March 12, 2017
Why Products Don't Matter To Tech Investors, But Hype Does
They say 'you get what you measure', and in the world of tech start-ups this is especially true.
Having lived and worked through several tech bubbles, I've seen how the promise of winning mind-bogglingly big ("boggly"?) has totally skewed business models beyond the point where many tech start-ups are even recognisable as businesses.
The old notion of a business - where the aim is to make more money than you spend - seems hopelessly old-fashioned now. Get with it Granddad! It's not about profit any more, it's about share prices and exit strategies.
If your tech start-up looks valuable, then it's valuable. It matters not a jot that you might be losing money hand-over-fist. As long as investors believe it's worth a gazillion dollars, then it's worth a gazillion dollars.
For those of us who create the technologies that these start-ups are built on, this translates into a very distorted idea of what constitutes a 'successful product'. I have, alas, heard many founders state quite openly that it doesn't much matter if the technology really works, or if the underlying code has any long-term future, What matters is that, when it comes time to sell, someone buys it.
Ethically, this is very problematic. It's like a property developer saying 'it doesn't matter if the house is still standing 10 years from now, just as long as it's standing when someone buys it'.
Incredibly, very few tech start-up investors do any technical due diligence at all. Again, I suspect this is because you get what you measure. They're not buying it because it works, or because the technology has a future. They're buying it so that they, too, can sell it on for an inflated price. It could be a brick with "tech" painted on it, and - as long as the valuation keeps going up - they'll buy it.
You see, investors want returns. And that's pretty much all they want. They want returns from tech businesses. They don't care if the tech works, or if the business is viable in the long term. Just like they want returns from luxury waterside apartments that no ordinary person could afford to live in. They don't care if nobody lives in them, just as long as they keep going up in value.
Just like the property bubble, the tech bubble runs chiefly on hype. A £1,000,000 2-bed apartment is worth £1,000,000 because an estate agent or someone in a glossy colour supplement said so. An expectation of value is set. Similarly, Facebook is worth twelvety gazillions because the financial papers say it is. That is the expectation for tech start-ups. They can be valued at billions of dollars with a turnover of peanuts by comparison.
What makes tech businesses worth so much is their potential for expansion. Expanding your chain of coffeeshops requires you to overcome real physical barriers like finding premises and staff and buying more coffee machines and so on. Cost-wise, for a software business, there's not a huge difference in outlay between 1,000 users and 1,000,000 users. If only Costa could host their shops on the cloud!
Tech start-ups are just lottery tickets, where the jackpot can be truly astronomical. And what matters most in this equation is that the technology sounds good.
Exhibit A: the recent Articificial Intelligence bubble. News journalists have latched on to this idea - carefully crafted and lovingly packaged by tech industry PR - that real AI, the kind we saw in the movies, is just around the corner. What, again?
The true promise of AI has been 30 years away for the last 50 years. In reality, chatbot sales support sucks, websites designed by AI are crummy, and recommendations made by ad taregting engines are as asanine as they always were ("we see you bought a lawnmower; would you like to buy another lawnmower?") And as for self-driving cars...
But it doesn't matter that AI isn't as far advanced as they'd have us believe, just as long as we do believe it - for long enough to dip our hands in our pockets and buy some shares in the companies hyping it. And we'll do it, because there's a good chance those shares will go up in value and we'll be able to sell them for a profit. This is why few people are willing to say that the Emperor has no clothes. Too many own shares in the company that manufactured those clothes.
As a software developer, though, I struggle to find job satisfaction or to find any professional pride in making invisible clothes for silly Emperors. Yes, there are those of us - sadly, too plentiful - who'll apparently do anything as long as the money's right. But I'd like to think that's a different profession to the one I'm in.
Posted 1 year, 6 months ago on March 12, 2017