The phenomena of technology companies’ valuations multiplying five-to-ten times year-on-year around the world is akin to the swelling of marshmallows inside a hot microwave oven. The infusion of hot air that causes marshmallows to expand is a befitting representation of the injection venture capital and private equity funds into startups. Just as analogous is the microwave oven to the modern-day ecosystem of capitalism that fuels the growth of new ideas and innovations.
The Rise of Microwave Capitalism
In the old days before Venture Capital, accelerators, and incubators, the venture funding landscape was centralized to a few institutions and companies with deep pockets. Sometimes, these companies would make big bets into new innovations, such as the case with Rockefeller’s investment in Fairchild Semiconductors. But more often is the case of large corporates allocating a sum of money for Research and Development. In this way, innovations were incremental, had to make good business sense, and must synergize with the core business. This is in stark difference to the spirit of Venture Capital that relies on predicting the future value of the new, independent idea. Rightly said, management influencer Gary Hamel observes that we have “reached the end of incrementalism. Only those companies that are capable of creating industry revolutions will prosper in the new economy”.
Undeniably, we are facing an economic shift. As the nature of venture financing evolves from being highly centralized to becoming increasingly decentralized, there are market inefficiencies that lead to ‘Microwave Capitalism’. It is in this era where Venture Capital reigns, that companies can swell five-to-ten times its size, being nothing more than the same company it was before. In the same way that a marshmallow swells under contained, pressurized heat, new and disruptive companies are under immense heat from Venture Capitalists and their investors, many of which require entrepreneurs to promise them massive scale and thus, returns, within a short period of time.
There are several reasons for the phenomenon of Microwave Capitalism. Startups (new, lean, and highly scalable companies) are particularly prone to Microwave Capitalism because new ventures need validation from not only the market, but from investors as well. For one’s innovation, be it market innovation or product innovation, to be truly of use to society, someone other than the founder or her immediate family and friends needs to be willing to share the risk of the venture with her. Institutional investors that are willing to back new ideas without any historical cashflows are called Venture Capitalists. Venture Capital (“VC”) is a high-touch form of financing that is used primarily by early-stage startups. Venture capitalists provide not only financing but also invest their time and other resources through mentorship, strategic guidance, network access, due diligence support and subsequent fundraising advisory. These investments made by Venture Capitalists are highly speculative — most of the companies that receive venture funding will fail, even as some become unicorns (companies valued over US$1 billion through multiple rounds of private funding).
Venture Capital Dominates Venture Funding
The importance of Venture Capital funding is clear to the extent that the largest companies that emerged in our lifetime have received funding from these investors. But successful VC-backed companies may have been successful even without VC financing. Of course, the fact that so many successful entrepreneurs choose VC financing suggests that this financing plays an important role in the entrepreneurial ecosystem. Three out of the five largest companies in the world received most of their early external financing from a VC. These companies are successful not because of the ‘extra shopping money’ but because the biggest companies in the world will be the ones that naturally use innovation and new technology to stay ahead of their competitors. Clearly, Apple, Google, and Microsoft are among the most innovative and most important companies in our lifetime.
In the instance a startup has secured institutional capital, it has achieved the highest form of validation, one that supersedes validation from your initial consumers. Firstly, they validate the team and founder behind the business plan. In the due diligence phase, VCs have multiple interactions and opportunities to understand the founder’s mission and vision, as well as see first-hand the operational mechanics of the business. It is often the team and the founder that determines the long-term success of a new fledgling company, of which consumers have limited interactions and access to in comparison to shareholders and investors. Secondly, the VC also validates the technology and the product. Often, startup entrepreneurs are engrossed in building their product and forget what the market competition is like. It is the job of the VC investor to keep up with the latest trends in technology and stay atop of market currents, validating that the company’s course of action is in line with favorable market conditions. In this way, Venture Capital fuels the new economy of innovation.
It certainly adds to the equation of Microwave Capitalism when VCs demand a startup to scale as quickly as possible, giving way to the rise of incubators and accelerators. Accelerators and startup incubators who promise entrepreneurs rapid scale through introductions to more business partners and clients. The difference between an incubator and accelerators are the stage at which they aid new companies. Incubators support a startup at its ideation stage, when the entrepreneur needs time to develop their business plan, tweak their product, and validate their market. Accelerators guide entrepreneurs from adolescence to adulthood.
Caution in the New Economy
There are dangers to Microwave Capitalism. By choosing to move fast without building stable infrastructure, one could expose a startup to risks. In a keynote presentation to his Facebook developers, CEO Mark Zuckerberg explained that “move fast, break things” is no longer the company mantra because “over time, it wasn’t helping us to move faster because we had to slow down to fix these bugs and it wasn’t improving our speed.” Amongst the things that count as ‘infrastructure’ is a culture of operational excellence. It is never too early to establish your company’s culture. Netflix for example, began building their culture, putting it down in writing, even when they had three employees. Establishing a culture where everyone is open to innovation is truly challenging, but it will ensure that your company continues to grow even when you are large. 2008 University of Minnesota research shows that culture is in fact the most important factor in driving innovation in larger companies.
Microwave Capitalism arises from the friction caused by the movement tectonic plates that make up the economy of innovation as venture financing becomes more decentralized. Beneath our feet, the plates will stabilize once venture funding becomes truly decentralized and crowdfunding takes off. As a result, market efficiencies will begin to pan out and Microwave Capitalism will soon subside.Report this
Gitta AmeliaGeneral Partner at EverHaüs | Venture Capitalist | Forbes 30 Under 30Published • 1yr