Venture Capital Ruins Startup Innovation
Using a personal example plus lessons learned to warn others, especially investors, you need to change
Venture capital can be an essential source of funding for startups, especially those working on innovative and high-risk projects. However, venture capital can also create specific pressures that can inhibit a startup’s ability to innovate. These pressures are built on focusing solely on investment return, which is based on broken economic theories that are not appropriate for the times we live in (climate change, the impending fall of the American empire, and modern neo-liberal capitalism).
One way venture capital can impede innovation is by focusing on short-term results and assuming an ability (and advantage) to scale infinitely. We live in a finite world with limited resources, and even more so, we live in man-made countries with borders, policies, and laws that make scaling very hard (and potentially dangerous) to do.
Venture capitalists are typically looking to invest in companies that will generate a high return on their investment within a relatively short time frame, usually within 5–7 years. Focusing on short-term results can cause startups to prioritize immediate revenue generation and profitability over longer-term innovation. It can also cause harm to people and the planet. You might not think that is a big deal, but capital alone cannot nourish bodies or quench thirst — something necessary to sustain life. Venture capital focuses on these short-term goals because it is more simple than focusing on sustainable growth that factors in externalities (or, in layperson terms — the real world and everything that governs us).
LendUp (innovation poisoned by VC)
I grew up in the Bay Area, the fertile crescent of technology, social media, and Venture Capital. As a young person, I knew I wasn’t smart enough to start a company on my own, but I was motivated to learn fast and use those learners to help others. Stupidly, I thought those with the most money must know the most (i.e., Venture Capitalists). After working hard to get their investment, I saw the company I helped start (LendUp) lose all its innovative elements, spiral into predatory and exploitative practices, and ultimately go bankrupt (or liquidate all assets here).
I joined LendUp when I was in my early 20’s. I had just returned from doing field research in South America for a book about global poverty. I quickly realized that if I wanted to continue working in international development, I needed to make money first. I am from the Bay Area, and when I came back, after living in Canada for seven years and then South America for one year, 2012 San Francisco looked like nothing I had seen before. Social Media companies were like a Phoenix rising out of the ashes of the 2008 recession, and everyone wanted in. All my friends and acquaintances were becoming nouveau-riche from these companies and believed that these companies were changing the world for the better. Even then, I was skeptical. These “sexy” apps and social media companies were bringing people together. Still, I wanted to help people, and I was attracted to complicated issues, ones uniquely made in the U.S., where exploitative financial policies hurt my family and caused the 2008 housing collapse. When I tried to find a job that aligned with my passion for helping people made victim to these issues, LendUp seemed like a great fit. It was a messy financial problem, and fintech seemed like an innovative, tech-forward solution.
Why did financial lending need innovation?
Due to institutionalized financial racism and sexism, millions of Americans have been historically denied access to the credit they need to build a life in the US (like purchasing big ticket items like owning a car, or a house, continuing their education, etc.). After the 2008 financial crash, the number of Americans needing access to cash rose dramatically, and at the same time, banks started restricting their lending criteria even more. This caused a perfect storm for smaller lenders, like payday lenders, to take advantage of this new market of people who needed cash to do things like fix their car (so they could go to work) or address an emergency that was not planned (like medical bills or family death). These people were not irresponsible with their money; they lived in a system that provided no security net, so although most payday recipients were fully-employed, they did not have enough to cover $150-$300 expenses (the average cost of a payday loan).
Why was LendUp considered innovative?
Payday lending has many conditions, substantial interest rates, and very fine print that they hope their customers don’t read. It is marketed to people as something to help them until their next payday, but what I quickly realized (and experienced from exploitative bankers and financial companies) is that companies make a lot of money off incentivizing customers not to pay their loans on time because the fees and interest make companies vast amounts of money. Payday loans are also not credit-building loans, so although many customers trying to improve their financial situation think they are building their credit when they take one out, they are not! Lastly, most regulatory bodies, like the Consumer Financial Protection Bureau (CFPB), did not have enough sway to penalize these types of lenders, so many of them continued predatory practices and had no incentive to change.
When I was hired at LendUp in 2012, I was keen to help solve the unsexy problem of payday lending and the opportunity for LendUp to offer a better, more transparent loan to Americans. I fully believed that fintech could solve this problem alone and the government would follow. I joined LendUp as their 5th employee, first female hire, and first non-engineering hire. I set up the customer service department and created and led the financial education and advocacy departments. I worked tirelessly to treat customers like humans, understand their issues, and create financial education courses that could help them make better future financial decisions. In the end, we created a LendUp ladder that gave customers discounts on their LendUp loans and ultimately rewarded them with the opportunity to turn their LendUp loan into a FICO credit-score building loan.
This was innovative and had not been done before, and it was happening at a crucial time. I was so proud to be a part of the LendUp team, and although I knew that loans were not a good idea in the end, I wanted to believe in the capitalist system that I was forced to be a part of. I wanted to desperately believe that if our team worked hard enough, we could really “disrupt” payday lending, create more transparent credit-building loans for a vast segment of the US population, and eventually, LendUp would not need to exist anymore. Innovation at its best!
The LendUp team initially did what the big VCs and their advisors told them. LendUp was the first fintech company in Y Combinator (although they took a large chunk of equity). The 11-person team worked tirelessly (beyond burnout rates) to win the attention of the biggest names in Venture Capital, winning investment from top-tier firms like GV (Google’s venture arm), Andreessen Horowitz, and Kleiner Perkins. We all thought we working with the best and brightest in the industry..because that is what we were told.
I stayed on the team and helped grow it from 5 to 50 employees. I left in 2015 to go back to graduate school (which everyone also said was a big mistake, but that’s a different story) and stayed on as a financial education and advocacy advisor until late 2016. After I left, I took my career in a completely different direction (working for the gender equality division at UNESCO headquarters in Paris). Although I had doubts, I assumed the company was in good hands. I trusted the team and assumed VCs had the best intentions for the company; how could they not? They invested in us. Lendup was named one of the World’s Most Innovative Companies in 2017 by Fast Company; LendUp was backed by leading growth capital and strategic investors like PayPal Ventures, Thomvest Ventures, QED Investors, and Kapor Capital.
Venture Capital ruined everything innovative about LendUp
During the series A and B raise, I was face-to-face with an array of the “best and brightest” investors — or so they would want you to believe. And, each time I was in front of these investors, I became more dubious that they knew more about the industry than our team did. Nevertheless, everyone with an opinion seemed to weigh in on how crucial it was to secure VC funding and that all great startups should desire to do so. Throughout the funding process, I saw big red flags as LendUp became a VC darling. I had way less exposure to what was happening at the company after 2017, but it was clear that the company culture, mission, and everything I cared so deeply about was fading fast.
From my standpoint, as the company grew, it came under more pressure to generate profits for its investors rather than focus on its innovative product for consumers. Moreover, VCs forced the company (or may have faced incentives) to prioritize revenue-generating activities over its original mission of improving financial literacy and access to credit for underserved populations. In my opinion, this was the dagger that destroyed the company’s ability to innovate and find new ways of achieving its mission. And in my opinion, the was a direct correlation between LendUp's ultimate failure and the liquidation of its assets due to these VC pressures. In December 2021, after multiple allegations of exploitative practices, they were forced to cease lending and ultimately liquidate their assets. The VC darling everyone was so keen to talk about and tie its success to its impressive list of funders, burned to ashes, exploiting the very people I so desperately wanted to help. My former colleague sums it up nicely, here.
Why does this matter? Lessons for startups
Don’t do what LendUp did. If I could turn back the hands of time, I would have spoken out a lot more, and when the company was making enough sustainable revenue, I would have doubled down on why we should focus on this type of growth rather than reaching out to secure more VC funding.
While venture capital can be a valuable resource for startups, a company's most valuable resource is 100% ownership from the team that built the innovation in the first place. No one wants to tell you this, but your company's revenue is way more important than how much funding you secure.
However, if that is not possible, these companies need to strike a balance between meeting the expectations of their investors and staying true to their long-term goals and mission.
This is where investors come in. If VCs continue to homogenize all startups with your terms and conditions and fail to see that some companies are built only to serve specific markets (therefore, not grow infinitely).
VC firms are often seen as a necessary evil in the startup world, providing the funding necessary to bring innovative products and services to market. However, I think VC is bad for innovation. The VC industry is plagued by a “playbook” mentality, where firms follow a formula they know works rather than taking real risks. This is particularly true for non-white and non-male founders, who are often overlooked in favor of more familiar faces. The problem with this approach is that it stifles innovation, as potentially transformative ideas are overlooked in favor of safer bets.
Moreover, VC firms can waste an insane amount of money, especially when they continue to back failed entrepreneurs who mismanage their companies. This provides a form of billionaire welfare, which is particularly irresponsible during tough economic times, as it can push the already struggling US working class into further destitution.
While VC funding can be essential for startups, the industry’s narrow focus, playbook mentality, and tendency to bail out failed entrepreneurs all contribute to a system that stifles innovation, particularly among non-white founders.
