Snake oil role models and silicon valley’s ponzi scheme

Several years ago, I considered someone “successful” because he had sold a business to a brand name technology company. Recently, I discovered he practically made no money from it. He’s still successful in my eyes, but when it comes to giving people advice on building a successful business I hold his opinion just as high as any other reasonably intelligent person — but no more.

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This is a common issue for people living in Silicon Valley that they can relate to: Smart people that “sell” their company and become celebrated entrepreneurs. As a case in point Facebook has quite openly said they only acquire companies for the talent and not for the business itself. What this means is that the products the startup built isn’t the reason they exited; instead the value of the people in the business are what was acquired. If I was to start a solar company and buy expensive furniture — only to be “acquired” for the value of that furniture and nothing more, that’s not success; that’s just money being shuffled around.

I’ve been observing a trend where smart engineers think they are founders. They start a company, but they lack essential skills that makes the startup gradate to a sustainable business: which is what the entire point is for a startup (the search of a business model, which it can then execute on). These smart engineers are smart engineers — but they are not founders. And because there is a talent crunch, these companies will get “acquired” and be considered a success, distorting the story that will inspire and help future entrepreneurs.

A ponzi scheme built on snake oil
If a company is acquired before it generates positive cash flow or even revenue, it means what they build wasn’t a success in the context of “let’s copy that model”. As to why they were acquired, there could be multiple reasons: talent acquisitions are just one example, but there could be strategic value in acquiring a company as it complements the acquiring company’s existing product line. A product is a solution to a problem, and often people build great technology that is better classed as a feature. An acquisition gives these feature driven technologies a fake sense of validation. It’s a ponzi scheme.

Snake oil, Sapa

Economically, this ponzi scheme doesn’t hurt so there is no need to regulate it: these founders cash out something and the company that acquires them can likely absorb the losses. In fact, the maturity of the information technology industry now has allowed for outsourced innovation which I think is a great thing. (Innovating in a big company is practically impossible if you ever meet someone who has lived to tell the tale, and now Silicon Valley giants can acquire disruptive innovation rather than solely relying on it to be generated internally.) But it also creates a fake understanding of what success is. An externality of this are small ideas and nothing game changing, the higher calling for those that can change our world.

A true measure of success
I’ve come to realise that the only metric that matters in business is cash. Not revenues, not number of employees — but cash that sits in the bank and the inflow of it that will grow it. I get nervous when I see companies hire ahead of their revenue growth and skeptical of companies that boast about revenue but sugar coat their margins. Cash is king, and any evaluation of a business is useless without understanding its cash position.

Start -> All Programs -> Cash Machine!

Which leads to why the ultimate goal of a startup is to be able to generate enough cash from customers so that it can fund its operations. You may want to change the world and that’s an honourable goal for a startup — but if you are not sustainable, you’re not going to last long enough to have that impact.

When we hear about smart people selling their companies, stop to ask are they really successful? Technology allows us to automate processes, but this simply allows us to scale operations due to reduced cost. But scalability is irrelevant in the same way revenue is irrelevant for a professional services firm that relies on the hourly input of its staff. If you’ve built something that improves society, while at the same time return increasing profits despite a constant investment — you’re a success and you should be ranked according to the fundamental value of the asset you build. And if you sell your company for whatever reason, you’re still a success: just don’t go around rubbing that snake oil in people eyes, because that’s not the medicine we need to foster the next generation of great businesses.

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