Why an ethical enterprise should never take on Venture Capital funding

Aral Balkan, in the context of a critique of Ello, an attempt to create a Facebook alternative, taking VC investment:

“Here’s how venture capital works: you go to an investor, before you’ve even built the thing you’re building and you tell them how you’re going to exit. It’s called an exit plan or exit strategy. You tell them, for example: “Hey, we’re going to get 100 million people using our new platform in two years time, how much will you give me for 100 million people?” And they go “Umm, we’ll give you this much for 100 million people because we’re pretty sure we can get that amount back several times over when we sell those 100 million people in an exit either to another company or in an IPO.” When you take venture capital, it is not a matter of if you’re going to sell your users, you already have. It’s called an exit plan. And no investor will give you venture capital without one. In the myopic and upside-down world of venture capital, exits precede the building of the actual thing itself. It would be a comedy if the repercussions of this toxic system were not so tragic.

Let me put it bluntly: if a company has taken venture capital, you have already been sold. It’s not a matter of if, it’s simply a matter of when. (Unless the company goes under before it can exit, that is.)

A venture-capital funded startup is a temporary company that has to convince enough people into using their platform so that they can make good on the exit they promised their investors at the very beginning. It is the opposite of a long-term, sustainable business.”

2 Comments Why an ethical enterprise should never take on Venture Capital funding

  1. Bob Haugen

    Bill, those would be angel investors. Venture capitalists in general do not do that. They call those “lifestyle businesses”. It’s not a compliment.

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