Today’s Venture Capital (VC) structure is much like what we now refer to as “markets” when trying to describe the capital markets, aka as stock markets. i.e., If you think it acts or operates with any semblance to what it was 10 years ago is a misnomer of epic proportions.
Today, most appear to be nothing more than legal constructs to mimic what is known in the criminal underworld as a “bust out” operation. And that’s being kind.
There was a time when attracting the eye of a VC firm had an inherent issue of pride for the entrepreneur of yesterday. The reason for this was simple: it signaled that your idea for product or business had value and others (VC’s) could see the potential for possible explosive growth and wanted to help fund the possibilities, for a cut of the proceeds.
There was, back then, a true need for expertise and adequate funds to make this possible, where the trade-off between budding entrepreneur and VC was (or at least used to be) something that was fair and equitable to both. But that’s ancient history.
Today many a VC backed “disruptor” is nothing more than the vehicle-of-the-day (aka pig-in-lipstick) as to gain entry into the public markets (aka casino) through the main entrance via the slip of a C-note to the doorman (aka an IPO filing) to then make their “machine” available for mom and dad’s, grandma and grandpa’s, cop’s, firefighter’s, teacher’s 401K and/or pension fund to “invest” in.
Oh yeah, and let’s not forget about the myriad of low-level employees that will have (and will continue to) worked countless hours in lieu of salary for those once coveted “stock options” that they’ll find either diluted into oblivion, or worthless all together, when the stink of that pig-of-a-business they’ve been riding becomes unbearable to those living in the “pen” and everyone dumps. (See Blue Apron™ and Snapchat™ for just two of the hundreds of clues)
I understand I’m painting with a very broad brush here and that there are still VC’s, along with publicly listed companies, that follow business fundamentals, along with ethics, that are worthy of praise. I’m sorry many suddenly find themselves smeared with the same brush.
But (and it’s a very big but) ethical business leaders of all stripes have been silent for way too long on this subject. It’s long past time someone calls this for what it is. i.e., A pox that is destroying both the once good name, as well as image, of what it was to be – a business.
Yes, it’s the equivalent of a disease. Period.
If you think I’m being caustic only for effect, let me share just a few of the latest examples to bolster my argument, as well as shear disgust. All these were cited just this past week, To wit:
Via the Wall Street Journal™ (paraphrased)
83% of U.S. listed IPO’s taking place during the first three-quarters of this year lost money in the 12 months leading up to their debut. That’s a new record up from the previous 81% of last year.
I will once again make this statement as forcefully and succinctly as I can: These aren’t businesses – these are concocted vehicles to swindle as much ill-gotten gains as possible – legally. Of course it’s only my opinion, but someone has to call this what it is, publicly, for the silence (as to not offend their next-in-rotation fund manager guest list) from not only the mainstream business/financial media, but so too across much of the business complex itself – is deafening. And it has to stop.
Let me ask you a very simple question: Since when does a business that can’t even make enough profit to sustain itself (e.g., pay its bills) for 12 months prior suddenly become a worthy candidate to then claim it’s worth $Billions upon $Billions and become a listed, publicly traded company, based on accounting practices for valuation metrics that would make Bernie Madoff envious?
Hint: rhymes with sham. Bernie himself must look up at the television screen in the prison cafe and ponder daily “What again am I in here for, exactly?”
Here’s another: Did you know that IPO’s for 2018 are booming? I bet you didn’t, why? Because it ain’t anything like you were once told and sold. Again, via the WSJ, to wit (paraphrased):
In a hot IPO market more than 180 companies raised over $50Billion in the U.S. in 2018.
Do you notice anything out-of-place or just seems a bit odd in the above statement? Hint: 180 companies – $50Billion total.
Remember when Silicon Valley had to coin a new term like “deca-corn” as to make sure one didn’t confuse growing concerns such as Uber™, or Airbnb™ and the likes from the chaff? i.e. the unicorn stables were now dividing into “party ticket wannabes – and party ticket providers or throwers.”
By the looks when one does the math (e.g., $50Billion divided by 180) There’s a reason why one no longer hears about it, for that works out to an average of around $275Million each.
Numbers like that didn’t even qualify one for a ticket in to the once “party scene” let alone any thoughts for VIP treatment. But today, this is how VC is cashing out (or in, depending on viewpoint), for there’s no longer any “free money” being supplied by the Federal Reserve. The sham has had to get small, but the after or lingering effects are just as disease ridden to everything once thought of as anything business ethical, along with its fundamentals. Case in point:
Have you every subscribed to a service then cancelled it for what ever the reason?
If you’re like most, of course you have. Subscription services today are the way of the web and for many a business model going forth. I myself am in the process of expanding into this territory, which is why the following is so abhorrent too me. For it effects, as well as affects, will converge and make people suspect against many a legitimate business trying to do business in a thoughtful, respectful, and legal way.
Businesses of stripes should be outraged as they look at the following example of what has been thrust upon the business landscape via the VC model of today, which they not only have to compete with, but also, are allowed to continue via this type of funding. Again, to come in and steal market share away with no regards to profitability and more. That’s not business. That’s predatory means and effects.
In what may be far worse is the inherent belief within these models that have taken the “beg for forgiveness rather than ask for permission” model to now mean: make sh•t up, lie, deface, or break any law that may be on the books until you get caught, if at all.
Here’s the latest example in spades, via The Verge™: “MoviePass is now forcing former users to opt out of new plan or risk being charged” To wit:
In an email sent to select MoviePass customers who decided not to opt into the company’s revised three-movie monthly plan, first unveiled last month, the company says it’s decided to enroll those people into a new subscription because “we really hope you begin enjoying your MoviePass subscription.” If they don’t want to be charged for the service, MoviePass is demanding they proactively opt-out of the plan they were enrolled in without their consent by Thursday, October 4th.
Yes, you read that correctly, if you once cancelled your subscription, so what, they are going to re-enroll you – and charge you – if you don’t stop them from doing so.
Every business owner, of any size, should be outraged with this openly abhorrent business behavior, not to mention its boldness as to flagrantly try to get around the law that barred this type of practice decades ago. (i.e., companies used to send un-ordered or non-requested products through the mail in the early 1900’s to households with a note to the respect of “if you don’t want it just send it back.” Of course all at cost of the receiver.
When the product wasn’t returned, which was for most cases, the company would then employ collection services and more as to extract payment and then some. The courts ruled this as an unfair and unethical business practice and made it illegal. And has been this way ever since. Hence, why you’re protected (or at least most assume to be) via the law that if you didn’t order it, it’s not your responsibility. And this practice ended as it should.
But it would appear that MoviePass thinks it’s above such things because it’s not delivering a tangible product through the mail or such. I would like to see which Federal Agency or Atty. General doesn’t believe this falls under “deceptive practices” and argue it as such. If they do, then we’re all in trouble.
This company would have never been able to last a day without VC backing as to try to get to the IPO land of riches. The business model just doesn’t work. It loses money on near every transaction. But then again, so does most of the companies VC has brought to business landscape since the Fed. unleashed quantitative easing upon it. And the disease of “the rules don’t apply to us” mentality that it has fostered along the way is palpable. I know because I’m in the heart of the fastest growing small business areas in the country: Columbus Ohio.
When I speak to entrepreneurs one of the most startling things I come across is just how warped their sense of business fundamentals has now become. So much so I stopped doing pro-bono type speaking events because it just seemed fruitless.
Far too many are focused on “funding” and IPO type issues first, rather than, as Peter Drucker professed years ago that the raison d’être of any business was to create a customer. Today that has now become something along the lines of create a customer, any way, by-hook-or-by-crook, fudging, implying, mis-stating, what ever it takes, as to help placate the idea that the next step is not to make a profitable business with happy customers, but rather, to sell a story for a profitable IPO.
This is what the current VC model has brought us. And it’s a disease. The problem here is that the only cure might be a pill too hard to swallow aka – a market rout. (Don’t look to the S.E.C. for help, just look at the latest Tesla™/Musk settlement for clues.)
However, with that said, one way or another this destruction of business morals and ethics has to end, as well as degradation to the once trusted models for business that everyday entrepreneurs rely on.
Most VC’s, as far as I’m concerned, don’t care. All they care about is if – they got theirs. Regardless of the mockery (as well as destruction) they’re consistently unleashing upon the business landscape where legitimate businesses have to compete with deplorable entities that make a Potemkin Village blush in absurdity.
This is what the Federal Reserve has brought us. If you’re in business, are you still so glad they got involved?
© 2018 Mark St.Cyr