The Shareholder Trap

With all the talk of around here, and in the slack channel, there’ve been a number of stories shared and rationales put forward around why traditional venture capital isn’t a fit for the vast majority of founders. 

One argument I hadn’t seen yet, is spelled out best by Brad Burnham @ USV. The piece centers around how bootstrapped deep web marketplaces can, and will, put pressure on their VC funded competitors. Here’s the relevant quote:

I have worried for some time that as the value of marketplaces like AirBnB and Uber soars, they become vulnerable to a new breed of competitors. No matter how efficiently they use technology, they now have another mouth to feed – the shareholder.

If Uber is valued at $40bn in the latest round and the new investors expect a 3X return, the company must somehow extract enough value out of the marketplace to justify a $120bn market capitalization.

Yes, established marketplaces have strong network effects, but it is possible for buyers and sellers to use more than one app, and it seems likely that they will begin to move to apps that share more value with creators in the form of lower costs, and with consumers in the form of lower prices.

With venture money comes venture expectations around growth, margins and value at exit.

That works well for some, but not for all.

In the past not having investors and deep pockets has been seen as a huge disadvantage. 

Maybe, just maybe, the underlying economics of cash efficient startups will swing to favor those who haven’t fallen into the shareholder trap.