Silicon Valley investors recently bet $50 million on a luxury sock company. And the most surprising part was how normal it seemed.
Venture capital investment is at its highest point since the late 1990s. Funders are flying close to the sun. The stable of privately backed “unicorn” tech companies—those valued at more than $1 billion before their initial public offering—is growing. Some investors warn of a great reckoning on the horizon, a draining of wealth on par with the first dot-com bubble, while others are still throwing in more cash, making more unicorns, and ultimately investing little, if anything, in the actual health of the American economy.
Every boom is a little bit different. While the dot com bubble was blown up on the open stock market, the latest tech boom has gone all puffy after a few very fat years living on venture capital.
Barring their ability to change government and economic policy by swinging their sparkling manes, the unicorns do little for the greater economy, where job growth is slow, wages are stagnant, and the wealth gap is widening.
Low interest rates have made other investments less appealing to funders, who are more and more willing to take on big risks in hopes of big returns. A small number of investors are throwing huge amounts of money at a small number of companies in hopes of finding the even smaller number of companies that yield even bigger profits. No one wants to miss the next Facebook. This is how we end up with $50 million dumped into a sock brand, while small venture investments are often deemed too much risk for too little reward.
That kind of money allows for swift and massive growth, the kind that many businesses would likely not otherwise be able to accomplish. But it doesn’t necessarily put those businesses in the best position to succeed. Venture capital is risky, volatile, and not necessarily a great investment strategy on the whole. VC funds make bad bets. They lose a lot. Most venture-backed companies fail. They raise too much money, and spend too much money in turn.
But right now the table is hot. And venture capital is hardly just how tech and socks are bankrolled: Last year, San Francisco coffee chain Blue Bottle raised nearly $26 million about a year after it raised $20 million.
These investments create tremendous value on paper. The unicorns have reportedly doubled in the last year. Many of them have real business plans selling actual products and services, though they’re still losing money on the whole. But none of this realism factors in. “The numbers are sort of made-up” in order to keep the myth alive. “These big numbers almost don’t matter” say the guys running the table. That’s good for the initial investors in those unicorns, and very dangerous for smaller investors who might buy in later.
The value of a company is truly in its impact, not in its ability to attract venture capital. These billions don’t translate into a rapidly expanding workforce or consumer spending. And why would they, when venture capital firms are only in the business of making more money? When Snapchat was first valued at $4 billion, it had only 20 employees. Venture capitalists point to the potential for unicorns to create more innovation, which in turn creates more industry, social reforms, and job growth. If unicorns are mythical, this line of logic is outright magic. When they do create jobs, unicorn companies are often staffing up with low-paid and precarious workers (Uber), or non-hotel-worker hotel workers (Airbnb).
Barring their ability to change government and economic policy by swinging their sparkling manes, the unicorns do little for the greater economy, where job growth is slow, wages are stagnant, and the wealth gap is widening. And they’re bound to do even less when the market cools and investors start getting antsy for their returns.
Venture capital has the potential to catapult a select few companies to success, and make some wealthy people even wealthier. The unicorns it creates are pretty and magical. But we would do well to remember that they’re not actually real.
The Crooked Valley is an illustrated series exploring the systems of privilege and inequality that perpetuate tech's culture of bad ideas.