The Money Siphon

There’s an awful lot of technological Utopian bullshit spoken at the moment about how we are at the cusp of a massive revolution in the hands of technology.

On the one hand I think there’s a strong argument that this has always been the case, at least since the first industrial revolution. There’s a chronocentricity that I’m sure every generation has demonstrated (documented in David Edgerton’s Shock of the Old) that means that we think our times are unprecedented. Of course the nature of exponential growth or change is that things are doubling at exactly the same speed throughout. Hockey sticks are primarily fascinating because our brains aren’t very good at numbers.

But on the other hand, the pace of technological change always lags the pace of cultural and social change. My favourite illustration of this these days is the 91 years it took from the invention of the internal combustion engine-powered automobile to the opening of the first out of town shopping centre in the UK. 91 years. 

But there’s an alternative analysis of the technology startup market that is important to understand, and has little to do with anything about technology. It’s something that has been banging about in my head for a few years now, but has been crystallised when reading Dan Lyon’s quite frankly wonderful, hilarious and deeply bleak Disrupted – the story of a 50-something journalist who on redundancy from Newsweek reinvents himself in a tech startup.

My understanding of Lyon’s core analysis is as follows: technology startups are not there to deliver technology. Their purpose is to act as a financial vehicle which in recent years has been acting as a money siphon taking vast volumes of cash from US quantitative easing into the pockets of a few very wealthy tech investors. A tech startup’s focus is on the exit – either an IPO or acquisition by a more established firm – and in that world revenue and user growth is key, not profit. This is all happening in what is undoubtedly a bubble (any continually growing market that lots of people flatly refuse to say can ever collapse is just about certainly a bubble).

People finding ways to create money through assets whose intrinsic value is questionable is nothing new. It’s what makes the whole capitalist system go round, whether through the East India Company, Dutch Tulips, Dot Coms, or houses in the south of England.

But the worrying thing for our broader society is that the tech firms that are disrupted traditional businesses are doing so with a totally different set of rules. Uber is burning cash like it’s going out of fashion (I seem to remember a figure of US$2bn a year). Funded with that sort of money, I could take out any SME-dominated vaguely regulated business you choose to name. Give me the money and I’ll show you.

The question becomes what happens when the bubble bursts? What happens when Uber is all that remains but the money has dried up? What happens when all the taxis have gone?

Ultimately, for all the talk of platforms and ecosystems and future value, businesses that aren’t economic cannot run forever. It’s fine for as long as the true profit being sort is the difference between investment made to investment divested. But there remain significant questions about the damage wrought in the secondary markets where the startups have ploughed.

Oh so bleak, and for traditional businesses the problem is that if you see the emergence of a tech startup as a challenger, as an established venture with shareholders and corporate responsibility you cannot compete. You are playing tiddlywinks against a competitor playing kickboxing.

Longer term, there is hope. Another great book on my shelf at the moment is Kevin Kelly’s The Inevitable. The book outlines a number of trends that Kelly sees as (clue’s in the name) inevitable. The analysis is not of technologies, but of business and social trends. It’s solid stuff.

One of the many trends Kelly sees as important is the rise and rise of crowdfunding models that will break where, for want of a better term, Big Capital currently has a monopoly.

To play as an investor today you either need to go through the mechanisms of Big Capital (investment funds, banks, pensions and so on) or have significant Big Capital of your own. In a crowdfunding world, that monopoly is broken. Moreover, with Big Capital less involved, we can start to see a more balanced emergence of funding for businesses that are aiming to run at sustainable scale, rather than the “10x hockey stick unicorns” that seem to be demanded by investors today.

Such businesses will be just as much of a threat to traditional big corporations, and big corporations will almost certainly be unable to react effectively to them. But they will be businesses that will have a much more human rather than firework trajectory. And, it strikes me, they will be much more valuable things in the short as well as long term too.