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The Liches of Silicon Valley
In the years I’ve done publicity for tech products, companies, and personas, I’ve been fairly direct with clients that I am looking for a path to profitability and a sustainable business. While there are companies that I’ve worked with that are pre-revenue (IE: trying to work out how to make a good business that people will pay for), I’ve been fairly blunt in rejecting companies that burn money.
The reason is that throughout my career, I have watched the rise and fall of companies that are given life support by massive, over-funded venture capital firms. Groupon was always unsustainable, spending insane amounts of marketing far excessive of what they were making, turning down a $6 billion offer from Google, and then having a disastrous IPO that left CEO Andrew Mason rich and nearly 3000 people jobless. Bird and other scooter companies were always ugly, lossy businesses. The many, many crypto companies that seem to have no utility yet millions (or tens, or hundreds of millions) of dollars of funding, kept afloat by increasingly bloated venture funds that have no reason to exist other than to further enrich the least-needy people in the world.
And now we have Brex, a company that provides (or, well, provided) financial services - including corporate lines of credit in the form of corporate cards to startups. Except, despite cutting its teeth in the startup world, Brex is leaving the small business market to “focus on the enterprise.” TechCrunch reports:
Its move to stop servicing SMBs is shocking to say the least, and one can only assume as market conditions have shifted it no longer wants to take the risk of serving less cash-rich customers as a way to limit their own credit risk. Talk about a fair-weather friend.
The announcement is even more perplexing as it also comes not that long after Brex announced that it was rolling out IRL advertising in a few American cities in an effort to attract — you guessed it, SMEs.
Earlier this year, five-year-old Brex confirmed a $300 million raise that valued it at a staggering $12.3 billion. The company as of March had about 1,100 employees, saw 100% YoY revenue growth in 2021 and a customer base “into the 50,000s,” according to Dubugras. He has declined to reveal hard revenue figures, but previously told TechCrunch Brex was still focused on growth and not yet profitable.
In short, this company provided lines of credit to businesses of all shapes and sizes, making money almost entirely from the interchange a company receives from credit card transactions, all while providing free rewards for doing so, and then woke up one day and realized “oh, this isn’t making us any money.” I cannot speak to their underwriting requirements, but shedding the SMB market in this way - and then giving them barely two months to cover their balances - certainly suggests that whatever rigor there was, it wasn’t rigorous enough. This company - allegedly worth $12.3 billion - is shedding a huge chunk of customers because its fundamental business model was stupid and shouldn’t have survived this long. Making money entirely off of slithers of a percentage of transactions is a guaranteed path to being ruined by any problems with the economy, both in a reduction of purchases and in the higher rate at which balances won’t be paid off.
And yet these mistakes keep happening, all because Silicon Valley has a lich problem.
Terrible Companies, Terrible Consequences
For those of you that have been outside, a Lich is a kind of undead creature that is, to quote my good friend and D&D fanatic Phil Broughton, “an abomination that required abominable act to come into being, more to sustain itself...a corrupt form of immortality in undeath.” These creatures can be quite powerful but require immense amounts of energy to continue to exist and very much should not exist at all. Their owners always claim their existence is necessary and justify said existence in a damnable and irresponsible way.
Sidenote: Another Lich definition - as per Greg Tito, Senior Communications Manager at Wizards of the Coast - is “a powerful wizard who has cheated death by using an arcane ritual to transform into an undying version of themselves, no matter the cost.”
This is an accurate way to describe a lot of venture activity in Silicon Valley, which continues to perpetuate the same mistakes of taking companies that shouldn’t exist - because they are bad ideas or because they are cool yet unsustainable ideas that can never be profitable businesses - and forcing them into this world. They repeat a very specific cycle - company is the next big thing, company is now worth over a billion dollars, company is experiencing “unheard of growth” (with no question as to whether they are sustainable or profitable), company is now challenging ‘the big dogs’ of industry, a little M&A, an absolutely insane valuation, and then a sudden realization that actually, perhaps this wasn’t a good business at all? I am hammering on TechCrunch links here because I am being lazy - they are far from the only outlet to assume that a company like Brex would not simply run itself into the ground through virtue of existing - but the path is always the same - growth, growth, growth, legitimization, growth, growth, acquisition, and then an eventual reckoning with real life.
That’s because Silicon Valley has conflated “making great ideas work” with “making ideas I like work.” A company like Brex existing - and theoretically giving any company digital credit cards and credit lines with crazy rewards - does not mean that the company is actually meant to exist. And just because a service can exist, and can have customers, and can make said customers happy, doesn’t mean that it should, or that it’s worthy of funding. Suppose the fundamental underlying functions of a business require a continual flow of venture capital to exist because the actual revenue generation of the business is terrible. In that case, that is not a valid company, and it should not be brought into this world.
Now, you may say that every startup investment is a risk, and thus venture capitalists are simply investing in risks that they believe may result in valuable companies, and all I have to say is one thing: “Wake the fuck up.”
This cycle repeats because venture capitalists keep investing in companies far beyond the point that they exist. This isn’t about seed-stage or even Series A level investment but in the continual doubling down on companies that fail to prove that they are functional businesses rather than entities that can be sold for a profit. It hasn’t even been a year since last October when Brex raised their $300 million round at a $12.3bn, and it must have been obvious for years before that this business while growing, was not making enough money to sustain itself without being bloated with more capital. The VCs who invested in the company must have known more than nebulous metrics like “total monthly customer additions increasing by 5X,” but saw fit to keep this necromantic freakshow stumbling a little longer.
The liches of the valley are both the founders themselves and the venture capitalists, existing in a continual rotation of unsustainable growth and absorption, sustaining companies until they can experience a liquidity event - an IPO or an acquisition. The “unholy” nature is that these companies have the appearance of an entity one can trust - as a vendor, as a customer, and as an employer, and are kept alive through unholy, undeserved capital. The longer they last in these unsustainable cycles, the more damage they are likely to cause in their inevitable contractions or death - through layoffs, dumping customers with little notice, and the overall dependence that a supposedly-respectable company grows with anyone that they interact with.
In Brex’s case, companies relied on the corporate credit cards (and their lines of credit) and will now have two months to close the books on a debt they likely assumed would be payable for a lot longer. Bird, a scooter rental company that many people hated already, laid off 22% of its workforce earlier in the month, despite it being obvious that companies like Bird can only exist when stuffed with venture money. As I talked about on Monday, overfunded crypto companies that are now laying off thousands of people were well-funded despite having no clear sustainable business model, and Coinbase, despite being profitable, clearly didn’t have enough profit or funds to justify keeping people. Or perhaps they did, and they’re just awful.
And while all of this is going on, a company that drives a restaurant to you and cooks you dinner has raised $350 million in funding at a $3.5 billion valuation, with no obvious questions around profitability, and the founder, Mark Lore, had this truly despicable thing to say about it to the Wall Street Journal:
The investment and valuation come at a time when funding for startups is drying up, a swift reversal from recent years when tech enthusiasm, low interest rates and other factors helped nudge investors further into betting on companies without near-term plans to earn a profit. Wonder has plenty of financing to grow, said Mr. Lore, but “six months ago, we would have raised at a higher valuation. Everyone would.”
Lore himself is a powerful and successful Lich, having sold both Quidsi and Jet.com, two utterly undifferentiated and meaningless Amazon clones, for a total of $3.8 billion. He has managed to do what many haven’t, creating these lumbering, company-adjacent entities with enough signifiers of danger to Amazon or Walmart that they had to be absorbed and their apparent power contained, despite neither of them being profitable. Quidsi, despite being bought for $500 million, was shut down for that very reason.
These exploitative cycles exist entirely to enrich founders and venture capitalists. They build companies that require vast resources to continue operating - resources that the company itself cannot generate alone - and exploit customers by making them dependent on a deal that is more often than not too good to be true. Their goal is always to reach enough scale and market share - even if said market share is held together with sticky tape and chewing gum - that the company seems attractive enough to take public or to sell to another company. The creature is summoned and sustained until it reaches the end that the summoner wishes - and perhaps I’m conflating the lich and the necromancer here, but whatever - or ends up killing one or both of them.
And the human capital cost is always severe. Companies like Uber and DoorDash are still unprofitable and yet still continually exploit workers to keep these negative margins afloat. In Brex’s case, actual, real companies relied on using their credit services, companies that will now be told to pound sand because Brex was never truly built to service them long-term, despite what promises may have been made or the trust that one puts in a company providing financial services.
The valley continually rewards venture capitalists for investing recklessly and celebrates said reckless investments until the time comes - years later - to ask whether these were ever functioning businesses. Founders are able to ride the same rollercoaster again and again, with Travis Kalanick, founder of Uber and now-CEO of Ghost Kitchens, raising $400 million from Saudi Arabia’s sovereign wealth fund and hitting a $15 billion valuation with no mention of profit other than that “current and former employees could not sell back their equity, referred to by the company as "profit units," in the 2021 funding round.”
The lessons of these companies never seem to stick - not with the media, not with the public, not with investors, and not with the valley at large. There are always excuses to be made about why a company isn’t profitable, or why there’s no plan to make it profitable, or why it requires a new funding round every six months to stay afloat.
The only solution is a reconciliation with the difference between a good idea and a good business. A company that provides a service that people like in an unsustainable way is a bad company, even if you really like it and use it all the time. A new company that provides a service at an unbelievable price may be providing it at that price simply to draw in customers in the hopes that they can find a way to monetize them further in the future, but with no rigorous plan to do so.
JOKR, a company that delivered things in 15 minutes, went from raising $260 million in December 2021 to entirely leaving the USA in June 2022, citing the fact that they were literally too popular to be sustainable. The very idea of these companies is insane - that you can somehow have the capital (human and fiscal) and logistics operations in major cities to summon a human to drop off a specific physical good in 15 minutes or less - and yet they’re not even the only company lying that this is a sustainable business model, with Zepto raising $200 million a month ago to do the same thing but in 10 minutes. These companies were lauded for their massive growth metrics, yet rarely if ever interrogate as to how these metrics would be sustainable outside of injections of investor capital.
What needs to be analyzed is how these companies are generating growth, and whether that growth is real or entirely necromantic. JOKR and others grew by effectively buying users with an offer they couldn’t refuse - of course a user would want stuff in 15 minutes, I would like everything I order to arrive instantly - and yet so many reporters and valley fantasists failed to accurately call an unsustainable shitshow of human exploitation and venture capital burn exactly what it was.
To be clear, I also understand why the media hasn’t asked these questions regular, because these companies and their investors almost never give them an answer. And there are many companies that truly are moonshot ideas (truly innovative, new things like medical devices and certain gadgets), and there are many others that aren’t profitable immediately but have a clear path to get there.
This cyclical poison will continue to flow until venture capitalists stop being rewarded for gambling on bad businesses masquerading as good ideas, both in the media and otherwise. Like all liches, these companies seem vast and powerful, but receive that power from a dark, abominable place - the greedy money of venture capitalists that doesn’t care about the business “succeeding,” but whether it can tread water enough so that they can receive an outsized return on their reckless investment.
And people will lose jobs, and their homes, and their lives because a multi-millionaire feels like becoming a billionaire one day.