You don’t need venture capital to change the world
Whatever happened to breaking even? Why do we see so few column inches devoted to the virtues of being able to pay your staff a fair wage and give them decent working conditions and still make a reasonable margin? Why have we turned into superstars employers who screw-over their staff, and often their customers, in the pursuit of dollars in profits and bonuses. Where did this new religion of money worship come from?
The late economist Hyman Minsky, said that capitalism can take many forms, and evolves over time.
He claimed that by the 1990s, capitalism had moved a long way from the ‘shared prosperity’ mixed economy the 1960s, where workers shared in the benefits of growing productivity. The Sixties were an era during which income and wealth became more evenly distributed than in previous generations, and the share of business profit in the economy had stabilised at a lower level. By the ‘90s, Minsky had identified a new financialised ‘money manager’ capitalism, a ‘Wall Street economy’, of dog-eat-dog profit chasing, with constant pressure to minimise wages and maximise returns to shareholders and bonuses to those right at the top.
Minsky died before he got to see the results of his predictions which were more than on the money. Businesses used to be a coalition of interests: employees, customers, senior managers and shareholders. Now, it often seems, only the shareholders and the managers right at the top of the corporate ladder really matter, and it is those managers who matter the most. A financialised economy. A Wall Street culture.
A culture where the only time a small and successful company makes the front page is when they have earned the attention – and funds – of a venture capitalist.
A culture where it often seems the only measure of success is how many dollars you have taken in return for a chunk of your soul.
What is it about your company or business that makes it worth more than a million dollars a year? And why are those kind of benchmarks important? What will you have to do in return, to attract those audiences and those dollar signs?
And how is the value of your company – of any company – truly measured?
And don’t you hate stories whose entire (and rather long) lede is a series of rhetorical questions?
There is a theory which states that your company has value because it is expected in the future to be profitable, and to be able to pay dividends to its shareholders. The higher those dividends are expected to be, the sooner they are expected to rise, the more quickly they are expected to grow, and the less risk is apparently attached to them, the more valuable your company will be. And the more dollars you will be offered for it today.
So the prospect of rising dividends drives rising prices. But in reality, in an uncertain economy, the truth is perhaps the other way around.
In our financialised economy, with its unhealthy focus on stock prices and other financial data, where growing inequality and tax distortions drive the stock market, the property market and private debt ever upwards, share prices rise because more money is directed – in part, through tax-advantaged private super – into the share market.
With rising share prices, directors benefit even more from all those lovely options they’ve been given as part of their packages. But they are also pressured to keep dividends rising fast enough to stay ahead of price rises. Got to maintain your dividend yield, or where will you be?
But how to do this, in an economy with sluggish economic and productivity growth?
The easiest way is to pressure politicians to bias the system to drive the wage share down further and further, to stop workers sharing in productivity gains, to drive the profit share up, and keep those dividends flowing. It drives more inequality. It might mean cuts in government services. It means turning globalisation to your advantage, along with new technology, to undermine employment security. It often means firing people.
Meanwhile, no doubt the euphoria driven by financialisation means shares and property become over-valued, and will remain so unless – and until – the debt bubble supporting them bursts. Arguably, this over valuation is part of the very problem underpinning inequality.
Property, stocks and shares are often over-valued, requiring payees to fork out ever more money for them, expecting an even greater return on investment and the further it goes, the bigger the bubble gets, and everyone keeps passing the parcel hoping they won’t be the one left holding the bag when everything turns to shit. And shit it will, bolstered along by the massive subsidies for the Finance, Insurance and Real Estate sectors which help hide & minimise costs, manipulating their true value.
Some of the biggest and most successful companies in the world suffer from overvaluation. World stocks are their most expensive in 17 years, according to Bank of America Merrill Lynch’s (BAML) poll of investors managing $592 billion worldwide was conducted from March 10-16. (Incidentally, the survey occurred during the week in which the Fed raised interest rates while Wall Street’s record highs began to reverse direction).
Facebook is the cautionary tale of what happens when you blow too much smoke up your own arse. And every business decision that has followed hence, has to support the outcomes of the IPO.
Its initial public offering on Friday, May 18, 2012 peaked at a market capitalization of over $104 billion but by the end of the weekend its shares had fallen by 19%.
Even publications like Pando Daily which have made a brand out of speaking truth to power couldn’t help but fret just this week that though Facebook’s revenue grew by 49% last quarter, ( fourty-nine per cent!), bringing in $28 billion a year “and yet its slowest rate in six quarters”.
This kind of thinking and guilty punditry creates and normalises the expectation of constant growth.
Never mind that you might just have to sacrifice your boundaries and your customers’ privacy and the entire purpose of the platform in the first place, so long as that stock price just keeps on growing.
Tesla is another example. Tesla has yet to put a single self-driving car on the road, but that hasn’t made a dent in its $53 billion dollar market cap, or prevented founder and CEO, Elon Musk from ending 2016 with $3.39 billion in cash and equivalents. But even then, it still delivered a net loss of $106.6 million after reporting a 79% increase in fourth-quarter revenue.
Financialisation has certainly driven over-valuations of companies with plausible (and not always all that plausible) growth stories. And we know what this can lead to, having lived through the tech stock bubble and crash of 15-20 years ago. But the same story repeats again and again.
At the other end of the business life cycle, in Australia, the country’s two largest media companies rely on the continuation of a model that does not even put journalism at the centre of its business.
Both across Fairfax and Newscorp publications, journalism continues to be the window dressing for advertising, but as the advertising dries up and moves on-line, the dollars are moving with it, and without the blessing of a Murdoch, in the case of Fairfax the journalistic lifeblood is being drained away from the corporate body. Before you know it, you have this corporate behemoth haemorrhaging cash and journalists to keep the board happy so they can continue to churn out their multi-million dollar dividends. They’ll even pay $30 million in executive bonuses to keep it that way. Why you’d pay a bonus to anyone while the business haemorrhages cash is beyond me.
But journalism is at stake. Good journalism requires the guidance of editors and sub-editors. And lawyers. Importantly. Simply being in the company of other talented journalists forces everyone in the room to raise your game. All of this costs money. And it doesn’t grow on trees.
And so we accept the need to find other revenue streams. Even if it means you have to create a whole bunch of other businesses just to keep the lights on in this giant house of cards.
Even if it means putting mining barons on your board. Even if it means capitulating to complaints of snarky CEOs who don’t like the coverage you gave them every now and then. Even if it means filling your website with Kardashians and sponsored content and MasterChef recaps.
Even if it means letting social media behemoths like Google and Facebook profit off your content.
Australia's media disruption in one graph: Facebook and Google are effective duopolists of Australian online media pic.twitter.com/c7WO1SBunN
— Ben Eltham (@beneltham) May 4, 2017
I want my friends and colleagues to keep their jobs. And I would like many more to be able to get their old ones back , or get even better newer jobs at the same company. So I recognise that some compromise must be struck to afford their salaries.
But in the words of Marcus Strong, science editor of the SMH, “it has to stop treating journalism as the bastard child”.
Over at The Guardian, its trust is haemorrhaging cash to pay its journalists, such that the company has also had to undergo several rounds of necessary cuts.
Gautam Mishra, co-founder of Inkl (whose technolog, incidentally, powers this paywall) and former strategy director for Fairfax, (Inkl’s technology powers its paywall also), recently revealed that the price and value of all advertising revenue eventually drops to zero as new platforms reach capacity, during an AMA for the Walkley Foundation’s Journalism Incubator. (Disclosure: Hello Humans was recently long-listed for a potential grant offered as part of the incubator program. Thanks, Walkley Foundation!).
You won’t hear that when an account manager or ad man is trying to sell you on programmatic advertising, or print, or tv, or radio or freaking YouTube. Eventually, everything drops to zero. Which means advertising strategies must continually evolve in order to sustain value for customers.
But when you get stuck keeping one formula alive, say: printing newspapers, your everything else – your digital strategy – suffers.
The same is true of most industries facing disruption: from tech to finance to business to subscription underwear: purpose must underpin your value or else we’ll continue this endless cycle of booms and busts, billions and bankruptcies.
A win or a lose means nothing to an investor in the long-run because their diverse, plump portfolios (should) immunise them against any individual loss. But for founders: Blood, sweat, tears and probably your life-savings have gone into making your idea a reality. Valuation and the consequences that come with it are what stand between you and food on the table. The ability to put your kids through school. To not lose your house.
And when an investor comes in promising the world, telling you that your prototype is worth millions more than you could ever envision, think twice. Step back and ask yourself ‘why am I doing this? And what do I want to achieve?’
If your goal is to simply pay yourself an income, enough to pay the rent or the mortgage, put food on the table, clothes on your back and still be able to put some aside for a rainy day, you probably don’t need venture capital. You don’t need to join the Wall Street economy. You don’t need to financialise.
Maybe you want to grow your business to support a small staff.
You might be better off getting a small business loan, making some sacrifices to break even as quickly as possible and gear your business towards a consistent year-on-year return. You might want to gear your business towards being a stable and secure coalition of employees, managers, customers and suppliers.
Unless you’re developing a cure for cancer, you don’t need venture capital. You don’t need money manager capitalism. You can opt for shared prosperity.
The need for venture capital very much depends on what it is you’re trying to achieve. And how quickly you’re trying to achieve it. Short term returns almost always require venture capital but that comes with an immense risk.
If you want to find a new business model, the trick is not to let people with money convince you to do it their way.
All that stands between you and a good idea is time and money. Outside of proof of concept and finding a customer base, what is the rush to market? Why is it important that your business grow by 65% over the next 12 months? Who are you doing this for?
Maybe you want to open a bakery, say, that sells bespoke Norwegian goodies unique to the Sør-Trøndelag region.
Or maybe you want to build the next big tech platform.
If your goal is to earn a million dollars, the thing your business does, doesn’t matter.
But if the function of your business is its soul, the thing that is most important to you as a founder, then your financial choices are very, very different.
So take your time. It might end up saving you millions.
These kind of choices don’t get enough coverage.
Listing on the stock exchange doesn’t make you a successful company.
Just look at Fairfax.
Then opt for a shared prosperity culture and not money manager capitalism.
Claire Connelly is working on her first book, How The World Really Works, a guide to recognising rhetorical red flags and immunising yourself against bullshit. You should definitely buy it when it comes out. A podcast of the same name will also be launching in the coming months.