The worrying tale of how my business made $515m more than Snapchat last year
First published in City AM on 14th February 2017
The marketing and media agency I co-founded likely made at least $1bn more profit than Uber last year. We also made $515m more than Snapchat and $450m more than Twitter.
This isn’t because we did anything particularly remarkable. We just stuck to the basic business principle that it’s better to make money than lose it. Yet these tech “unicorns” are lauded as success stories despite the fact they’re yet to make a single penny in profit. In fact they’re a long way from it.
We find ourselves in a strange position where some of the most recognised companies in the world are built on foundations of sand, packed only with venture capital and investor funds. Subsequently, a number of founders are creating companies predicated on securing the next round of funding rather than creating a viable business model that the market will reward.
It’s hard to pinpoint exactly how we’ve come to this, but the answer could be more rooted in culture than economics. The profile of today’s businessperson is starkly different from that of yesteryear. The fast-talking, street-walking hustlers have been replaced by well-educated and smart-as-hell tech nerds who could tell you the square root of a banana, but wouldn’t have a clue how to sell you one.
In other words, today’s businesspeople are the kind who can write the theory behind how a business might succeed, but putting the theory into practice is a different story. Yet the phenomenal success of the likes of Mark Zuckerberg at Facebook and Larry Page at Google have led to investors scrambling to give any kid in a hoodie a pot of cash to turn their idea into the next big thing.
On the flip side, the VC world has been infiltrated by big finance types that treat their investment portfolio as a simple financial arbitrage, rather than considering the complex factors that lead to a business becoming a long-term success.
The over-reliance on data in the corporate world can often mean that the only metric that matters (profit!) is overlooked. Worryingly, we’re starting to see market conditions mirror those of the late 90s and early 00s; the lavish years of the dot-com bubble. Just as it was 20 years ago, the excitable venture capital community favours intangible metrics such as potential and speculation over the ability to actually make money.
In an environment where capital is so fluid, entrepreneurs receive million-pound VC investments, and instead of spending that capital on staff, infrastructure and R&D, they blow the investment on plush central London offices, thousand-pound coffee machines and designer bean bags, all before their business has even had a sniff of profit.
All of these factors have led us to the verge of a startup Armageddon. The entrepreneurial mind-set that prioritises investment over sales cannot last and will eventually catch up with us. We, as a society, have built a narrative that being an entrepreneur is “cool” and have ignored the fact that hard work and talent make the difference between success and failure. The cold reality is that it’s much easier to become a rapper than it is to create the next Facebook or Apple.
There’s no getting away from it. Business is binary; you either make money, or you don’t.