You may find it odd for a venture capitalist – a capitalist – to attempt to interpret investing in startups through a Marxist lens. Be that as it may I enjoyed the thought provoking argumentation and hope you will find humor in this tongue in cheek exercise!
Entrepreneurs, when founding a startup, engage in a revolutionary and subversive act. They self actualize their ideas and dreams as well as themselves and appropriate the capacity to transform the world. In other words, an entrepreneur exerts meaningful labour by leveraging his vision in the real world. This labour is his and his alone, and his relation to it is crucial. (Relation should be read as ownership in this context). The fruits of his meaningful labour are embodied in his startup.
Entrepreneurs need capital in order to achieve their visions. For the purpose of this discussion, let’s assume this capital comes from Capital which is dissociated from Entrepreneurs. In this sense, Capital mediates the social relationship of production and the Entrepreneur gives up ownership of his startup. This is akin to alienation whereby the Entrepreneur loses the ability to solely determine the life and destiny of his startup. Of course the Entrepreneur receives capital from Capital in the exchange – without which achieving his vision may not be possible. Nonetheless the end result is an alienation from his meaningful labour. To what extent is this alienation material or will become actualized is key to the discussion.
Another way to visualize this alienation is to use the term “class struggle”. Here the interpretation of the term is dual. First, we are confronted with a class struggle between the Entrepreneur/Labour and the VC/Capital in a general sense. Second, we are dealing with separate classes of stock, common shares vs preferred shares, one “struggling” against the other, in a specific sense.
Class struggle permeates the narrative of early stage investing from the start of a term sheet negotiation til the sale of the startup. The major terms found in a term sheet serve to define the investment and the relation between the Entrepreneur and the Venture Capitalist. A different interpretation forces the astute reader to conclude that each term also serves as a means of alienation by Capital. These terms enable Capital to control or eventually take over Labour’s fruits, i.e. the startup and/or its assets: liquidation preference, cumulative dividend, control provisions, governance issues relating to board composition and board election, contract and compensation issues relating to the Entrepreneur, various flavors of anti-dilution. The more protected Capital is, the more alienated Labour will become. Either materially so or potentially so over time depending on specific future events.
Class struggle becomes even more intractable as the capital stack densifies over time and as Labour faces Capital(s). Several classes of preferred shares may alienate one another and in turn individually and collectively alienate the common share class. The ultimate alienation for an Entrepreneur being his removal in whole from his startup. To be clear, alienation can only remain within the realm of potentiality should outcomes develop in a positive fashion.
The old adage that main terms are as or even more important than valuation takes on a vivid dimension when the above Marxist interpretation is taken into account.
As this alienation is inevitable – potential or actualized – Labour needs to choose Capital wisely and concede the right level, both in depth and breadth, of its alienation. Where does the Entrepreneur draw the line and where does the Venture Capitalist accept the line to be drawn are eminently complex questions.
No liquidation preference, no cumulative dividends, the lightest possible control provisions, an Entrepreneur friendly board, benign overall governance will make for minimal alienation. What if no other class than common shares existed and were issued over time? I recently witnessed the CEO of a fintech startup push back against aggressive liquidation preference and cumulative dividends by stating such terms would work against shareholder alignment. He really meant alienation, unconsciously so. I also witnessed another founder pushing back on special controls and board representation a corporate investor was requiring prior to investing by arguing he feared too much control by one corporate would risk altering the strategic roadmap of his startup. Subconsciously so, he also meant that too much corporate control was an alienation he did not care for.
I think all Entrepreneurs are hidden Marxists in as much as left to their own devices, they would insist on zero alienation. I do not think all Venture Investors are of the malevolent Capital type described by Marx, although it is indeed in their nature, theoretically and sometimes practically, to generate alienation. The best Venture Capitalists intuitively grasp that too much control generates false comfort and negative unintended consequences. I view the “purest” Venture Capitalists as non-interventionists intent on ensuring, to the maximum of their abilities, the visions of the Entrepreneurs they back without undue meddling. Witness the stories we hear and read about top tier VCs who negotiate an investment and a term sheet in a couple of hours over a handshake and who only get high praise and positive reviews from the entrepreneurs they work with. Praise the Entrepreneur that encounters such a VC, as his alienation will be minimal.
The ideology of venture capital investment with its term sheet and final documents accoutrements can also be interpreted as false consciousness, whereby the Entrepreneur is sold the venture capital investment ideology (terms and conditions associated with an investment) while the true nature of alienation is hidden. Caveat Entrepreneur! Be mindful that the venture capital investment ideology is actually true – capital needs to be remunerated, comes with caveats… – but that as the true motives it impels remain hidden from the Entrepreneur, it is therefore false consciousness.
I will leave you with two parting thoughts.
First, there is a cost to the absolute absence of alienation. Freedom is indeed very dear and forces an Entrepreneur to a higher level of solitary fiduciary care. Indeed, the absolute absence of alienation may not be optimal.
Second, I guarantee that no Marxist or Capitalist was harmed while writing this post.