There has been a lot of recent discussion about the lack of tech startups attempting to solve humanity’s most important problems. While it’s true that Facebook has changed our social lives, Airbnb is making it cheaper to find a place to stay while also connecting people, and Square is changing the way we make payments at bricks-and-mortar stores, these startups fall short of addressing humanity’s most important needs. Although these startups certainly improve our lives, they do not tackle big problems like malnutrition or political oppression, reduce deaths from illnesses like cancer or malaria, or lower our dependence on the fossil fuels behind global warming. Since venture capital is the traditional financier of tech startups, the lack of progress in applying technology to resolve humanity’s most pressing concerns has led to criticisms that venture capitalists simply aren’t doing their jobs properly.
This criticism is incorrect, and we don’t need to travel far to see why. A venture capitalist’s primary obligation is towards the limited partners who provide the capital to invest in startups. These limited partners, which include pension funds, endowments, and wealthy individuals, have a single objective. This is to generate a financial return on their capital. As a result of this obligation, venture capitalists need to invest in those startups that have a relatively high probability of becoming sizable commercial successes.
Unfortunately, humanity’s most important problems are very, very difficult to solve. Investing in startups is already a risky business, but this risk pales in comparison to the risk of backing a startup attempting to address one of humanity’s most pressing problems. A marketplace connecting buyers and sellers of a particular product is a much safer bet than a potential cure for a cancer that has yet to be defeated. Not only is the probability of success significantly lower than what a venture capitalist can reasonably justify to limited partners, but there may also not be a clear path to achieving a financial return. What if a startup discovers a way to prevent malaria but is required to make it available free of charge due to the treatment’s life-saving characteristics?
A startup attempting to solve one of humanity’s biggest problems has a very low probability of success even when measured on the scale of startups. In addition, a startup’s ability to monetize its solution to one of humanity’s most pressing problems is far from being assured. As a result of these two factors, venture capitalists find it very challenging to justify backing these types of startups. If venture capitalists cannot support such startups because of their obligation to generate a financial return, then who can?
The answer is those groups whose primary obligation is not financial, but human development. The key groups which meet this requirement are governments and philanthropists. It was NASA, supported by the US government, that landed the first man on the moon. And it is philanthropists like Bill Gates and George Soros who are using their private capital to respectively prevent deadly illnesses and fight political oppression. If these sources of capital which do not have a financial return as their objective are able to bring a startup they back to a point where it has a sufficiently high probability of becoming a sizable commercial success, then venture capitalists can do their job by helping the startup complete the journey.