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No Mercy No Malice

Tell Me a Story

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.

Elizabeth Holmes

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.

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

Heretic

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

Pendulum

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.

Blind

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,

P.S. This February, I’m heading to Miami with my Pivot co-host Kara Swisher for the first-ever Pivot MIA, a brand new three-day event hosted by us. Plus, No Mercy / No Malice subscribers who APPLY TO ATTEND Pivot MIA will participate in a 30-min meet & greet with me at the Opening Night Party. Let’s connect over cocktails at the 1 Hotel Beach club, February 14-16. I’ll meet you in the cabana, but you have to APPLY first.

P.P.S. My NYU Stern colleague Adam Alter is back to teach the Product Strategy Sprint, and this time he’s brought Malcolm Gladwell with him. Don’t miss this one — registration closes soon.

41 comments

  1. Vladimir Svetlov says:

    Scott, this is just FYI, as you might run into some biotech investment opportunities. Biotech isn’t like TikTok or dog walking apps, as it isn’t built on exploiting people’s failings, fetishes, and cravings. Biotech – if it good – always has a simple principle, which can be outlined in a paragraph. mRNA vaccine fits this pattern (Moderna), as does NGS (Illumina) or viral protease inhibitor (Pfizer’s Paxlovid). The timing and the scale of the demand are hard to predict, that’s what one needs to sell to investors, but the science should be there. Holmes could talk for an hour, and never got to science. Tests wouldn’t work just because you look like Steve Jobs Light, and no amount of human influencing, viraling, liking, or retweeting are gonna change what happens in the tube or fluidics chamber. So if the pitch doesn’t contain science that fits into a paragraph, it’s a delusion, or a grift, but never a vision.

  2. David Merkel says:

    Justice systems, if they are good, are by nature reactive. You only get justice if you complain and file a suit. That is the difference between Elizabeth Holmes and others who have exaggerated/lied in their business plans. Her crimes were big enough and concentrated enough that she offended powerful people who had the strength to fight back. That’s why she got convicted, and the others did not.

  3. Jeff Smith says:

    Do you still own Facebook stock? Do you think it’s a Buy at current levels? Thanks

  4. Dennis Cowles says:

    Hail to the Chief! Thank you Prof. Galoway for your clear as glass story here.
    More please – keep them coming….

  5. Greg Randall says:

    I am both a Senior eCom Strategist (being doing this for over 20 years) and an Entrepreneur about to launch another business. So I come at this narrative from two perspectives.

    Perspective #1:

    Even though I have clients in the US, I am based in Australia so cannot speak for Entrepreneurs in the US. However, it appears access to funding $$$ is almost too plentiful. I would never say it’s easy to come by, but when I analyze the “story stocks” receiving funding I come to this conclusion.

    Perspective #2:

    Because I believe in this new business I am creating, I am happy/excited to “bootstrap” (self-fund) the launch of the business.
    There is a fundamental need to hold entrepreneurs accountable for decisions and approaches to spending. Every dollar should be scrutinized.

    And once the proof of concept (MVP) has been validated (in some specific ways), not only does the “story” become more real, it could potentially lead to more investment later.

    Thanks for your article, long-time fan, first-time “commenter”.

  6. Alan says:

    Is the move to London still on Prof G?

    If so will there be some events lined up after your arrival?

  7. Tarana Lalwani says:

    Love the opening line “A man’s reach should exceed his grasp, or what’s a heaven for?” — Robert Browning
    The only way to predict the future is to make it – Scott Galloway
    The article is very timely as it addresses story telling with balancing of governance, two things that I have been debating over the last few weeks given all that has been happening in the ecosystem with Elizabeth Holmes in the US and some of the headlines in India. Scott’s article resonates, however, I believe what doesn’t come out is the “intent” as it is very clear Elizabeth Holmes did not really believe in her “story” unlike the other founders mentioned, and deliberately deceived her investors and customers(con artist).
    On governance, I think what we need to recognize is there are two roles of investors – pre and post investment. The last few years of “deep story phase” have led to brashness. Everyone, from VCs and founders to recent hires, current employees, have all been caught up in the euphoria and “gold rush of valuation upsides” where in the race to close fund rounds, due diligence and governance in most instances has taken a backseat. Investors are dangling term sheets like carrots and this sets a dangerous precedence. Instead, what we collectively (as VCs and participants) need to bear in mind is that if they are bringing value to the table for a company seeking to close a round of funding, they need to draw the line between closing out of greed or FOMO vs clean, deep due diligence of the senior hires, newly minted board member, or even vendor/supplier. Its public knowledge some founders and senior management have a toxic culture or that there are governance issues but no one does anything unless it comes out in the media, and make one a fall guy versus actually investigating the situation. Does anyone question the other cofounders or members of the leadership – birds of the feather flock together? We need to as investors set a solid foundation for corporate governance, and that will set the tone for the way leadership functions, the manner and environment in which decisions are taken that positively impact all stakeholders.

  8. J. Peterson says:

    Elon Musk deserves the same fate as Elizabeth Holmes for making his “self driving” car claims. Several people are dead because they believed it.

    The most tragic case is two people killed innocently waiting at a stop light when a “self driving” Tesla slammed into them after the car confused an exit ramp with a freeway lane.

  9. Ruben says:

    Great piece and great points. I think you could have avoided that cheap shot at Zuck at the end. I’m no fan of the man or the company but their responsibility in causing harm to people and society is not as direct as pharma cos pushing opioids or gouging AIDS patients.

  10. George L de Verges says:

    Could you apply the “S&P 500 v. Story Stocks” scale to all of the 959 unicorns? Could you apply it more broadly?

  11. John Kratz says:

    “Humans are not ideally set up to understand logic; they are ideally set up to understand stories.”
    Roger Schank

  12. Cass Bielski says:

    This is a great topic. Seems a little short on solutions. The line between what is fraud and what is positive thinking gets a little blurred. Perhaps we all have had my experience of running into a positive thinker whose positivity tends to work in his or her favor at the expense of others. And if you tried to do something within their positivity framework that didn’t benefit them, you would get some really positively aggressive pushback, indicating that even the positive people saw through their game. (To be clear, most of the positive folks I have known a were and are legit.) Our former President’s claim of winning the election could be seen as positive thinking on steroids. And my guess is that claim might be made if he ever faces a judicial proceeding on the matter. I think that leniency for misplaced optimism might be warranted on occasion, but it’s a slippery slope toward justify criminality.

  13. Rodney Reynoso says:

    Scott, it’s like you always know the right topic to talk about. This must be what it is like to be a student in your class

  14. Glen McGhee, FHEAP says:

    I keep thinking of higher education, MOOCS, HyFlex as oversold and over-promising. https://www.insidehighered.com/advice/2022/01/19/hyflex-teaching-black-mirror-higher-ed-opinion

  15. Brian says:

    I think the take that Holmes us being punished solely for what she did to investors misses the holes in our legal system. Entrepreneurs mislead for money All. The. Time….which is technically fraud, but generally not one where we as a society feel like the victims (VC investors) need protecting. I’m not sure any VCs have any takeaways other than “we expect many of our investments to go to zero, this was one of them.”

    However – trust in medicine is a big deal for public health (and it’s not high right now anyways) so frauds against patients need to be stopped – in our society, the individual victim matters more than the crime sometimes. However – our legal system makes punishment of this hard. How do you quantify a loss from an inaccurate test result? What is your stress worth? How do you compute this in a non-class action manner? Sentencing based on investor losses is clear and discrete: investors put in hundred of millions, lost it all, and proving the damages in monetary terms is easy.

  16. James L Somers says:

    If you (entrepreneurs) must employ a fiction that captures imagination and capital to pull the future forward and turn rhyme into reason, then you aren’t really entrepreneurs at all. You’re merely speculative investors.

    According to 18th century French economist Jean Baptiste Say, an entrepreneur is the economic agent who unties all means of production, the labour force of the one and the capital or land of the others and who finds in the value of the products his results from their employment, the reconstitution of the entire capital that he utilises and the value of the wages, the interest and the rent which he pays as well as profit belonging to himself.

    He emphasised the functions of coordination, organisation and supervision. Further, it can be said that the entrepreneur is an organiser and speculator of a business enterprise. The entrepreneur lifts economic resources out of an area of lower into an area of higher productivity and greater yield.

    • Nancy Langer says:

      Very apt description of what I do as a business founder! I operate a 28 year old manufacturing business. We started with our own capital and some loans along the way. Having responsibility for workers and financial commitments provides an effective reality check. The goal of creating an unleveraged enterprise seems quaint in a “greed is good” and “debt is not a problem” environment. In the 18th C. debtors prison would have offered a remedy for failed entrepreneurs.

  17. tim michalik says:

    Great articles , as always. quick question ion the Holmes/Theranos fiasco. What type of due diligence did these “entrepreneurial geniuses”(there words not mine) do on Theranos. Walgreens has blood ont there hands also. I would love to say I can make your dog fly give me a billion dollars and I will show you.
    Scary to think we look to many of these people for educated information on the state of our country’s economy or technological developments. Message me and I will give you my Venmo. for the flying dog. Great insight Scott, thanks for starting my weekend with some real head scratcher information

  18. Dave says:

    Ah, fundamentals! Remember the days when? Capital is simply following the overall shift to the sound bite society, just like the media, politics, and corporate leadership. If you don’t have a good elevator pitch, you’re doomed. Nobody has the time to dig in and truly understand. I remember Robin Williams saying cocaine was God’s way of telling you you have too much money. Now it’s putting $100M into a good story about something that is either impossible or, at the end of the day, just won’t matter in three years. It’s not about innovation. It’s about getting rich quick!

  19. Fateh Madani says:

    I think fundamentally what defines fraud is intent. This is an old legal paradigm : how do you consider a person who’s invited to sit at a restaurant table by a waiter, doesn’t ask for the menu, is asked by the waiter what he wants to eat, accepts the first thing the waiter proposes then after finishing leaves without paying??
    It used to be hard to trial 100+ years ago. Then lawmakers defined the intention. Super hard. Would love to hear a law scholar view on these cases. Was Holmes intention to defraud investors when she was asking for money?

    • Glen McGhee says:

      The construction of “fraud” is post-facto but “intent” is not. Besides, fraud pertains to the little people, NOT for visionaries that are reality-distorters. . .

  20. Bijan I says:

    Absolutely loved reading this one. Learned a lot

  21. Pablo Garfunkel says:

    “their vision only becomes fraud when we say time’s up.“ – or, I’d argue, when regulations come into play, floating obscenities so egregious that are impossible to ignore. You know, the likes of which SOX act and S1 disclosure were meant to curtail.

  22. Mamie Patton says:

    Another thoughtful, good read, thank you.
    “Our laws reflect our values.” Should our branding and marketing reflect our values? Why does Section 4 support “this guy”? https://www.youtube.com/watch?v=8qPVhr2Gd1M.
    He endangers the lives of teenagers and participated in helping a small company with expertise to overthrow legitimate governments through use of social media manipulate our democracy. Read Mindf*ck: Cambridge Analytica and the Plot to Break America, by Christopher Wylie.
    I’m a big fan of Section 4, sad that the company supports Facebook. It’s beneath you.
    If Zuckerberg were a woman, would he get by with this?

  23. MARC CANTER says:

    Great issue, dude

    Speaking as one who’s been both fucked over and kicked out of my own companies – by John Doerr and Naval Ravikant – let me attest to the truth in your words.

    The only way to defeat this bullshit is to keep starting great companies with great products.

    It’s about the Products, the users (Creators) and the value delivered.

    Instigate.ai is avail in both App Stores = now

  24. MJ Salvato says:

    Adam and Malcolm in one room? That’s a power session I would like to hear!

  25. Mike Fisher says:

    People in the medical device industry looked at Theranos and asked “where are the experienced med-tech investors?” Either there were none or they hide their participation very well. It appears this company was a cult of personality and a slick TED talk. People who do this for a living like crass things like evidence, data, and integrity. It’s a brutal career trying to get data to exceed requirements with six-sigma quality. People pay the price with their health and marriage and more. Theranos lied to investors, deceived FDA, and bullied internal whistleblowers. There is a special place in Hell for people who engage in this type of storytelling. The damage goes deeper than defrauding investors. Cheers, Elizabeth. I hope you find redemption.

  26. Claire Felong says:

    Why are women always the high profile entrepreneurs going to jail while men who have caused much more damage avoiding it? Martha Stewart, Elizabeth Holmes.

  27. Phillip Soltan says:

    So true. White collar crime is only really treated as a crime if it affects powerful, rich investors (150 years in prison for Bernie Madoff comes to mind). I do think Theranos was different from most startups because it was literally impossible, not just improbable. The due diligence of the investors was a joke.

  28. Alfred says:

    I think the sudden change in messaging coming out of the Fed might be making a big difference. Bond yields have been rising and some investors are snapping out of their consensual hallucination and de-risking their portfolios. It seems that when money was so cheap in such low interest rate environment, investors were really scraping the bottom of the barrel for places to park their capital. Now the Fed seems to be slowly turning down the volume on the speakers, so people can tell that the party might almost be over and are looking towards the exits.

  29. Steve V says:

    Interesting – slam Magic Leap (rightfully so) and then have their CEO speak at your conference: https://voxmediaevents.com/pivotmia/NoMercyNoMalice

    • Brandon says:

      The conference also costs $6,000 to attend after an “application process”. Starting beef for clout and ticket sales is quite the play.

    • RA says:

      Why must they only invite people they agree with and praise to their conferences?

  30. Mark says:

    This is really 2000 all over again. I do not see any differences. Am I missing something?

  31. Yuri says:

    Governments and their corporate media mouthpieces are the greatest con and have caused by far more harm than any business. For the past 2 years they have amplified irrational fear to take power, strip civil liberties, and harm a generation of children. They gaslight and move the goalposts all in the name of “safety”, while billions suffer mentally and financially. As a result, trust in institutions has crumbled. Real courage is standing up to those tyrants, not sniping at easy targets.

    • DK says:

      So public health measures during a pandemic are actually tyranny. Got it. So what’s the dystopian end game of asking people to wear a mask?