We Need to Diversify Our Innovation Portfolio

An excerpt from Behind the Startup on how venture capital investors set the agenda for innovation

Behind the Startup: How Venture Capital Shapes Work, Innovation, and Inequality

Benjamin Shestakofsky

326 pages, University of California Press, 2024

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Startups that promise to change the world for the better often create social problems as they grow. Some critiques of the tech industry focus on founders’ outsize personalities and questionable behaviors; others emphasize the potentially harmful consequences of algorithms and AI.

I spent 19 months embedded inside a successful Silicon Valley startup that I call AllDone. I did not discover toxic leaders or algorithms running amok. Instead, I had an up-close look at how venture capital investors are setting the agenda for technological innovation in the United States and around the globe.

At AllDone, I observed how VC’s imperative to massively increase a startups’ valuation drove startups to engage in relentless experimentation aimed at pushing the numbers up as quickly as possible. This constant churn created organizational problems that managers solved by combining algorithmic systems with low-wage workers in Las Vegas and in the Philippines.

Ninety-two percent of the company’s workforce was comprised of these off-site, independent contractors who, because their compensation did not include stock options, were unable to share in the wealth they helped to create. Meanwhile, software engineers’ decisions about which innovations and ideas to pursue and ignore were explicitly made with investors’ preferences for high-risk, high-reward projects in mind. Consequently, many users who relied on AllDone’s software found their livelihoods jeopardized as the company “pivoted” from one business model to another to meet VC’s expectations.

This experience left me curious about how we might reorganize innovation so that the gains it generates are more broadly distributed. The following excerpt from my new book, Behind the Startup: How Venture Capital Shapes Work, Innovation, and Inequality, describes what it might take to curb the influence of venture capital and make room for alternative funding models. This is not about stifling innovation—it’s about making room for the rest of us to have a say in our technological future.—Benjamin Shestakofsky

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Technologies, organizations, and institutions are human creations. Our current era of technological change invites us to look toward an uncertain future and to ask how we can come together to minimize the harms generated by new technologies while sharing their benefits more broadly. This is not simply a question of technological design—it encompasses broader questions about how innovation is organized in our economy.

The ownership structure of venture-backed startups pushes companies to engage in relentless innovation aimed at quickly inflating the firm’s perceived value. Although venture-backed startups and publicly traded corporations dominate the field, attending to the varieties of capital active in smaller niches of the tech sector can open our eyes to alternative models and politics of technological development.

As a society, it’s time for us to diversify our innovation portfolio and look for better ways to invest in our future. A brief survey of the platform ecosystem suggests that there are other ways to fund innovation that are likely to produce better conditions for workers and societies, while also ensuring that the bulk of the gains generated by the globe-spanning networks of people who make innovation possible are not hoarded by a small group of economic elites. Privately owned tech companies, non-profit corporations, and platform cooperatives are among the entities that could play an important role in supporting innovation while distributing its benefits more broadly.

The online bulletin board craigslist is privately owned and has largely resisted outside investment. As communication scholar Jessa Lingel argues, “[c]raigslist defies many of the most basic assumptions about how to be a successful tech company.” Founder Craig Newmark and CEO Jim Buckmaster have rarely altered the website’s user interface or policies since its launch in 1995. The two have run the site with what Lingel calls a “minimal-profit politics,” charging a small fee for certain (presumably wealthier) users to post listings (e.g. real-estate ads or job postings in certain cities), but otherwise maintaining a conservative growth trajectory. Unlike other popular platforms founded in the years following its emergence, craigslist has refrained from constantly experimenting with its service to increase engagement, hosting ads, or harvesting and selling user information to advertisers and data brokers.

The case of craigslist demonstrates that privately owned tech companies face fewer external pressures to maximize profits and may thus be less likely to continually update their systems and implement practices that harm workers’ and users’ well-being. The continued existence and viability of craigslist thus suggests that it may be possible for entrepreneurs who eschew venture capital to build successful tech companies that balance the profit motive with a public-service ethos. However, the ecosystem in which craigslist first achieved popularity—which predated the tech behemoths that dominate today’s internet in part by acquiring and copying competitors’ products—was a far more hospitable environment for privately owned, values-oriented companies. If we are waiting for benevolent founders to bring about a better tech ecosystem, we could be waiting for a very long time.

Nonprofit platforms may provide another model for entrepreneurs who wish to prioritize users’ well-being over the interests of investors. Amara is a nonprofit translation and video-captioning platform that launched in 2011. Its Amara On Demand service allows clients to pay workers around the world to translate and caption their content. Freed from the imperative to maximize profits, Amara pays higher wages than many for-profit digital labor platforms (experienced workers in the U.S. can earn $15 an hour). Unlike popular platforms like Amazon’s Mechanical Turk, Amara On Demand also allows workers to communicate with each other and collaborate on projects.

Another alternative to the VC business model is platform cooperativism. Instead of being governed by outside investors, boards of directors, and executives, cooperative businesses are collectively owned and operated by the workers who rely on them for income. One example of a platform cooperative is Up & Go, which allows customers in New York City to order house-cleaning services. Up & Go was founded with the support of a local nonprofit that helped an existing, offline cooperative business build a digital booking interface to compete with venture-funded platforms for cleaning services like Handy. Ninety-five percent of the revenue generated through Up & Go’s platform is paid out to workers, almost all of whom are women who migrated to the U.S. from Latin America. The other five percent is reinvested in supporting the app. Workers’ wages average $22.25 per hour, about $5 per hour above the local average. Because platform cooperatives are accountable to workers rather than investors, they are more likely to innovate in ways that stabilize and increase workers’ income. But they confront challenges as well: many struggle to find initial financing to launch their platforms and to attract customers in markets dominated by powerful incumbents.

Each of the above models—private ownership, nonprofit organizations, and platform cooperatives—have their strengths and limitations when it comes to their potential to transform the tech sector. What they all have in common, however, is the potential to reduce entrepreneurs’ dependence on external funds, and thus external control of their enterprises. Venture-backed tech companies are designed to “scale,” growing as quickly as possible by incorporating a vast array of users with diverse needs and interests into the same computational system. Venture capitalists are moreover legally obligated to maximize the financial interests of limited partners in their investment funds rather than considering the needs of other stakeholders. When technologists resist “scale thinking,” they are better equipped to begin to address the structural sources of inequalities: users can be treated as individuals rather than as interchangeable units, and power can be more decentralized and distributed, allowing for greater participation and mobilization.

Scholars and activists are working together to build the intellectual and legal infrastructure that can help startup founders look beyond lucrative “exits” via corporate acquisitions and IPOs. Advocates argue that founders should instead consider “exiting to community” by converting their enterprises into democratically governed corporations, trusts, cooperatives, or nonprofits. By promoting and investing in businesses with alternative ownership structures, consumers, workers, activists, and governments can challenge venture capital’s winner-take-all model for technological innovation. In so doing, we can create ecosystems of smaller, more localized and specialized platforms that are more responsive to the people who use them and to the communities in which they are embedded.

Federal agencies like the Small Business Administration, National Science Foundation, and Department of Defense—as well as numerous state governments—already provide entrepreneurs with grants and loans to support goals such as national security and economic development. These government programs use taxpayer dollars to help founders commercialize their ideas and create private wealth. Such programs could require entrepreneurs who accept government funding to commit to supporting the public good by capping prices or establishing profit sharing arrangements. Publicly owned investment vehicles could also be designed to give citizens a voice in the direction of technological change. Municipal governments that support tech “incubators” could become equity partners in the companies that benefit from their support so that some of the profits they generate flow back into public coffers. In Quebec, labor unions have created their own venture capital funds to support workers’ pensions, providing equity only to startups that can pass a “social assessment” that includes an enterprise’s working conditions, employment relations, and health and safety at work. Alone, none of these alternatives are likely to challenge venture capital’s dominance, but the wider adoption of strategies like these can make room for new practices and ideas about funding innovation that distribute the benefits of technological change more equitably.

Societies can also support business models and institutional ecosystems outside of the VC paradigm by curbing finance capital’s influence over innovation. Public policy changes enacted during the late 1970s—including rules that allowed private pension managers to include riskier investments in their portfolios and dramatic cuts in the capital gains tax rate—turbocharged the VC industry. The reversal of such policies could open space for other players to fund, and benefit from, the growth of startups. A smaller tweak is straightforward: if legislators eliminated the “carried interest loophole” from the tax code, then the commissions VCs are paid by their investors would be taxed as income rather than as capital gains, which are typically subject to a lower tax rate.

Legislation, regulations, legal actions, and antitrust enforcement aimed at bolstering labor rights and curbing the influence of the most dominant tech companies can also create the conditions of possibility for other approaches. The Biden administration, for example, aggressively filed antitrust suits to oppose the accumulation of economic power by large, monopolistic actors in the tech sector. Lawmakers can support new legislation that ensures that companies can’t use novel technologies as an excuse to violate labor rights. These potential solutions are not aimed at curbing innovation—but they do attempt to ensure that the gains derived from innovation are more broadly shared.

At a time when the dominant narrative surrounding technology assumes that algorithms and AI alone are driving change, centering the role of capital in structuring tech companies’ activities helps to remind us that questions of technological design are in reality often questions of political economy—of who has power over how agendas are set and how resources are allocated, of who will take on risks and who will reap rewards. Even the most talented and well-intentioned technologists are incapable of developing systems that can bypass these social conditions. When we observe the deployment and reception of algorithms and AI systems without keeping capital firmly in view, we neglect an important influence on our technological future while limiting our imagination of how it might be otherwise.

 

Behind the Startup: How Venture Capital Shapes Work, Innovation, and Inequality

Business

Benjamin Shestakofsky
Benjamin Shestakofsky is assistant professor of sociology at the University of Pennsylvania, where he is affiliated with AI at Wharton and the Center on Digital Culture and Society. Shestakofsky’s research centers on the relationship between work, technology, organizations, and political economy in the age of AI. His work has been featured in the Financial Times, Axios, and in a publication of the World Economic Forum.