In 20 – 30 years we will look back at quantitative easing the way we look at lead pipes in the Roman Empire. It’s making everyone and everything crazy. The Federal Reserve pumps huge amounts of money into the economy in the form of bonds. Companies can borrow money from banks which get the money via issued bonds which over the last decade have offered anorexically low interest rates. When the Fed loans at a low rate, banks can loan at a low rate. Meaning lots of cheap money to go around.
The situation for corporate borrowers is similar to consumers who have access to low-interest credit cards. When you can put $5,000 on a credit card to finance your vacation and pay back only 3% on that money, you’re going to be taking a lot more vacations. And when funds go on vacation, they invest. Often they invest in startups.
Growth qua growth
Investing in startups hinges on the concept of being “in on the ground floor.” Say you were lucky enough to be an early investors during the railroad age. Railroad is boring old technology now, but it’s critical to the operation of our day to day lives, and once upon a time it was the “disruptive technology” changing everybody’s lives at a time when taking a horse and buggy was the only way to travel long distances. Today, everything we buy either comes in on a truck or a freight train. Without the freight rail system, the economy of the United States would presumably grind to a halt. It’s so critical that we don’t even think about it.
Let’s say there were a hundred different railroad companies in 1890. You bought a 10% share in all of them. Only two or three are going to be around in 100 years, but they will have expanded to encompass such a critical component of the economy, that 10% will be a massive chunk of change. So you lost out on all the other railroads, which were crushed under the weight of Rockefeller and his ilk, but you won in the end because you bought into all of these railroads.
The same thing happened in the late ’90s when it was clear that Tim Berners-Lee’s invention was going to become the new railroad. Investors flocked to quickly growing companies like Pets.com, Webvan, and eToys – futuristic companies where consumers could shop in their underwear from their living rooms. The assumption by investors was that these early innovators would have to grow at a break-neck pace to soak up the burgeoning market for online retail, short term losses be damned.
Well, we all know how that worked out.
Betting on horses that might be horses or might just be drawings of horses
Startups are by definition companies that don’t know how to make money. There might be a “…yet” on the end of that sentence, or there might not be.
Sometimes they have a product, but more often they don’t even have that. They have an idea for a product, and some rough sketch of how it might work as a business. Depending on the stage they’re at, they might even have a few clients. But they are not bringing in revenue. Which is to say that they do not make money. If you were to view one of these companies through the lens of an MBA textbook from 1980, all of them would be enormous failures. But viewed through the lens of sustained growth, they are potential gold mines.
Most of these are not your Apples and your Facebooks, companies built by engineers and technology enthusiasts. There are only so many of those every generation. As the market heats up, tons of money coming in from demanding investors incentivizes the creation of more new companies. But it’s hard to make the next Apple. Really, really hard. It’s much easier to create a company that looks like the next Apple.
Funds that invest in startups prefer to invest in companies with a large potential for growth. They are typically afraid of companies that make money. Revenue signals that the growth objective has already been reached. That’s no good. Most of us invest with humble goals in mind. We want to beat inflation. We want our money to grow steadily so that when we’re old and decrepit, we’ll be able to buy ourselves a nice new hip. Startup fund investors are different. They would rather have a 1% chance of making a 100,000% return than have a 90% chance of making a 10% return.
That’s because these investors pool their money into hundreds of such companies. If 90% of them fail and return 0% but the remaining 10% nets them 1,000,000% return, they still even out to 100,000%. Imagine investing your money into a fund that promises you those kind of returns.
Okay, those aren’t real numbers, but that’s essentially “the dream” for early investors. They’re not investing in a known, existing product or a service. They’re investing in growth for growth’s sake.
A high bar for failure
Given that startup funds are investing in long-term growth oriented companies, the management of these companies is given a long leash when it comes to daily operations. Burning cash is expected. Quality issues are overlooked. The important thing is to keep moving. Do whatever it takes to get clients or users as quickly as possible. Go go go. Show continual growth and you’ll look successful.
This means that mistakes that would kill your neighborhood hardware store are often overlooked. If the initial product doesn’t work out, or it turns out that there is no demand for it, or whatever, the company can simply come up with another idea. Usually something sort of adjacent to the original idea. “Pivoting” to the next idea is not seen as a sign of incompetent leadership or poor management. Failure is embraced.
Remember, investors are not interested in revenue. Revenue is for losers. If they wanted revenue they would invest in something boring like noted toilet paper manufacturer Proctor & Gamble. You don’t get rich with toilet paper.
Welcome to your new job
Welcome aboard! We’re excited to have you at Blubbr. Blubbr is the leading solution for enterprise marketing data management solutions driven by advanced cloud computing machine learning artificial intelligence keyword keyword.
Our army of inexperienced twenty-somethings, armed with the latest MacBook models, work in this cramped and noisy office space in this expensive American city to produce a slipshod product in time to meet deadlines. In order to keep our employees engaged, we provide snacks and fun team-building events to distract everyone from the fact that we have no business plan.
Once a year, our founders go to various venture funds and beg for money. We show our numbers which have been engineered to demonstrate a vision of asymptotic growth. We are blowing up.
Our investors like to see young, enthusiastic people stooped over their MacBooks here in the Blubbr office space. The more casually dressed, the better. Our investors remember what Mark Zuckerberg looked like before he was dragged up on stage to dance in front of Congress, his cherubic curls framed by a black hoodie, youthful zeal in his eyes. That kind of casual confidence screams “lazy genius.” Our investors like to hire young people like the young Zuck because they literally physically resemble another successful person.
Your supervisor is Ted, an overextended 27 year old with no management experience and a drinking problem, but he was our only developer 8 months ago when the company got a new $60 million series-B round of funding, so we gave him a promotion. And then another promotion. Well, actually, our 28 year old CEO called him in a flurry one night and told him he’d have to take the reins. In fact, Ted doesn’t want to manage anyone. He’s just hanging on long enough to cash out his stock options. *
What will you work on during your time at Blubbr? Primarily projects that make us grow. Growth is our objective, principles be damned. Quality is secondary. If we don’t hit our growth objectives, we’re all going to be updating our LinkedIn profile and one by one, we’ll jump ship for some other high growth company.
If we don’t hire you, it might be because we don’t think you’re a “culture fit.” What culture, you ask? Well, consider that zero of our engineers are over the age of thirty, none of them are married, and none of them have children. Yeah, that culture.
* Note: Yes, this actually happened to me. No, the guy’s name was not Ted. He is now, according to LinkedIn, a “Founding Partner” at a company in New York. I overheard this man when considering hiring a young female designer say, “well, I liked her body.” Out loud. In an open floor plan office. One of his female employees sitting next to him scolded him in the voice you use on bratty seven year olds who don’t want to clean their room. I find some solace in knowing this guy would be shit-canned nowadays.
Values over growth
The fake “culture” of most startups is a side effect of the influx of cheap money. All those bean bag chairs and hoodies are more often than not a cover for age discrimination, credentialism, and sometimes actual honest-to-god racial and gender discrimination.
All of which is just a cost minimization strategy. Companies like this must hedge their bets since what they are doing is so risky, and the odds are high that they will have to pull out or “pivot” at any moment, as Nebraska-based Spreetail did with its new Austin office this summer.
Only a company focused on appearances can afford to operate this way. A mechanic shop that repairs engines does not worry about appearances beyond basic cleanliness and safety requirements. Mechanics are certainly not hired because they look like mechanics. They are hired for their experience and skill.
When all is said and done, only the basics matter. You can’t declare the culture of your company. That is determined by the kind of people you hire. If you hire based on growth objectives, you inevitably end up with people who look the part but don’t necessarily bring a lot to the table.
A personal reflection
The best team I ever worked with was described as possessing “intelligence, kindness, and an unwavering sense of adventure.” When I think about the qualities in other people that I value, those are definitely in my top three, whether I am talking about coworkers or friends.
Those are my values and I prefer to orient my life around those things rather than something as nebulous as growth. I don’t always succeed but I try to always remain true to that original creative impulse that led me to want to work in startups in the first place. I just want to do something creative with smart people. Is that so much to ask?