Venture Capital & Exit Strategies

When I posted about Ello the other day, I began to look into their manifesto a little more deeply. What I didn’t know at the time was that they’d taken $435,000 in seed funding from FreshTracks Capital, a Vermont-based Venture Capital firm. This had apparently been announced by FreshTracks Capital in March.

Here’s how venture capital works: a start-up like Ello will approach an investor, before they've even built the service and explain to them how they are  going to exit. It’s called an exit plan or exit strategy. The start-up says “Hey, we’re going to get 100 million people using our new platform in two years time, how much will you give me for 100 million people?” The investor replies  “We’ll give you this much for 100 million people because we’re pretty sure we can get that amount back several times over when we sell those 100 million people in an exit either to another company or in an IPO.”

At the moment, Ello is a minnow but once it has enough users and profiles, the sharks will move in. This is essentially what happened to Instagram. When you post there now, your data, activity and snaps are owned by Facebook.

When you take venture capital, it is not a matter of if you’re going to sell your users, you already have. It’s called an exit plan. And no investor will give you venture capital without one.

Venture capital is private subsidy that keeps the start-up alive long enough until enough people have joined their platform. At this point, it’s too late. By being part of the platform, users have created its value. This is the value that is sold in an exit. The only way to resist this system is to not build that value in the first place.

It points back to my original post. How do you fund something like this? Venture capital means agreeing to an exit plan. Charging a subscription turns off new users. A free service means you are the product and your data is a commodity to be sold.