Disrupted, a different view on the startup bubble.
Grow fast, lose money, go public, get rich.
A new paradigm is eating the world: and it is not just about Silicon Valley, in Tel Aviv in 2020, 60 exits and 93 M&A have been recorded and they created a bulk of new millionaires.
“ -Making the Movie- is the term that a venture capitalist friend applies to the process of building a start-up. In my friend’s tech-company-as-a-movie analogy, the VCs are the producers and the CEO is the leading man.”
- Possibly get a star who dropped out of college and is a bit asperger, like Zuckerberg.
- Have a script about the narrative: origin of the myth, the eureka moment, the hero’s journey with roadblocks to overcome, a mission to accomplish, about markets to disrupt for the benefit of the whole humanity.
Then put millions of dollars likewise shooting a movie just to build up the company, and even more millions to promote it and acquire customers.
“ By the time you get the IPO I want to see people lined up around the block waiting to get into the theatre on the opening night. If you did it right then you cash out at the counters”
If the idea is not scary enough consider this: there has been a time when VCs were used to require an “adult supervisor” beside the young founders. Today, the trend is to leave them alone, empower them (with a lot of money), and unleash their potential. Actually it is a strong Silicon Valley belief what Mark said once: “Young people are just smarter”.
Dan published his book before Bad Blood, and even the WeWork crash, but he proposes a great profile of Adam Neumann. In some way opening our eyes on what was going to happen soon. In 2015, the year Dan wrote the book, the valuation of Uber was already astounding, 51 billion, but it rose to 82 billion in 2019 when the IPO took place. To drop the next year to 46 billion.
Dan points out that “Making the movie” boosts the valuation of companies in preparation of the IPO, but before going public there is very little or no information about its financials. Investors’ time for a proper analysis is squeezed. Hence, after going public, many companies’ value just drop heavily.
A friend of mine once told be; “Well, their value is on data ownership”.
Possibly, but UBER’s EBITDA is still in a red area having burnt 6.5Bn in 2020. Because of it, its market cap dropped to 87 Bn in April 2021 (it was above 100Bn in March). But notwithstanding it, someone keeps calling it “investment”: Uber piled up an astounding 31 billions of losses in the last 6 years, marking a profit (1 Bn) only in 2018 (just before the IPO).
Hubspot’s Evaluation/EBITDA ratio in 2020 is 162x , (here).
The valuation / EBITDA ratio show one simple, plain, banal metric: the payback period.
If Hubspot will keep the same profitability in the future, it will be able to refund the investors in just 162 years. Someone will say, but tech companies can enormously boost the EBITDA leveraging on the growth. Yes, but: 1) it means that in 15 years of activity Hubspot is still investing in its own growth, not having been able to unleash any phenomenal boosting of its EBITDA. 2) considering how the price of stock increases when profits arise, anticipating any future compensation, we should recall that a better EBITDA leads to a much higher valuation.
It means that the total valuation can skyrocket if the company will eventually show a 5x EBITDA.
Hence, let’s stay with a static view: investing in Hubspot (but we can pick almost any tech company in the market), at today’s stock price, mom-and-pop investors, will be able to get their investment payback in just 162 years.
How long should an investment payback period be?
-Badass you are- someone will name me, -The investment in the stock market is not about the dividend, that is totally insignificant, the investment is about the stock value flourishing!-
Here we are: they are telling us that the value of a business is not about profit.
Dan depicts the system as an enormous funfair where everyone is happy, founders make millions, and with them, employees have the opportunity to cash a great amount. Venture capitalists are happy, they produce the movies and cash at the box office, the public is also happy, mom-and-pop savings flourish with an effervescent stock market.
Hence? Where the problem is?
I won’t tell that it is all fake, but we can’t avoid to see the system failures.
First: if you run a good, honest and stable business you will find it hard to get invested. Many good ideas are just considered “not good enough”. The myth that it is better to fund many startups “spray and pray” instead investing time and effort in analysing which are good, is killing the good entrepreneurs and supporting the bad ones. It is called Reverse Selection Effect.
Second: this system enables wealthy concentration, making working class poorer by exploiting wealth from their jobs and creating an idea that makes middle class people betting on false myths in the hope to get a seat at the party.
In the real economy, if someone wants to buy a company is going to consider how long the company can remain in business safely. The more troubled and complex the markets are, the shorter companies’ survive. We can guess the survival rate shrunk since last analysis probably below 50% over a period of 20 years in today’s time
Dan Lyons says: “If I would have been a journalist right now I would be writing to raise attention about investing in startups, but I’m part of the system now and I’m also trying to cash out my slice of pie”. For the whole book we all can’t avoid to wish him the best, after all at least be able to get some cash for his family.
And what about all the young boys and girls on their first experience? No idea what a job is, what a company is (Your company is not your family!), what their rights are, what would be proper leadership behaviours and values… Would you wish them to not get compensation when they accepted to work for peanuts? Ok, it can be harder to sympathise with spoiled, selfish, bad mannered, overconfident, just graduated arrogant young people, who play the -your death is my life- game at work. But they have just been fooled by their own cults: people who “made it” by themselves. The ones who get rich, are selling them the “mission”, well beyond the easy-money ideology, to disrupt the markets against the bad giants that dominate them for the benefit of everyone.
When Dan was experiencing his misadventure, one co-founder was benefited by a win of 70 millions by the IPO. Seven years later, the same guy is credited today with a wealth of 893 millions of dollars. But the company is still “investing for its growth” (read losing money).
I used the word “win” for its real meaning: betting over the luck of “make it or brake it” is not something in anyway close to business.
This system, in fact, rewards luck over anything else. No matter how did you get there, no matter how many deaths you left on the ground behind you, you won the gamble, you are the hero, you rock.
When Schumpeter theorised the creative destruction, I’m not sure he intended such a mess we are doing of the economy and society as well. Of course markets, inefficient systems and bad giants should be challenged and beaten to pave the way to fairer and more efficient methods, able to distribute the wealth across the society to improve and enrich everyone’s life. But what we can see right now are new inefficient oversized corporations leveraging on the internet and digital technology (both intended to reduce costs, disintermediate markets, and zeroed privileges of position), gathering money from the public to pay for their inefficient, extremely risky betting.
- Of course UBER has shocked the old fashion, inefficient system, often even ineffective, of the yellow cabs. It has also created opportunities for many who can now make a living driving their own car and benefiting citizens who can now book a ride much easier.
- Of course AIRBNB has disrupted the hospitality industry creating a source of income for families and people who can now safely host strangers and make some money and meet interesting people. It has dramatically changed the way people can travel today, planning their journey and choosing local people’s homes and avoiding the formality of hotels.
Disruption is not bad
It is not the creative disruption that is the problem, it is more the way we reward the gold diggers and probably the way in which getting rich became the final purpose of human life. Something is broken and it is something big this time.
Read my previous article on Stupidity and Processes, leave your comment here and stay in touch by following my publications.
