Unbridled Capitalism Works

Grow, or Die

This morning as I was getting my coffee, I read the news about Kickstarter. It saddened me. Kickstarter was a darling back in the day, but it lost its way. (During the rest of this post, when you see a paragraph of italics, I am quoting from the linked article)

How, you might ask. How did it lose its way?

First off, the founders of the company weren’t capitalists. They see capitalists as kind of dirty. Unfortunately, they had been educated that capitalists only care about profit and profit is dirty. In the Bible, “money is the root of all evil” after all. In political or corporate corruption, “follow the money”.

We were educated by our unionized teaching system that people who innovated and built big companies were evil, gluttonous, robber barons. We didn’t hear about the problems they solved or how they made our lives so efficient. We also didn’t hear about how they gave back to society. We wouldn’t have a library system in the US if it wasn’t for Andrew Carnegie.

Going back to the founding of America, the wealthiest of Americans always engaged in philanthropic activities. Ben Franklin was a self-made man and invented the fire department.

However, they did it after they built their business.

Today, the wealthy do not feel the same pull or philanthropic responsibility because many of the activities that they would engage in have been outsourced to the government. The “give back” ethos is rooted in guilt.

“You should give back.”

“Why? I took big risks to get it.”

“Because, you know you couldn’t have done it without society.” That actually means you didn’t build that.

Carnegie, Ford, and the other industrialists weren’t feeling guilty. They wanted to give other people the same opportunity. There is a difference.

Kickstarter and many other startup businesses don’t understand that. You have to eventually make a profit if you are going to exist, otherwise it is charity.

In Kickstarter’s case, they initially were solving a problem. They made it easier for people who wanted to create to raise money.

The focus from top management went from solving that particular problem to what they thought were grander things. Their board of directors didn’t reign them in.

Here are a series of quotes from the article that illustrates how to ruin a great company.

Early employees remember a company that valued creativity and a socially conscious ethos over the growth-at-all-costs mentality that typically defined Silicon Valley startups. Rather than pursuing the usual venture path of going into the red to achieve hockey stick growth, the Brooklyn startup notched a profit in its second year through the 5% cut and processing fees it took from successfully funded projects.

If you don’t grow, you die. Dying can take different forms. The business gets acquired. The business fails. The business becomes a lifestyle business. Startups must grow or there is no reason to exist.

The same goes for GDP of a country. Growth is prosperity. No growth is death. Today, the US is in a death spiral. High inflation, high and growing like a malignant cancer debt, low growth.

“Art for art’s sake was really important,” one former employee told Fortune. “It shouldn’t be just how much money a project can turn around for investors that should dictate its being allowed to get made.”

Art is important. But, you have to make money on it otherwise you get to wait tables.

Another early investor told Fortune that they put money in because they “just loved the concept” and never believed it would lead to a financial payoff.

The above is a charity no? If you have enough money to toss into a business and you care nothing about the return, bully for you.

Then in 2015, Kickstarter took the rare step of becoming a public benefit corporation, a type of classification where for-profit companies agree to meet social and environmental standards. An employee-produced podcast described the public benefit corporation as a legal structure that could protect Kickstarter from attempts by investors or directors to exit or sell the company.

I wrote back then, and have continued to write that Public Benefit or B Corporations are odious. They are more than odious because the designation gives employees the power to stifle the creativity and speech and beliefs of other employees. It gives a carte blanche license to companies and their employees to actively discriminate.

I have been an investor in a B Corp. It doesn’t work and it shows that the focus of the CEO/Company is not on making a profit and returning money to shareholders, the focus is on other things that are meaningless to operating a successful company.

If you are an investor in a company that decides to focus on becoming a B Corp, ask to get paid out. Take a haircut. If you are an employee of a company that transitions to a B Corp, get a new job.

For what it is worth, companies should do all they can within the constraints of running the company for employees. Companies do not exist if they don’t solve problems for customers, and earn something of value that they can monetize for shareholders back from it.

If you are taking care of a problem for a customer, you are in fact embracing the ethos of a B Corp. Oil companies are solving big problems for customers. They take stuff out of the ground and turn it into something we can use. We don’t have horse poop in our streets and we get places a lot more efficiently and faster.

Oh, and don’t give me the crap about saving the planet. There are costs and opportunity costs, and oil companies aren’t killing the planet.

Chen reinforced the message when he returned as CEO in 2017 and restated earlier proclamations that Kickstarter would never go public or be acquired.

When your CEO is telling your startup that it will never go public or get acquired, you are dead.

In March 2019, the tensions in Kickstarter’s workplace culture boiled over in the form of a union drive—at the time, an unprecedented step for full-time workers at a tech company.

Let’s follow this timeline. In 2011, Kickstarter said it had no interest in making a profit. In 2015, it became a B Corp. In 2017, the CEO said it had no plans to monetize the equity in the company.

Then, unionize a startup? It’s kind of hilarious but when you think about where the employee’s heads were at, it makes sense. Why let the CEO earn all the dough, especially when there is no pot of gold at the end of the rainbow? In addition, why would anyone go to work at Kickstarter if there was no chance at cashing in?

Unions can make sense in big huge corporations. In many cases, it’s simply more efficient to negotiate with a union than thousands of employees. In startups, they are totally 1000% stupid. They are stupid for NCAA athletic teams too.

If a startup embraces the unionization of employees, something is fundamentally wrong with the startup.

Kickstarter then pivots. It decides to go blockchain. Given where the company was at and what must have been a toxic employee culture, taking a shot on crypto wasn’t a horrible idea. That’s where it is today, though the management team has indicated publicly that it isn’t embracing crypto.

You cannot go crypto without embracing it fully. There is no optionality in strategic decisions like that. You go for the brass ring and let the chips fall. If you aren’t fully committed, you will fail.

Rather than injecting capital into Kickstarter to buy new equity, the deal came in the form of a tender offer, meaning all of the new cash went to buy up outstanding shares owned by other shareholders—none would go directly to Kickstarter. Instead, it allowed employees and early investors to cash out.

Kickstarter would take its own crack at becoming a Web3 company. The grand but improbable plan called for shifting its entire platform onto a blockchain called Celo, another a16z portfolio company, where it would operate as an open-source protocol—akin to http or Bitcoin—rather than rely on the proprietary code model used by most tech firms.

This next paragraph is telling. Kickstarter’s management embraced a new strategy simply for the money ($100MM) but didn’t have the trust of its employees to fully supercharge the pivot. It also did a poor job of explaining to its users what it was doing, why, and most importantly how it affected them.

Most of the community outrage fell upon employees, who expressed their disbelief in group chats and swapped sardonic jokes about Kickstarter NFTs. Meanwhile, the company’s decision to use an outside consultant to announce the blockchain news meant that many staffers were ill-prepared for the sudden torrent of vitriol from users. And given Kickstarter’s checkered history of launching new initiatives, doubt spread about its capacity to pull off a major technology pivot. “It was inconceivable,” said one employee.

Kickstarter isn’t dead yet. But, it’s illustrating some valuable lessons about how not to run a business. If I were a Vegas oddsmaker, the odds that I’d give it to make it are long. Very long.