Jack Dorsey And The CFPB Jump On The Venture Capital Demonization Bandwagon

OBSERVATIONS FROM THE FINTECH SNARK TANK

It’s a great time to be a venture capitalist. If you have thick skin, that is.

Why is it a great time for VCs? According to CB Insights, the third quarter of 2021 was a great quarter for VCs in terms of:

• Funding. Global venture funding reached $158.2 billion, a 105% increase year-over-year. US companies raised $72.3 billion in more than 3,200 deals— the most on record.
• Mega-rounds. The 409 $100+ million mega-rounds was an all-time high for the 5th straight quarter. Q3 2021’s $91.3 billion in mega-round dollars was double that of a year ago.
• Unicornification. In Q3 2021, 127 new unicorns were created—the second highest number following the unicornification of 140 startups in Q2 2021.

And why the need for the thick skin? There are some people unimpressed by these numbers, including:

• Rohit Chopra, Director of the Consumer Financial Protection Board (CFPB). In its order to fintech startup LendUp to cease lending operations, the agency’s director noted that “LendUp was backed by some of the biggest names in venture capital,” and mentioned well-known VC firms like Kleiner Perkins, Andreessen Horowitz, and QED Investors.
• Jack Dorsey. The New York Times reported that the Block head “exposed a deep internal rift over the direction of crypto and pitted himself against some of the industry’s deepest-pocketed backers,” and “warned that Web3 was really owned by the VCs pouring billions into cryptoventures.” Dorsey tweeted that Web3 “will never escape their incentives.”

Other passengers on the VC demonization bandwagon include:

• New Yorker magazine. The author of a November 2020 article titled How Venture Capitalists Are Deforming Capitalism stated that “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 VCs help balance greedy impulses with enlightened innovation. Rather, VCs embody the cynical shape of modern capitalism, which too often rewards crafty middlemen and bombastic charlatans rather than hardworking employees and creative businesspeople.”
• TechCrunch. An August 2021 article titled Venture capital undermines human rights cites an Amnesty International survey which found that none of the world’s 10 largest venture capital firms had an adequate human rights due diligence process that met the UN Guiding Principles on Business and Human Rights’ standards. The author of the article concluded, “this failure to carry out adequate due diligence means that a vast majority of VC firms are failing in their responsibility to respect human rights.”

Jibbing Jack’s Jeremiad

Ari Paul, CIO and founder of BlockTower Capital, stepped in on Twitter to defend the venture capital community:

“As for the VC hate, it’s not like VCs just decided to own big stakes in web3. They bought the positions. Why were they able to buy so much? Two main reasons:

1. Regulators. As many pointed out, teams are legally required to fundraise from AML/KYC’ed investors, and it’s far far safer and cheaper to fundraise from only accredited investors. While there are ways around this, those ways are either expensive and inefficient, or legally risky.

2. VCs allocate capital reasonably well. In a meritocracy (aka free markets), the best allocators will eventually own everything (absent taxes and other redistribution mechanisms).

A few years ago, Jack and many bitcoiners said all this Web3 stuff was just scams. Now that it works and [has] generated hundreds of billions of $$ of value, he complains that VCs own it.”

Dorsey’s claim may not even be correct. As Mike Dudas, general partner of Red Pill Ventures, points out on his blog:

“Typically, [Web3] token ownership stakes are significantly less concentrated in the hands of capital (investors) and management (team) than in traditional Web2 models. In most cases more than half of the network, sometimes much more, is reserved for users of the protocols and for treasury and future growth efforts.”

In his complaint that VCs own Web3, Dorsey conveniently forgets—or omits—the fact that in 2015, Twitter created its own venture capital arm. The Quartz article covering its launch doesn’t include complaints from Dorsey about VCs owning too much of anything, by the way.

Chopra’s Cheap Shots

Chopra’s comments are selective and misplaced criticism, as well—misplaced because the VCs who invested in LendUp are hardly responsible for the company’s lapses in regulatory compliance, and selective because we never hear a government official publicly congratulate a VC for making an investment in a firm that goes on to create jobs and value for society.

Publication Palaver

The two publications’ rants against VCs are odious, as well.

The New Yorker article claims that VCs “too often reward crafty middlemen and bombastic charlatans rather than hardworking employees and creative businesspeople.”

Exactly how often is “too often”? If once is “too often,” then the New Yorker has a point.

The reality, however, is that the overwhelming majority of VC funds goes to hardworking and creative founders and companies. Throwing out hardworking and creative babies with the bombastic bath water doesn’t make the New Yorker’s case.

TechCrunch’s critique of VCs is a real head scratcher—this is a publication that practically licks the venture capital community’s boots. The article’s critique suffers from a couple of problems:

• The UN is hardly a paragon of human rights protection. Former UN ambassador Dore Gold’s book, Tower of Babble: How the United Nations Has Fueled Global Chaos, criticized the UN for its occasional support of genocide and terrorism.
• Weak logic. Concluding that VCs fail to respect human rights because they don’t use one organization’s “guiding principles” doesn’t prove that they don’t support human rights.

The Vacuous Demonization of Venture Capital

The demonization of VCs is rooted in psychology and our need to have an enemy to blame for outcomes we don’t like. A research report with the indigestible title An Existential Function of Enemyship: Evidence That People Attribute Influence to Personal and Political Enemies to Compensate for Threats to Control states:

“Perceiving oneself as having powerful enemies may serve an important psychological function. People attribute exaggerated influence to enemies as a means of compensating for perceptions of reduced control over their environment.”

A study conducted by the authors showed that people attribute influence over life events to an enemy when the broader social system appeared disordered.

Blaming venture capitalists for enslaving Web3 to its incentives or for the systemic violation of human rights or even for causing a single fintech startup to mislead investors is nonsense.

Jack Dorsey and Rohit Chopra might do well to remember the words of Pogo, Walt Kelly’s comic book character, who famously said, “I have found the enemy and it is us.”