about, and this is probably a thought experiment that doesn't work that well because it's hard to consider in a vacuum, but what if Facebook had started as a subscription model and not an advertising model? We would have none of this conversation about... The European regulations maybe never would have existed in the first place. Maybe something else would come up, and I'm sure someone would have come up with advertising. If it wasn't Facebook, it would have been someone, and it was investors who really advised Mark Zuckerberg not that he was resistant to pursue advertising rather than subscriptions.

If you could let companies just be what they naturally are, might you avoid a lot of the risk that creates the harms that you need to regulate against in the first place. And so maybe my advice to them would be invest more in the thousand flowers blooming kind of approach. Don't try to think France wants their own OpenAI or whatever. It's just like you're not going to recreate that. I feel like you need to focus on your strengths, and there are a lot of really good companies in Europe that are doubles and triples and make that your identity and invest in that. And you probably won't run into as many of the challenges that require regulation and lockdown in the first place, so maybe you can loosen those up a little bit as things advance.

Now, most of the companies that are having these issues are American companies, so they're regulating because of what Facebook is doing, not because of what some French social media company is doing. So it's a global environment and it's hard to say, "Get rid of these rules and then just let Facebook do whatever they want in Europe." But maybe just try to figure out how to bring in a little bit more of that investing in doubles and triples approach.

They do have a lot of ESG stuff. I did look into this a little bit when I was researching the book, and I probably would have written more about this if I had more time. Never write a book while you have a full-time job is my advice to anybody who was thinking about it. I think trying to force ESG onto investment funds, I don't know about that approach. I don't know that it's that effective. And it might have that same stifling approach for the smaller funds who could seek out the doubles and triples, then you're getting benefit from having more socially responsible investors.

Justin Hendrix:

You end this book with a message for entrepreneurs who are working in this wild environment that you've described here. I still work with graduate students, many of whom are trying to build new things in the digital media space, and I see their good intentions that often run headlong into the capital needs they have, which leads them directly into the clutches of early-stage venture capitalists. What would you tell those entrepreneurs who want to do something different, that don't want to go the way of the next Uber or WeWork?

Catherine Bracy:

This was the most tragic thing about writing this book: talking to entrepreneurs who had internalized that they were failures because their companies were not venture-scale successes or because they were not able to raise venture capital for the idea that they had. And that to me is probably the most insidious part of all of this, is the mindset that we have a culture that we have created around entrepreneurship about what success looks like.

And so I end the book with a call to them to not give up on the vision for the thing that they really want to build. It doesn't say anything about their idea that they can't raise venture capital. I would hope that they could find the Bryces of the world and that by seeking them out, they encourage more investors to take that approach. But I recognize how hard that is advice to give to somebody who's just really trying to keep the lights on and get a product out the door. So I guess what I would tell them is, yeah, man, it sucks and I commiserate and let me buy you a beer. And whatever happens, don't take this as a verdict for the value of your idea and the business that you wanted to build.

Justin Hendrix:

Well, perhaps some of the policymakers who are responsible for shaping the environment and the incentives those individuals are operating in will read this book, which is called World Eaters: How Venture Capital is Cannibalizing the Economy by Catherine Bracy from Dutton, which is a Penguin imprint. Catherine, thank you so much.

Catherine Bracy:

Thanks for having me. This was fun.