Tell Me A Story
A lot can happen in 18 months. Last January, the Nasdaq and venture funding were fresh off all-time highs. The market was birthing two unicorns (startups worth more than $1 billion) per day. Then the music stopped. Tech stocks led a market collapse with some shedding more than 90% of their value. Bitcoin fell from $60,000 to $16,000. The Iron Bank of Silicon Valley imploded.
And then the steady hand and hype of the Fed and AI, respectively, seized the controls and pulled the nose up. The markets recovered, led by a small number of stocks that dominate the Nasdaq. The hype machine has returned to full spin cycle. Animal spirits have returned as we, again, become increasingly skeptical of skepticism. Some of today’s prophets will turn out to be frauds (just like last time) and, unable to raise money or hawk SPACs, will start podcasts. I wrote the following post 18 months ago during the froth and, as our subscribers have grown 50% and we enjoy a 44% open rate … three quarters of you have not read it.
[The following was originally published on January 21, 2022.]
“A man’s reach should exceed his grasp, or what’s a heaven for?”
— Robert Browning
Entrepreneur is a synonym for salesperson, and salesperson is the pedestrian term for storyteller. Pro tip: No startup makes sense. We (entrepreneurs) are all impostors who must deploy a fiction (i.e. story) that captures imaginations and capital to pull the future forward and turn rhyme into reason. No business I have started, at the moment of inception, made any sense … until it did. Or didn’t. The only way to predict the future is to make it.
This is not the same as lying. There’s a real distinction between an entrepreneur and a liar: Entrepreneurs believe their story will come true. This requires confidence … and delusion. It helps to be somewhat detached from reality — to assume that, for whatever reason, you are the one who can see into the future, and that in the new world your product/service will be needed and successful, despite overwhelming evidence (i.e. the current reality) that it’s not. A reality distortion field if you will.
The Crazy Ones
A vision that’s not widely derided likely isn’t much of a vision. MLK was a radical reformer who had a 63% disapproval rating at the height of his activism. Women were perceived as physically incapable of the demands of flight, until Amelia Earhart landed her Lockheed Vega in an Irish farmer’s field. Steve Jobs was a Zen Buddhist college dropout who believed he didn’t need to shower because he only ate fruit and that you could treat pancreatic cancer with juice therapy. He also believed he could put computers in the homes and pockets of everyone on Earth. Crazy.
Being a great storyteller carries risks. Success begets acolytes who tell you you’re right when you’re wrong. Worse, you start believing them. This leads down a dangerous path where vision breaks from reality, and — likely aided by a fear of failure — curdles your confidence into a con.
Holmes was assembled in a factory from parts of prior visionaries: smart, Stanford dropout, turtleneck, building blood-testing technology. Plus a nice backstory: Her professor told her the original concept for Theranos would never work. In addition, hundreds of millions in funding from backers including Tim Draper and Larry Ellison, coupled with covers on Fortune and Forbes, were a heavy blanket of affirmation that ensured Ms. Holmes was a visionary. The visionary narrative is a self-perpetuating machine: a flywheel of storytelling, capital, and the future that capital can pull forward, which buttresses the storytelling, and so on and so on.
Fun fact: Ms. Holmes cost her investors less than a billion dollars, didn’t make any real money herself, and is going to prison. Adam Neumann cost his investors $11 billion, received a 10% commission on those losses, and is going to Coachella. Note: Ms. Holmes’s vision progressed to the exaggeration/fabrication of contracts and clients, whereas Mr. Neumann’s “only” went so far as accounting irregularities.
When I Say Steve, You Say Jobs
Fast forward: There was no working technology, and Ms. Holmes has been convicted by a jury of her peers — and faces 20 years in prison. Soon after, VCs distanced themselves, claiming they’d seen through the facade. The tell for people who exaggerate for a living is, after it’s been deemed illegal, they begin preaching the importance of restraint. The narrative being wrapped around the very unlikeable Ms. Holmes is that she’s an outlier. No, she’s just one point on the line that is our storytelling economy in a frothy part of the cycle.
The Valley’s “always tell the truth” sermon is reductionist and hypocritical. It ignores the fact that many of our nation’s most valuable companies are priced on promises of technologies that don’t exist. The entire venture capital industry, in fact, is predicated on promising things that don’t exist.
Microsoft, perhaps the most successful tech company in history, got its break when Bill Gates sold IBM an operating system he didn’t have. (He and Paul Allen subsequently bought what they needed from another programmer, but they didn’t tell him they had the deal with IBM to distribute it.) Allegedly, an engineer at the company coined the term “vaporware” a year later. Promising something that doesn’t exist is as central to the Valley ethos as late-night coding sessions, hoodies, and the hallucination that the public has asked you to solve the world’s problems vs. just do less damage.
“[Google Glass] will be broadly available. You won’t have to jump through any hoops.”
— Sergey Brin, 2013
“Can we build a better phone for prime members? The answer is yes.”
— Jeff Bezos, 2014
“A year from now, We’ll have over a million cars with full self-driving.”
— Elon Musk, 2019
Yes, claims about health-care solutions warrant scrutiny beyond whether or not rich investors get their money back, but Holmes wasn’t convicted for defrauding patients. She’s going to prison because she ripped off George Schultz, not because her bogus blood-test machine errantly told someone they had HIV.
Florida AR company Magic Leap has (no joke) burnt billions since 2010, with nothing other than a failed $2,300 headset to show for it. The company routinely hyped technology that didn’t exist, even using Hollywood special effects to mock up its PR videos. An early (fired) employee called the company’s founder “a believer in magic.” It was meant as a compliment. And the tricks keep coming. In October, Magic Leap announced it had raised another $550 million and was pivoting from consumer to … wait for it … health care. Nobody seems all that concerned that a company with a 12-year track record of false promises and fake products is now going into medicine. And, with the right leadership and engineers, it could build something valuable. You know … vision and capital … and more vision and more capital.
The line between vision and fraud is only drawn in hindsight. We set arbitrary deadlines for entrepreneurs to deliver on their vision, and their vision only becomes fraud when we say time’s up. What if Holmes, with five more years and another billion dollars, shipped a working product? Or pivoted to a home-testing machine for an acute respiratory syndrome?
“Real artists ship.”
— Steve Jobs
When valuations are overwhelmingly driven by stories, things can get ugly. Investors will do whatever it takes to defend their narrative — their investment depends on their flocks screaming “heretic!” at anybody who questions the scripture, as the foundation doesn’t hold up to more modern orthodoxies (i.e. math). Theranos employees made a video game where they shot at the Wall Street Journal reporter who exposed the company’s fraud. The firm also engaged Harvey Weinstein’s attack-dog-attorney, David Boies, to try to shut down the story.
Swarming anyone who questions the narrative is a built-in feature of stocks and sectors that have gotten too far out over their skis. I often commit the crime against humanity of pushing back on Bernie Bros, VC-backed unicorns, Tesla longs, meme stocks, or web3. I do this knowing the flying monkeys and bots will attempt to burn the village to save it from my boomer views. These guys, and they’re always guys, make the High Sparrow’s Faith Militant look thoughtful.
Note: I’m going to see if I can offend everyone with this post. #squadgoals.
The pendulum swings between stories and fundamentals. Right now, we’re still deep in the story phase. Capital is cheap: $621 billion went to startups in 2021, a 111% jump from 2020. We’re seeing record numbers of unicorns: 959 across the globe, up from 569 in 2020. The hottest sector is fintech, which accounts for 15% of these firms — all promising to become the next JPMorgan. Are they lying or telling the truth? A: Yes. Vision.
There are few fundamental truisms in the markets. One of them is … fundamentals. Another is cyclicality. And in my view, the atmospherics, if not sheer probability, augur that we’ve entered the less-appealing part of the cycle. Ground zero will be a regression from fiction to nonfiction, story stocks that represent ownership in a (shitty) business, not a movement. The meme trade is already unwinding.
The darkest side of our idolatry of innovators is that we become blind to the costs incurred by those who are least able to bear them — and we protect those who least need protection. It bears repeating. Holmes is going to prison because she defrauded investors — specifically, members of the Valley aristocracy and the global elite. Tim Draper led her seed round, and Rupert Murdoch invested $100 million. That’s what brings the feds to your door. Remember Martin Shkreli, the guy who raised the price of a life-saving treatment needed by AIDS patients 56x just because he could? He’s in prison, but not for price gouging. He was convicted of defrauding … investors.
Our laws reflect our values. What we hold dear, who we deem precious (i.e. who needs protection). We’ve decided the rule of law in the U.S. must be a warrior for corporations and old, wealthy investors. Teen girls and rural American families burying opiate addicts? Fuck you, you’re on your own. Who’s going to jail? No member of the Sackler family. Nor this guy.
Life is so rich,