Venture capitalism is a manifestation of structural changes that increasingly shifted power into the hands of the financial sector, which began to cement its influence over the economy following the crisis of the 1970s. Amid increased competition, rampant inflation, and rising energy costs, American corporations’ profit margins began to stagnate. Powerful actors responded to this threat by mobilizing for changes in corporate governance and public policy to reinvigorate profits—a social movement of the elite aimed at reinventing the corporation.
The owners of large firms—their shareholders—increasingly held executives accountable for the slowed growth in profits. Investors advocated for the “shareholder value” conception of the firm, according to which the sole purpose of publicly held US corporations is to maximize the price of a company’s shares on the stock market, thereby increasing the returns to owners. Shareholders organized to increase pressure on executives, incentivizing them to make decisions that would be perceived as prioritizing investors’ interests.
The so-called “shareholder revolution” changed the nature of the game that corporations were playing. Previously, executives had been focused on increasing sales to maintain their companies’ growth and stability, reinvesting gains in developing products and workers. At the same time, they attended to their responsibilities to an array of stakeholders, including their customers, employees, and the communities in which they operated.
General Electric’s 1953 shareholder report touted how the company worked “in the balanced best interests of all,” describing how much the company paid in salaries, benefits, and taxes before mentioning that it had returned a modest 3.9 percent of sales to investors. Today, executives must commit to pleasing shareholders who view the corporation not as a social institution but as a bundle of assets. It has become less important for companies to focus on balancing their books and more important that they increase the firm’s market value every quarter, regardless of the instability that may result from their actions. Companies are designed to redistribute resources upward and risk downward. Managers are duty-bound to maximize the returns delivered to investors; considerations of the social value they create or the harms they inflict on workers and societies are secondary.
As the criteria for being considered a successful company changed, firms altered how they operated. Corporate reorganizations became more common, and companies adopted more cost-cutting technologies and employment practices such as layoffs, outsourcing, and scaling back compensation and fringe benefits. At the same time, ostensibly nonfinancial firms, like General Electric and General Motors, increasingly pursued financial activities like mortgage lending as a means of generating profits.
As companies found new ways to trim costs and boost revenue, executives began to siphon off a far greater share of corporate profits to investors. In the 1970s, publicly traded US companies paid their shareholders about one-third of their earnings via dividend payments. A 1982 rule change at the Securities and Exchange Commission allowed corporations to buy shares of their own stock, rewarding investors with inflated share prices by reducing the supply of company stock on the market.
Since then, stock buybacks have come to consume most of the earnings of S&P 500 companies. By the late 1980s, publicly traded corporations were distributing more than 100 percent of their profits to shareholders via dividends and stock buybacks, either by drawing down savings or selling off assets to pay investors more than the companies had earned. This has left corporations with less money to invest in opening new plants and stores or training and compensating workers. During the 2010s, publicly traded corporations spent over $3.8 trillion on their own stocks—more than every other type of investor (e.g., mutual funds, pension funds, foreign investors, and individuals) combined.
These developments were indicators of the trend toward financialization— what economist Gerald A. Epstein has described as “the increasing role of financial motives, financial markets, financial instruments, financial actors, and financial institutions in the operations of domestic and international economies.” Deregulation of the banking sector during the 1980s, the concentration of the financial industry, and the introduction of innovative financial products further contributed to the dominance of financial actors and activities in the US economy.
The rise of venture capital funds as a mainstream investment option for wealthy individuals and institutions is among the most visible manifestations of this trend. VC investment decisions are premised upon the belief that, at some point in the future—through the sale of shares to another investor during a subsequent round of VC funding, corporate acquisition, or initial public stock offering—another party may be willing to pay a substantially higher price for a comparable ownership stake in the firm. In this sense, venture capital is no different from financial activities in other segments of the finance industry. In the words of one investment banker, “at the end of the day, with any investment product, you might say, you’re looking for somebody else to pay you more for it.”
Yet there are also aspects of venture capitalism that are not adequately accounted for by theories that specify how finance capital affects organizational structures and practices. Capitalism is a system characterized by “dynamic disequilibrium,” so it’s no surprise that even after tech startups grow into publicly traded corporations, they continue to innovate as they compete for attention and dollars. But venture-backed startups represent a supercharged version of financialization that takes its core logics to extremes.
VC investments are far more speculative than investments in publicly traded firms, and VCs invest with the knowledge that most of the firms they fund will not survive. Startups maximize flexibility not to wring more efficiency out of existing operations, but instead to facilitate constant experimentation aimed at rapid and precipitous growth. Startup workers build companies on quicksand; if organizations are to survive while developing untested products in fast-changing environments, everything must be subject to change.
The consequences of the rise of finance have been far-reaching, particularly for workers. In an increasingly financialized economy, workplaces and work are increasingly structured to serve the interests of investors, often at the expense of employees. Before the shareholder revolution, firms typically hired additional workers to cover new roles and responsibilities associated with growth. Now, however, companies (and their investors) prioritize organizational flexibility. In practical terms, this means that the corporate workforce has become increasingly bifurcated.
Organizations typically invest in a smaller “core” of well-compensated employees and maintain arms-length relationships with a greater share of (often outsourced, subcontracted, or part-time) “peripheral” workers, many of whom possess less specialized skills, receive lower wages, and enjoy fewer of the legal protections associated with full-time employment. Workers with previously secure jobs have found themselves exposed to more insecurity in the labor market. The availability of middle-class union jobs for people holding only a high school degree has plummeted. Median employment tenure has shrunk, as has the percentage of employees receiving fringe benefits like medical coverage and defined benefit retirement plans. Meanwhile, protections like unemployment and health insurance remain tied to full-time employment, failing to reflect the rise of nonstandard employment arrangements.
These changes in the relationship between workers and employers have contributed to a staggering rise in income inequality. Between 1980 and 2014, the top 1 percent of earners in the United States saw their share of the national income double, from about 10 to 20 percent. Workers in the financial sector have been among those driving this phenomenon: the increasing profitability of financial institutions has allowed its workforce to claim a wage premium of 50 percent over workers in other industries. Yet, for workers in the bottom three-quarters of the income distribution, wages have been stagnant. The increasing importance of financial activities in corporations has decreased the relative value of workers involved in productive activities; along with the declining power of organized labor, this has left workers with less leverage to advocate for their own interests within firms. In short, workers’ cut of the national income has decreased even as productivity has risen, signaling a redistribution of income from workers to managers, executives, and investors.
In venture-backed startups, where stock options are commonly included in privileged employees’ compensation packages, some workers may find themselves in a unique position, inhabiting the role of employee while simultaneously sharing investors’ dreams of a massive payout. Yet, unlike investors, startup workers—who may log long hours in precarious jobs while in some cases even being asked to forego their salaries—find that their fortunes are tied to particular companies or industries, leaving them with fewer opportunities to diversify their risk portfolios. Founders value organizational flexibility both because they genuinely do not know what the future will hold for their startups, and because they know that investors would be wary of companies that make long-term commitments to specific people and processes.
This dynamic makes startup cultures ideal sites in which to observe how the financialization of the economy is transforming workplaces and workers’ subjectivities. Sociologists have long endeavored to situate labor relations within their social contexts to understand the cultural dimensions of work. Managers and workers participate in organizational cultures that endow tasks with meanings and values, which in turn matter for how workers are motivated, how tasks are executed, and how workplace technologies are deployed. Venture capitalism invites workers to dwell in fantasies of how being a part of a startup could transform their lives.
Behind the Startup thus attends not only to fluidity in the organization of production at AllDone, but also to how startup workers’ livelihoods and emotions are linked to the imaginaries invoked by venture capital and the organizational flux that it instigates.
Benjamin Shestakofsky is an assistant professor of sociology at the University of Pennsylvania, where he is affiliated with AI at Wharton and the Center on Digital Culture and Society. He is author of Behind the Startup: How Venture Capital Shapes Work, Innovation, and Inequality.
