The current model for funding advancements in tech in the 21st century is: quantitative easing-doped venture capital hungry for investments -> startup uses initial money to make actual tech advancement (this is the good bit) -> hypes up idea, does IPO -> ideally market monopolization and vendor lock-in -> which allows them to enshittify and extract arbitrary rent from both the supplier and consumer side of their user base and return money to the investors, for ever.
The fact that this funding model applies to tech in general is demonstrated by the broad range of fields where it has been used:
- for software, things like Figma or Medium
- for hardware, things like the Juicero (a great example of how venture capital values trendiness (juicero was wifi-connected, required an app, god forbid if AI existed at the time) over real-world utility (the juice capsules could be opened by hand))
- for biotech, things like GMO golden rice, where Monsanto disabled propagation so that farmers would have to come back to them for seeds (that’s not exactly what happened, but I’m trying to make a point).
The obvious alternative to this is touted to be open source, ie. people making things for free and sharing it with others.
Unfortunately, the amount of things you can achieve for free, possibly relying on donations, is very limited. If you want to become a serious business, you need a serious funding model. I am convinced that the choice between open source and the Sillicon Valey model is a false dichotomy, and other ways of funding advancements in tech must exist (after all, the Sillicon Valey model has not always been the modus operandi).
Are there any hybrid business models for funding tech developments, that eg. even allow the developed tech to be open source? Has any research been done into the design of novell funding models?
In addition to the other models people have mentioned, one I think that’s an important and sometimes overlooked alternative to venture funding is a good-old-fashioned small business loan. Venture funding became super attractive to startups because it looks kinda like free money. If your startup fails, you don’t have to pay it back, they take on the risk with you. However, if you succeed, they own you forever. And they are going to demand a huge return on their investment to pay for all the other ones that failed.
So in certain light, investment funding is kind of like a super predatory type of loan. With a traditional loan, you have fixed terms, you pay it back, then you’re done with them. With equity investors, you’re never rid of them, as you noted. They sell their piece onto someone else of their choosing, who demands you make them even more money, etc. When the startup period’s over, if you’re not making enough money, yeah technically you don’t have to pay back the loan every quarter. But the investors will fire you and hire different management unless you lay off half your workforce, cut the quality of your product, and make a much bigger margin by next quarter.
Also, lenders can have different structures and we can improve those as well. Instead of traditional banks, they could be credit unions with particular community objectives. Local members deposit their savings, and vote on lending principles and goals, like prioritizing lending to local worker-owned co-ops in their geographic area, and/or lending to community land trusts to enable purchasing of more real estate away from asset-based markets, fund construction of new housing, etc.
Edit: Plus, a credit union could agree on how to handle cases in which the co-op/organization can’t pay back their loan. How to re-negotiate terms, when to vote on forgiving the remainder of the loan (turning it into a community donation) potentially based on demonstrated non-monetary value delivered to the community, and how to distribute that loss among the depositors, etc. There might be options for depositors to opt their funds into riskier loans, or loans they’re willing to turn into crowd-funded donations, maybe even loans with voluntary pay-back terms only (i.e. when the receiving organization can afford to pay it back, to enable more loans to good causes in the community), creating hybrid types of funding as well.
Ah, very good point.
I see now. I suppose small business loans favor a more tempered approach whereas venture capital better incentivizes a more frantic approach of throwing things at the wall and seeing what sticks. And with a bank loan-based business, a lot of the other incentives get corrected too (no pressure for constant growth => no need to enshittify once genuine growth stops).
I suppose the flaw of the bank loan model is that there’s no certainty that the research will pay off, so as the researcher (ie. prospective business owner), you don’t want to be the one paying for that inevitable risk…
Exactly, 100%. Small business loans are a way to fund new businesses without ending up with non-worker owners. So once the businesses get off the ground and pay off their loans, they can get into a steady state that’s good for their workers, customers, etc without needing to grow further.
Your last point is a very good one and I think the main reason why venture capital is so much more popular than traditional loans in industries that can get access to venture capital (particularly tech). It’s why I wonder if some credit unions with civic-minded members might opt for some hybrid options that have more generous terms if the research doesn’t pay off.
E.g. loans with voluntary repayment (it becomes a donation otherwise, but the lenders have less money to keep contributing to others in the community). Or at least the ability to renegotiate payment timelines collaboratively. Seems like an important thing to come up with creative approaches for, in order to make loans more attractive even for high-risk innovative research endeavors.
Yep. You’re essentially looking for someone willing to buy debt with a substantial chance of non-repayment. Perhaps if these business loans were bundled then you would at least be able to predict with some certainty what percentage of the money you were likely to get back.
One source of inspiration that springs to mind are UK Student Loans, where incomplete repayment is expected (repayment is income-contingent and the loan defaults (with no consequences) after a fixed period of time). You’d think it would be hard to sell debt of which a substantial portion wasn’t going to get repaid. But in the case of British student loans, pension funds seemed to be interested in buying the debt, I assume because the long term predictabiloty of the repayments made up for the incomplete returns [aren’t normal loans predoctable too thouh?]. Anyway I’m getting side-tracked, this might not be all that applicable to startup funding.
I like that, the UK student loans definitely seem like an interesting model, especially since it sounds like it’s been working. I also imagine that as long as the rate of repayment is somewhat predictable for a large enough body of loans, some depositors would be willing to take a gradual reduction in their funds, potentially while continuing to contribute to their accounts, as long as they like the research outcomes and social benefits those loans are enabling. The partial repayment enables the community lender group / credit union to essentially donate to/support far more projects, and far larger projects, at a steadier rate over time, than they would with zero repayment (pure grants only).
That’s a good point - even just making your grant money go further (with partially repayable loans) is very valuable compared to using it all on a one time grant which might fail
Credit unions are a good idea and I don’t understand why they aren’t more widespread. Would the infinite growth pressure of publicly traded banks (which I assume CUs don’t have) be enough to incentivize them to push all the CUs off the market?