In markets where the winner takes most, speed has to be bought

The argument

Proponents of this position argue that the case for venture capital depends on the kind of market a company is in, and that in a particular and common kind it is decisive. Where a product gets better as more people use it, or where customers settle on one option and rarely move, the position a company reaches early tends to be the position it keeps. In those markets the contest is not for the best product in five years' time but for the default in eighteen months, and the firm that assembles a team, builds the thing and reaches customers first takes a share that later entrants cannot dislodge. Speed on that scale, proponents argue, cannot be funded out of early revenue. Hiring engineers and salespeople ahead of income, building infrastructure before it is needed, entering several markets at once and absorbing the losses of doing all this badly at first are expenses that arrive long before any customer pays enough to cover them. Equity funding is the instrument that matches that shape, because it supplies money against a future that has not happened yet, which is precisely what a bank lending against assets and cash flow will not do. Proponents also stress what declining the money means in such a market. A founder who grows only as fast as revenue allows is not choosing a slower path to the same destination; they are choosing to be beaten to it by a competitor who took the funding, after which the careful business is left serving whatever the winner did not want. On this account startups should take venture capital, because in winner-take-most markets the speed it buys is the difference between building the default and building a footnote.

Premises

Counter-arguments

Critics argue that the premise about market type is assumed far more often than it is true: most businesses face no winner-take-most dynamic, and founders are encouraged to believe otherwise by investors whose returns depend on a few enormous outcomes. They also contest the causal story, pointing out that being first is frequently no protection and that well-funded speed often buys growth in the wrong direction, since the pressure to spend arrives before the company knows what works. Others note that the argument proves something conditional at best: it tells a founder in a genuinely winner-take-most market to raise money, and says nothing about the great majority who are not.

Rejecting the premises

[Rejecting P1] Critics argue that the winner-take-most premise is assumed far more often than it is true, and that founders are encouraged to believe it by investors whose returns depend on rare enormous outcomes. [Rejecting P2] They object that funded speed often buys growth in the wrong direction, since the pressure to spend arrives before the company knows what works. [Rejecting P3] They note that revenue-based finance, grants and customer prepayments also supply money ahead of profit without surrendering equity. [Rejecting C] They conclude that the argument is conditional at best, since it says nothing to the great majority of businesses facing no such dynamic.