WTF?

13 SUPERMONEY

WHAT IS SILICON VALLEY’S ROLE IN THE ECONOMY GONE awry? It is easy to blame the ability of technology to replace human labor for declining wages and increased wealth inequality. But technology is being used for cost reduction rather than to empower people and to reach for the stars not because that is what technology wants, but because it is what the legal and financial system we have built demands.

For all its talk of disruption, Silicon Valley too is often in thrall to that system. The ultimate fitness function for too many entrepreneurs is not the change they want to make in the world, but “the exit,” the sale or IPO that will make them and the venture capitalists who funded them a giant pile of money. It’s easy to point fingers at “Wall Street” without realizing our own complicity in the problem or in finding a way to bring it under control.

I had always made the unquestioned assumption that financial markets were simply one face of the overall market economy. It was Bill Janeway who first brought the distinction between financial markets and the real market of goods and services to my attention. In his book Doing Capitalism in the Innovation Economy, he wrote: “I have come to read [the history of the innovation economy] as driven by three sets of continuous, reciprocal, interdependent games played between the state, the market economy, and financial capitalism.”

What did Bill mean by calling financial capital out as a separate player equivalent in stature to government and the market economy? The more I thought about it, the more sense it made of my own experience. In my business, a private company started in 1983 with $500 in used furniture and office equipment as its starting capital, though now approaching $200 million in annual revenues, I’ve always lived in the real economy of goods and services. Originally a technical writing consulting company, we got paid when we found customers willing to hire us to write their manuals, and spent many an unpaid hour looking for new customers. Once we became a book publisher, we embodied our expertise into products, and sold them to customers who wanted to learn what we knew. We grew the business by developing more products, finding more customers, and hiring more people. Once we added conferences, we had to find people willing to pay us to attend or sponsor them. Debt, when we were able to use it, was generally secured by receivables and inventory, tying our growth directly to the underlying fundamentals of finding and serving new paying customers. Having to find people who will pay you for what you create clears out an awful lot of wishful thinking.

Over the years, it became clear to me that many of the companies in the technology industry we are part of were playing by very different rules. They were not getting paid by exchanging goods and services with customers, but by persuading investors to give them money. Perhaps customers would come along eventually, but as long as the company could find investors to finance their next round, perhaps all the way to an IPO or acquisition, a company could just have “users” instead of customers.

Early in my career, venture capitalists still funded entrepreneurs in the hope that they would build companies with real revenues and profits, but in the years leading up to the dot-com bust, it seemed that the game had changed. Entrepreneurs were not creating true companies but a kind of specialized financial instrument, a financial bet not that dissimilar to the CDOs that bedeviled the banking industry in the years leading up to the 2008 financial crisis a decade later. I see much of the same misdirection of entrepreneurial energy in today’s overheated Silicon Valley boom.

These companies, often sold for billions of dollars, are valued not based on some multiple of their sales, profits, or cash flows, but for expectations of what they might become, promoted like fake news in a market of attention. This effect is central to understanding the hypnotic allure of financialization.