Flash and substance in tech
If you are a tech worker, with a network of people in tech, you probably have to trudge through thousands of irritating humble brag posts on LinkedIn.
Incredibly honoured to be joining X tech company today as a manager of product to help scale the worlds access to checklist software. The team at X is full of incredibly smart people and I am humbled to be able to work along side them and bring my knowledge and expertise. Let’s go change the world guys!!
Tech companies tend to have a mindset that they are the next big thing. And tech employees tend to think they are all incredibly high performing super geniuses. You don’t have to stare at LinkedIn too long to see my point. I also know this because I am a tech worker and have had all these thoughts personally. The problem is this is often all flash and little substance.
Don’t get me wrong, I love tech. I like the fast paced environment and the mindset that anything is possible. But I think we could stand to gain from humbling ourselves a little.
Let me give you some real world examples to help paint the picture of what I am talking about.
The worker
Tech
Ryan joined Zoomphi, a cloud based minesweeper hosting company. He joined in the early days as a customer support worker and had 200,000 stock options offered to him at a strike price of $0.001. Today he is the VP of global partnerships, earning $300,000 a year and his 200,000 stock options are worth $15 million. Zoomphi is worth so much because the company is trading at a 400x revenue multiple due to their small user base growing 100% per year for the last three years. Investors are very happy with this growth and continue to agree to large financing rounds at very high valuations, as long as they are able to sell their shares within one year to the next fund. Ryan is asked to speak at conferences. He does so humbly (only posting about it on LinkedIn five times). Ryan gives a few inspiring quotes that if you work hard and always believe in yourself and others, that anything is possible. The crowd tears up a little bit, and heads to North Face right after the conference to buy a puffy vest just like the one Ryan was wearing despite the conference having a more formal dress code.
Non-tech
Then there is Herb. Herb works at the corporate office of Ratzlav Iron smelting Inc. Like Ryan, Herb studied business administration and communications at a mid tier school. Herb does not have any stock options. Instead, Herb makes 55K a year and usually gets a $100 Save on Foods gift card at Christmas. Herbs role is to oversee the businesses entire sales and marketing strategy since he is one of only six office staff. Herb has tripled Ratzlav Iron Smeling Inc’s. direct B2B sales revenue stream since he started. Ratzlav Iron Smelting Inc. isn’t quite as glamorous or well known in LinkedIn clout circles, but unlike Zoomphi, they actually make a profit every year. Herb was asked to speak at his parents 35th wedding anniversary, but has yet to be invited to be a keynote speaker at any business conferences.
The company
Tech
Since Zoomphi continues to attract large scale investment from venture funds, they have excellent cash reserves and have ballooned up to an employee count of 13,000. Many governments have contacted Zoomphi and asked that they set up headquarters in their jurisdiction. In return, they will offer reduced corporate tax rates, reduced property tax, and provide relief on other bloated government revenue schemes.
Zoomphi’s senior leadership is invited to private investor conferences and has a seat at the table at various economic forums. The recognition from having their name all over these private and highly exclusive meetups bolsters their brand and attracts more media and investor attention. Zoomphi decides to capitalize on all this attention and IPO’s. The IPO values Zoomphi at $11 billion. Though revenue was only $600K last year, it has doubled every year for the last four years which is very impressive in the eyes of investors. Zoomphi’s slide deck highlighting their market opportunity and projections is also very sleek and showed how they will be competing with FAANG in no time.
The companies CEO, Zed, is a major influencer on Twitter, and his public comments have at times had the power to move stock prices of major companies. Zed owns 33% of Zoomphi, which makes his net worth somewhere around 3.6 billion dollars. Pretty good considering he was living in his parents basement, studying communist theory, and delivering pizza just six years ago.
Non-tech
Ratzlav Iron Smelting Inc. on the other hand, just received notice from their local municipality that their property was assessed at 50% higher value then the year prior, meaning their property tax is going up. Not to mention the city decided to increase the overall property tax rate. This tax increase cost RIS about 1% of their operating margin. As a result, RIS will need to accept less profit every year, cut costs by removing some staff or freezing salary increases, or raise their prices in a very price sensitive industry. Other legislation was just passed down from the federal government requiring companies to give their employees seven additional paid days off a year to be designated as psychological strengthening and meditation days. The government, which is up for re-election, saw a cool Ted talk on the power of meditation which inspired this law. Placing this perk on their election platform has really boosted their polling numbers within the eighteen year old political science major demographic. This is another blow to RIS’s margin, forcing further difficult decisions about how to remain profitable enough to make the business risk they undergo every year worth it. RIS petitioned their local politician, but never got an email back.
Further pressure due to inflation and supply chain issues has forced costs of goods like metal upwards and put further pressure on margins. As a company, their revenue has been growing at about 20% year over year. Profits have stayed relatively flat however due to rising costs of labor, goods, and tax. They have had an enormously difficult time finding and retaining talent. This is because despite paying above industry wages to their production workers, those workers are migrating to unskilled sales positions making cold calls at tech companies where they earn double the money and get to play ping pong and drink freshly squeezed fruit juice at lunch. This is of course on the backs of investors as Zoomphi doesn’t earn enough to truly pay its employees that much. Zoomphi happens to be burning $10 million a month at present.
RIS CEO, Samantha, comes from a line of blacksmiths dating back to the medieval ages. She owns a 3 bedroom home in a small town, drives a 2005 Honda civic, coaches kids soccer, and was recently diagnosed with tennis elbow. She loves being a business owner, but is struggling to want to continue running her company and employing her 33 staff, as it is taking an increased toll on her health due to stress.
The fate of the companies
Tech
Speculation that the worlds lithium reserves were actually 7% smaller than we thought, caused the global tech market to go into a massive panic based sell off. Zoomphi’s enterprise value dropped from $11 billion to $4.8 million within the span of a week due to a market wide reduction in tech multiples. Suddenly Zoomphi had to put its plans to take minesweeper to the meta-versa on hold, and it instead laid off 12,985 staff. Zoomphi’s most recent investor was furious and called Zed in a blistering rage, yelling that they had been misled. Zed’s CFO had presented a revenue projection to the investors that showed accelerated revenue growth of 300% per year. The revenue projection was so aggressive because their recent ad campaign at the Superbowl had resulted in a 300% spike in new users. Plus, the pandemic had caused the amount of people playing minesweeper to increase greatly.
As a result of the growth projections, the company was projected to hit over $600 million in revenue in the next 5 years. Very impressive. Due to the news about lithium mines however, the CEO revised down their revenue growth rates modestly. Revenue was now expected to be about $711,000 after five years. Zoomphi’s most recent investor had lost basically all of their $350 million investment in Zoomphi. Unfortunately, the investor happened to be a US based AAA rated, low risk pension fund specifically tailored to people expecting to retire in the next year.
Non-tech
Ratzlav Iron Smelting Inc. continued to see modest revenue growth, but profits were flatlining. Samantha was in her early sixties and starting to get tired . She loved the business, but was questioning the value in continuing to work hard for the business if profits are stagnating. The cost of running the business was creeping up faster than revenue growth, so the parity between risk and reward continued to grow further apart. Competition for staffing was also an enormous pressure and it was nearly impossible to keep staff for the mid to long term. This meant Samantha had to constantly focus on re-training and hiring, when her true passion was forging medieval weaponry.
Samantha made the difficult decision to sell the business to a private equity company who intended to liquidate the building and assets. The company paid her $125,000 for the assets and goodwill of the company, which she used to pay off her blackjack debts.
Real life Zoomphi’s
Fast
The Zoomphi story may sound hyperbolic, but it isn’t that much of a stretch. I think Fast may be a crazier story than Zoomphi. Fast was raising money at almost unicorn level valuations in 2020 when all the tech multiples were going crazy. Their annual revenue during these valuations was $600,000. (Sounds a lot like Zoomphi to me). They were burning $10 million a month. Fast recently announced they were laying off half their staff, and then a day or two later, announced they are shutting down. They had a big name like Stripe agree to finance them, had some fast user growth, and that was apparently enough to rocket their valuation. And since their valuation was so high, they of course needed to spend like crazy to capture market share from competitors. So they spent millions hiring up to almost 400 employees, bought high end swag for everyone, and even hired the chainsmokers for $1 million as a celebrity endorsement at a retail conference.
Let’s talk about Fast’s CEO for a moment, Domm. This guy is a liability at best, but I think a more accurate description is a con artist. Here is how his story is said to go. He purchased a domain name for $20 called Qant.as. He pressured an airline called Qantas to buy it, and even redirected the domain name to a competitor. He ended up selling it to an undisclosed company for $1.3M. (The undisclosed company was almost certainly the airline he was pressuring). Now he has some nice capital for a new venture.
So he starts a on-demand tow truck company that is supposed to be the Uber of tow trucking. Well that goes terribly. The vehicles his tow truck contractors picked up were often worthless, and the owners of the cars didn’t even pick them up. That left tow truck companies footing the bill. They were obviously really angry with Domm. Domm ended up in a $15M court battle with the government of Australia. Domm graciously offered to sell his users private information they gave him as part of his platform on the black market with the quote:
A driver’s license detail on the black market is worth $80, and we’re talking tens of thousands of these types of records,
The government shut that down right away. But Domm still owed over 100K to all the tow truck companies who were picking up cars that were flagged on his platform. So Domm did the classy thing again and fled from Australia to the US.
Now he has a fun new idea for a company that offers one-click payment solutions. This is a saturated market because Amazon’s one-click checkout patent expired, so many other companies were jumping on this gravy train. Domm hires a bunch of Nigerian developers for below even the Nigerian market rate. He had them build the initial infrastructure for the company that he could use to pitch to investors, and then fires and ghosts them all and takes credit for building the product himself.
Domm described Fast to investors as an incredibly high potential company sitting in a trillion dollar market. Under Domm, Fast ramped up spending to insane levels, burning over $160 million while generating only a few hundred thousand in revenue. This was all funded by outside investors of course. So Domm would have exited his failed startup called Fast with his presumably large salary and the proceeds from whatever options he had and exercised when they were at their peak valuation. Domm likely has more than enough money to start his next big money vacuum.
Domm has positioned the failure of Fast as simply another startup failure, and he takes full responsibility. This is not just another start up failure though. This is a company that was led straight to hell by someone with a giant ego, who only cares about money and himself. I’d like to see Domm take responsibility for that. Scroll his Twitter before his company went under in April 2022 if you want a taste of this guys ego. Unfortunately I get the sense that he is not leaving this venture overly scarred, and will have the resources to spin up his next scam of a venture.
Domm shouldn’t be running companies. He is all flash. And flash costs a lot of money.
Thinkific
The all flash and little substance problem doesn’t just happen to high bravado Silicon Valley companies either. A mild-mannered and always polite Canadian tech company headquartered in Vancouver called Thinkific also IPO’d during the hype of 2020/2021. They IPO’d at a billion dollar valuation in April 2021. Their revenue in Q1 2021 was $8M. So a run rate of $32 million revenue a year. This means the market said that they think the $32 million dollars they deliver in a year in revenue, and the few million they lose every year after expenses, computes to being worth $1 billion at the time of IPO.
I watched this one closely as several colleagues of mine from prior companies worked there. There was a lot of linkedIn posts around IPO day of how proud everyone was of Thinkific and how amazing it is to be on the rocket ship.
“And we are hiring of course, so reach out if you want to join a hyper growth company.”
They are going to be huge! It’s obviously exciting to IPO. It’s a really cool milestone and I am not trying to pick on them or take away from that moment. I wonder if anyone within the company questioned what was under the hood? Was it really worth $1 billion dollars?
Thinkific was growing fast. But many tech companies were seeing massive tailwinds from the pandemic. Everything shifted online. It’s like the example I gave with Zoomphi. Just because their user base spiked from a Superbowl marketing campaign, doesn’t mean it’s wise to apply surging growth rates in users forward to support a crazy valuation. The “Covid cohort” as we call it was the 2020 equivalent to a Superbowl ad. It was a big spike in subscribers/users in many tech companies at the beginning of the pandemic due to the lockdowns. But now that the world has opened up again, the covid cohort has churned at much higher rates than regular subscribers. This snap back to reality has been harsh for many companies. Even Wall St. darlings like Shopify were punished heavily. Look at their stock price correction at the beginning of 2022.
Similarly, Thinkific’s stock has been hammered since IPO. They started at $13.50 and spiked up bit right after IPO. But since then, it has sharply declined and bottomed out under $3. They recently announced they are laying off 100 staff (20% of their workforce). I think IPO’ing during the hype was a shrewd business decision for them because they took advantage of the market and got a lot more cash at a much better valuation then they would have otherwise. But even if it was a good move for Thinkific, someone lost their shirt on this transaction. Value wasn’t created. The $1 billion dollar market cap at IPO last year is $463 million today. So $550 million is simply gone, and someone had to pay the bill.
Peloton
With examples like Fast or Thinkific, I am benefitting after the fact from market signals like their stock price to back up my claim they had too much flash and too little substance. So I’m not particularly smart for pointing out that something obviously went wrong after seeing their stock prices tank.
Peloton however is an example of a company that I was talking about two years ago, and not talking about favourably. There is money to be made in fitness fads. Bowflex was super cool for a while there. But seriously, do we have to pretend that Peloton is going to revolutionize the fitness industry because they put a little TV on ridiculously expensive bikes? I have the same opinion about fitness mirrors and other equipment that companies like Lululemon or Tonal are putting out.
I’m really disappointed with us as humans. A company like Peloton can put Usain Bolt or some other celebrity on their advertisements, and we are soft brained enough to let that influence us into buying their extremely overpriced products? Reminder – their extremely overpriced products also require an ongoing subscription to be used as intended. Also, Usain Bolt was famous before Peloton was cool, so he is literally just a tool to manipulate you into buying their product. Peloton did not contribute in any way to Usain Bolts success in running. He probably ran on the ground like the rest of us. Not on a $4,000 treadmill while being yelled at by a J. Crew model.
Is it the dream of every tech company that we spend 100% of our time in our homes and never see a human in real life again? We wear our Oculus goggles and spend eight hours a day in the meta-verse. Then we make dinner and get ready for our virtual workout. Then we watch Netflix the rest of the night and finally go to sleep in our smart beds.
There is a few things I wish I could say to these fitness companies.
First. Could it be any more obvious that you intend to mine and monetize every possible piece of data you can from us? Why are we so obsessed with smart tech anyway? It’s so gimmicky. When I lift a weight, I don’t need dynamic inertia reduction from Tonal’s patented digital weight system. I just need to be able to lift the weight up and down.
Second. Even though your models are obviously super ripped and cool looking, when I am at home, I like wearing sweat pants and sitting on the couch. I don’t enjoy dressing up in $600 worth of Lululemon gear and a sweatband and getting extremely sweaty all by myself.
Third. The fact that you can immobilize my crazy expensive equipment because I didn’t run a software update or pay a subscription should be considered a war crime.
I’m getting off track with my angry rants about these fitness companies. I don’t need to say much more about Peloton. Their stock price tanked. They laid off 2,800 people. Now the stock price is super low and people are suggesting you buy. Hey, buy the stock if you want. It might be a good speculative investment. There are plenty of people in the world with plenty of money to waste.
Of course all these stories were hand selected by me to prove my point that tech companies and people can be really flashy, but have little substance. But it’s not true across the board. And I believe Thinkific specifically can be/is a good company. They just got caught up in the typical hype cycles and have paid the price. There are lots of great companies out there that are focused on fundamentals and don’t overextend themselves based on speculation and hype. These companies more closely follow the 20-mile march as Jim Collins would call it which is basically just business speak for saying “slow and steady wins the race”. The company I work for currently, Automattic, is a 20-mile march company in many ways, and I have a lot of completely unbiased respect for their approach to growth.
Real life RIS.
My made up examples with RIS actually mirror a lot of the frustrations and challenges my parents are facing right now in running their small manufacturing business that employs about 30 staff.
The part about governments begging for tech companies to headquarter in their jurisdiction is not made up either. British Columbia was trying really hard to get Amazon to set up their major second headquarters in the province and their pitch boasted stats such a really low salary for software developers compared to other places to entice them. Of course, on the other side of the coin, British Columbia talks up its blossoming tech industry and mentions the high quality jobs and pay. Classic two-faced politicians.
What was the motivation for this long winded post?
My tone probably made it sound like I was jealous of those posting on LinkedIn that they get to speak at a conferences. That isn’t my motivation for writing this. I just enjoy being sarcastic and overly critical. I’m trying to tone that impulse down a little. Baby steps.
The real reason this is all coming up is I have been considering getting a career coach. In the process of signing up, I have been thinking about my career and skill development. The big questions I am asking my self in this process are: Am I getting complacent? Have I stopped pushing? Do I feel like I am successful because I work for a great company? Am I riding the coattails of a companies success and just tacking on their wins to myself personally, as if I am something special? Do I have much to offer if I were forced into other industries? Am I valuable because I happen to work for a successful and fast growing company? Are others more valuable then me because they work for even faster growing or even bigger companies? What does value even mean? How is value measured? If large scale disruption and automation were to wipe out most jobs, what would I be able to do? Work is such a big portion of my time and life, would I face an existential crisis if it were stripped away?
With all these questions on my mind, the act of scrolling LinkedIn and seeing lots of self-aggrandizing company press releases and employee LinkedIn posts is what sparked my desire to write this.
To summarize, here is what I would want to say, and want to come back to as a reminder for myself.
The only possible outcome of pride is being humbled. If we have elevated ourselves to the very top, the only direction we can go is down. We’re not helping ourselves by deluding ourselves. In fact, the mindset typically results in settling and not continuing to round out our skills and character.
I’m about to delude myself by speaking to companies and fellow tech workers in the following paragraphs as if anyone actually reads this site that I don’t promote in any way. Ironic.
Companies. Let’s focus on building fundamentally good businesses. There is a time and place to be unprofitable as you invest and try to build something great. But let’s not over-extend ourselves based on FOMO, or market speculation, or one-time positive growth signals.
Fellow tech workers. Though we are individually unique and valuable, theres thousands of people who can do exactly what we are doing. And the rest of the human population who doesn’t have experience with what we do can learn it, really fast. Let’s try to stay grounded and remember there was a time before we knew everything. And news flash, in the grand scheme of things, most of us know very little.