UC Press Blog

In recent years, dreams about our technological future have soured as digital platforms have undermined privacy, eroded labor rights, and weakened democratic discourse. In light of the negative consequences of innovation, some blame harmful algorithms or greedy CEOs. Behind the Startup focuses instead on the role of capital and the influence of financiers. Drawing on nineteen months of participant-observation research inside a successful Silicon Valley startup, this book examines how the company was organized to meet the needs of the venture capital investors who funded it.

Benjamin Shestakofsky is Assistant Professor of Sociology at the University of Pennsylvania, where he is affiliated with AI at Wharton and the Center on Digital Culture and Society.

Stories about tech startups often highlight the software, founders, or AI. What insights do we gain by shifting the focus to the role of venture capitalism and funding in shaping the tech industry? And why is it imperative that we have this conversation now?

A1: Startups that promise to change the world for the better often end up creating social problems as they grow. Some critiques of the tech industry focus on brash and often toxic startup founders and CEOs, while others focus on problems with the technologies themselves. The problem with these approaches is that they ignore the systems and organizational contexts that incentivize questionable behavior.

Shifting our focus to how startups are financed allows us to center the powerful actors—venture capital investors—who set the agenda for technological innovation in the U.S. and around the globe. Right now, we are seeing a new wave of generative AI startups take center stage in Silicon Valley, and, once again, venture capital is setting the agenda, unleashing experimental technologies that expose us all to substantial risk. Now is as good a time as ever to take a closer look at how the venture capital business model shapes the tech industry and how that matters for all of us.

The book takes the reader deep into the work and culture of a single startup – pseudonymized as AllDone in the book. Can you tell us a bit about AllDone and your experience working there?

AllDone built a digital platform to connect buyers and sellers of local services—think wedding photographers, plumbers, math tutors, and everyone in between. It was part of a new wave of startups that emerged in the late 2000s. Like Uber and Airbnb, AllDone served as a middleman who made money by taking a cut of transactions initiated on the platform.

I started working at AllDone as an unpaid intern while gathering data about the company for my research, but my role quickly evolved. Within a few months, I was working full-time, helping to manage AllDone’s customer support teams and its back-office operations while continuing my research.

The small staff of about 20 full-time employees in the San Francisco office relied on a global network of 200 online, work-from-home contractors spread across the Philippines and the Las Vegas area. I observed that being part of a high-velocity, high-growth startup meant different things to differently positioned workers. Workers across the organization got wrapped up in fantasies about how AllDone’s success could improve their lives. A few did reap massive rewards, but some workers who made crucial contributions to the company’s success soon found that AllDone no longer had a place for them.

How do the practices of venture capitalism contribute to racial and gender inequality within the tech industry?

Venture capitalism is designed to enrich the wealthiest among us, and it advances this aim without regard to the social costs generated by VC-backed firms.

The racial and gender disparities begin at the top of the VC ecosystem. Principle investors—known as partners—receive a proportion of the profits generated by the funds they manage. Seventy-eight percent of partners are white; only 4 percent are Hispanic, and 3 percent are Black. A mere 16 percent are women. The founders who receive funding generally look like VCs: 91 percent are men, and 77 percent are white.

When it comes to the makeup of startups themselves, employment discrimination in the tech workforce—as well as harassment, hostility, and harmful stereotypes—are pervasive and well documented. As new startups model themselves on more successful firms to boost their perceived legitimacy to VC investors, they often reproduce the industry’s employment norms. At AllDone, as at other companies, workers’ race, gender, and geographic location were inseparable from managers’ judgments about how particular types of work and workers should be valued and rewarded.

The phrase “growth first, profits later” is often associated with startups backed by venture capitalists. Can you discuss the implications of this approach and how it shapes the priorities and behaviors of startups?

The “growth first, profits later” mantra reflects that VC funds don’t generate profits from a startup’s operating revenue. Instead, VCs make money when the firms they’ve invested in appreciate in value. Their goal is to parlay their initial outlays into blockbuster deals down the road.

This means that for startups and their founders, building an efficiently run business is, at best, a distant goal. Startup leaders are busy racing to fix whatever is slowing their expansion. Software developers constantly experiment as they try to produce a “hockey stick” growth curve pointing up and to the right. Founders, for their part, try to convince potential investors that their startup will maintain that trajectory into the foreseeable future.

The problem with this approach is that in a “winner-take-all” tech industry with monopolistic tendencies, the startups that grow fastest are not always those that figure out how to create a sustainable business model. Instead, the winners are often companies that grow rapidly and recklessly to amass as much capital as possible.

What has to change in order to secure greater job security, fair wages, and workplace protections for tech workers?

We need to look out for all tech workers—not just the full-time employees in corporate headquarters but also the globe-spanning networks of independent contractors who, in many cases, constitute the bulk of a tech firm’s workforce, as well as the millions of people who rely on digital platforms to find work.

Legislation, regulations, and legal actions are all tools that can bolster labor rights in the tech industry and beyond. Lawmakers can support new legislation to ensure that companies can’t use novel technologies as an excuse to violate labor rights, which seems to occur all too frequently in the platform ecosystem. For example, many have advocated for enforcement actions designed to crack down on worker misclassification. Alternatively, we could grant contract workers access to more of the employment benefits and protections that full-time workers enjoy. And we could develop regulations requiring tech companies to monitor their global labor supply chains. This could help us ensure that the people working behind the scenes to enable AI systems are adequately compensated.

How can consumers advocate for greater transparency, accountability, and ethical behavior among tech companies to ensure their products and services align with societal values and priorities?

There are many ways to get engaged. Here are just a few examples:

• Consumers can use scorecards produced by organizations like Fairwork to guide them to the platforms where workers receive fairer pay and better working conditions.
• Consumers can patronize digital platforms that workers–rather than investors– co-operatively own.
• Tech workers can join organizations like the Tech Workers Coalition, which aims to build worker power through self-organization.
• We can all support unionization drives, such as the recent push to organize Amazon’s fulfillment centers.
• We can advocate for antitrust enforcement to oppose the accumulation of economic power by large, monopolistic tech companies.
• We can demand that companies publicly disclose information about their labor supply chains to help ensure that the hidden labor behind AI systems is properly valued.

What are some key recommendations from your book for reimagining the funding and organization of innovation to promote a more equitable and sustainable future?

There are a variety of measures we can take to loosen venture capital’s grip on our innovation ecosystem. Federal programs providing entrepreneurs with grants and loans can require founders to support the public good by capping prices or sharing profits. Publicly owned investment vehicles can give citizens a voice in the direction of technological change. Legislators can also eliminate tax dodges like the carried interest loophole and the Qualified Small Business Stock exclusion, which help funnel more of the gains generated by startups into the hands of economic elites.

As a society, it’s time to diversify our innovation portfolio and experiment with better ways to invest in our future. Consumers, workers, activists, and governments can all support a push to promote and invest in businesses with alternative ownership structures to challenge venture capital’s winner-take-all model for technological innovation. In so doing, we can create ecosystems of smaller, more localized, and specialized platforms that are more responsive to the people who use them and the communities in which they’re embedded. Curbing the influence of VC isn’t about stifling innovation—it’s about making room for the rest of us to have a say in our technological future.