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Wednesday, September 21, 2016

The Emperor's New Clothes

A few weeks ago Nick Bilton of Vanity Fair wrote an article on one of my favorite companies, Theranos. "How Elizabeth Holmes' House of Cards Came Tumbling Down" is a fascinating piece, not because of any particular revelations but because it highlights so well the mentality and attitude among certain Founder/CEOs, that they simply don't play by the same rules as you or I, that the narrative of a company is far more important than the reality, and that this behaviour is both enabled and rewarded by VC and tech media.

There are a few points in the story regarding Holmes and Theranos I'll come back to in future posts, however one section in particular hit home for me. This one section of the article reminded me why I'm not a journalist, as in just over a paragraph, Bilton summarises everything about the Venture Capital/Tech Media/Startup ecosystem I've been trying to highlight in this blog, and does so in a way that almost anyone can understand:

While Silicon Valley is responsible for some truly astounding companies, its business dealings can also replicate one big confidence game in which entrepreneurs, venture capitalists, and the tech media pretend to vet one another while, in reality, functioning as cogs in a machine that is designed to not question anything—and buoy one another all along the way.

It generally works like this: the venture capitalists (who are mostly white men) don’t really know what they’re doing with any certainty—it’s impossible, after all, to truly predict the next big thing—so they bet a little bit on every company that they can with the hope that one of them hits it big. The entrepreneurs (also mostly white men) often work on a lot of meaningless stuff, like using code to deliver frozen yogurt more expeditiously or apps that let you say “Yo!” (and only “Yo!”) to your friends. The entrepreneurs generally glorify their efforts by saying that their innovation could change the world, which tends to appease the venture capitalists, because they can also pretend they’re not there only to make money. And this also helps seduce the tech press (also largely comprised of white men), which is often ready to play a game of access in exchange for a few more page views of their story about the company that is trying to change the world by getting frozen yogurt to customers more expeditiously. The financial rewards speak for themselves. Silicon Valley, which is 50 square miles, has created more wealth than any place in human history. In the end, it isn’t in anyone’s interest to call bullshit.

The only thing I'll disagree with is the last sentence - it is in almost everyone's interest to call bullshit, just not those currently profiting from the system. The misallocation of society's resources, both in straight cash invested and the working efforts of thousands of the smartest and most talented people on the planet, harms us all. These events have impact beyond just the company and the investors - imagine during Theranos' positive publicity peak in 2015 a scientist promoting their genuinely amazing blood testing technology to VCs, that truly does everything they claim, yet does not meet the fantasy specs touted by Theranos. How well do you think they fared in the fundraising? Exactly. What life enhancing technologies may we have lost because investors demand founders willing to be flexible with the truth?

In the past, I've sat inside a company watching the CEO engage in a war of fantasy performance stats and delivery dates with a competing vaporware company, using the tech press to launch salvos of ever increasing capabilities. When the enemy returned fire with a further 'improved' product, there was panic at the top and demands made to engineering that our product get better or timelines be shortened - statements from those trying to be rational, such as "No. Their numbers are just as made up as ours.", garnered a mix of confused and annoyed looks.

Neither company has, to my knowledge, released a product since then and in part this is connected to these inflated performance promises. It may have been possible to produce a more modest and realistic package that engineering originally wanted to do, but demands for "Perfect. Now." tend to wreck the ability to build anything of quality.

Many people have no problem dealing with bullshit in their working lives, and in fact for many in the legal, marketing, and sales side of business it's an intrinsic part of their day (apologies to the ethical ones among those groups!). Some drink the Kool-Aid and believe, some know the reality but the paycheque keeps coming in and it's not too important anyway. With engineers though, it's different. Our ability to perform and deliver in large part depends on our ability to spot falsehoods and mistakes, the desire for things being 'correct', and our inability to lie to ourselves about the reality of the situation (at least as far as the technical is concerned).

I rarely see engineers quit over pay (except when large inequities are made very clear), but I do see them quit over death march projects or managerial destruction of a long term and rational approach to delivering a product. If they don't quit it's common to see engineers continue on despite the conditions, desperately trying to save the product in the mistaken belief that either they have some form of personal responsibility beyond their employment contract, or that they will ultimately be rewarded for their perseverance when finally things are done. To their own detriment, this can result in significant personal health issues due to the stress, depression that can take them years to recover from, or even in the case of Ian Gibbons, the Chief Scientist for Theranos, can tragically end in suicide. Investors and tech press laud the dedication founders have to their company, to the perseverance, but forget the sacrifices made by those who don't have a 50% ownership in the profits.

In reading this piece by Nick Bilton I realised that the internal divisions I have experienced in companies are often between those who believe or profit from the bullshit, and those who either cannot or will not. It's the common "C-suite vs Engineering" - and in almost every case the former 'win', at least until the point it all comes crashing down. Why? Because making today look better, even at the long term expense of a worse tomorrow, is most profitable for those at the top. This shows up whether it's salesmen pulling forward orders from future years, CEOs cutting R&D for future products to make the bottom line better, or founders and investors "putting the most positive spin on things" (to be polite) in order to sell on to a greater fool.

It looks like the federal government may be cracking down on abuses that have been growing over the last few years, and Theranos seems likely to be the precedent. In my opinion we'll be seeing a rash of prosecutions of startups by the SEC, FCC, FDA, and other regulatory agencies over the next few years, and some very large investments will become worthless. They'll put it off as long as possible, but once it starts to hit the pockets of the large investors, suddenly we'll hear that it is in the interest of everyone to call bullshit. Here's hoping that comes sooner than later.

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