I’ve spent the last week making my way through Douglas Rushkoff’s “Throwing Rocks at the Google Bus”. If you’re considering starting a business or are interested in finance and entrepreneurship, this is a book you really must read.
In a nutshell, “Throwing Rocks at the Google Bus” is about “how growth became the enemy of prosperity”. Rushkoff critiques the very basis of modern economic thinking and calls out the grand illusions so deftly hidden behind the enticing veil of the digital economy. An economy dominated by the stock market, venture capital and platform monopolies, it turns out, is not particularly good at creating real value. When the accumulation of capital is prioritized over the movement of capital, the principles that underlie how we create and exchange value become skewed in favour of a winner-takes-all game.
Startup culture, in other words, is no longer about building a profitable enterprise, it’s about building a sellable enterprise.
Consider, for instance, the cannibalistic nature of venture capital. Rushkoff outlines how entrepreneurs these days have little hope of ever escaping the abstracted game controlled by investors who seek to make big exits. When people put money in a startup, it’s not because they’re interested in growing a sustainable, profitable company. Quite the contrary. At each stage of the investment cycle – from angel investors to Series A, B and C funding rounds – everyone is trying to 100x their contribution. (The perfect worst-case scenario of what this does to company incentives was illustrated during the 2017 cryptocurrency ICO boom – more about that here.)
This poses a serious dilemma to the college kids who just won a hackathon with a smart idea. As soon as money starts flowing into their project, they become obligated to build a billion-dollar company – fast.
As Rushkoff points out, “Venture capital is not patient money. If a company doesn’t hit in two or three years, it’s considered cold and may as well not exist at all. So instead of developing a long-term strategy, companies make quarterly and semi-annual plans – each with its own fantasy megaexit.”
Here’s the tragic irony: for the investor and, increasingly, for the entrepreneur, it becomes all about the valuation, not the actual profits. Pie-in-the-sky outlooks about potential revenue are worth far more to an investor than revenue itself. In fact, as soon as a company starts taking in money, it can be judged on those profits and losses. But investors don’t want that. IPO valuations, stock prices, arbitrage opportunities – these are the things that bring home the bacon.
Take the example of Zoom’s IPO on April 18, 2019. Zoom shares initially sold for $36 at the IPO price (paid by institutional investors) and then jumped to $62 at the opening price (paid by the general public to those institutional investors). But Zoom did not reap any benefit from this 72% jump on the secondary market. $258 million of value went straight to bankers’ pockets, not towards the success of Zoom as a company.
Since day one, WeWork, the highest-valued startup in the US, has never made a dime in profit. The company made a $1.8 billion loss in 2018 and has already lost $690 million in 2019. Despite not having a clue where future profits may come from and explicitly bracing for a recession, the company recently filed for an IPO underwritten by JP Morgan and Goldman Sachs. The IPO