BUT AT LEAST THERE IS AN APOLOGY

It has been a bloodbath in technology recently, with massive unprecedented layoffs in the crème de la crème of tech, often abbreviated as MAANG (Meta-Amazon-Apple-Netflix-Google) as well as some of the hottest startups in Silicon Valley (how do you know someone works in a “crème de la crème” company? They write ex-<name of company> after they no longer work for it). While most of the engineers with strong technological foundations, laid off from these companies will firmly land on their feet, being highly qualified individuals in most cases with stellar resumes, those on an H1B immigrant visa are on a very short fuse in terms of the number of days they can stay in the USA and look for a job. This means they might have to leave the country, incur financial losses and stress to themselves and family, or settle for a job that is not what they would have liked to do.

Life, I have always said, rewards you not for your abilities or hard work but for the risk you take. But here the problem was that many of the engineers were not even aware of the danger they were in, after all, what could be more desirable or “safe” than a job offer from Amazon or Google, it’s like working for the Indian Railways but many times the salary, look at the stock prices, look at the prestige, look at the hype, let’s go and buy a house based on the insane value of the stock I will receive.

But why were they in danger? According to the CEOs, they “grew” too fast, and Jack, the virtue signaller supreme of Twitter and the richest man with a dude-goatee, cried himself a river apologizing for growing Twitter too fast.

I own the responsibility for why everyone is in this situation: I grew the company size too quickly. I apologize for that.

The CEO of hot-startup Stripe and wannabe Jack, after slashing 14% of their workforce, wrote a long mea-culpa to his departing employees, in another display of virtue signaling for social media, and these were his words:

In making these changes, you might reasonably wonder whether Stripe’s leadership made some errors of judgment. We’d go further than that. In our view, we made two very consequential mistakes, and we want to highlight them here since they’re important:

  • We were much too optimistic about the internet economy’s near-term growth in 2022 and 2023 and underestimated both the likelihood and impact of a broader slowdown.
  • We grew operating costs too quickly. Buoyed by the success we’re seeing in some of our new product areas, we allowed coordination costs to grow and operational inefficiencies to seep in.

Here is our man Zuck, the world’s most socially awkward man, creating the world’s biggest social media company, putting his own “mumble-mumble” spin on things.

At the start of Covid, the world rapidly moved online and the surge of e-commerce led to outsized revenue growth. Many people predicted this would be a permanent acceleration that would continue even after the pandemic ended. I did too, so I made the decision to significantly increase our investments. Unfortunately, this did not play out the way I expected. Not only has online commerce returned to prior trends, but the macroeconomic downturn, increased competition, and ads signal loss have caused our revenue to be much lower than I’d expected. I got this wrong, and I take responsibility for that.

So you have two options. Either you believe that some of the world’s smartest people, backed up by other very smart people backed by some of the best financial science money can buy, all made the exact same mistake at the exact same time, of growing too fast during Covid, in the way middle aged men find their waistlines, OR you suspect that maybe, just maybe, there is something else going on.

In order to understand the real game, let’s take a step back. In the days of old, a business’s success was measured in the amount of money it made as profits. This is so obvious as to not need stating, but in this current milieu, it needs to be written down in black and white. The duty of a company was to its shareholders i.e. its owners with its objective being to maximize returns for its investors. If it kept on making losses, investors left, if it made a profit, investors piled on. Of course, money would need to be raised from the market, through debt, since one cannot operate purely out of earned capital and one also needed money for expansions, but the money raised (or the ease of raising money) was based on current profits, which again was a function of the actual demand of the product in the market. I say “days of old”, but most companies in the world still work on this model, at least to an extent —they survive because there is concrete and current demand for their products—be it medicines or televisions or groceries or clothes, and yes they raise money for new initiatives, but it is usually based firmly on what they currently do, what products sell, and most importantly, what products make money.

In comes the new days, a marriage of Wall Street and Silicion Valley. This model starts from the assumption that demand for a product does not exist, it needs to be created by the company itself, what instead exists is a “potential for demand” and the “potential for a business to service the demand”. Note, please, the addition of the phrase “potential for”. The primary goal for the CEOs of the world, be it of Zuckerberg or uncle who brags off being the CEO of his single-person startup, is to demonstrate the “potential for a business to service the demand”. So the way it works in this model is

  1. You have an idea
  2. You develop a prototype, financed by your own money
  3. Your prototype acquire users.
  4. Once you acquire a certain number of users, people invest in you. You now have a product.
  5. The more users you have, the more you understand what users really want, and you develop the product further
  6. If not profitable yet, keep doing steps 4 and 5.

The metric to gauge a company’s “potential for a business to service the demand” is measured by the people currently using it, in much the same way we measure a person’s worth by the number of followers they have on social media and the likes they get. Specifically, Wall Street and investors measure a company’s growth, how fast their users increase, they predict how much it will increase next quarter, if it meets or surpasses the expectation set forth by Wall Street and investors, the company is “doing great”i.e. meeting its objective and more money flows in to the company.

If you note, dear reader, I did not use the word “profit” for quite a few paragraphs. In the new paradigm of business, profit is not as important as the acquisition of users or to put it even more generally.”product buzz” (are people talking about your product). That is why so many unicorn startups bleed money to acquire users, and that is why so much of modern startup culture is about publicity and big talk about huge problems. Without “excitement” and “hype”, there is no perception of growth potential, and consequently, there is no “money raised”.

Take the example of Twitter. From 2010 to 2021, Twitter has lost money *every year* except 2019 and 2018, and the amount of money it made is dwarfed by the amount of money it has lost and using the naive lens of profits, you would wonder why Twitter even survives, far more why it is always in the news. But there itself you have the answer, it is always in the news, it is always being hyped, it always is being condemned by both left and the right, and it has the persistent buzz that many other more solid companies can dream of, and the reason for that, despite many attempts, it has a high number of users and premium users, those with money and influence, even though (and Musk is trying his level best to figure this out) no one has cracked the equation of making money from this in a sustainable and profitable way, and yet, Twitter is what it is, over ten years.

Take another example of a hot startup, Carvana, which was seeking to create a new, what’s the MBA-speak here, oh yes paradigm, for selling cars. Here is what Forbes writes about Carvana’s spectacular crash.

In light of the earnings miss, many investors are pointing to the balance sheet as they worry about the company’s long-term growth. Carvana doesn’t have much cash on hand, and they have $6.3 billion in debt, including $5.7 billion in senior notes. The company has consistently borrowed money to cover losses. They’ve also borrowed money in the past for growth plans as they finance. The most shocking aspect of the earnings report is the amount of cash the company has burned through. Carvana’s cash and equivalents totaled $1.05 billion in its second quarter this year, it now has just $316 million left.

Now the difference between Twitter and Carvana is that the latter was not able to, despite its high advertising budget in media, meet its growth expectations (i.e. its potential to serve its market), while Twitter has been able to (glory be to Jack), even though none of them have made profits.

As an exercise for the reader, now try to think of why Mark Zuckerberg has re-branded Facebook as Meta and invested billions of dollars in a speculative pipe dream called the Metaverse? Hints: growth potential, excitement, buzz.

So how is the real money made here? I mean if no one was making money, how is this game being played repeatedly? If you look at the list above, steps 4 and 5 are repeated, the investors in the (n-1)th round get their return on investment from the money raised in the nth round, and the CEO and the executive management put some of that in their pocket, and so yes, money is made, insane amounts of it, just not in profit, and that someone at the end is left holding the can. Now it is not that all companies falter before they reach step 6, some do actually make profits, but most crash and burn a lot earlier, but not before making a few people very, very rich.

Coming back to the “growth mistake”. Covid19 came along, locking down the world, and while overall it destroyed many of the old businesses which worked on actual demand for their products, it was a God-given boon for many of the companies that were in the business of demonstrating potential for profit. As people stayed home, e-commerce rose, non-cash transactions rose, streaming rose, buying cars from home rose, riding a tidal wave, and every CEO with projections for growth found those projections met, exceeded and some.

However, rather than honestly recognizing that this was an accident and the growth could not be expected to sustain itself, they all rolled the dice and upped their growth expectation. And since they had already met a very high bar and exceeded it, they were patted on their back, took home record compensation, and then the nth round of investment was huge. There was another reason for the hugeness of the nth round: interest rates were dirt-low. No one plays this game with their own money, they borrow from the market, and so combine these two factors, easy money and unprecedented growth, Covid19 led to huge capital influx, most of it being siphoned off to the (n-1) investors and of course executive management, their take being in proportion to their position from the apex.

When one is committed to grow, one needs to hire (remember once again, it does not matter how much you spend to meet these objectives). This bidding war for talent then triggered the great HR-churn of 2021, the “Great Leaving”, as conventional companies found themselves unable to hold onto their employees as the “potential for growth” businesses poached them away with insane salaries, salaries which were being funded by their outsized capital influx from the market and salaries which would not sustain. Obviously when you hire, just to show your investors that you have the capacity to meet their next growth target, you not only pay way more, but also end up with talent that is not aligned with what you can maintain, “potential of growth” translates to “potential to perform”, and as we know so much does not live up to their potential. Of course, they knew, this kind of hiring and these kinds of compensation would not last, but remember the scheme, dear readers, the ones making the decisions will not be left with the nuclear waste, that will be the investors who bought into the last round of hype and obviously the employees, who will be let go off during the holiday season, and an apology email that says “I am sorry we grew too fast”.

But what about Google and what about Amazon? These are consistently profitable companies, with demonstrable demands for their already existing products, market-leaders in their verticals, and not the “selling dream” kind of fly-by-night operators. You are right, they occupy a spectrum between solid old-world businesses and new-world ones (it’s another tragedy that even old-world companies are moving to this model). They have multiple, nearly independent lines of business, some of them quite speculative in the”potential for growth” categories , and sometimes the more profitable parts of the business are used to bankroll the expensive bets in the growth areas, and sometimes they do not and the speculative branches are allowed to die while the main trunk remains untouched. This is why Google became Alphabet, to more clearly isolate the foundational aspects of the business from the speculative.

Let us consider Amazon. Their cloud infrastructure business, which is based on solid fundamentals of profit, has had no layoffs to my knowledge, but their layoffs have happened in those lines of business that are more speculative–like their hardware business and Alexa voice control, scheduled to lose $10 billion. One may ask, as many ask, why cannot Jeff Bezos take the loss, and the reason, besides personal greed, is simple: he has growth targets to meet and other growth stories to sell, if there is a part of the business for which no narrative can be constructed and no suckers found to invest in, it is dead weight and needs to be jettisoned.

Now Google/Alphabet. From what I hear, their plans as of now, are to fire 6% of their poorest performers across the board, which would be 10,000 employees. Besides the stigma the fired employees will now have to bear (will people be writing ex-Googler now on Linkedin I wonder), there are other things about this that require a closer look. In a letter written by an activist investor (the guys who matter), Christopher Hohn, he cites several items of data—including Google’s hiring 20% annually, and its median salary being 153% higher than the 20 largest listed tech companies in the US. And why has this happened? Simple. Google has hired too many and at too much in order to grow fast or more cynically, demonstrate the capability to grow fast, to get the next round of investment. And now, people will likely lose their jobs, people on H1Bs, new parents, and fresh graduates. Why now? Same reason as everyone—higher interest rates, less “easy money”, and in the case of Google/Alphabet, a 27% drop in profit in its Q3 2022 earnings report , and therein lies the rub, Google still makes a profit, quite a lot of it, but since revenue growth is down from 41% to 6%, it is demonstrating to the moneybags of the world, less potential for profit, and hence Pichai sir needs to meet growth expectations by lopping off the decaying branches, or else someone else will take investment money earmarked for Google by showing more potential.

Now there is nothing wrong with any of this, it is all predatory capitalism with the devil taking the hindmost, and as I said in the beginning, the world rewards you for the risk you take, not your effort, and working at these companies remains for most people the fastest way to generate wealth through income, but as an employee, nor privy to the games going around in the stratosphere where you may not enter and the way market performance truly works, it is good or rather fair to know the risk you are exposed to. So most certainly take the MAANG or startup job, especially if it is at 150% more than what it is outside, but do take a moment to contemplate the risk, plan accordingly and know that in end you may be getting an apology mail from a very very rich guy.

7 thoughts on “BUT AT LEAST THERE IS AN APOLOGY

  1. Thank you, cogent analysis. For old time’s sake: I’ll have 14-inch MBP.

  2. And I thought you would write about BHAANG – byjus, hat, akash, are next g****

    They also laid off thousands but avoided all scrutiny.

  3. Which other company makes $5bn in profit a quarter and that is considered a disastrous financial result?

  4. Gaurav Dey Purkayastha December 11, 2022 — 4:00 pm

    There’s no way of downplaying this … Zuck does suck!

  5. Lovely, clear, well-written piece. Enjoyed reading it. Thanks!

  6. very well written!

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