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For decades, venture capitalists have succeeded in defining themselves as judicious meritocrats who direct money to those who will use it best. But examples like WeWork make it harder to believe that V.C.s help balance greedy impulses with enlightened innovation. Rather, V.C.s seem to embody the cynical shape of modern capitalism, which too often rewards crafty middlemen and bombastic charlatans rather than hardworking employees and creative businesspeople. Jeremy Neuner, the NextSpace co-founder, said, “You can’t blame Adam Neumann for being Adam Neumann. It was clear to everyone he was selling something too good to be true. He never pretended to be sensible, or down to earth, or anything besides a crazy optimist. But you can blame the venture capitalists.” Neuner went on, “When you get involved in the startup world, you meet all these amazing entrepreneurs with fantastic ideas, and, over time, you watch them get pushed by V.C.s to take too much money, and make bad choices, and grow as fast as possible. And then they blow up. And, eventually, you start to realize: no matter what happens, the V.C.s still end up rich.” ♦

I know there have been #money_stuff posts that talk about the reality-distorting effect of VC money, even while you can probably make a case for it,11 The typical argument is that you need to get to a certain scale/market penetration to reach profitability (due to things like network effect and whatnot), which almost feels like you’re saying you need to be a monopoly to win. but they clearly create perverse incentives and completely break down the free function of capitalism to weed out the cruft.

However, this second part is probably worth pondering over, that the V.C.s, even while making such terrible bets (like WeWork) are still able to come out on the other side making a substantial profit. The gist of the article is that, given the potentially incredible pay-out if WeWork were to IPO, there was very little incentive for the Board of Directors to question or intervene, which is counter to their fiduciary duty to all shareholders, and so the Board essentially gave Neumann free reign, up until the point where it was clear that an IPO wouldn’t proceed (after the revelations from the S1 and journalists, which shows the purpose and power of public markets and the press). The losers in this were the employees (whose stock options became worthless), and the various investors that bought at the peak (including some mutual funds?). I mean, in some sense (and probably this is just stolen from #money_stuff again), this is just what happens in the wild-wild-west of private markets, where there is little oversight; it’s not like the V.C.s actively defrauded people (?), they just propped up and propelled a dream that was too good to be true.

All that being said, it does seem like this environment does create perverse incentives for the V.C.s, since it is no longer necessary to pick the best horse; if you’ve picked the wrong horse (or the horse falters before the finish line), as long as you shower it and dazzle the crowd, you can eventually pawn it off. Not really sure how to correct the market here (though the spectacular failure of We has done much to offset the irrational exuberance, though not sure if it has changed the calculus).