Why privacy becoming a norm requires venture funding

Posted on October 31, 2023 by Evgeny Poberezkin
Tags: privacy, internet

This post is about myths and realities of privacy, business and venture funding. The privacy community is isolated from the rest of people. Unless it changes privacy won’t become a norm for technology solutions.

Without venture funding, SimpleX Chat would not exist

In 2022 I raised funds for SimpleX Chat from several angel investors and an early stage VC fund Village Global 1. They believe that everybody will want communication privacy, and that SimpleX Chat will become a communication platform that provides it, profitably, solving a decade-old problem of tech businesses abusing privacy of their users.

It enabled our team 2 to continue working full time, and to pay for a security audit done by Trail of Bits, one of the best security consultancies in the world 3.

When we announced this funding, the community response was polarized: while most people were excited about us having the funds to continue the development, some critics stated that venture funding is incompatible with privacy and the need to make profit creates a conflict of interest with users’ privacy.

We discovered that in the same way majority of people ignore their privacy, regardless how much it costs them 4, many people in privacy community believe some damaging myths – both groups equally preventing privacy from becoming a norm.

Myths about privacy

Myth 1: Venture funding is incompatible with privacy

The narrative in support of this statement:

  • a business needs to make profit for the investors,
  • majority of the users won’t pay, as they don’t care about privacy,
  • so, the business will be “made” by its investors to sell users’ data 5,
  • therefore venture funding is incompatible with privacy.

The main error in that logic is the assumption that today’s status quo – that majority of people don’t care about privacy – will never change.

But we see a growing number of people realizing the value of privacy, and willing to pay for it, unhappy about mass-scale surveillance by the tech platforms, that costs them real money.

SimpleX Chat investors are betting that a large number of people will refuse to use technology that doesn’t respect and protect their privacy, demanding the level of privacy they had before smartphones.

The nature of VC investment is to expect very high rewards with very high risk of failure – the norm is losing 9 investments out of 10. So the future when all people care about privacy doesn’t have to be certain, but if it happens, there will be large rewards for the investors.

Myth 2: Making profit creates conflict of interest with privacy

The main wrong assumption here that the only way to make profit is by selling users’ data.

We are building the business that sells privacy, as a product, to its customers, and does not sell the data of its customers. We believe that selling users’ data is unethical, even if people consented to it, and that it should be directly prohibited by law – it should become a focus of legislators.

This myth also equates profit with corruption and greed. But having profit simply means earning more than spending, something that any responsible person, family or organization must do. Making a profit is an important objective of any organization that wants to be financially sustainable and self-reliant, whether it’s a business or non-profit, and without profit the organization remains dependent on its funders, open to negative influence.

So, making profit in the long term is required to protect the privacy of customers, which is exactly opposite to this myth.

Myth 3: Privacy is only possible with non-profit organizations

This wrong belief here is that the organizations that do not pay tax on profit 6 is unlikely to compromise privacy of their users.

Non-profit status does not pay bills – the organization still needs money to operate, whether it pays tax on profit or not. Non-profit technology organizations, as they grow, can become heavily dependent on the funding from the state-sponsored funds and big tech companies.

Once the organization is profitable it is more likely to do what its customers want. But if the organization has no customers, but only users 7, and is dependent on its donors, then it is at a high risk of being influenced. Many non-profits are specifically established by corporations to lobby their interests, and it was also non-profits that advocated anti-privacy legislation in different countries, with the mission of achieving online safety at a cost of everybody losing privacy 8.

There is an area when non-profit structure is effective – to provide the assurance to the users and developers that the network protocols will continue to be licensed under the open-source license, and to ensure a wider community review of protocol changes. We will be setting up a non-profit organization to manage the evolution of the SimpleX protocols in 2024, so that they are wider adopted in client and server applications.

Reality of privacy

Reality 1: Privacy is possible only if everybody has it

Privacy of communications requires that the network is used by a large number of people. Niche privacy-focused products used by a small number of users may put them under suspicion, hurting their privacy. So we need mass adoption of privacy tech to achieve real privacy.

Mass adoption requires a “whole product”, to make this product attractive and usable for majority of the users 9. For example, many people say that the absence of built-in stickers in SimpleX Chat is a blocker for adoption, and therefore, counterintuitively, we will need to add stickers to make it more private.

The majority of users need a very stable, polished and simple user experience. It requires at least 10x the investment compared with a usable v1 of the product.

So while we believe that SimpleX platform will be sustainable and profitable once it grows to millions of users, to get there we need high risk investment, and neither non-profit funding, nor bootstrapping, nor business customers can provide it for a mass-market consumer product – exactly because VC funding expects only 10% chance of success and can bet a substantial capital on this chance.

Reality 2: Privacy is a product people are willing to pay for

If privacy is a value, some people will pay for it. We believe that freemium model works best – when a small share of users pay for some secondary benefits and additional services. If a small share of users pays a few dollars each month, it will be more than sufficient to fund both hosting and development of the platform once it grows.

We were lucky to have many supporters who donated to the total of approximately $40,000 to date. Without their support venture funding would not have been possible, as these donations proved to our investors that people will pay for privacy once we have a usable product. So if you believe that privacy should be provided profitably, it would hugely help us if you start donating today, even if it is a very small amount.

Reality 3: Commercial companies are better at creating successful products

The history of technology and of the Internet is largely written by commercial companies, with some rare exceptions, like Wikipedia. Many technology pieces were created in academia and by enthusiasts, but in most cases it is venture-funded companies that made them widely adopted.

Even the open web would not exist if not for a venture-funded company Netscape 10 – without it the Internet would be owned by a tech oligopoly 20 years earlier.

All other hugely successful Internet products were also created by commercial companies, and not by non-profits – Google, Facebook, Amazon, Twitter, Instagram, WhatsApp, etc. While they made users’ privacy a collateral damage of their success, and became synonymous with mass-surveillance for many people, they have shown what product experience people want, and enabled us replicating this user experience in decentralized technologies, like Mastodon, Nostr or SimpleX.

We now want to build the network that will be as useful and as widely adopted as the products of these companies, but open and decentralized, evolving the open web standards. We believe that it can only be done by a commercial company, as it allows both to raise sufficient investment and to hire a highly motivated and talented team, that would be able to prioritize creating value for the customers.

People are increasingly willing to pay for privacy. This allows companies to build better products. Which in turn brings more users to privacy-focused products and technologies.

Reality 4: Venture funding is the best way to build large consumer-focused companies

Mass-market communication products have low revenue per customer with much higher expectations of the users than products for businesses. So while building technology for businesses can be possible with little or no investment, this path is not viable for consumer Internet products – they require substantial investment to get to mass-adoption.

It’s certainly possible to build initial prototypes and early versions of the product without or with very little outside funding, like we did with v1 of SimpleX Chat, but it becomes impossible to sustain as the number of users and complexity of the product grows.

So if we agree that real privacy requires a mass-market adoption of privacy-focused technology, then we should accept that venture funding is the only viable path to it, and to make sure that privacy of the users is not compromised on this path.

QED: Global privacy is impossible without venture funding

Without venture funding, it is impossible to create a consumer product that can compete with large technology companies.

We believe that to achieve communication privacy we must build superior products that are private and secure, convenient and user-friendly, reliable and performant. VC funding from the right investors will enable that.

There is a growing number of privacy-focused tech companies providing technology solutions based on open-source software. These companies are backed by VCs that believe that privacy will be demanded by the majority of people.

We see our mission in making privacy so common that we would not need to think about it, as it would be protected by any technology product we use. If you want to help us build private and secure communication network, use SimpleX Chat with your friends and spread the word.

  1. https://villageglobal.vc – an exceptionally helpful and supportive fund. Without their capital and help SimpleX Chat would not exist. Some of its LPs make some of our users worry about the risks of negative influence on the mission and users privacy. These concerns are caused by misunderstanding of how VC investments work. LPs can’t be involved in VC fund operations, other than providing capital, and can’t influence invested companies in any way.↩︎

  2. Right now we have 5 people, two of which joined in 2022, and one engineer joined just recently. We are looking for a few more people to join the team!↩︎

  3. https://simplex.chat/blog/20221108-simplex-chat-v4.2-security-audit-new-website.[html↩︎

  4. Based on the publicly available revenue data, using the largest social network must be causing its users to lose a hundred or more of dollars each year each, on average, in the form of higher prices and unnecessary impulse-driven purchases enabled by users’ data.↩︎

  5. VCs can only influence the companies as the agreement allows, so it depends on the founders what level of control the investors have. The tale of investors “making” companies do bad things is supported by the founders who accepted a high level of control from investors, and then prefer blaming the investors rather than accepting responsibility.↩︎

  6. “Non-profit” does not mean that organization does not need profit to exist - it only means that this organization won’t pay tax on any profit it makes. While it may be beneficial to organization in some cases, in may be harmful in some others, as it creates certain regulatory obligations and limits this organization freedom.↩︎

  7. Other than Internet technology companies, there is only one other industry that refers to its customers as “users”.↩︎

  8. For example, thorn.org.↩︎

  9. The concept of “the whole product” is from the book Crossing the Chasm by Geoffrey Moore. While the chasm between early adopters and pragmatic users usually exists only for the business products, it appears that privacy community is also isolated from the rest of people by such chasm.↩︎

  10. Netscape evolved the standards created to distribute documents into an application platform, inventing all the foundational pieces of the web technologies we rely on today: SSL for web security, JavaScript to enable client-side applications and cookies to allow user authentication. Even though cookies are often used to track users, hurting their privacy, they are necessary to login to online services.↩︎