Making Money on Autopilot

Why VC shouldn't be automated

This is the first in an (at least) two part series on the dangers of automating venture capital.

As we’ve often cited, Automatter was born out of the feeling that way too much work in the venture industry is done in manual, inefficient ways. We’ve argued that VCs are missing out on huge productivity gains and competitive advantages by neglecting to automate their administrative and operational work. But the more time I spend thinking about potential applications of automation in venture, the more I question where it has a place in the industry at all. 

Automation is often perceived as a disruptor of convention and a democratizing force. From the Industrial Revolution to the Dot Com Bubble, automation has been perceived as a way to create increased access by making things faster and cheaper. But it has also proven itself to be a powerful perpetuator of the status quo. How can one force have two such opposite outcomes? In order to better understand this phenomenon -- and the potential impact of tech-enable automation on venture -- I want to dive into the history of automation.

The earliest examples of mechanical automation are cited during the British Industrial Revolution in the 1770s. Tools like the Spinning Jenny emerged to help workers get their jobs done faster. But the term automation wasn’t used until the mid 20th century, when physical automation became a foundational part of the automotive manufacturing industry.  As physical automation emerged, there was a general anxiety among workers that it would take their jobs. That anxiety soon subsided as workers realized that automation was more likely to be a productivity extender than a complete replacement. People started to get excited about the potential of automation to make things cheaper and faster, allowing more people to participate. For example, the automation of car manufacturing in the early 1900s reduced the price of a vehicle from $850 to $260.

As workers began to embrace the benefits of automation and technology continued to advance, physical automation gave way to digital automation. With the rise of the internet in the 1990s, automation was embraced as a way to disrupt antiquated systems and create increased access. People began to believe that automation was not just good, but necessary. Over the past few decades, tech startups have become mammoths by embracing digital automation. The tech industry has become obsessed with technology that makes it easier and faster to take their customers’ money.

Since its beginnings, two of the foundational characteristics of automation have been its ability to accomplish things faster and cheaper. It removes friction, which is a dirty word in the world of Silicon Valley. Capitalism rewards efficiency so, in a capitalist society, it’s easy to think that automation is inherently good. 

But what happens when we remove friction from a system that is built to benefit the few rather than the many? The venture capital industry is dominated by Power Law, meaning that a very small percentage of firms capture a large percentage of returns. While other parts of the financial sector have benefitted from automation (i.e. trading, where automation and algorithms have allowed computers to outperform humans), successful venture investing is still more of an art than a science. Accessing the top left quadrant of the Power Law Curve isn’t as simple as being able to invest faster with less operational burden. As evidenced by the recent activity of Tiger Global Management, being able to muscle into hot deals and inject loads of cash is a winning solution in the current venture landscape.

For decades, automation’s ability to make things cheaper and faster has been associated with disruption of the status quo and creation of increased access. In the early 20th Century, automation allowed 70% more of the population to afford a vehicle. But disrupting venture capital is a lot more complicated than building infrastructure that removes the friction from investing in startups. In fact, because of the role that Power Law plays in VC, I worry that removing friction will simply serve to perpetuate an unequal distribution of power. If we were to truly automate the core processes of venture capital, wouldn’t that just allow the already-rich to make more money on autopilot?

Although output per worker expanded by 46% between 1770 and 1840, the gains from growth didn’t find their way into the pockets of ordinary people. Real wages were stagnant or even falling for those in the lower ranks of the income distribution, as the jobs of adult craftsmen were replaced by machines and children who were working in the factories. The living-standard crisis of the industrial revolution famously led Friedrich Engels to conclude that the machine-owning industrialists “[grew] rich on the misery of the mass of wage earners.” 

In part two of this series, I’ll explore the specific ways in which digital automation has been applied to the venture industry, the impact of those technologies, and my perspective on the role of VC automation moving forward.