reinventing the American capitalism one pyramid scheme at a time

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“Capitalism is the only engine credible enough to generate mass wealth. I think it’s imperfect, but we’re stuck with it. And thank God we have that in the toolbox. But if you don’t manage it in some way that incorporates all of society, if everybody’s not benefiting on some level and you don’t have a sense of shared purpose, national purpose, then it’s just a pyramid scheme.”

David Simon

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“It’s not personal. It’s strictly business”

The Godfather

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I do not get (understand) investing, VC evaluation and startup support in general. Ok. I get it, it just confuses me. And I say that having:

  • Been on both the good and the bad side of a VC takeover: buying out a profitable business seeing an opportunity to make it more profitable by running it better & buying out a business to break it apart to make money
  • Been in multiple startup incubators (B2B & consumer) and seen a wide range of technology to non-technology startup ideas (good and bad)

All that said. Don’t ask me to explain how startups get funding, how VCs evaluate & invest nor how some ‘successful’ startups continue to get money <although this piece, “What I wish someone had told me about Venture Capitalists‘, does a nice job>. No matter how many times I’ve been involved in the process or been asked to evaluate businesses I seem to be on the wrong side of the evaluation ‘brain.’ Why? Well. That has an easy answer. I like businesses that make money as in ‘profit’, not revenue, as my main criteria. Doesn’t mean I don’t care about revenue or the bullshit buzzword of the day, ‘scale’ (which is simply another bullshitty way of saying ‘growth’), but I like to stack profit dollars on top of profit dollars rather than cross my finger a business will cross the ‘making lots of unprofitable revenue’ Rubicon to the ‘hey, all this revenue is now profitable’ side.

** note: the exception would be what I call the ‘enabler idea products.’ These are the products which I usually call, in my non-startup pea like brain, the engine part ideas. They see the world as an engine and they develop parts which can replace existing parts or be inserted into the engine to make it run more efficiently or effectively – software ideas often fit this criteria.

 

What I will say is that the startup industry has become a master pyramid scheme in which the investors hope that one of the pyramid scheme bets pays for all the other bad bets. And you know what? Sometimes they do. And you know what? More often they do not. They have made capitalism a pyramid scheme. They encourage us to view business, all business and the economy, as one big gambler’s bet. And because they do they have reshaped the larger economy (forcing larger businesses to view innovation as a gambler’s bet too – if not their own business).

You may think I may be misguided or even wrong. But play a game. How many well known ‘successful’ technology startup like businesses are making a profit? Amazon? Nope. Uber? Nope. Wework? Nope. Shit. Go into the best startup incubators, maybe even audit Techstars (who I like and admire). How many are making a profit (but showcase revenue)? Zero (okay … not many). It’s a gambler’s game. American capitalism has become a pyramid scheme. Can big business benefit? Sure. They can look at the gamblers and then buy the winners and absorb them. It limits their innovation ROI risk, but costs them in the purchase.

** note: I would suggest that many larger businesses are actually more well positioned to develop these more successful ideas but they tend to either (a) have a poor new idea evaluation process or (b) do not approach ‘startup idea innovation’ in a way that enables the focus & investment needed to make it successful.

 

Companies like Techstar basically serves as the big business ‘brain’ that a small startup cannot afford.

Even the exceptions I highlighted, the enabler idea products’, are a gamblers game

Here is where this version of pyramid scheme has an even darker underbelly. Conflicting interests. This new model of capitalism is an attempt to get around inefficiencies and costs imposed by larger business but creates an ambiguous allocation of rights, and ownership as well as an ambiguous business model. Simplistically everyone is in to get their money (let’s call it at its worst: greed). Even if the founder/owner truly isn’t overcome with a greed muscle and simply is in it for the idea, there is a dilution of control (under the guise of ‘freedom to innovate that engages a market that doesn’t yet exist’). This is nuts. Fringe business malpractice, but, simplistically, nuts. As I have noted most of the most successful businesses, and profitable ones, aren’t particularly disruptive at their onset nor do they ‘think outside the box’, but rather see the box and reconfigure it. And they make money.

I call this lazy capitalism (when I am being generous) and pyramid scheme capitalism (when I am not being generous).

** note: this pyramid scheme has a variety of bloodsuckers. For example, I have sat in on or eavesdropped on dozens of business people looking to pick the pockets of founders – the social media structuralists, the PR scale people, the ‘organic growth’ disruptors, the brand builders, the startup marketing futurists – who slither their way into founder’s (investors) wallets.

 

Look. I am all for startups with appealing ideas and driven founders getting the expertise they need quickly and the funding necessary to give them some traction that they may otherwise would have no access to. But over 80% of startups fail because, uhm, there is no market for their idea. and, no, this isn’t because they see a future no one else can see (they are visionaries), but rather because THERE IS NO MARKET FOR THAT IDEA.

** note: I have never seen an angel investor or any investor sit in on those ‘pick pocket presentations’ I mentioned in my last note. If they did, they would not only hear how stupid (nonexistent possible success, i.e., ‘no real market for that idea’) some ideas they have invested in, but would also watch a pick pocket in action.

 

The flow of money into the startup world is absurd. I look at that money and can only dream about what it could do if invested elsewhere. But it will not stop. Why? Greed. That’s what pyramid schemes work in the first place. Greed. Easy money. All that bullshit.

There has to be a better way – and there is. Startups have a place in the world and investing in them in which dreams turn into viable businesses is actually good for capitalism. It’s a funded Schumpeter Creative Destruction and I love that. Family companies have, and should have, a new lease on life. Public companies SHOULD be challenged as they try and squeeze out more profits through their operations in a variety of misguided ways. Short term mentality, archaic hierarchies, status quo onerous non-digital business models should be gamed out. All that said. A pyramid scheme non profitable lazy capitalism startup investment model is not the way to do it. An insurgent economy should be a hybrid of smart idea, money making, startups and large public company smart non-standardization (I hesitate to call it agile so let’s say adaptable, antifragile) money-making longer-term business sense making.

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“A job is the ultimate pyramid scheme.”

Ken Poirot

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I believe we are seeing a shift in the underpinnings of the business world. I may not agree with all the “its about culture” people or the “purpose over profit” people, but I do believe, and have for quite some time, business is transitioning from an outcome only mentality to more of a “business is more than just business” mentality. I do believe technology is playing a role and while not in the ‘digital transformation’ camp I believe augmenting humans and thinking-conceptually-sensemaking is edging its way into the ‘way we do business.’ Someone said awhile back that business is learning that to ‘outbehave’ is the path to better performance. Within that idea is part technology and part people. Within that idea is where the startup world may find its most fruitful investments – ideas that outbehave created by a mindset that seeks to outbehave the status quo (ethically & service).

 

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Written by Bruce