Beware the "Tech Industrial Complex"

[00:00:00] Hi, I'm Eric Newcomer. And I am Madeline Rennbarger. And this is the Newcomer Podcast. Each week, Eric and I discuss the VC deals and the drama that went down. Let's do it. Here we go. Welcome back to the show. Lots happening in tech this week, although it feels like all of a sudden between the deal news,

[00:00:25] it just got completely switched around with the Biden announcement this week about the Tech Industrial Conference. Yeah, it was like a drive-by shooting presidential address. You know, all of a sudden we have plenty of going on in Silicon Valley. And then the Biden administration is like, oh, yeah, my Eisenhower-style warning about what's going on in America is about the oligarchs in the tech industry and the techno-industrial complex.

[00:00:49] I mean, it's crazy to hear when you think about like an Eisenhower warning about the military-industrial complex. And that's, you know, a thing of history books. And so now we're watching, it's like, wow, is tech this bad? What was your reaction? I mean, yeah, it's interesting too also because of tech's, you know, increasing involvement within defense world. But that's an aside for another day. I would say my initial reaction was it was quite peculiar.

[00:01:16] I mean, partially, I have to think that some degree, you know, the tech people, a lot of tech leaders coming out and either endorsing Donald Trump or remaining silent in this election when they had historically been larger Democratic donors, or at least that was the public perception, maybe played a part in this. It felt maybe a little personal on a couple accounts. But I feel like it really-

[00:01:40] Easy to be wary of the tech industrial complex when, you know, Elon Musk opening up his pocketbook might have lost you the election, right? I mean, it's very personal to Biden in that this, the tech set did a lot to, you know, I mean, Elon was literally, what, paying for the Trump ground game. So clearly it was very personal to the election.

[00:02:04] It feels personal and it also feels like a shift in the attitude of government towards the tech sector. I mean, we here at Newcomer are very pro-tech, pro-innovation. It seems historically like that's one of the end-all be-alls of why people come to America and American identity and values, right? Wow, the real Texas girl is coming out over here. I know, my individualism programming just immediately shot to the front for this one.

[00:02:32] But seriously, it doesn't seem like a shift in how the government is approaching tech, or at least one side of the government, before a new party takes control of the White House, right? Yeah, I mean, you know, I'm on both sides of this. On the one hand, right after the election, I said, you know, I didn't vote for Trump. I think it's going to be a disaster, but the best possible outcome is that tech gets its talons in Trump world. I still think that's true.

[00:03:00] Like, I think, to me, tech, sort of a tech administration is the best case scenario. Everyone wants their friends in tech in the administration, right? Their enemies in tech, they don't want in the administration. Right, but I mean, I just think the general tech ideology of inevitably it's about sort of growth, pro-GDP, sort of loose regulation on tech, sort of very free market.

[00:03:26] Like, that's better to me than, you know, the sort of nationalist version of Trump that's all about sort of rounding up immigrants and tariffs. Like, that's clearly sort of in contrast to the tech version. And then, you know, we could have sort of a neocon administration out of nowhere. That would be worse to me, too.

[00:03:48] So if the options are sort of extreme tech-favored capitalism, sort of nationalism and protectionism, or a return to neoconservative Republicans, I would pick the tech set. That's still true. Absolutely. Well, if you're picking out of those three, that's easily the best place. That's the path. Those are the paths, right? Am I missing one? Or like... No, not at all. And our government's about to get a lot more efficient, it seems, too.

[00:04:17] So in some ways, when talking this week to people over at JPM Healthcare, a lot of people mentioned that the new regulatory environment could really be favorable in part for biotech development, health development. And that's one thing that this new government set has really set out to cut back a lot of red tape within a lot of federal agencies, which no doubt would be helpful for innovation in these sectors. I mean, the oligarchs idea. I am deeply troubled by the idea, you know, Trump's putting what?

[00:04:46] Jeff Bezos, Mark Zuckerberg, Elon Musk on stage with him as if they're like cabinet members. I think at the inauguration... I don't like the sort of pay-for-play that's been happening around this, you know? That's one part that I will say. Like, it does seem like a lot of these tech people have been really quick to go ahead and... I won't say kiss the ring. No, that's literally what it feels like. Yeah.

[00:05:08] Donate right ahead of inauguration, like signaling with their money, hey, we're going to be your friend, which to me feels like a little bit more ominous. To me feels ominous. The inauguration donating obviously is always a thing. I think what's more troubling is it's like they're going to Mar-a-Lago. It feels like very like... Yeah. I mean, it's kiss the ring. It feels very sort of mobster-esque, which is you have to sort of pay your dues. Not pay your dues. You have to sort of, you know... Yeah, you just have to kiss up to the leader.

[00:05:38] Yeah, you have to pay your respects to the great leader. And it feels like sort of proximity to him personally. I mean, Semaphore basically had a piece saying, you know, it used to be we'd track all the, you know, business money and politics, like looking, reading the tea leaves. And now it's the opposite where everybody's just like, yeah, obviously I'm kissing up to Trump. That's the name of the game.

[00:06:00] And then you pair that, you know, Ezra Klein's podcast just did something about how the Republican Party has moved from being, you know, an ideas type party or a party really ruled by a shared coalition of people trying to get some policy agenda to a personal party. One run by Trump and where it's really about that guy. And so I think tech has been uncomfortable. It's become a cult of personality in some ways. Tech's caught on. They're like, fine. Yeah.

[00:06:30] All right. I want Amazon to be the most important company. And if it's not me, it's going to be Zuck. And so we're all going to kiss the ring. It's, you know, classic sort of collection action problem. And that's how we get sort of, yeah, the destruction of democratic norms. So to that degree, I agree 100% with Biden that they're oligarchs. That's terrifying. But then he just, sorry, I just lost my rant.

[00:06:56] I mean, he's hitting on, he's attacking profits, which is a classical classic like caricature of Democrats. Like profits are the worst thing in the world when it's like profits reflect businesses successfully delivering things people want. And then he just like throws AI and it feels like he's shitting on AI and worried about that. And social media. It's just like a kitchen sink of worries. It felt very haphazard. It was sort of like a take, choose your own adventure of grievances. Right. Right.

[00:07:22] He doesn't seem the sharpest, you know, it's not necessarily, yeah, it feels an airtight argument. I think we can note where there are some causes for concern and also view the concept of the tech industrial complex being portrayed as much of a boogeyman as the military industrial complex was to be somewhat of a false comparison. Right. Well, to be an extreme Silicon Valley booster, the key element of Silicon Valley. Please. You know, it encourages new entrants.

[00:07:51] So it's, it's there, you know, there's a power center and certainly there are these VCs that stay in the mix and are power brokers. But it is like really searching for the next person with a great idea to thrust into the heart of everything. Right. If you think of the new hot company is, is always like the most important piece of it. The problem with the defense industrial complex is that it was a lot like the government. There's a lot of protectionism. It's slow. It's sort of extracting things against American interests.

[00:08:19] Whereas Silicon Valley is really a machine of people trying to say, who's got the best new thing? Let's immediately pump them to the center of all our money and the culture. And so, yeah, I guess I'm just saying Silicon Valley is good in a way that the defense complex isn't. Counterpoint to you, Eric. How would you feel about the startup part of Silicon Valley versus the big tech part of Silicon Valley? Because it seems like also a lot of these fights have been picked with, you know, the Googles and the Microsofts of the world rather than the innovation economy.

[00:08:49] I mean, people in the administration were, you know, this is much more active antitrust administration. We'll see what happens, but it'll probably be less so in the future and there'll be more exits. But, you know, Gary Tan spoke pretty highly of Lena Khan over at YC because, you know, it leads to antitrust enforcement, leads to more little tech flourishing. Right. I mean, big tech is very company specific. Google, Microsoft, backbone of America represents everything great about what we're doing.

[00:09:20] Amazon, pretty good. Important to the, you know, logistics and getting us everything. Facebook's somewhat soulless. I'm never going to be able to book anybody from them if I say that. No, no. You know, not the meta guests. Come back. Llama is good, but I just have to say, like, I mean, you even look at, like, the Facebook product. It's just, like, shameless, you know. I just don't.

[00:09:46] And then Mark Zuckerberg went on Joe Rogan and he's shitting on Apple for never coming up with a new idea. It's like Apple delivers me the best device, best thing I hold built by anyone to date. Whereas Mark Zuckerberg is, like, taking advantage of the fact that I look at Facebook every once in a while to, like, put a bunch of shit in front of me. Yeah. I just think. Yeah. I don't know. Zuck is not the bastion of principles. He's the most opportunistic here and just sucking up to Trump.

[00:10:14] Every couple of years, it's like I'm going to totally reinvent myself. Yeah. So, company-specific views of the big tech ones here. The last thing I'll say is, you know, we always want to cover politics less and they keep dragging us back in. I think if Kamala had won, we'd gotten away with it. But we will be keeping you up to date. Just when we thought we were out. We will be keeping you up to date on your favorite oligarchs, malevolence.

[00:10:44] So, stay tuned. Moving on, Eric, you had this great story of the behind the scenes of the Bench fall and return. Eric, what even is Bench? What is this Canadian company you fell into? Yeah. Not a company I'd heard of a month ago.

[00:11:02] You know, the company's old founder, Ian Crosby, basically after Bench went kaput, tweeted out, you know, the story of how the board removed him and basically said, I hope this is a lesson to all VCs, you know, not to remove your founders. It's only going to be a disaster. And something every VC wants to be on board with. So, you know, you saw a lot of people being like, who did this to you? And like, Amjad, Massad at Replit was like, these are the VCs never to take money from.

[00:11:30] And, you know, just very simple, satisfying narrative that people want to see play out on Twitter. And I, you know, played my small part tweeting out PitchBook with the list of board members. And that got people being like, oh, you know, I wasn't even on the board then. And so then. Oh, no, you were a factor in the witch hunt. Right, exactly. So then it's like, all right, let's what actually happened here? Was this as simple a story? And, you know, it wasn't. What did you find in your reporting?

[00:11:59] I mean, people should go read the story on newcomer.co to get the full picture. But what's your biggest takeaway around the merits of being founder friendly or not? And what happened with Bench? You know, Bench was a substantial company, about $35 million in revenue doing an accounting business. You know, they basically figured out how to do a services heavy business pretty well, you know, using some technology.

[00:12:22] Then they raised a substantial series C at the peak, you know, in 2021, $30 million in equity and like $30 million in debt. And then they spent a lot of it. Ian Crosby spent a lot of it trying to build like a banking business and new ideas. Not a lot of it seemingly to make the core bookkeeping business more scalable.

[00:12:42] And so all of a sudden the business is losing a lot of money on products that it hasn't even launched without necessarily a plan for how they're going to raise more money that they might need eventually. And so that freaked out the board. You know, the board sort of pushed him out. And then at the same time, his executive sent a letter to the board sort of complaining about him and asking for an investigation into him. So it was just sort of the perfect storm of, you know, classic startup dysfunction.

[00:13:11] Oh, wow. A perfect storm and almost pile on, if you will, to the founder here. These stories are always more complicated than could be boiled down on Twitter. But yeah, I mean, I think it's an open question. I mean, you read the story. Did you come away pro-founder or? Yeah, what was your point of view? I'm going to take the case for being founder friendly on this one because we know what happened to Bench after they pushed the founder out, right? It basically collapsed and they had a willing buyer, but it was not the exit that VCs dream of.

[00:13:40] So I'm going to stake my claim here for that case that being founder friendly and to go, you know, to focus on sort of a very pro-founder posture in this case actually made a difference in the future of this company. The fact that they did not do this. Eric, I don't know. In your own reporting, you can take another stance. I mean, replacing the founder always has this sort of, oh, anything could be the alternative world. And then often it's terrible.

[00:14:11] I think the key thing is if you are a founder that wants to stay at your company, generate profits or at least grow revenue substantially and improve profit margins. You know, like at the end of the day, like a board will put up with bad behavior if you're delivering like business results.

[00:14:29] But if you're angering your executives, your strategy seems sort of wild and you're not – your core business isn't throwing off a bunch of money, then you don't have anything. Like revenue, revenue growth, profits. Those are the things that cause people to ignore questionable sort of behavior and sort of people who piss people off. If you don't have those things, all of a sudden it's like you should be a nicer person to these executives. And that's sort of my view.

[00:14:59] It's like sure, you can – like, you know, the Uber is my sort of case study and it's just like, man, you burned so much money and then you didn't let your early investors really take a lot of money off the table. If you just let, you know, benchmark just sell their stake and walk away, then maybe you don't have the mutiny. Anyway, so these investors are trying to make money. I see your point here. Yeah. Strong opinions loosely held on my part.

[00:15:25] I'm always generally pro-founder, but when – like to your point, if the actual core part of the business is no longer functioning, what are investors supposed to do at that point? Or not function – if the actual core part of the business is off the path and you don't see the revenue that you'd want and you don't see the profits that you want because you're working on these other projects, that to me seems like a point where it makes sense that people would want to intervene. Because if you're not landing on what you've promised to do, that path may not be the way that the business should be going.

[00:15:54] But if I want to flip the side, it's like the founder gets sort of these intangible things about the business. They have a really visceral sense of what they're good at and what the business is capable of. And so they can steer it towards new ideas and sort of things that are going to deliver sort of a level of creativity that a traditional business wouldn't. And that's what you're betting on with a startup. And if you get rid of the founder, you're sort of just going to be a regular company.

[00:16:22] And so you're never going to deliver sort of the exceptional returns that venture capitalists want. So we can both see both sides of it. And like – It's a nuanced position. And it's funny with this specific one. I mean I will say like – I mean clearly Crosby brought in executive coaches to try to improve the relationship with executives in some ways. And that was a negative experience. You know, it went poorly.

[00:16:50] And so it's like if that had gone well, you know, there are things where it's like if they could have found a way to sort of improve that. You know, there are little things. And, you know, even some of the executives that I talked to who signed the letter regret that he was sort of like totally ousted from the company. You know, it might have been the kind of thing where it's like bring in a COO who can make it seem a little more normal or bring in a new CEO but you're the chair and you're still the visionary.

[00:17:17] And also like this guy, a lot of people praise him, Ian, for being like a visionary, you know. And so in some ways it's very natural that the visionary CEO plays more of a chair role. So, you know, it really seems like they should have navigated to that. And this letter maybe sort of – There were – To jump in, it seems like there were avenues that they could have taken that weren't entirely just zero-sum ousting the founder of the company from the company.

[00:17:46] He didn't have to keep leading the company but they made the call to fully remove him in a way that led to a lot of spite and animosity and ultimately seemed to be not productive. But if you get this intense letter from executives, you already sort of want the guy to go and you're going to have to do a complicated investigation where you might – then you're like whatever. Like let's manage this guy out, you know. So it's a tough one.

[00:18:14] I have a lot of empathy for everybody around. Employer.com, you know, is scooping up the remnants and I think they're going to be potentially buzzy with a number of acquisitions. I also think sort of sadly for Bench, there's this trend now which is like service-heavy businesses can be sort of smoothed out with AI.

[00:18:36] And so I think investors are actually somewhat excited about things like bookkeeping at the moment because you can throw language models at them to try and really extend bookkeepers across a lot of customers, which is what Bench was trying to do. So it is sort of the classic maybe, you know, wrong time, right idea. And then Crosby, you know, he's at Mercury. He's actually working as part of, you know, a banking startup on accounting. So he sold his company to Mercury. So in some ways he's doing what he wanted.

[00:19:05] So I just feel bad for the – He's doing what he set out to do. Right. Yeah. I just, you know, I feel bad for the employees that get sort of caught up in this, right, that we're working on this mission and don't have as clean of an exit as maybe the founders or executives will out of this. Every startup's highs with our deal of the week with Rush Capital coming in.

[00:19:27] AnySphere, the makers of Cursor, the popular coding assistant that's powered by Generative AI, raised $105 million in new funding co-led by Thrive Capital and A16Z. And Benchmark additionally participated in the round as well. A really big round for what won our newcomer superlative for product of the year, right? Yeah. No bigger honor. No, the buzziest – Means you're actually building. Buzziest product in Silicon Valley right now.

[00:19:57] Probably that and Granola AI have got to be two of the buzziest AI products at the moment. But as we've covered in the newsletter, coding assistants had a really big wave earlier last year with a lot of VCs sort of staking their claim into which ones that they thought were going to be the Microsoft co-pilot upender. Cursor seems to be in the lead right now just based on user chatter and based on venture interest. But we will see – there's always room for more entrants in this space. It's pretty saturated.

[00:20:27] And leads, as we've seen in this AI era, can have the lead and then be immediately usurped by a new up-and-comer. It's hard to be at the top for very long. Everyone's always nipping at your heels a little bit. So congratulations to AnySphere for the funding. And we'll see – And there's a subplot. Am I – you have me? There's a subplot in that Anthropic – I think Cursor is like running through Anthropic.

[00:20:53] So like it's great business for Anthropic too and it'll be interesting to see who really benefits more. Is it like Anthropic's sort of genius or is it Cursor's product that's more valuable and that'll play out over time? Well, that's our show. We covered everything from politics to startup failures to startup wins. It's all of Silicon Valley in one episode. We run the gamut. All right. See you guys next week.