Have we really learned nothing over the past 20 years?

Last week, the SEC filed a lawsuit against former executives of the now defunct MoviePass. It alleges what has become an all too familiar tale. That MoviePass was not only a business that could never work, but that its owners knew it could never work, lied to customers, investors, and the markets, and to cap things off siphoned money away to executives through fraudulent invoices for services never delivered.

MoviePass was a service whereby movie patrons would pay $9.99 per month and see as many movies as they liked –  MoviePass would reimburse the movie theater for the price of the ticket. From the start there were those that said that this could never work. But the modern gods of data, analytics, and consumer research said otherwise – or so we were told. It turns out this was not the case. There was no research, no analytical software, and what boils down to no business plan – alleges the SEC. 

I for one am getting pretty sick of this.

Some new highflying new business comes along and promises to change the world and by implication telling us that we are doing it all wrong. And it leaves those who do not buy into the hype scratching their heads wondering what they are missing. What is rarely discussed is the reliance on venture capital. On creating market share above all else – stability and long-term viability be damned. The magicians point to Google, Uber, Amazon, Airbnb, Facebook, YouTube, PayPal, et al. But for every one of these there are hundreds or thousands of companies that don’t, that can’t, work. And some of these flameout spectacularly: Theranos, WeWork, Enron, pets.com, remember these?

I can’t help thinking about the Michael Lewis book, and its surprisingly faithful movie adaptation; “The Big Short.” The Big Short is about the housing crisis and the subsequent crash and world recession. More precisely, the book is about those who saw that the subprime housing market was fundamentally flawed if not actually fraudulent and spend most of the book trying to figure out what they are missing. As it turns out there are missing anything other than the willingness of others to delude themselves. 

Business should be about delivering goods and services to the community. The contract being that if a business delivers a fair product, at a fair price, a business should be rewarded by being profitable, paying its employees fairly, and if the owners want, being able to sell that business as a going concern in the future.

Where things have gone wrong is the idea of using a business to create a narrative. A narrative of the potential of the future. One day we will be profitable. One day we will be sustainable because our competitors will be out of business. We’ve ran the numbers and by some magic it will all work out down the road – look at all our customers. South Park highlighted this nonsense best with a group of gnomes who collect underpants. Their three-step plan being step one: collect underpants and step three: being profit, but never actually figuring out what step two, the most important step, actually is.

Once those at the top realize that their emperor has no clothes the lies start, and then in some cases, the fraud. Even if it does not lead to lies and fraud, the implications for society can be dire when we up end markets on a promise rather than a sound financial plan. Rental arbitrage for example, where properties are rented and then put up for short term rentals using services such as Airbnb, have made renting impossibly expensive in many cities for people who just want somewhere to live.

Now I like to think I’m not an idiot. I understand that some industries need scale to be able to work. That a startup might well have significant burn rate (the rate at which it spends investors cash). Visionary ideas are often not recognized. Disruption can be painful – and there are businesses that do need to be disrupted. There are businesses that leave money on the table that become opportunities for others. Finally, I also get that startup culture has changed our world, for the better, in a lot of ways.

But in turn, that does not mean that we should blindly accept the narrative of a businesses that sounds too good to be true is actually just ahead of their time when actually the much simpler explanation of them actually being too good to be true is more accurate. What does is say about our business landscape when a company, or an existing industry which is profitable is put out of existence by a company that can never be profitable except in the minds of those willing to finance the risk up until the point they can sell the risk to someone else and make boat loads of cash?

Take Uber. The poster child for the disruption of an industry that needed disrupting. A radical change to how people get around cities. However, they still have not made a profit in any meaningful way. Just how big does a company like Uber need to be in order to be profitable? Lots of people have gotten rich, lots of other companies have gone out of business as a result, lots of ethical lapses, lots of legally questionable tactics, and an internal culture so toxic it got its own TV show – the excellent Super Pumped on Showtime.

Uber makes our lives easier but customers underpaying for something always makes customers happier. And that’s the problem. I would argue, that in the long run stability is what matters for society. The jury is still out as to whether Uber drivers are happier than Taxi drivers. Uber is certainly more convenient for drivers, they tend to be more productive, and the barriers to entry have been removed (although there is a significant argument that Lyft deserves more of the credit here). The recent lawsuits about employee classification would seem to suggest that all in not well in the space. But what happens when Uber is “too big to fail?” Does it become the very industry is sought to disrupt?

In the end, while traditional business can be seen as stale and boring, without the glamor and potential riches of startup culture, they have the advantage of adding to society and generally being profitable. The masters of the universe of startup culture, and venture capitalism, at times seem to be the peddlers of nothing but vision. While there is lots of talk about changing the world, this is often at the expense of internal culture and the norms of doing business. Breaking things is not always the best way to get what you want done. Not all startups / venture capital funded enterprises are toxic cesspits and not more traditional business are sweetness and light.

What is becoming obvious, however, is that just disruption and having a good vison are not enough to achieve results in the real world and there by bring benefit to society as a whole.