Evan Spiegel, the CEO of Snap Inc., has frat boy good looks, although he appears a little awkward in his suit. He is standing behind the podium of the New York Stock Exchange. He has been invited to ring the historic bell that signifies the start of a day’s trading; a grand honour.
The prestige has been bestowed because Snap Inc. – the parent company behind Snapchat – is launching its IPO. By the end of the day, his company will soar to a gargantuan valuation of over £30bn. Snap’s IPO will most likely prompt Uber and Airbnb to launch their own epic IPOs, chimed CNN Money.
Spiegel’s supermodel fiance, Miranda Kerr, is one of the most beautiful women in the world. Spiegel, at age 26, is set to become a multi-billionaire. Spiegel’s white teeth are perfect in a very American way; he flashes them as he stares at the NYSE’s trading floor from the podium.
You could easily forget, amid the fanfare, that Spiegel’s company lost over £500m last year. In the risk factors section of its S-1 filing - required when a company goes public in the US - Snap tersely warned it “may never achieve or maintain profitability”.
Your business has almost certainly made more profit than Snap Inc. You’ll notice that you haven’t been invited to the NYSE and you (probably) didn’t wake up next to a supermodel.
That’s the famous opening line of Guy Debord’s seminal book Society of the Spectacle. How comfortable Debord – an avowed Marxist – would have been with being quoted on BusinessZone is a separate issue (my guess, not very).
But it’s hard not to hear the echoes of Debord’s lament when surveying the current startup landscape. Debord had written Society of the Spectacle because everywhere he looked, he saw the negation of real life by reducing it to appearance.
For us here in Startupland, it’s easy to marvel at the market-warping powers of the seriously VC-backed business. The nine-zero valuations, the eulogised founders and the ‘world changing’-mantras have become synonymous with startup success.
But it was a profound disillusionment with precisely this spectacular vision that prompted the London entrepreneur Leon Emirali to pen a scathing rebuke of unprofitable startups in City A.M. “The marketing and media agency I co-founded likely made at least $1bn more profit than Uber last year,” wrote Emirali. “We also made $515m more than Snapchat and $450m more than Twitter.”
This wasn’t a boast. All of those businesses are comically unprofitable. As Emirali noted in City A.M., Crest Communications, the company he founded last year, isn’t a unicorn, they haven’t gone viral and they haven’t taken on a cent of investment. “We just stuck to the basic business principle that it’s better to make money than lose it.”
Besides a shared disillusionment with spectacle, Emirali bears little resemblance to a saturnine Frenchman like Debord. Swarthy and well dressed, Emirali has the easy charm of a good salesman that enables him to zip straight past small talk.
“It’s as if the whole world is predicated on bullshit right now, which I can’t really get my head around. It’s very vanity driven,” says Emirali, sitting in a crowded coffee shop near Farringdon tube station. “It’s the Kardashian era where it’s all about what you can post on Instagram rather than what you can actually achieve.”
An easy counter to Emirali’s argument is: who cares? These businesses – Snap, Uber, Twitter, Salesforce – are doing their own thing. But it’s not necessarily the economics of these companies that’s Emirali’s main concern. “I’m not smart enough to wrap my head around that,” he admits.
“But it’s the motive for these businesses and the way we position entrepreneurs that worry me the most. Take Mark Zuckerberg, a great CEO, there’s a film about him. Everyone wants to be Zuck because of what he has achieved. Now, that’s unrealistic at best and deluded at worst. What we need to be doing is going back to basics.”
Entrepreneur’ stands for something different now because so many people can do it.
Ciaran O’Donnell is a virtual finance director that specialises in helping growth-stage businesses to scale. In his position, he is immersed in the financial realities of starting up. “Profitability is massive for most business,” says O’Donnell in a steady Dublin accent that has softened through years spent in the UK.
“I understand why people can look at a Snap Inc. and say ‘it’s okay, I’ll just keep getting funding’, but in the world of startups there are so few that can clock up that level of loss, have an unproven revenue model and still have investors say it’s fine.”
For most businesses, says O’Donnell, if you can’t get to profit or to cashflow positive, the investors won’t follow their investment, regardless of the EIS and SEIS tax breaks. “You may find that you have one shot at this: if you can’t get to profitability, it’s over.”
It circles back to Emirali’s concern that titans of Silicon Valley have tainted how entrepreneurs approach building a business. Fresh faced entrepreneurial hopefuls emerge from university armed with an idea. The first instinct is to go, cap in hand, to ask for investment. And the investment community, Emirali explains, has massive FOMO, so the money is doled out freely.
It’s a cycle of dependency that feeds into the ‘cool entrepreneur’ mythos. “Being an entrepreneur isn’t actually cool,” says Emirali. “It’s hard work. It’s rolling up the sleeves, it’s taking shit from clients, it’s finding new business. There’s a lot of hardship and the narrative we’re selling to entrepreneurs is what’s worrying me and I think it’s what we’re seeing with these businesses not making any money.
“I worry about the mindset of these entrepreneurs who are starting out now. They’ve got funding and they’re on top of the world. But what happens when they’ve not made a penny in profit after a few years and they’ve been kicked out on the streets? Where do they go from that?
“Okay, you learned some things along the way, but you didn’t attain the level of success you anticipated and that’s damaging. Ultimately, the only thing on your CV is a failure. You’ve failed.”
The cultural trendiness of ‘the entrepreneur’ is something that O’Donnell is wary of, too. “In the past five years, everyone thinks ‘I’m an entrepreneur’. We need to ask, what’s the standard we’re applying?
“‘Entrepreneur’ stands for something different now because so many people can do it. Tech has made it easier to build a business, plug in, get your website, launch your website, take payments. The barriers to setting up have been massively reduced and, in a way, that’s great.
It has to do with big finance, that is the root of this.
“But the area people are missing is ‘what’s the value of a customer? How much are they going to pay you? How are you going to make money?”
So, who the hell benefits from all this dysfunction? If you ask David Heinemeier Hansson, he’ll gladly tell you: it’s VCs. DHH, as he’s known, is the creator of web application Ruby on Rails and is the co-founder of Basecamp.
“The VC model is simple and lucrative,” DHH tells BusinessZone. “They’re selling potential. They’re ballooning up these startup ideas to the point where they find something that reaches a threshold where it can be sold on the market. They sell potential through growth rates and clearing the magic hundred million dollars gross revenue bar.”
VCs are finance guys, not entrepreneurs. And despite the complex schemes and machinations of the process, the model itself is deceptively simple. Acquire a diverse basket of companies at a comparatively low price and keep pushing that basket until one – or a few of them – grows big enough to be sold to a bigger pool.
Entrepreneurs are proxies in a different game altogether, played by a coterie of spreadsheet gurus (and, they are largely men). Not even an ostensible titans like Snap Inc. or Facebook are immune to big finance. Even these big players were manipulated by a syndicate of middlemen artificially pumping share prices, leading to the much-hyped share “pop” (Silicon Valley veteran Antonio Garcia-Martinez explains the con here).
Emirali agrees, saying: “It has to do with big finance, that is the root of this. They project and they hypothesise but they don’t necessarily know. It could happen, it’s all based on ‘what ifs’. You invest in 100 businesses, 99 will fail but if one gets acquired for a billion dollars, you’ve made your money back and well done you. But realistically, it’s not going to happen all that often.
“You may as well play the lottery every week. It’s not easy to set up a billion pound business. It’s exceptionally hard work. And because VCs and angels are just pumping money out there, everyone’s got this great big idea - but it will come crashing down eventually.”
Writing about Snap’s IPO recently, Recode commented “Snap still looks like a startup. It lost half a billion dollars last year, even more than the $373m (£301) it lost in the prior year”. It’s beyond time to ask: when did that become what a startup is? And more apparently what is the cost of this method?
For DHH, it’s beginning to look a lot like the infamous .com bubble of the early 00s. “I saw these same themes play out - just on a smaller scale,” he says. Back then, people criticised the cycle of boom and bust just as fervently, but the stakes are higher this time.
“It isn’t just a financial discussion anymore. When we speak about a company like Salesforce, for example, there’s not a whole lot of people who have any stake in that. It’s some investors making business software - who gives a shit?”
The difference now is, says DHH, is that companies like Uber and AirBnB, or any of these companies, are having a very real societal impact. Suddenly stories of Uber’s toxic corporate culture, poisoned by an insatiable lust for growth, have become a mainstream concern. “People start being interested in digging below the surface; they start to wonder ‘oh, how did they end up becoming a $70bn corporation despite being such a fucking complete dumpster fire?’
“You dig in and realise the mechanism of how they got there. These things are becoming ever larger parts of our lives. Ranting about this stuff in 2003, it just wasn’t such a large part of our lives back then.” As the gig economy is discovering, growth doesn’t come no strings attached. Increasingly, society at large is asking some serious questions.
For entrepreneurs, the question becomes: If this impulse to dominate doesn’t appeal to you, then what are the alternatives?
The British anarcho-punk band Crass had a simple remedy for dealing with politicians: “If you don't like the rules they make, refuse to play their game.” Startups could do with a touch of Crass’ anarchic fierceness.
“I give the same advice to every startup I speak to,” says DHH. “Take an industry-led approach where you can bootstrap. That is a market where you can start out just selling your product to just a few customers and they can be happy with their purchases and they can tell other people they are happy with their purchase.
“You get the wheels turning and then slowly but surely you build your audience. And you will grow, not at an exponential pace, but at a linear pace. So structure your expenses to be in line with linear growth. And maybe that linear growth doesn’t lead to a place that can support thousands of employees, maybe that linear growth leads to a place that can support five or ten employees, and you can lead an incredibly happy life on that basis.”
Profit isn’t just about making money. It is that, of course. But it’s also the most solid foundation from which to grow. If your base isn’t profit, then it’s the whims of valuations and investors. “And we’ve seen, time and again, investment goes in booms and busts and if you’ve got nothing else to fall back on, it’s going to be a hard landing,” says DHH.
If you don't like the rules they make, refuse to play their game.
A smile creeps across Leon Emirali’s face when he reflects on how he and his co-founder started Crest. “We sat in an empty office and twiddled our thumbs for a little bit,” he says.
“Then we hit the phones, sent out emails, tried to prove our worth and then we sold. We sold. And that’s what’s missing. If you’ve got a customer, why aren’t you making money off that customer? If you’re not making money off a customer, they’re not a customer.”
In eight months, Crest had turned a six-figure profit. Sure, the market is scary. Some competitors might be steroided up to gills - but it needn’t be a case of ‘can’t beat 'em, join ‘em’.
DHH’s response is brief when asked about VC-backed competitors spending over the odds on customer acquisition: “Who gives a shit?”
“Basecamp has been in business for 17 years there are tonnes of VC-backed competitors in our space. We do just fine. We do fine in large part because we aren’t in a winner takes all market. And most markets aren't winner takes all.”
In some markets, DHH’s linear growth model won’t work, of course. Social media, for instance, is a network based market where reaching a critical mass in users is crucial. That’s because, in those kinds of markets, the product you use is very much down to what your social circle is using. But the solution to that is simple: don’t compete in network driven markets dominated by market-warping entities like Facebook.
“It’s easy because most markets aren’t network based like social media. There are all these categories where you create a better product, you build an audience - it’s the same as it ever was. It doesn’t matter that much if you’ve got stronger competitors.
“If you have a bootstrapped company, to get to the first million a year in revenue means you need a few thousand customers. Out of what? A market of tens or hundreds of millions? It's completely achievable to do that.”
There’s plenty of precedent for that. Basecamp certainly isn’t the only company operating in a competitive space against VC-backed competitors.
“And,” says DHH, finishing his point, “we’re doing very well, thank you very much.”
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About Francois Badenhorst
Francois is the deputy editor of BusinessZone and UK Business Forums.