The Venture Capital Paradox?

Building a software business on the internet requires almost no capital. You don’t need to rent an office or a warehouse. You don’t need to invest in expensive machinery. You don’t need to buy tons of supplies. At the same time, you can make a lot of money because the distribution of bits over the internet is ridiculously cheap.

All you need to know is how to write software. A single person or a small team can rather quickly build a tool that people are ready to pay for and start making a living. Sure, building a successful business requires more than just writing software. You need to know how to market your product, acquire customers, provide customer support and have some notion of finance. But these are also not capital-intensive things.

What is more, writing useful web apps and deploying them gets cheaper and simpler by the day. Ten years ago, you might have needed to rent a computer in a data center and set up your server. Now, you can deploy your app with one click to AWS or Digital Ocean and pay by the second for what you use. No upfront investment, only variable costs.

Here is what I thought was paradoxical: Why do most venture capital firms invest billions of dollars exactly into these kind of companies that require almost no capital to get off the ground? Wouldn’t it make more sense if they invested in companies that needed millions of dollars of machinery to scale?

The thing is, it’s a trick. Founders of software business are tricked by venture capitalist into thinking that they need their money. What for? To hire a lot of people and spend money for paid ads! Why? So that your startup can grow quickly! Why? Otherwise someone else will come along and take away all your potential customers!

Venture capitalists are great at creating FOMO for founders. If you just follow their lead, you will be the next rockstar founder, worth a billion dollars and featured on every tech blog.

The reason venture capital firms invest so so so much capital into software businesses is not because the businesses need it. It’s because software business are unique in that, thanks to the internet and their digital nature, they can experience explosive growth almost overnight. Explosive growth means a shit ton of money for venture capitalists.

I used to think it’s paradoxical. But it really isn’t. Founders, their companies, their customers and society as a whole would be much better off if software businesses stopped taking money from venture capital firms. Venture capitalists are gamblers. They crash and burn amazing founders, teams, ideas and businesses. Just to make more money. They don’t care about you or your business, they are just great at pretending.