Weekend Reading #37
This is the twenty-seventh weekly edition of our newsletter, Weekend Reading, sent out on Saturday 5th October. To receive a copy each week directly into your inbox, sign up here.
Anatomy of a tech founder.
This isn’t another article about Adam Neumann and WeWork, Travis Kalanick and Uber, or Elon Musk and Tesla. This is an article about tech founders everywhere – how they’ve grown to dominate our culture and markets, and why it matters.
In the early 2000s, in the ashes of the Dotcom crash, the ideas and protocols that define today’s startup culture were codified. The message from the likes of Paul Graham and Jessica Livingston was simple. When it comes to building and managing great tech companies, forget MBAs and CEOs – founders know best.
Now tech founders are everywhere. The global economic miracle has made Homo Sapiens rich beyond the wildest dreams of our fellow hominids. Yes, wealth distribution is uneven, but capitalism works in mysterious ways and the convergence of developed and developing markets continues unabated. Recent field trips to Jakarta, Warsaw, Istanbul and Cape Town demonstrate that you are just as likely to find startup accelerators in emerging markets as you are in tech hubs like San Francisco and London. Tech founders truly are a global phenomenon, and startup culture is thriving everywhere you look. As a corollary, entrepreneurship is no longer the domain of the risk-tolerant few – it’s an established industry.
The cultural construction of the tech founder might seem like a relatively new development, but it’s been a hundred years in the making. And at its heart is the concept of disruption. This commingling began with the most eponymous founder of all, a man whose disruptive ideas, manufacturing techniques and marketing strategies literally changed the landscape of America. We’re talking, of course, about Henry Ford, who reimagined the way that people live, work and connect with each other long before Facebook, Uber et al laid claim to that achievement.
We've created a monster.
Since the 1920s, adoption of technology has grown exponentially, and the status of the tech founder has followed suit. The meteoric rise of business leaders like Steve Jobs, Bill Gates, Michael Dell and others is well documented. These innovators created the technological infrastructure upon which subsequent cohorts of founders have built their own empires. The second generation – including the likes of Zuckerberg, Systrom and Dorsey – is now being joined by a third wave, with a string of IPOs (some successful, others less so) hitting the market in recent months.
The maturation of the founder as cultural symbol has accelerated due to underlying macroeconomics. Thank the Fed. Rock bottom rates since the Global Financial Meltdown allowed startups to fund themselves cheaply and acquire large amounts of users, sometimes with the help of sustainable unit economics, sometimes in spite of them. By the same token, abundant liquidity has created the perfect conditions for founders to flourish, accruing enormous wealth and social status. Like any asset bubble, there are genuine stars, there are crooks, and there are those who were simply in the right place at the right time.
The pros and cons of egomania.
The ongoing rush to get IPOs out of the door tells us a lot about the psychological state of founders as the current economic cycle approaches its end.
Banks, VCs and indeed founders are all on the same page – the mantra seems to be, “time to sell to the public before sentiment deteriorates any further and valuations take a hit.” The lacklustre secondary performance of Uber (valued at $76 billion pre-IPO and now with a market cap of about $51 billion) and Lyft are a case in point. And of course, there’s WeWork’s botched IPO, with investors valuing the company at $10 billion, down from $47 billion at its last funding round and worth less than the actual amount of cash – $12.8 billion according to Crunchbase – which has been showered upon it over its lifetime. Turns out public market participants, obsessed with boring, old-fashioned things called “earnings” and “cashflow”, are not as gullible as they seem.
What can we learn from recent flops? Egomaniac founders are able to build great startups, acquiring users, attracting talent, bagging funding and soaking up press coverage by the bucketload, but they struggle to navigate the transition from private to public markets. This is because institutional investors in listed stocks demand a greater degree of governance and are unwilling – and sometimes unable – to tolerate the kind of cavalier risk-taking that often helps unicorns emerge from the soup of the startup ecosystem. These two systems, hitherto disparate and partitioned from one another, are now colliding like hot and cold weather fronts, spawning a hurricane of questions.
A beginning, a middle, and an end.
There is also an alignment problem. Founders typically exert a high degree of control over the companies they create, with special kinds of voting stock that allow them to benefit from investor capital without ceding equitable levels of control over the corporate structure. In other words, they get to have their cake paid for by investors and they get to eat it.
Furthermore, the runaway success of technology as an investment category in recent years has incentivised some founders to portray their companies as tech stocks, when they would be better off managing investor expectations. Many unicorns are masquerading as tech businesses in order to obtain higher valuations, and their founders are impersonating the precocious technologists of yesteryear, who steered companies like Apple and Microsoft to gigantic market caps. But many so-called 'tech' businesses simply don’t have the same margins as traditional software companies. WeWork leases office space. Lyft and Uber face margin pressure from both demand and supply. Peloton sells exercise bikes and gym class subscriptions. VC Fred Wilson sums it up by saying:
“We have seen a narrative in the late stage private markets that as software is eating the world (real estate, music, exercise, transportation), every company should be valued as a software company at 10x revenues or more. And that narrative is now falling apart.”
The use of the word narrative is instructive here. Disruption through technology is a story that some tech founders and their bankers have peddled to investors. And like all stories, it has a beginning, a middle, and an end.
On cults and religions.
It’s been suggested that the prominence of the tech founder in our society is something akin to a cult. Cults are quintessentially obscure, characterised by a certain closedness. Secret knowledge is revealed to adherents by the cult’s leader and the success of the organisation depends on a personal, charismatic relationship between leader and followers, often facilitated through detachment with friends, family and the real world. Once this process is complete and followers have been isolated from their support networks, cult leaders are able to dominate and exploit them for personal gain.
Religions, on the other hand, are characterised by openness. They publish their beliefs. The Bible, the Torah, the Koran, the Bhagavadgita and other religious texts provide advice (and sometimes instructions) on how we should live. They seek to inspire, persuade and guide us towards richer and fuller lives.
Viewed in this light, the prevailing obsession with the figure of the founder is less cult, more religion, one characterised by openness, accepted wisdom and a healthy dose of groupthink. Some Silicon Valley even amplify this by ‘hacking’ spiritual practices in order to boost employe productivity, drive innovation and cultivate their brands. In 2016, Quartz observed:
“Steve Jobs was famously influenced by Zen Buddhism and LSD. His successor as Apple CEO, Tim Cook, recently pleaded to the Hindu gods in India. Mark Zuckerberg speaks openly about how he is inspired by Buddhism and tries to integrate its tenets at Facebook. Google (Alphabet) has sought the guidance from spiritual leaders and offers employees a popular course on meditation.”
We are the congregation, and even if we don’t believe, we are captivated. Techcrunch is our Bible, the high priests are the founders who dominate the headlines and capture our imagination, and the clergy are the VCs, bankers and journalists who rely on celebrity founders to keep the show on the road. The tax-efficient status of certain startup investments (including seed stage investments under EIS and income tax relief on VCTs in the UK) further underscores the crossover between startup investing and religious worship – in the all-seeing eyes of Her Majesty’s Revenue and Customs, they are one and the same.
Holding out for a hero.
The purpose of this piece isn’t to deride founders. We are embarking on our own entrepreneurial journey with our business here at Three Body Capital, so we have massive respect for those who are doing it the right way. There are countless incredible entrepreneurs out there who create value for investors and other stakeholders.
We need heroes. We need to know that success awaits those with the creativity, guts and work ethic to make it happen. Being a founder is not a lifestyle choice, as some might have you believe – the vast majority of founders don’t have a lifestyle, and if they do, it has nothing to do with style! Being a founder is HARD. It means early mornings and late nights, sacrificing things, important things, like time with your family, income and the security of an established career path. There’s an opportunity cost attached to all things, even opportunity itself.
But not everyone does it right. Some abuse their privilege, wasting investors’ money on parties and perks. Others oversee toxic cultures that facilitate sexual harassment, gender discrimination, retaliation and bullying. And some play fast and loose with securities laws.
We are all a product of our time, and our time just happens to be highly supportive of asymmetric risk-taking (heads they win, tails you lose) on the part of unscrupulous founders, who are able to raise large sums of money for businesses that can seem unsustainable and sometimes even corrupt. Some simply don’t give a damn about anything other than themselves. And as we see unfolding in the unravelling of the vaping miracle that was JUUL (no surprise it’s potentially lethal despite it's catchy “heat not burn” claims), not giving a damn can literally turn out to be a matter of life and death.
The alignment problem is real, and we have only scratched the surface with this WeWork debacle. The recent episode with Theranos should serve as a precautionary tale of how wrong even the noblest of aims can go. As the story plays out, some founders will be confirmed as the incredible geniuses they claim to be. Others will be exposed as charlatans.
Regardless, by unpacking the ubiquity of the tech founder in our media and markets, we remind ourselves of the dangers of hero worship, the ubiquity of misalignment, and the perilous oversimplification of complex narratives. And where we recognise our need for heroes, we also embrace our individual potential for greatness.
What we're reading.
This week we had our minds truly opened by a great read, How To Change Your Mind: The New Science of Psychedelics, by American author and activist, Michael Pollan.
Pollan has made a very big name for himself writing about how nature and culture intersect, be it on our plates, in our homes or gardens, and, most recently, in our minds. This, his most recent book, takes a deep look at how psychedelics are improving the lives not only of the mentally ill, but also of healthy people coming to grips with the challenges of everyday life.
Given what he found while researching his book, Pollan decided that he couldn’t stand on the sidelines. He chose to dive in and explore the landscape of the mind in the first person as well as the third.
This is a highly controversial topic but a renewed openness from regulators has led to literally mind- blowing permutations in terms of potential medical applications for the treatment of depression, anxiety and addiction. The research is fascinating and has been given a massive boost by the opening of the world’s first formal centre for psychedelic research at London’s Imperial College earlier this year.
What we're listening to.
The office playlist took a turn for the better this week, thanks to the release of The Lumineers latest album, III. So often, as bands move into second or third album territory, they decide to experiment with their tried, tested and popular formula to push new boundaries in an attempt to create some sort of individual artistic legacy.
We’re delighted to report that The Lumineers have rejected this maverick approach, deciding instead to stick with what they’re good at. Cue another album of uplifting folk rock that will delight fans who enjoyed their previous two smash hit releases.
It’s an interesting lesson to remember in business and in life – if something’s going well and being well received, double down on it, repeat it and continue to satisfy and delight your fans, customers, investors or partners. Whilst experimentation, evolution and development are vital, especially in this frantically-paced and ever-changing world, “if it ain’t broke, don’t fix it” continues to ring true. It certainly does for The Lumineers, and the office airwaves are a lot brighter for it.
What we're watching.
Once the hard work of the day has been done, there are few things we like doing more than spending time in the boardroom together discussing grand ambitions for where we want to go and what we want to build as a group of friends and business partners.
But regardless of how imaginative, ingenious and borderline crazy these ideas may be, we always revert back to the reason why Three Body Capital exists – because we believe that broadly speaking the investment management is failing investors we see great opportunity in aligning interests.
In returning to this mantra we recently sat together and watched the 3rd most popular TED Talk of all time, delivered by Simon Sinek in 2009. It deals with how great leaders inspire action. In his talk, Sinek discusses why a company like Apple has had such immense success selling its vision to its customers. He portends that the answer lies not in what they do, or even how they do it, but in why they do what they do. It’s this sense of centre, of mission, that pervades every single aspect of a successful company’s existence, leading a company onto ever greater things.
When the imagination carousel really gets turning in the TBC boardroom, our theory of alignment always forces us to focus on why we’re here and what we’re trying to do as a business. We hope that our partners and investors believe in this mantra too.
What we're doing.
As the first blast of winter arrived in north London, the office central heating decided to go on the blink. Hence, this week we’ve been mostly hunkering down in our chilly office clad in jumpers and jackets, drinking scalding hot tea and cramming into meeting rooms, looking to generate a little collective warmth.
As we’ve written on the blog, the reason we decided to launch our business from an attic office in Camden is because it reflects what we’re trying to do as a business. We wouldn’t trade our HQ for anywhere in the world… although I’m sure that a WeWork or a Canary Wharf tower would have been a little more comfortable this week.
Still, that’s startup life. The struggle is real. And we’re delighted to be shivering our way through it!