Mar 7, 2018 ยท 13 minutes

There was a time it cost millions of dollars to get a consumer product to market.

There was a time that it cost millions even to get an Internet consumer product live. There was a time when building an enterprise software business required armies of sales people.

Great entrepreneurs like Jim Clark bemoaned how much of his companies he had to give away to VCs in days like those. Because it just took a lot of money.

The fundamental change between Web 1.0 and Web 2.0 was that the cost of starting a company plummeted.

That low cost of starting a business had a whole raft of beneficial ramifications for the startup ecosystem. Lots of companies could flood into a sector and slug it out. People who weren’t independently wealthy or highly connected could also start companies. And acquihires and sub-$50 million exits weren’t just face-saving base hits from a dream that didn’t quite turn out as planned. They were life-changing events for founders.

Stewart Butterfield told us about the impact of selling Flickr for well under $50 million, saying:

The acquisition price was actually less than the $30 million that was reported. For whatever reason, we decided we weren't going to reveal the actual price. I don't remember what the actual price was, but let's say more like $25. That was pretty fucking successful at the time. In the context, $25 million is a lot of money. It doesn't seem like anymore, because of this crazy world that we live in, in this particular geographic region, and stuff like that.

The advice that we got, and I think it was good advice, from Reid [Hoffman], from Esther [Dyson], and from Brett [Bullington] was, "Look, these people at Yahoo are good people," and many of them actually are good people, "and you never know when another plane is going to fly into the World Trade Center or there's going to be an Asian currency crisis or any of the other things that could happen."

Again, there were no successful consumer Internet companies for that whole period, from 2002 to early 2005. There was no example. "You sell now. You'll learn a lot going there. It'll still be successful. You'll have enough money that you can decide what you want to do next after that, and that's a pretty powerful thing. And so there's not really any downside."

Not only did dozens and dozens of founders make life changing amounts of money without having to build a $1 billion business, but it spawned more angels who were able to meaningfully seed even more companies because their cost of starting up was so low.

Caterina Fake took that same Flickr exit and leveraged it into a formidable angel portfolio including Etsy, Kickstarter, and Blue Bottle. These were three companies that other top angel investors like Hoffman didn’t get, as he explains in his recent podcast with Fake. It’s not an exaggeration to say that without angels who were enriched by sub-$50 million exits, a lot of the most successful tech companies may not have gotten funded or founded. (Disclosure: Hoffman is an investor in Pando.)

But if you are a true devotee of the cult of the founder, you should’ve loved this new reality back in the mid-2000s more than anyone. Because it was the first time in Silicon Valley history where founders had the upper hand and there didn’t seem to be any reason they would lose it again.

And then….. disruption and unicorns happened. The new wave of companies didn’t so much disrupt industries like hotels and transportation and real estate as they just wildly outspent them.

So many of the things the startup ecosystem is grappling with are self-inflicted and this is one of the biggest ones. In putting off IPOs interminably and chasing arbitrary headline-grabbing valuations, startups have overcapitalized themselves. They’ve come to rely on spending billions to make billions in a way that none of the Web 2.0 crop did— even those like Facebook that ultimately took a shit load of money and time to get to an IPO.

Today’s founders have invited VCs to be kingmakers once again. Everyone is buying growth. VCs back up the truck into certain “winners” who are pre-determined based largely on the biased pattern recognition games that places like Y-Combinator play and no one else enters a space as a result.

When YouTube was riding high there were hundreds of copy cats vying to be the #2 player. Witness how limited each country’s competition in ridesharing has been. And with SoftBank now basically bankrolling almost all of them, expect even more consolidation within territories.

As this trend has accelerated, and foreign capital has put off IPOs and dominated valuations and funding totals, it’s getting even stranger. WeWork looks like a company whose primary business is spending money in order to one day justify its valuation.


WeWork is throwing its capital at more than just buildings. It’s doing more than just expanding from residences and-- ahem-- schools. WeWork-- like Didi-- is investing in any hot up-and-coming competitor, like the women-only networking space The Wing.

Large publicly traded tech companies rich on cash (from, ahem, actual operations) tell inestors they won’t give dividends because it’s a better use of their capital to invest that money in R&D. So what does it say when a company like WeWork is investing the capital it just raised into… other startups? Two obvious views are that the company is either out of ideas or has simply raised too much capital.

Don’t like the bro culture we’ve helped popularize? We’ve got the exact opposite to sell you!

As WeWork’s founders explained to the New York Times in a piece that is the closest I’ve seen to explaining how they even try to justify this with a straight face:

It’s an all-encompassing sort of ambition, and Mr. Neumann is the brash and idealistic pitchman. Simply by encouraging strangers to share a beer at the office, he argues, WeWork can heal our fractured society.

“How do you change the world?” Mr. Neumann asked in a recent interview. “Bring people together. Where is the easiest big place to bring people together? In the work environment.”

Yep, nothing bad happened when Facebook connected the world together…

The piece continues:

Already the company has started WeLive, its residential offering, and Rise, its gym. It acquired Meetup, the social network that facilitates in-person gatherings, and the Flatiron School, a coding academy. Still to come: WeGrow, the company’s for-profit elementary school, set to open in September. WeWork has even invested in plans to create giant wave pools for inland surfing.

A company ostensibly about co-working now employs yoga instructors, architects, teachers, environmental scientists, software engineers, molecular biologists and social psychologists.

Is it all a bit much for a young company still trying to build out its core business? “I’ve made that argument,” said Bruce Dunlevie, a WeWork board member and partner at the venture capital firm Benchmark. But, he said, “great entrepreneurs like Adam don’t listen to guys like me.”

That makes at least two of Benchmark’s most highly valued companies who don’t listen to them…

Here comes the justification:

As WeWork expands in all directions, it faces persistent questions about its rich valuation and the durability of its business model. Critics argue that the company does little more than corporate real estate arbitrage — leasing a space, spiffing it up, then subleasing it out to other tenants. The company owns hardly any properties, giving it precious few hard assets. Its growth projections strike many as unattainable, and it has missed expectations before. A number of upstarts loom as potential competitors, seeking to replicate WeWork’s success. And many WeWork tenants are unproven start-ups that could quickly fold.

IWG, a publicly traded co-working company that has more members and more real estate than WeWork, is valued at just $2 billion. Yet Mr. Neumann has convinced investors that WeWork is worth 10 times that figure.

“Adam’s explanation for the valuation of WeWork speaks for itself,” said Chris Kelly, co-founder and president of Convene, a company that offers flexible event spaces and is backed by major real estate firms. “This is not an Excel spreadsheet calculation. He believes there’s an energy behind the brand, and he’s gotten people to invest at that valuation. He has not tried to explain it in traditional financial terms.”

Indeed, to assess WeWork by conventional metrics is to miss the point, according to Mr. Neumann. WeWork isn’t really a real estate company. It’s a state of consciousness, he argues, a generation of interconnected emotionally intelligent entrepreneurs.”

I guess when you consider WeWork a higher “state of consciousness” that does justify the price…

As for Softbank’s articulation, the Times offered this:

“Make it 10 times bigger than your original plan,” Mr. Son late last year. “If you think in that manner, the valuation is cheap. It can be worth a few hundred billion dollars.”

It’s an actual articulation of something Valley founders have sought to disprove: That money alone is responsible for building massive, enduring businesses. Just add 10 times the cash!

It’s worth noting how many tech companies built in the last twenty years are currently worth at least $30 billion. From a previous piece on the looming $200 billion-plus in paper worth held captive by the decacorns:

I went through a spreadsheet of some 700 current publicly traded tech companies. Guess how many I saw that had been founded in the last twenty years that were worth at least $30 billion? Seven: Google, Amazon, Netflix, Facebook, Salesforce, eBay, and vmware. Even LinkedIn sold for “just” $26.2 billion and was an enormous success. Netsuite was one of the biggest winners of the first wave of SAAS and it sold for “just” $9.3 billion.

Wait, just seven? Why didn’t all the other companies just make their plans ten times bigger if that’s all there is to building a hundred billion dollar company?

To add to all this chaos, WeWork bought a digital marketing startup yesterday, because why not?

Remember when diversification was what you did after you went public, bailed your primary market, returned a shit load of money, and then needed to find a second act? For companies like WeWork and Uber, they are desperate to find one to even make it to the IPO. Google reorganized as a holding company of multiple businesses years after it had gone public off the strength of its primary business, and used those proceeds to buy or build other major franchises like YouTube, Waymo, and Android. Facebook bought its way there quicker with Instagram, WhatsApp, and Oculus, but it was still long after the company had proven its core business, was making money, and was IPO ready. 

WeWork is hardly the only private company who is spending its own venture capital…. pretending to be a VC investing in other startups. It’s one of the weirdest trends in this era. Didi has a stake in seemingly every global ridesharing company, including competing stakes in Uber and Left.

Speaking of Uber, the only thing the company has unequivocally done well is raise and spend money. A Bloomberg story yesterday it has burned nearly $11 billion in nine years, some two-thirds of the record breaking sum raised. Given the mass dysfunction that has come at the board level with the last round, there was a very real cost to that cash.  

New CEO Dara Khosrowshahi has tried the usual line of money losing tech startups: Hey, dude, this is a lifestyle choice… we could totally be profitable if we wanted…

And yet, compare Uber to other tech giants who also spent heavily on growth at this stage. From Bloomberg:


When the primary “skill” of the top private companies are raising and spending money, where is our ecosystem headed? Even worse: Uber can only make money if it continues to screw over drivers, according to a new piece by The Guardian. Has anyone in tech built a $100 billion company surviving only at the expense of the people who are actually providing that company's service? There's a reason Uber is often compared to big tobacco and it's not just their brass-knuckled approach to silencing critics.

All of this is starting to look at lot like a few guys that people around here used to despise, used to say were everything Silicon Valley wasn’t: The Winklevosses and The Samwers.

The Winklevosses were widely derided for claiming an “idea” entitled them to significant ownership in Facebook…. Nevermind they didn’t and some would say couldn’t have actually built it. The one and only time I met with the Winklevosses, in the early days of Pando, they insisted they would prove those haters wrong, the next thing they would build themselves. They did something way more au currant in the Valley: Bought a shit load of bitcoin early on and got filthy stinking rich.

This has gone from objectionable in the late 2000s to aspirational a decade later.

And then there are the Samwers: The German duo who would shamelessly rip off creative ideas, throwing capital and machinery at them until the dominated  non-US markets, frequently to the destruction of local founders in markets like Africa and Southeast Asia.

They were like the flipside of the Winklevosses: No idea, just ripping an idea off and throwing MBAs and capital at it and hoping somehow entrepreneurship resulted.

Buying your way to success was derided as not any way to build a lasting business ten years ago. Now it’s the playbook of companies like Uber and WeWork.  

After all, when it comes to the dismissiveness that the Winklevosses have never built something, what is the difference between them and Uber spending $10 billion to buy market share while making self-inflicted operational error after self-inflicted operational error? What is the difference between the Samwers seeing something taking off, putting some guys on a clone and flooding that clone with capital and how Uber and WeWork are growing?

At some point, these companies will have to go public. At some point, they will have to put operational rigor over drunken spending. At some point, founders will look at their burn rates, their fate being firmly in the hands of Saudi princes, Russian Oligarchs and Asian moguls and wonder if the headlines of those gaudy mega rounds and valuations were worth giving up all autonomy. Like Uber’s many missteps, this cultural shift was entirely self-inflicted.

I’ll end with something VC Michael Dearing Tweeted even before WeWork’s latest insane round:

Kiss goodbye whatever discipline and grit was left in WeWork. $1bil secondary is corruption defined.

There’s a reason the best companies are built in downturns. Money and greed alone typically aren’t the best motivations towards building something lasting. Consider Snap: The decacorn that has come closest to building something that a broad base of users want, that could have a sustainable business model, and went public in a reasonable time frame. When it priced it was the third largest tech IPO in 15 years and not a single analyst advised you buy its shares. That's the closest we're getting to Jim Collins-style leadership in the unicorn era. 

I prefer Bill Gross from Idea Lab’s methodology on what makes companies succeed. As Fake explained on Hoffman’s podcast:

Bill Gross at Idea Lab did this research where he looked at all of the different companies, 200, 300 companies that he had invested in over his career, and tried to figure out what it was that made them so successful. Was it execution? Was it the market? Was it their financing? Was it their team? What was it? And it turned out that it was their timing, and that they had found a parade and gotten in front of it.

They had found larger societal and cultural movements that were happening.

If kegerators at work and “baller” car service are cultural movements, they will divide the rich from the poor faster than even Facebook and the Russian Media could.