For a solid ~10 years (aka the 2010s ZIRP era), startup fundraising became completely decoupled from reality.
Founders started treating fundraising as their entire job - and almost a religious calling. Investors, journalists, and founders all collectively agreed to treat the capital raise itself as the reward signal, and basically nobody stopped to ask the much more fundamental question: wait, what is the actual compute/capital allocation plan here?
The sad part is that many of these teams had already found a really nice local minimum! They built good software with real, paying users. They could easily have stayed lean, compounded, and run super-profitable 8-person software companies for decades. Instead, they over-capitalized, fucked their org chart by hiring 40 people to do the work of 8 and introducing massive communication overhead and organizational bloat, burned capital on paid acquisition just to overfit to arbitrary investor growth targets, and signed leases on giant offices that sat mostly empty.
Within a few years, the gradient exploded: most of them had to lay off their staff, sell for less than the total capital raised (getting Spooned), or just rm -rf the whole company.
The error here was treating capital as a trophy rather than a chemical reactant.
This is entirely wrong.
Very specifically, capital = fuel. And as any aerospace engineer will tell you, engines are notoriously picky about what you put in them.
If you’re trying to put a Saturn V into low Earth orbit, pumping the tanks full of liquid oxygen and RP-1 is the exact right move. You physically cannot achieve escape velocity without it. If, on the other hand, you pump liquid oxygen and RP-1 into a 2004 Honda Civic, you do not get a Civic that wins the Daytona 500. You get a very brief, very exciting thermodynamic event that melts the engine block and scatters the transmission across three lanes of traffic.
A whole generation of founders had to discover this empirically. Venture capital is a miraculous coordination technology if you are building a literal rocket company, a frontier AI lab, or a semiconductor fab. It is a catastrophic additive if you are building a slightly better to-do list app.
Why?
Because a modest, sensible software business was never designed to survive the chamber pressure of a ten-times return mandate.
The Brutal Math of the Power Law
Venture capital isn’t designed to support good, profitable, enduring businesses.
It’s an extreme financial instrument engineered for a very specific type of bet.
VC funds operate on what’s known as the “Power Law.” Because early-stage investing is inherently risky, most startups in a given VC’s portfolio will fail completely and return zero dollars. A few might limp along and return the initial investment. Therefore, to make the math work for their own investors (the Limited Partners), a venture capitalist needs the one or two winners in their fund to return the value of the entire fund.
If a VC has a $100 million fund, they aren’t looking for ten companies that’ll generate $10 million in steady, reliable profit. They’re looking for one company that’ll achieve a $1 billion valuation so they can cash out a 10% stake and hand $100 million back to their LPs.
This means the moment you take a venture capital check, you’re no longer in the business of building a sustainable company. You’re in the business of creating a unicorn. The money's structural mandate demands hyper-growth, massive total addressable markets (TAM), and an eventual liquidity event, usually an IPO or a massive acquisition. If your company can’t realistically reach a billion-dollar valuation, venture capital won’t help you; it’ll break you.
Why Rockets Need the Tool
If you want to build a reusable orbital launch vehicle, you can’t bootstrap it. You can’t build a Minimum Viable Product in your garage over a long weekend, launch a tiny rocket into your neighbour’s yard, and charge them $5 a month in recurring revenue to fund the next iteration.
Rocket companies absorb hundreds of millions, sometimes billions, of dollars in upfront research and development before they ever see their first dollar of revenue. They cannot function without entire teams of highly paid aerospace engineers, sprawling manufacturing facilities, and literal launch pads. The barrier to entry is astronomically high (if you’ll pardon the pun).
For this specific challenge, venture capital is a beautifully designed, precision instrument. It bridges the “valley of death” between an ambitious idea and commercial viability. VCs take on the massive risk of the rocket blowing up on the launchpad because the upside is equally massive: if the rocket succeeds, you monopolize an industry, redefine human capability, and generate tens of billions in enterprise value. The founder's incentives (change the world, get incredibly rich) and the investor's (return the fund ten times over) are perfectly aligned.
The To-Do App and the Terrible Drug
The economics of building a software utility are the exact opposite of building a rocket. The barrier to entry is nearly zero. A single talented developer or a small team can build a fully functional application in a few weeks using cloud infrastructure that costs pennies. You can launch it on the App Store or the web, acquire users through organic marketing, and start generating revenue on day one.
A to-do app, or any niche SaaS product, is a beautiful business model. It’s got high gross margins, predictable recurring revenue, and requires very little overhead. A small team can easily build a to-do app that generates $2 million to $5 million in annual recurring revenue. For a founding team of three people, a $5 million-a-year business is a spectacular, life-changing success. It allows for high salaries, creative freedom, profit distributions, and long-term stability.
But what happens when that $5 million-a-year to-do app takes a $10 million Series A from a venture capital firm?
The money acts as a powerful, perception-altering drug. Suddenly, a perfectly healthy, highly profitable boutique business is told that its current trajectory is a failure. Remember the Power Law: the VC doesn’t care about your $5 million in annual revenue. They need you to hit $100 million in revenue so you can go public.
The drug immediately alters the founder’s behavior.
They hire twenty engineers, ten product managers, and a bloated marketing team because they’ve got $10 million sitting in the bank and a mandate to “grow at all costs.” Suddenly, a business that was actually profitable is now burning $500,000 a month to sustain an inflated headcount and aggressive customer acquisition costs. The simple, elegant to-do app that users loved is suddenly deemed insufficient. The market for simple to-do apps just isn’t big enough to support a billion-dollar valuation.
So, under board pressure, the product begins to mutate.
The Inevitable Crash
To justify the venture valuation, the to-do app has to become an “Enterprise Productivity Suite.” The product team starts bolting on features: complex project management dashboards, real-time chat, AI-powered predictive scheduling, and integrations with legacy corporate software.
The original users - the poor saps who loved the app because it was lightweight and simple - become alienated by the feature bloat and leave. The company pivots to B2B enterprise sales, hiring aggressive account executives to sell to Fortune 500 CIOs. But now, they aren’t competing in the niche to-do app market; they’re competing directly with Microsoft, Atlassian, and Asana.
Which means the company likely gets caught in a death spiral. They’ve abandoned the niche where they were uniquely competitive to fight a war they can’t win, all to satisfy the growth expectations of their capital stack. When the $10 million runs out, the metrics don’t support a Series B. The VC firm writes the investment off as a loss - just another acceptable casualty of the Power Law. The founders are forced to lay off the massive team they hired, the company shuts down, and an asset that could’ve generated millions in personal wealth and a lifetime of calm, fulfilling work is destroyed.
Choosing Your Engine
The core lesson for modern entrepreneurs is this: you’ve got to choose your capital stack with the exact same rigor and strategic foresight with which you choose your technology stack.
If you’re trying to mine asteroids // cure a rare disease // build a generalized artificial intelligence, you need to raise venture capital. You’re building a rocket, and you need the rocket fuel. Go pitch Sand Hill Road, embrace the high-stakes gamble, and swing for the fences.
But if you’re building a beautiful, intuitive tool to help people manage their daily tasks, a niche CRM for local bakeries, or a niche Shopify plugin - don’t touch the drug. Retain your equity. Charge your customers. Grow at a pace dictated by your revenue, not your burn rate.
Venture capital isn’t a badge of honor; it’s a very specific tool for a very specific job. A hammer is incredibly useful for driving nails, but if you try to use it for open-heart surgery, you’ll end up with a mess.
Build the business you actually want to run, and tool // fuel it accordingly.
🍕 I’m JA Westenberg. I write essays about technology, philosophy, productivity, and what it means to be human. If you’re an optimist, you’re in the right place. You can read my AI disclosure here.
