Cancer Capital: It sucks for founders, too!

So, we've been breaking down the way venture capital has evolved over the last two decades or so (spoilers: it got worse!), but a lot of that has been kind of theoretical. Now it's time for us to talk about how that impacts players in the real world, at a practical level.

Let's take founders, the entrepreneurs who actually build companies and invent new technologies. Now, what I mean here are people who have a great idea for a product or a service, and who want to get it out to the world in order to make something amazing happen. (These days there's also a cohort of people who call themselves "founders", but who basically just identified a pile of money that they wanted to grab, and decided that they were willing to suck up to whatever investors they had to in order to get that pile of money. Let's file these horrid people away for later — we'll come back to them.)

The deal for founders used to be pretty straightforward. You'd have an idea you were obsessed with, you would build it out as far as you could with whatever resources you were able to scrape together yourself, or with the help of your friends and family, and then if you absolutely had to have more money to make your idea succeed, you might seek out some investors to help you get to the next level. The conventional wisdom was that investors were a bunch of predators (everyone called them "vulture capital", often to their faces), and that founders should go in extremely skeptical about them, but at times they were a necessary evil in order to achieve one's goal.

What about the investors?

On the other side of the table, investors knew the deal, and the best of them understood their role within the ecosystem. Here in New York City, we had influential firms like Union Square Ventures priding themselves on how founder-friendly they could be, both by trying to be straightforward in their communication with founders and by having an understandable thesis for their investments, which would let founders anticipate whether their company would be of interest or not. This avoided wasting time on the part of both founders and investors.

There was also a norm with real teeth, because it actually cost firms money: a VC would generally refuse to invest in a company that competed with one of their existing portfolio companies. Not as a favor, but because the conflict was obvious to everybody involved — you can't sit on two boards in the same market and be honest with either of them, and you can't ask a founder to open their books to somebody who's already funding their rival. Firms would tell you up front that they were out because of a conflict, and that early no was understood to be the professional thing to do. Part of why a legible thesis mattered so much is that it let you find those conflicts before you'd spent three months preparing a pitch.

By the time I pitched a company to Bloomberg Beta here in New York in 2013, they had published their operating manual on GitHub in order to be more transparent to founders — and they let us publish our term sheet on GitHub as well, for the same reason.

After the Good Old Days

I share all this history to give some sense of how, as recently as a dozen years ago, venture capital firms were striving to compete by showing how founder-friendly they could be, and in the following years many even made a lot of noise about how inclusive they wanted their portfolios to be, inviting underrepresented founders in to pitch. (To their credit, many of the most prominent investors in our NYC tech community have not succumbed to the Cancer Capital values yet, though it has meant that they're stuck as smaller players in deals where those giant firms dominate.)

In recent years, though, the mask has fully come off for the giant firms, and even many smaller firms that are aligned with their agenda. It's not merely that they've adopted extremist political positions — though they have — it's that they now regularly collude against founders.

That's going to sound shocking to people who haven't been involved in pitching these firms. But I'll say it again, and then I'll explain how it works: major venture capital firms now routinely collude against founders, which means those founders end up with worse terms for their deals.

Stacking the deck

Founders who are aggressive and enthusiastic about their companies will try to pitch a range of firms on the merits of their startup, often coming in with a well-polished pitch deck and presentation, sometimes tailoring each pitch to the specific preferences that they've researched about that firm or partner. It can take months and months of preparation to get ready for these meetings, and they're often among the most stressful and high-stakes meetings of a founder's career. I've helped many founders prepare for these meetings, and have seen folks break into tears or wake up with panic attacks ahead of them — people take them extremely seriously. (I never got stressed about these pitches, but I have a fairly atypical attitude about VCs and their firms.)

A bit of important context here: for decades, VCs have said that they don't sign NDAs. Decent guys like Brad Feld, Mark Suster and Fred Wilson wrote their blog posts about this many years ago back in the early days of VC blogging, because it would have added a bit of absurd overhead to ordinary conversations, and they genuinely wouldn't have entertained investing in competitive companies within the same portfolio. But a once-benign policy takes on pretty sinister implications in today's environment.

So look at what the actual arrangement is now. You are expected to hand over a complete financial model, your customer pipeline, a product roadmap, probably your unit economics or cost of go-to-market, and some version of an assessment of where you're weakest or how you stack up to your competitors — to a group of people who have explicitly refused to keep it confidential. And they declined before you walked in the room, as a condition for you getting to pitch them at all. They're exploiting the power imbalance from the start, in a way that no other industry considers normal.

Which brings us to the peculiar thing that I've seen happen to a number of founders who went through the process of pitching multiple investors: they would commonly find that the partner they were speaking to could speak with some familiarity and fluency about the details of their businesses, even before they'd gotten to that part of the presentation. Sometimes, the partner would openly say, "I was talking to [X] over at [other venture firm], and he thinks this is really interesting." It would almost always be when they were saying something positive (at least superficially), but they would routinely reveal that they had spoken to other investors, at other firms, about a company that was pitching them.

This was a casual point that came up in conversation! A few times, investors would even say it like it was a service they were rendering for the founder: "We were thinking we might team up with that other firm and we'll go in together on your next round."

Here's the issue with that kindly offer: it's colluding against the founder! I couldn't tell if the investors didn't know, or didn't care that they were admitting to working together with the other venture capital firms to discuss the proprietary, confidential details of a company that they hadn't even invested in. And all of this was happening years ago, before they had extremely advanced AI tools to help them analyze the details of the company data for startups that they were considering investing in.

To draw an important distinction here: syndication during a funding round is normal. Firms routinely co-invest, with rounds filled by multiple investors. As founders, we frequently want two or more firms to come in together to reach the desired amount of capital we're trying to raise. But that's not the phenomenon I'm describing. Syndication happens after a firm has consent, in collaboration with the startup's founders and executives. What happens in these meetings is a different thing entirely: firms that have not committed, may never commit, and in many cases are about to pass on your startup entirely, are comparing (confidential!) notes on your business while you're still in the middle of pitching them.

One of the most striking parts of this collusion is, from a legal and market standpoint, these venture firms are supposed to be competitors! I noticed this twenty years ago, back when it was merely funny: VCs are as obsessed with what the other guy is doing as anybody in fashion or entertainment. If you ask regulators or lawmakers, they would likely insist that venture capital is a healthy market where there is lots of thriving competition. But if you're a small startup trying to get funded, it can look a lot more like the entire industry is just one big company with a lot of little branches that operate under different names. (Back when regulators still pursued this stuff, the DOJ quietly pushed a dozen directors off nine company boards because the way they were intertwined was against the law, mostly at private equity firms. But that's the board-level version of the problem. Nobody's looking at the pitch meeting.)

Cancer Capital colludes against you

So we've seen how VC firms would team up against founders, even before the rise of the hyper-scale Cancer Capital firms. But how has it gotten worse since they took over? Well, there are a few ways.

The first is pretty straightforward: Pretty much everybody feels like they have to pitch the mega-firms, at some point. If it's not in the initial round of funding, then certainly by the time a company has reached a valuation of about $100M or so, they will have been expected to pitch one of the small handful of Cancer Capital funds, and it would be considered a glaring negative signal if they hadn't at least gotten one of them to sign on as an investor.

What's more, since they will have had to pitch all of the mega-firms in order to get to that level, all of those firms will now have gotten a full overview of the entire business plan and financial details of that startup (since that's a core part of the pitch) — as well as every one of their competitors, since all those companies had to pitch the same firms, too. And remember: not one of those firms signed anything.

The second way is that the conflict rule is simply gone. Firms now routinely take pitches from companies that directly compete with each other, and will invest in more than one, or even several of them. In the hottest categories it's just described as their strategy — they're taking a position on the category rather than simply investing in a company.

Think about what that does to the information problem. It's one thing for a firm to have every competitor's pitch deck. It's another for them to have every competitor's deck and board seats or information rights for multiple companies in the space. (Information rights include actual monthly numbers, real churn, staffing plans and compensation, and much more sensitive data that wouldn't be included in a pitch.) At that point the extractive VCs aren't just investing in the market — they're the only party that can see it. Not even regulators have access to this breadth of data.

Where that leaves the market is that the Cancer Capital firms often have nearly complete information about a nascent market, acting as an information tollgate that every startup has to pass through at a certain scale. They suck in the pitch decks from every player in a market, and sometimes far more data than that, all without an obligation to invest in any of them.

And it gets worse.

Because these firms are committed to their ideological agendas, if they do see an idea they like, but they don't like the morals of the founder who pitched it (i.e. the founder has morals), they could elect to merely choose someone in their network to create a clone of the idea, and then hyper-fund that clone in order to kill the company that just pitched them. If that sounds awful to you, imagine how it feels to the multiple founders that this has happened to over the years. I've heard about it firsthand, though nobody will go on the record, because they are convinced it would be the end of their careers. The receipts I've seen make me 100% convinced, though.

And this is where those horrid money-chasing fake founders come back into the story. It's not just that the industry tolerates them. It's that an industry shaped by Cancer Capital now produces them. If you're a firm choosing between an obsessive builder who's got a clear vision for what they want in the world, and is going to fight you on terms, or a sycophant who'll take whatever you offer and execute the ideas laid out in the manifesto on your fund's homepage, the second one is the obvious choice. And there's no shortage of folks in that second category.

The Cancer Capital firms are now operating with something like X-ray vision over entire markets, being fed detailed information on emerging spaces by founders who are effectively coerced into handing over all of their most sensitive business data.

Meanwhile the other 99% of venture capital firms, who are still operating in the old world, are at a massive disadvantage, because their "deal flow" (the number of startups that come to pitch them on investing) is more constrained as they don't have the name recognition or coercive power that the hyper-scale firms do. The network effects are a lot like social media platforms — the giant ones are toxic, but a lot of people go there because they feel like everybody else is there. This isn't coincidence; the guys running the Cancer Capital firms made a huge part of their fortunes by investing in the biggest, worst social networking platforms.

Any way out?

It's easy to see the way the deck is stacked and to feel a sense of despair if you're trying to build a business or a product. But there are lots of ways out. The first few here are about staying out of the trap in the first place; the last two are about going after the trap itself. No individual action can solve a systemic problem, but all of these tactics together can begin to change these systems.

• Bootstrap. First, there's a big reason that the conventional wisdom in the early days of the web was to caution against ever taking venture capital funding: you often don't need it! As I noted in my last piece, legendary companies like Microsoft and Apple got to the launch of their earliest milestone products without any VC dollars, and your business will be more robust and resilient for having gotten on its feet without taking on those burdens. Put simply: Live within your means, don't raise VC.
• Build more efficiently. Many startups are finding that contemporary tools (for some, including LLMs) are letting them build products and go to market much more efficiently than before, obviating the need for raising giant amounts of money just to get something launched. By staying lean and remaining closely connected to a community that can support you, you eliminate the need to rely on outside funding. Open source and open communities can be a superpower here.
• Leak-proof the deck. If you're going to pitch anyway, pitch like everything in your deck is going to end up in front of your competitors, because there's a decent chance that it will. Founders often get coached to be exhaustive with every detailed number, every roadmap item, every honest weakness, but that's advice that only made sense when you could trust the people across the table. Give them only what they need in order to make a decision, and then hold the rest for later meetings once there's an actual commitment. Or: build your business to be fully transparent, where there are no secrets, and you don't have to worry about anything leaking, and there isn't any advantage to them having access to the data. Either way: protect yourself. And always, always compare notes with other founders. The VCs are already comparing notes about you. (I have a lot more advice about pitching VCs, but that's an entire other series of posts.)
• Other VCs. Finaly, one last investor option: work with the more conventional VC firms. This remains technically possible, albeit dangerous. There are many firms in the "99%" of the venture world that haven't fully embraced the toxicity of the Cancer Capital funds. Earlier I gave credit to the folks in our NYC tech community who've held the line, and I meant it — but their decency can't protect you from the structure they're operating inside. The challenge is, even though these may be run by thoughtful or decent people, if your company succeeds, you may well end up having to do a follow-on round of funding, and that increases the likelihood that you will have to do business with one of the bad actors. Plenty of folks are trying this path, but I would caution against it.
• Push for regulation. This option is hard at the federal level in the United States, due to the level of corruption under an authoritarian regime, but some limited wins, especially at state or local levels, may be possible. In the longer run, this has been the only mechanism that has truly held these kinds of abuses in check during prior historical precedents. Some state regulators may be willing to enforce rules against the worst behaviors that violate anticompetitive or anti-collusion laws.
• Encourage limited partners to divest. Many of the Cancer Capital firms rely on funds from sources like public retirement funds which often still have responsible investment commitments. These may still offer some possibility of accountability or leverage which could be used to get them to divest from these firms, and put some pressure on others to discourage them from enabling these kinds of bad behaviors.