World Eaters

Longlisted for the Porchlight Business Book Award for Current Events & Public Affairs
Longlisted for the Non-Obvious Book Award 2025
A Next Big Idea Book Club March 2025 Must-Read

An urgent and illuminating perspective that offers a window into how the most pernicious aspects of the venture capital ethos is reaching all areas of our lives, into everything from healthcare to food to entertainment to the labor market and leaving a trail of destruction in its wake.

The venture capital playbook is causing unique harms to society. And in World Eaters, Catherine Bracy offers a window into the pernicious aspects of VC and shows us how its bad practices are bleeding into all industries, undermining the labor and housing markets and posing unique dangers to the economy at large. VC’s creates a wide, powerful wake that impacts the average consumer just as much as it does investors and entrepreneurs.

In researching this book, Bracy has interviewed founders, fund managers, contract and temp workers in the gig economy, and Limited Partners across the landscape. She learned that the current VC model is not a good fit for the majority of start-ups, and yet, there are too few options for early stage funding outside of VC dollars. And while there are some alternative paths for sustainable, responsible growth, without the help of regulators, there is not much motivation to drive investors from the roulette table that is venture capital.

World Eaters is an eye-opening account of the ways that the values of contemporary venture capital hurt founders, consumers, and the market. Bracy’s clear-eyed debut is a must-read for fans of Winners Take All, Super Pumped, and Brotopia, an appealing “insider / outsider” perspective on Silicon Valley, and those who are fascinated to look under the hood and learn why the modern economy is not working for most of us.Praise for World Eaters
“One of the most important and insightful books about venture capital I have ever read. A clear-eyed and illuminating examination of VC’s peril and possibility. Bracy's call to action to reimagine what VC can be is one we should all heed.”—Ro Khanna, Member of Congress from Silicon Valley and author of Dignity in a Digital Age

"World Eaters is a compelling account of the grift that so much of Silicon Valley VC has become, and a vision of what a more equitable and equity-enabling VC industry might look like."—Tim O’Reilly, Founder and CEO, O'Reilly Media

“Persuasively demonstrates how VC’s prevalence has created a startup monoculture."—Bloomberg Business Week

"Clear-eyed and unbowed."—Bloomberg

“Community organizer Bracy debuts with a bracing takedown of the venture capital financing model… It’s a convincing call for change.”—Publishers Weekly

“Bracy’s study adds up to an important analysis… An informative look at an industry that values ‘hyper maximalist growth at breakneck pace.’”—Kirkus

"Tech activist Catherine Bracy charts the sheer scope of venture capital’s destruction in a book that’s as enraging as it is illuminating. It’s not just a lament, though—Bracy also calls for a reimagining of the modern economy, one that places a higher value on solving real problems than making a select few disgustingly wealthy."—Literary HubCatherine Bracy is a civic technologist and community organizer whose work focuses on the intersection of technology and political and economic inequality. She is the Founder and CEO of TechEquity, was previously Code for America’s senior director of Partnerships and Ecosystem, and founded Code for All. During the 2012 election cycle she was director of Obama for America’s Technology Field Office in San Francisco, the first of its kind in American political history. She is a prolific public speaker for places like Axios and the Personal Democracy Forum. Her TED Talk “Why Good Hackers Make Good Citizens” has almost one million views. Her work has been highlighted in the LA Times, New York Times, and NPR.1

THE METHODOLOGY

HOW VENTURE
CAPITALISTS THINK

"Venture capital is not even a home run business.
It's a grand slam business."

-Bill Gurley, investor, Benchmark Capital

Over time, venture capital has come to be governed by a law of nature known as the power law. The power law is a naturally occurring phenomenon defined by the distribution of values within a certain type of dataset. Unlike in a normally distributed dataset, where most of the values are clustered around the average, in power law distributed sets, a tiny number of outliers can drag the average up all by themselves. Power law distributions have long tails, representing a large number of small values and a small number of very large values.

Power laws can be observed in almost every corner of nature and society. The intensity of earthquakes, for example, is power law distributed. Most earthquakes, which occur with much more frequency than humans ever notice, don't even register on the Richter scale. But a small handful result in disastrous outcomes, leveling cities and defining how scientists relate to the phenomenon. Human populations are distributed according to a power law. Most people live in a tiny handful of very large cities, with the rest of the earth's population spread among many more smaller locales. Activity on the internet tends to be power law distributed too: a small number of sites on the web account for the majority of its traffic.

Venture capital funds, it turns out, also appear to be power law distributed. Venture capital funds are made up of a collection of companies, called a portfolio, usually a few dozen or so per fund. These companies are in early stages of development, and as such, there is much more uncertainty about their prospects. Unlike the companies funded by private equity, venture capital's more mature and boring older brother, the startups in a venture capital portfolio are, at least in theory, doing something interesting and innovative, often employing new technologies if not creating them. These characteristics lend themselves to a dynamic where there are lots of companies that fail to deliver on their vision but also a handful of world-changing breakthroughs that create enormous value. This end result, when these companies are compiled into a portfolio, is an overall fund value that is quite lucrative, even though only a small fraction of the companies within the fund are driving most of the value creation.

The relationship between the power law and venture capital has evolved over many decades, and in fact, as Tom Nicholas points out in his seminal history of venture capital, VC: An American History, has its roots in a much older industry. Whaling in nineteenth-century New England was, much as the tech industry is today, both highly lucrative and highly risky. Investors understood that if a whaling vessel had a successful venture, it could make them a huge return in exchange for a relatively small chunk of up-front capital. This was a big if. Whaling was highly unpredictable and very dangerous. It could take years for them to return, if they returned at all (many of them were lost at sea), and there was no guarantee that even if they did return, they would do so with a big enough catch to turn a profit. And yet, when they did succeed, they tended to succeed big.

Soon enough, savvy middlemen emerged who realized that if you spread around investors' money to multiple ventures, the chances of making a profit were much improved. If you aligned the incentives of the investors and the ship's crew by compensating the crew with a cut of the ship's haul instead of a regular salary, the chances of success went up even further. You could improve your odds even more by making bigger bets on the most successful ship captains.

The whaling industry died out by the end of the early 1900s, but it planted a seed for what would become a persistent idea in American capitalism.

It would be several decades before the techniques used by investors in whaling made their way to the world of high technology. Prior to World War Two, there were very few sources of capital available to American entrepreneurs who wanted to bring risky innovations to market. Traditional banks were far too conservative to take the kind of risk necessary to support these startups, and fallout from the Great Depression limited the appetite for them to do so. Wall Street investment mainly went to support mature industries, making it very difficult for new technologies to emerge that could jump-start new sectors. More often, new innovations were fostered in the research and development departments of established firms, which made it harder for new entrants to compete. Breakthrough entrepreneurs in the early part of the twentieth century, like Thomas Edison and Henry Ford, had to rely on informal networks of wealthy people who treated early-stage investing more like a hobby than a business (a precursor to today's angel investors). Their ultimate success was almost an accident-a product of sheer force of will and being in the right place at the right time with access to the right networks.

As World War Two ended, and the Cold War began, there was increased urgency to commercialize the myriad technological innovations induced by the war, both to spur postwar growth and to make an ideological point about the power of capitalism. In 1946, a group of civic leaders and businessmen who were increasingly concerned with the lack of risk capital and associated innovation in the American economy decided they needed to take matters into their own hands. Led by a French émigré and Harvard Business School professor named Georges Doriot, they founded American Research and Development Corporation (ARD) to attract risk capital to innovative businesses. Their aim was to demonstrate that there was a way to earn reliable returns by investing in risky startups. Doriot and his partners hypothesized, much as the whaling agents of the previous century had, that to make investors comfortable with these high-risk investments, they should take a portfolio approach, creating exposure to multiple companies at a time. Nicholas quotes Merrill Griswold, one of the founders of ARD, as saying: "It is very risky to put money into a brand-new project. Some of them are bound to fail. But if you secure diversification, by buying fifteen or twenty of those indirectly through a special company, it does not matter that four or five of them may fail because the others, the hope is, will more than make up for it."

It took a while for ARD to prove this hypothesis correct, but when it did, it created a template for the generation of venture capitalists that would define the sector in the second half of the twentieth century. Eleven years after its launch, ARD invested in a small company called Digital Equipment Corporation (DEC) that made components for computers. DEC's founders, engineers who built some of the first computers at MIT and IBM, devised a way to lower the cost of computing, thereby providing access to computing power to a broader set of customers. Their products were so successful that by the end of the 1960s they were second only to IBM in the computing industry. ARD's $70,000 investment in DEC in 1957 (about $780,000 in 2024 dollars) was worth $230 million (over $2 billion in 2024 dollars) by 1968-a three thousandfold return, a demonstration of the power law in full effect. This one investment out of the dozens that ARD made in its entire twenty-five-year existence was responsible for doubling the firm's overall lifetime return. Without DEC, ARD wouldn't have outperformed the S&P composite index over the same period. With it, ARD beat the S&P by more than three percentage points.

The Rise of the Limited Partnership

Those numbers got the finance world to pay attention, and other investors who had fluency with the technology industries that were beginning to emerge in the vicinity of research hubs like Cambridge, Massachusetts, and Palo Alto, California, felt a wind at their back with the success of ARD's investment in DEC. New venture investment firms, such as Draper, Gaither & Anderson, Greylock Partners, and Venrock Associates, all emerged in ARD's wake.

But despite the influence ARD had on the venture capital industry, the quirks of its corporate structure created significant drawbacks. While ARD was investing in private companies, the fund through which it made the investments was publicly traded. This subjected it to a number of constraints that modern venture capital is not bound by. For example, the investing partners who worked for ARD could not receive equity stakes in their portfolio companies, which meant they didn't get a piece of the upside if one of their investments performed really well. This made it hard for ARD to compete for the best investor talent, because they couldn't offer a compensation package better than any other Wall Street salary. ARD also had to manage investor expectations for access to liquidity. Mid-twentieth-century investors often expected to be paid regular dividends on their shares. But the companies in the ARD portfolio wouldn't be making profits for years, if not decades. This illiquidity presented a problem that ARD solved by extending debt to its portfolio companies alongside equity investments, so that they could pass the monthly interest payments on the debt from the companies to their investors in the form of dividends. This debt burden on the companies weighed them down, making it harder for them to achieve the outsized scale that would deliver big returns in the long run.

Ultimately, all these factors taken together led to ARD's demise. The fund wound down in 1973 in the face of stiff competition from the upstart funds that ARD had inspired.

In many ways, those new firms were set up to replicate ARD's methodology: taking a portfolio approach to investing in companies, acting as hands-on advisers to the founders to build their management capacity, trying to identify risky bets that had huge upside potential and could drive power law returns. But they diverged from ARD's model in one critical way: they had stumbled upon a corporate structure-the limited partnership-that freed them from the oversight and overhead that ARD had to endure.

Limited partnerships are a type of organization designed to allow multiple actors to participate together in the ownership of a set of assets. The limited partnership acts essentially as a pass-through entity, allowing investors (the "limited partners," or LPs) to provide capital to general partners (for our purposes, the general partners are the venture capitalists) who organize it into a collection of funds that make investments in assets (for our purposes, these assets are startups). The limited partnership structure was not a new invention in the early 1960s when these firms adopted the model, but it did feel like one. First implemented in the United States in the early 1800s, it had more recently gained traction in the field of oil and gas speculation.

Perhaps the biggest advantage of limited partnerships is that, unlike the structure of ARD, they are private entities not subject to onerous oversight. Limited partnerships are required to register with the Securities and Exchange Commission (SEC), and general partner firms must register their funds when they create them, but otherwise the parties in the limited partnership are accountable only to one another. The partnerships are "limited" in that the LPs are protected from any liability arising from the actions of the general partners or the companies in which they invest. The worst the limited partners can do is to lose their original investment. They cannot be held responsible if, say, one of the companies they invest in commits fraud or mishandles customer data. This limited liability made limited partnerships appealing to the kinds of investors who were skittish about the risk associated with untested startups-something that hampered ARD.

Limited partners are typically sophisticated investors, including wealthy families and institutional investors like university and private foundation endowments and, more recently, pension funds and insurance companies. As such, they are much more comfortable making longer-term investments than the public market investors who made up ARD's shareholders. This allows venture capital firms to invest entirely through equity rather than debt, freeing the portfolio companies from the strictures of making debt service payments. (Although there is such a thing as venture debt, and some startups do take out these loans alongside equity investments.) Equity investing also enabled limited partnerships to align the incentives of all the stakeholders involved, much as the arrangements used in the whaling sector aligned incentives across the investors, the agents, and the ship's crew. In the limited partnership structure employed by most venture capital firms today, general partners are paid through a combination of a flat fee (usually 2 percent of the total value of the fund per year) and a cut of the gains that their investments make (this varies, but 20 percent is standard). This structure is known as "two and twenty," and while the numbers differ slightly, depending on the fund, it has evolved into a remarkably consistent-and quite lucrative-compensation model (and one that, as we'll discuss later, is at the root of many of the harms of the modern venture capital system).

One of the biggest challenges facing ARD was that they were unable to compensate their investment managers in line with the value they created. The ability of the limited partnership structure to align compensation incentives meant that the best talent was flocking away from firms like ARD and toward the ones set up as limited partnerships, putting the final nail in ARD's coffin and ensuring that the limited partnership model would come to dominate venture investing for the decades that followed, right up to today.

Importantly, limited partnerships also offer significant tax benefits for both limited partners and general partners. In fact, as Nicholas points out in VC: An American History, their rise in popularity in the mid-twentieth century was driven in large part by a desire for investors to limit their tax liabilities. Limited partnerships allow LPs to claim a variety of deductions and to write off losses in ways not available on other types of investments. General partners, in turn, are able to take advantage of the controversial carried interest loophole, which allows them to report their share of the profits from the funds as long-term capital gains rather than income.

All these things-the aligned incentives through compensation, the tax benefits, the minimal oversight, and the limited liability-made limited partnerships a perfect vehicle for venture capital investing, and allowed the model to take off. Most of the pioneering venture capital firms that adopted it outperformed the public markets with their earliest funds, replicating the type of success ARD demonstrated-and entrenching belief in the power law-but with much lower overhead and appealing compensation and tax benefits to boot.