Patreon, Venture Capital, and the Loss of the Win-Win.

A briefcase full of money on a table. A gun on top of the money.

Does venture capital ruin companies? I didn’t think so, twenty years ago, but perhaps the worm has turned. Back in the late nineties I worked as a headhunter, nabbing software engineers from big companies and placing them at startups for exorbitant fees. And even we recruiters were enamored with the big VC firms, like Kleiner Perkins, that offered money and (sometimes) office space to smart software engineers seeking to make new and exciting things.

At it’s best, venture capital can be a win-win. Investors can own a piece of small and feisty companies with a big idea. Entrepreneurs get funding and support from experienced business people. Consumers get new products and services, workers get jobs, and retail investors can invest in publicly traded companies in their retirement accounts if the company breaks through. And when it works this way, a wide cross-section of people benefit.

Most of the nineties tech-boom startups went belly-up, but a few persevered. I was overweighted in tech stocks and lost a big chunk of money at the time, but for someone in their early twenties the whole experience was a good education in risk, reward, and irrational exuberance.

Lately though, it seems that VC firms are harming companies and consumers, not helping them. Take Patreon as an example. They offer individual creators a way to get paid by customers and fans. The creators make something cool, customers pay, and Patreon facilitates the payments and communications. At the moment, I support a Stoic Philosopher and a talented Cartoonist financially through Patreon, and I think it’s a great model.

Patreon may be profitable and well-liked, but because they’ve taken in over 100 million dollars (US) in venture capital, their current profitability isn’t enough to satisfy their investors. So their CEO says they may need a new business model.

Youtuber Dan Olson wrote an interesting thread about the impact of this dynamic. He said, and I agree, that “the investors who demand geometric growth are about to demand Patreon eat itself.”

He’s right! Here we have a business that people like, offering a service we value, and it enables small businesses to grow, benefiting many people. That’s how business should work. But because Patreon took in a shit-ton of VC money, they don’t have the freedom to stay in that business. They have to chase more money, a lot more, just to stay afloat.

I’m less interested in assigning blame to the VCs (after all, Patreon sought out and accepted that money, didn’t they?), and more interested in pointing out that when a company takes in a too much VC funding, it’s bad news.

Patreon is in trouble, I think. Not only are they being pushed into squeezing more money out of an audience that will rise in revolt, but their product can be easily replicated. A payment portal with a light blogging platform attached doesn’t have a high barrier to entry, and a new company could replicate the Patreon model without a 100 million dollar monkey on their back.

I was thinking about this mess when I read that Reddit is seeking additional venture funding. Yeesh! My first thought was “If Reddit isn’t self-sustaining by now, will they ever be?” and my second thought was “They won’t be able to pay this back without exploiting their user base. I should be wary!”

If I were starting a tech firm in this market, my goal would be to self-fund as much as possible. A crafty entrepreneur could even improve upon the model of a current over-funded star like Patreon and make bank. I’d bet Patreon will irritate their customers by increasing their take, or by offering bloated services no one wants. That means someone else could swoop those customers up with a nice sustainable version of the subscription business, one that isn’t being bled dry by the sharks of Silicon Valley.

Patreon’s loss could become someone else’s opportunity. Sometimes, in business, it’s smart to let the first-mover take all the risks and build demand for the product. Then when they stumble, WHAM, you step in with a clean reboot, free from all the complicated history and debt.

Who will replace Patreon? I’m still rooting for them, because I like them, but there are stormclouds on the horizon. Here’s my unsolicited opinion: If Patreon’s VCs have any brains in those well-coiffed heads, they’ll back up a step and give Patreon room to breathe, and allow them to serve their core customers instead of exploiting them. Why? Because when venture capital ceases being a win/win, it quickly becomes a lose/lose.

And that’s bad for all of us.

Cheri's Micro Blog @Cheri
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