dot .communism
I have been developing a theory of the current economic downturn as it relates to non-internet companies.
.communism is my term for the phenomena of centralized institutional control and distribution of the money resources needed for startups by venture capitalists. Like communism, this made it possible for a while for companies to operate without putting in sufficient exchange for the money they were recieving, and also like communism, it tended to collapse upon itself over time
.communism is a philosphy of operating in the red.
The in-vogue comment about busineses created and operated under this regime is that they “had no business plan.” But this belies the truth.
For any tech companies that have been swept away or failed to close their necessary rounds of financing in the last year (including a number of P2P companies that made it to O’Reilly P2P SF but not to DC), the reasons seem obvious: they did not have a business plan that made them self sufficient within the first year.
Note that this does not mean they didn’t have a business plan; many companies were pursuing TRIED AND TRUE internet business plans, such as:
- field of dreams business plan (build it and they will come)
- big bag of users business plan (acquire market share and get acquired by a media company
- mindshare business plan (be the first, not even the best, to a market, get acquired or IPO)
- research lab business plan (build cool tech with no particular business plan, get acquired)
- verticalportal business plan (insert vertical into portal, get acquired or IPO)
There’s a bit of overlap on this list, but the point is, getting acquired was a respectable exit for tech-oriented or consumer-centric plays, and IPO was also an available exit for the more business-oriented plays with a good MBA team on board.
Any sensible venture capitalist in the computer industry would have been foolish to not to pursue the ‘new economy’ rules in 1997, 1998, 1999. My own experiences with venture capitalists showed that in 1999, they were still talking about “IPO in 18 months.” Having run a company on angel and cash investment for 3 years prior to this, the concept of doing a public offering on a brand new business seemed absurd. Hiring people and spending the money as fast as possible to expand as fast as possible… This story has been told before.
But this was not an unreasonable phenomenon. It was simply a game, and a new way to play the game had been pioneered, and our VC was simply trying to get us to play.
During the Internet boom, I often remarked how much space technology would have advanced if it had been as heavily financed recently as the Internet was. Areas of intense attention and funding advance very quickly. For a while, all the research for the Internet was being done in industry instead of acadamia, helmed by college dropouts and/or MBA’s instead of professors. This increased the heterogeneity of the exploration and resulted in prolific and unprecidented growth
But what effect did this have on non Internet or tech sector companies? How could this affect power companies, airlines, or small businesses?
Believe it or not, not all venture capital funding goes to technology companies. Some goes to good, old fashioned enterprises like supermarkets or utilities. And those companies began to envy what was happening over in the Internet hemisphere.
Here’s my theory: Several years of .communism took its toll on seasoned capitalists in the venture world for other industries. The stable Yahoos, Ciscos, and Amazons were making fools of these companies. AOL’s acquision proved that monopoly money could be exchanged for dollars. And the philosophies of pull out all the stops gain mindshare at all cost the first one there wins (and charge it on your VC credit card) became so demonstrably successful that they began to creep into the thinking of offline enterprises.
Although .communism may not have created a direct financial impact on non-e-companies that were totally disrelated to the internet, it’s infectuous philosophical stance on finance certainly altered the thinking of businesspeople industry- and world-wide.
As a result, other industries began operating on similar principles:
- expand as fast as possible
- create value through market share, not sales
- ‘mindshare’ or brand identity as a substitute for stable income
- high risk = high reward
etc.
(I suppose a more accurate equation would be: high risk
.communism also had it’s censorial dark side. Just like in Animal Farm when the rules seem to change over time, .communism endorsed a Stalinistic approach to marketing and finance alike. Fallen founders and under-credentialed staffers could vanish from the photo-retouched company bio page, and erased from company history. Name changes and new business models could effectivly bury old mistakes with new marketing propaganda. And darkest of all, each new regime could practically rewrite the capitalization table by simply closing a new round. “The new investors understand that we have to incentivize the people who are still here…
note on business theories:
There is an interesting phenomenon that goes on with business theories. Not to belittle something by calling it a “management fad”, it is nonetheless true that certain “one size fits all” management techniques are taught and applied in the world.
Here’s an example: a developer I know said (precociously) that MBA’s, in his opinion, “just cut a company in half and prepare it for an acquisition”. I found this statement rather astute; it is certainly a sensible pattern to come into a company, cut all the dead weight, focus on ‘low hanging fruit’ business opportunities, and steer the company to success.
Note that you could create several scenarios for which this somewhat cookie-cutter strategy would not work: companies that needed ALL their on-board talent to create a product would not survive after 50% layoffs. Companies with no dead weight would be arbitrarily throwing away value (human capital, acquisition cost of new developers, etc.)… the point is, one size does NOT always fit all. Certainly, it’s a good strategy, just not always applicible.
Sometimes it is correct to ‘pull out all the stops’ and expand as fast as possible. Sometimes it is correct to slowly and stably grow an enterpise. And it always depends on a combination of market conditions, the condition of the enterprise, and the financial patterns that are in operation at that time
So, in summary, my theory is that the financial philosophies of .communism, well documented in magazines such as Business 2.0 (alpha; guess we had to roll back), and financial leftist rags like the Red Herring, found sympathizers in offline markets and businesses. Certainly, I have heard election years, cyclical economic patterns, Republican presidents, etc, etc. presented as more sophisticated ways of explaining the financial downturn. Yet I think it was just manic financial optimism and balance sheet bullshit (a logical extension of capitalization table “creativity”) that has seeped over from the .communes to red scare our economy.
I was reminded of this when I recently was in Germany giving a keynote for a business-oriented P2P symposium. A student peer of mine, the chair of the conference, hearing me describe my six-year-old company, asked “so, your what happened to your IPO?”
I had not even heard this kind of talk for years, but then I remembered that I have observed that the cultural lag in Europe makes it take a while to adopt crazy American trends like “profitless companies”.
The new fad is back to good old, capitalistic, profits-or-else. And now we go back to ’stifling innovation’, ‘preventing new risky ideas’, etc.
Perhaps .communism it is a threat to our way of life, but the space race mentality it fostered and the “market gap” we sought to defeat made it an exciting time.
Have I hyperextended my metaphor?
