At the center of everything I’ve written for the last few months (if not the last few years), sits a cancerous problem with the fabric of how capital is deployed in modern business. Public and private investors, along with the markets themselves, have become entirely decoupled from the concept of what “good” business truly is, focusing on one metric — one truly noxious metric — over all else: growth.
“Growth” in this case is not necessarily about being “bigger” or “better,” it is simply “more.” It means that the company is generating more revenue, higher valuations, gaining more market share, and then finding more ways to generate these things. Businesses are expected to be - and rewarded for being - eternal burning engines of capital that create more and more shareholder value while, hopefully, providing a service to a customer in the process. In the public markets, that means that companies like Google, Meta, and Microsoft were rewarded for having unfocused, capital-intensive businesses that required mass layoffs when times got tough, because the market loved the idea that they’d found a way to save money. They weren’t punished for their poor planning, their stagnating products, their mismanagement of human capital, or their general lack of any real innovation because the numbers kept going up.
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When I wrote in October that Mark Zuckerberg was going to kill his company, the street responded in kind, savaging Meta’s stock for burning cash building a metaverse that was never going to exist. Yet once Zuckerberg fired 11,000 people and claimed that 2023 would be the “year of efficiency,” the market responded with double-digit increases in the price of Meta’s shares, despite the fact that Facebook’s active user growth declined and they lost $13.7 billion on the same metaverse department that caused the stock to drop the last time.
The markets seemed to ignore the $410 million fine that Meta received for GDPR violations, along with the fact that European users will now have to deliberately opt-in to sharing their data - which is bad, considering only about 25% of iOS users choose to opt-in to app tracking, and their business model is intrinsically linked to the repurposing of customer data into ad targeting telemetry.
Let’s be abundantly clear: Meta’s core advertising models depend heavily on things that likely become impossible to do legally (or even technically, given Apple’s App Tracking Transparency, Alphabet’s retirement of the third-party tracking cookie, and the Chromium Project’s planned blocking of non-cookie fingerprinting technologies) in the next decade. Their other products simply do not make that much money. Their CEO’s big idea to make more money has lost them billions of dollars, and likely won’t make them any for quite some time. Yet Meta remains beloved, because the numbers are going up.
Google has a similar yet slightly different story, where their core product - search - has gone from a place where you find information to an increasingly-manipulated labyrinth of SEO-optimized garbage shipped straight from the content factories. As Charlie Warzel put it last year: “Google Search, what many consider an indispensable tool of modern life, is dead or dying.” Users have to effectively find cheat codes - adding things like “[whatever you’re searching]+Reddit” to get reliable answers. Despite its decades-long efforts to improve the quality of organic results, Google remains easily-gamed by anyone who knows how to craft an algorithm-friendly headline.
Without finding a way to negotiate with Google Search, you’re offered a fragmented buffet of content provided by Google’s algorithm, either based on how much they’ve been paid to prioritize said content or by how companies have engineered content to rank higher on search. Google no longer provides the “best” result or answer to your query - it provides the answer that it believes is most beneficial or profitable to Google. Google Search provides a “free” service, but the cost is a source of information corrupted by a profit-seeking entity looking to manipulate you into giving money to the profit-seeking entities that pay them.
The net result is a product that completely sucks. “Googling” something is now an exercise in pain, regularly leading you to generic Search Engine Optimized content that doesn’t actually answer your question. Google’s push to hyper-optimization has also led it to serve results based on what it *thinks* people mean, rather than what they actually said. It’s frustrating, upsetting and annoying. A problem that likely hits hundreds of millions of people a day, yet Google doesn’t have to change a thing, because the street likes that they have found more innovative ways to get blood from a stone. These moves are unquestionably hurting Google, to the point that Microsoft’s Bing (paired with OpenAI’s ChatGPT), has gained major headlines for providing the service that everybody wished Google would.
That’s because Google has, like every major tech company, focused entirely on what will make revenues increase, even if the cost of doing so is destroying its entire legacy. Google has announced their own “Bard AI” to compete with Bing’s ChatGPT integration, and I’ll be honest - I feel a little crazy that nobody is saying the truth, which is that Google broke the product that made them famous and is now productizing fixing their own problem as innovation.
That’s because the markets do not prioritize innovation, or sustainable growth, or stable, profitable enterprises. As a result, companies regularly do not function with the intent of making “good” businesses - they want businesses that semiotically align with what investors - private and public - believe to be “good.”
Despite its ubiquity, companies like Uber should not exist. Uber has not made a profit from its businesses. They had a net loss of 1.21 billion last quarter, yet the street fell over itself to praise the company because “gross bookings grew 19% year-over-year” for their unprofitable businesses that largely hinge upon the government failing to impose sensible labor laws, a con that will eventually come to an end, and indeed, has ended in some territories like the UK, where Uber drivers are now recognized as employees, and are therefore entitled to pensions, paid vacation time, and a minimum wage. London, I note, is one of Uber’s most important markets.
Yet as of writing, Uber’s stock is up 5%.
The media itself somewhat fuels this economy of growth-mongering. CNBC reports earnings like many other media entities, but their reports on, say, Uber fail to acknowledge the fact that Uber has spent nearly 15 years burning money. It has never turned a profit. Even with its push into freight and food delivery, it may never turn a profit, no matter how much it contorts its financials to pretend otherwise. Yet acknowledging the truth is that much worse because Uber will not be killed, because people keep buying the stock, because it is a “valuable company” in the eyes of markets that have fucking cataracts.
This is why we see such vast oscillations of hiring and firing - because these companies are never, ever punished for failing to operate their businesses in a sustainable way, or even with a view for the future, particularly when it comes to macroeconomic trends that literally everyone else saw coming.
Their business models were predicated on an endless supply of cheap money, even though the Fed steadily ratcheted interest rates in the years leading up to the Covid pandemic, only slashing them to mitigate the pain of Covid and (to a lesser extent) the US-China trade war.. The specter of inflation reared its ugly head as early as 2020, first driven by the lockdown-induced chaos on supply chains, and then exacerbated further by the war in Ukraine, the collateral damage of China’s Zero Covid policy, and a chronic labor shortage in most industrialized countries.
The markets do not react when they are mass-hiring people to capture consumer demand. They do not react to the fact that Microsoft, for example, seems to be laying off people almost every year. In 2020, CEO Satya Nadella called for a “referendum on capitalism,” telling businesses to start to grade themselves on the “wider economic benefits they bring to society, rather than profits.” To be clear, this was four months after Microsoft laid off 1000 people, one year before they hired 23,000 people, and a few months after which they laid off 10,000 people to “deliver results on an ongoing basis, while investing in [their] long-term opportunity.”
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Everything Ventured, Nothing Gained
Before these companies reach the public markets, they are fueled by an even more violently reckless form of funding - venture capital. Venture capitalists are regularly incentivized to create businesses that look valuable but aren’t necessarily of value. When I wrote about the Liches of Silicon Valley last year, I remarked upon how many valley companies experience volatile, erosive cycles of growth with the goal of being acquired or going public, burning as much venture capital as it takes to find an outcome:
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.
Venture pumps millions or billions of dollars into ideas that might sell a product or a service, but ultimately resemble things that can be sold to other companies or put on the public market for a profit higher than what was paid on a per-share basis. I once suggested that Silicon Valley conflated “making great ideas work” with “making ideas I like work,” but on consideration, many of these companies aren’t even things venture capitalists like - they are things that resemble things that they can sell. Do I genuinely believe that everyone who invested into the Web3 grift was a strident believer in the brave new decentralized economy? Hell no. They just went where the winds blew — or where they seemed to be blowing.
Andreessen Horowitz was the lead participant in arguably the biggest con in venture capital, pumping billions into Web3 companies that didn’t have any real product, but stapled together enough buzzwords and websites to resemble actual entities. A16Z found a way to vastly accelerate the idea-to-business-to-profit cycle of venture. Despite claiming it was “Time To Build” in 2020, Andreessen Horowitz realized that there wasn’t ever really much of a need to build at all - you could create things that semiotically aligned with what “valuable” looked like and profit off of that. While the public markets may (at least, before the rise of the SPAC) have required some sort of business - even if said business wasn’t graded on being a “good” one - the cryptocurrency markets allowed the vaguest of ideas to get even vaguer valuations.
This same insipid thought process applies to the rest of their portfolio too. Adam Neumann, a guy who is most famous for running WeWork into the ground, got a second at-bat with his new startup “Flow,” a company that Neumann is still not able to fully describe, but that may involve you renting to own an apartment that Flow owns somewhere at some point. Just like Silicon Valley can’t help itself from reinventing the bus, Neuman is seemingly attempting to reinvent the rental market — a diseased, exploitative industry in its own right — in his own image. He’s replacing one cancer with another, only even more aggressive and metastatic.
Neumann was, is, and will always be full of shit. Appropriately, in a video A16Z released yesterday, Neumann used the following analogy to describe Flow:
The founder turned to a toilet metaphor to explain one aspect of his idea of ownership. “If you’re in an apartment building, and you’re a renter, and your toilet gets clogged, you call the super,” he said. In contrast, “if you’re in your own apartment, and you bought it and you own it and your toilet gets clogged, you take the plunger.” For Neumann, fixing up your own apartment means shifting from “being transactional to actually being part of a community” and “feeling like you own something.”
In a functioning society, Adam Neumann would not be given a single dollar. This quote proves that he has never unclogged a toilet, because in the event that you could unclog your toilet in an apartment you rented, you’d probably do it. If the clog was so severe it required the super, you would probably still call a plumber if you owned the place, because your nasty business has created a problem you cannot solve.
What I am suggesting is that Adam Neumann doesn’t know anything about home ownership, or unclogging toilets, or toilets, or the regular experience of being a human. Yet he is given unfathomable amounts of capital to address problems related to these things, because he has the resemblance of the kind of messianic white guy that is able to take a product and sell it, even if he is quite literally the guy who failed to do this before.
Neumann turned a (nominally) $47bn company into a $2.9bn company. In a sane and just world, he wouldn’t see a dollar of funding for the rest of his life.
There are tons of other examples of colossally stupid assholes and stupid ideas getting money. As I wrote about on Monday, the largest investment rounds of the last few years have gone to companies that got obscene valuations based on nothing other than a vague sense of them “looking like a winner.” There is no reason a weight loss app should need $540 million to operate - that is not a sustainable enterprise considering the entire weight loss industry is worth about $3.8 billion. Clubhouse was never worth the billions of dollars pumped into it, considering the entire radio industry only makes about $12 billion a year combined. While capital is required to get a company off the ground, the only way to justify these massive surges of capital is that venture capitalists are putting companies on life support in the hopes that they can flog them for a profit.
And this corrosive capital system gets continually rewarded. Companies like Uber are taken public, making massive windfalls for venture capitalists without ever having to run a profitable business. Venture capitalists crammed $41 billion into crypto in the space of 18 months, despite there being no real use cases for crypto. Metaverse companies raised $120 billion in 2022 for a concept that has yet to really exist, and perhaps never will. Yet these concepts get vast amounts of money because venture capitalists are incentivized to pump cash into “good companies to invest in” over “good companies.”
As my friend Kasey put it in a recent conversation, growth is a fire. If you build a nice, sustainable fire, it’ll keep you warm, cook food and sustain life. And if the only thing you care about is how big your fire is, then it’ll set fire to everything around it, and the more you throw into it, the more it’ll burn. Eventually, you’ll have nothing left, but if you desperately desire that fire, you will constantly have to find new things to burn at any cost.
And we, societally, have turned our markets and businesses - private and public - over to arsonists. We have created conditions where we celebrate people for making “big” companies but not “good” companies.
Venture capital and the public markets don’t actually reward or respect “good” businesses or “good” CEOs - they reward people that can steer the kind of growth that raises the value of an asset. Elon Musk’s success with Tesla didn’t come from the inarguable point that he ended the monopoly of the internal combustion engine - it came from his canny manipulation of the symbolic value of a stock through lies and half-truths, meaning that there was always a perpetual reason that Tesla was a “growth” company and a “good stock to buy.” Sundar Pichai isn’t paid $280 million a year because he’s a “good CEO.” After all, Google has all but destroyed its search product. He’s paid because he finds ways to increase the overall growth of the company (even while their cloud division still loses money), and thus the stock goes up.
The consequences are that these companies will continue to invest in things that grow the overall revenue of the company over all else. They will mass-hire and mass-fire, because there are no consequences when the markets don’t really care as long as the company itself stays valuable. Venture capitalists certainly don’t mind - after all, it’s “less burn” to “get you through” tough climates that were arguably created by the poor hiring decisions of a company that was never incentivized to hire sustainably or operate profitably.
Until we see a seismic shift in how major investors treat the companies they invest in, this cycle will continue. I guarantee that we will see each and every one of the companies doing mass layoffs do mass-hirings in the next few years, and then do another mass layoff not long after, because they are simply treating human capital as assets to be manipulated to increase the value of a stock. They are not structured to evaluate whether the business is “sustainable,” because their only interest is seeing their current profits grow by multiples that please Wall Street.
“Good companies” should not have to repeatedly lay people off. They should not be mass-hiring for fear that the demand they are capturing is temporary, and those new employees will soon find themselves at the receiving end of a pink slip.
The lens through which we evaluate businesses is cracked, and until we fix it, we will continue to experience these punishing cycles of binging and purging on human capital.
This is the problem at the center of almost everything I’ve written. Why are bosses mad they can’t bring people back to the office? Because their alignment of business success isn’t really tied to profit or “success,” but rather the sense that they are “big” and “successful,” which requires a bustling workplace and “ideas.”
Why did billions of dollars get pumped into crypto’s countless non-companies? Because “success” as defined by capital has been reframed to mean “number go up.” As a notion, it is divorced from any long-term thinking, fiscal probity, or even what you and I would call “morality.”
Why did these companies never seem to get blamed for hiring and then quickly firing tens of thousands of people? Because at the heart of the business media and the markets, workers were necessary casualties of the eternal struggle for growth. Layoffs are inevitably reported as a large number (“10,000 employees at Microsoft”), which makes it all too easy to remove the human element. When confronted with numbers of this scale, it’s easy to ignore the individual human agony that comes with losing a job. The uncertainty and shame that follows a firing.
The truth is that nothing lasts forever. Companies can (and should) die — or, at the very least, understand that there is an inevitable limit to growth, and eventually they must reconcile with being a stable, albeit plateaued, business.
A product may be profitable for a while, but there is a line at which profitability comes at the cost of functionality, and your company may simply not be able to grow more. A business that cannot generate profit is not a good business, and a business that can never generate a profit deserves to die.
And the net result of all of this is that it kills innovation. If capital is not invested in providing a good service via a profitable business, it will never sustain things that are societally useful. Companies are not incentivized to provide better services or improve lives outside of ways in which they can drain more blood from consumers. And the street doesn’t care either - just look at Facebook and Instagram, two products that have grown endlessly profitable and utterly useless in the process.
If capital wishes to call labor entitled, capital must acknowledge that it is the most entitled creature in society, craving eternal growth at the cost of the true value of any given service or entity.
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Most insightful thing I’ve read for ages. This is a rich vein Ed, keep at it. It takes a while to get one’s head around the fact that growth without aiming at creating shared value is empty and stupid. Especially hard to grasp for finance professionals.
Banger post Ed. The realization that many of these VCs care more about the perception of value in a company than any actual underlying unit economics was a big one for me. Dump those bags on retail and get their money back out.