F*cking money man !
💸 Només vull veure bitllets de cent 💰- an analysis on what's wrong with today's VCs world
Hello, product-loving people,
If you are new to my newsletter, I write about Product Management and I aim to provide a fresh perspective to the Tech world with a no-bullshit approach. By following me month after month, you will join me through my Product and writing journey.
In this first newsletter, I wanted to dig into how Venture Capital rules our world and how it affected my Product Manager career.
🎯 Today’s content:
Why I will dread receiving a text from HR early in the morning for the rest of my life
Why so many VCs invest in bull#$it business models
The link between Prince Alwaleed Bin Talal, the Ukraine war and VC money
The Time I Was Part Of A Big Lay-off
The VC topic started nagging me after seeing so many LinkedIn posts from people boasting about their company's last fund-raising & becoming the latest unicorn just to see the same people explaining a few months after that they have been part of a lay-off.
Looking back, almost all the startups I have worked in went through those 4 common steps:
Rapid growth backed by funding - “yeah let’s spend money on ping pong table and free booze”
Reality check from investors - “when did you say you are going to be profitable again?”
Cut-costing and restructuring via major lay-off - “we are sorry, but we realized the economics are not working and to keep going on we had to make a hard decision” > insert picture of crying CEO”
Back to start and repeat.
Sometimes it has been harder than others: one time I was asked, together with 35% of the company’s workforce, early in the morning by HR to go to a specific address instead of our office. Once there we were told all together that we were made redundant effective immediately and had to be escorted to take our personal belongings. Another time (lucky me I already left the company) all people affected by the lay-off were called to a Zoom meeting to be told that this was their last day.
The “fun part” is half of the concerned people could not log in and therefore discovered they were laid off from their colleagues hours after (as it happened with Bird).1
So in May, when I read about Gorillas' huge lay-off (300 employees) and 4 markets closure (including Spain), I wanted to understand how they could have ended up in such a situation. Gorillas had raised $1.3bn 7 months before in VC funding from big names like Tencent, so they had quite a lot of cash to burn2.
VCs Flooding Billions In Non Economically Viable Business Models
I found articles explaining how VCs started getting sceptical of delivery firms3 which made them reduce the torrent of money spread into those startups. Unfortunately, VCs started questioning the viability of last-mile delivery service4 only after flooding more than $25 billion5 into dozens of copy-cat start-ups (Gorillas, Flink, and Getir to name a few).
One could think that VCs funded so many quick-delivery startups because they had a profitable business model with a huge prospect of returns. Indeed, investors blamed the downfall of the sector on the pandemic. But is it really the reason?
I believe the collapse of the industry has more to do with the fundamentals: how many people really need gums and ice cream in under 10 minutes?6
In his 2021 book, Why Startups Fail, Tom Eisenmann, a professor at Harvard Business School, shows that ultra-fast shipping companies share a key vulnerability—initial revenues and growth are not sustainable. Because there is always someone prepared to try a promising new service, the initial wave of customers arrives quickly and cheaply. But to keep and grow that customer base, you need to identify a substantial number of customers who frequently require ultra-rapid shipping (that’s where the fundamentals don’t work). To put it another way, you need loyal customers who are willing to shell out a little additional money to have an avocado or a box of pasta delivered to their homes in 10 minutes instead of getting their ass out of the sofa to buy it from their nearest convenience store.
All those startups that were not solving a real-user need began to give highly aggressive discounts when they notice a decline in demand, to be able to show strong revenue and client base growth to their VCs investors.
From there, things only become worse since, in the words of Laureano Turienzo, "their clients have become hooked to discounts and will never pay a penny more." If we look at Getir, a Turkish ultra-fast delivery startup, 80% of its orders were discounted in countries like Germany and France7.
Additionally, looking at the unit economics, a typical e-commerce grocery order has a negative marginal profit for each order8.
So I still couldn’t grasp why the funding continued when the last-mile delivery bubble already fell apart in early 2022, when NYC was seeing two ultra-fast delivery start-ups shut down in one week9 or when Getir, valued at more than $11 billion, slashed 4,500 employees10 (14% of its global workforce) just 2 months after raising $700 million.
The reason VCs invested millions in businesses, that after a 5-minutes analysis make no sense at all, is pretty simple. Our good old FOMO (Fear Of Missing Out).
Many venture capitalists now admit their market was overcome by a race to invest at almost any price. “If there was one word to describe it, it was FOMO,” says Eric Vishria, a partner at Benchmark Capital. Investors were prepared to pay high prices not to miss the boat, but most important periods for conducting due diligence were drastically shortened11 and protections that investors usually build in to protect their investments were skipped. This race led VCs to invest in startups that were fixings problems users didn’t have (#FirstWorldProblem).
Which led me to think: Do we have enough apps worldwide to order pizza?
That’s the opinion of Magatte Wade, the creator and CEO of Tiossan. She believes that more apps should be developed to help the "billions [who] are suffering" in Senegal and other developing nations. Wade said, "So much innovation is just one more app or game. [...] I want to see more venture capital and technology focused on resolving human issues, such as the red tape that makes it practically impossible for entrepreneurs to register a new company and establish operations in sub-Saharan Africa.” Focusing the investments on the wrong startups and making decisions with the wrong incentives (herd mentality) is one side of the problem.
How Startups Forget About Their Ethics When It’s Time To Fundraise
But the most alarming issue of VCs is not where the money is going but where it is coming from. To attract Gen-Z, startups are communicating about their diversity & inclusion initiatives and their desire to make the world a better place. However when it’s the time for fund-raising, those same startups through all their ethical principles to the bin. Look at the most popular apps like Uber or Slack: they all have been financed by the Saudi Arabi Kingdom. The Tech Industry let the Saudi Arabi kingdom pour billions of dollars into US and Europe companies.
It took years and some tragic events, such as the killing of journalist and critic Jamal Khashoggi12, for investors, VCs and founders to start asking a simple but often neglected question: Where is our money coming from?13
It’s in fact coming only from a handful of venture capitalists: the world’s 10 leading venture capital firms have, together, invested over $150 billion in technology startups14 and some of them are from countries with a loose conception of human rights. Although it has now come under scrutiny those ethical issues are still present.
For example, Saudi Arabia’s sovereign wealth fund has bought a $1.5 billion stake in the investment company of billionaire Prince Alwaleed Bin Talal15. The same prince who invested more than $500 million in Russian firms around the time of Moscow’s invasion of Ukraine16.
According to Amnesty International, venture capitalists are failing to do even the bare minimum to ensure their investments are not contributing to human rights abuses17 and have had little to no processes assessing whether the uses of their capital are ethical. The conclusions of Amnesty International are alarming:
VC firms sometimes invest in companies whose products and services have been implicated in ongoing human rights abuses, such as companies that provide support to the Chinese Government’s repression of the Uyghur population in Xinjiang and across China.
VC firms continue to fund companies whose business models have a significant negative impact on human rights, including privacy and labour rights.
The lack of human rights due diligence by VC firms dramatically increases the risk that they fund companies developing new and “frontier” technologies that have a significant negative impact on human rights, as long as those technologies promise a positive return on investment.
This challenges us to think of another world where massive fundraising is not glorified and where another type of growth is promoted. Actually, few Software companies don’t believe in the Venture-Capital system that focuses on exponential growth for a quick successful exit.
That is the case of Sridhar Vembu, co-founder of SaaS Zoho, who thinks “there are too many VCs floating around, which are too much exit driven, that’s an incorrect strategy for operations (for a startup)”18.
With the current slowdown, many VC firms including some of the world’s largest such as Sequoia Capital, and Y Combinator, have asked their portfolio startups to cut expenses, freeze hiring and prioritize profitability over growth19. This may be the perfect opportunity to bring to the market companies that solve real user needs and have healthy business models with strong economics.
Thank you for getting to the end ❤️.
If you have any question, feedback, suggestion for the next newsletters, don’t hesitate to drop me an email at yourproductpill@substack.com 📩Footnotes:
“Here's How Bird Laid Off 406 People in Two Minutes.” dot.LA, https://dot.la/bird-layoffs-meeting-story-2645612465.html.
Levingston, Ivan, et al. “Startup Gorillas Planning to Raise $700 Million of New Funding.” Bloomberg.com, 25 February 2022, https://www.bloomberg.com/news/articles/2022-02-25/startup-gorillas-planning-to-raise-700-million-of-new-funding.
“Silicon Valley VCs are growing wary of on-demand delivery.” Reuters, 13 December 2016, https://www.reuters.com/article/us-delivery-startups-analysis-idUSKBN1420DO
Chadha, Nishant. “Venture capitalists fast losing faith in on-demand delivery startups.” The Economic Times, 14 December 2016, https://economictimes.indiatimes.com/small-biz/money/venture-capitalists-fast-losing-faith-in-on-demand-delivery-startups/articleshow/55972313.cms
Loten, Angus. “Food Delivery Startups Look for New Ways to Sustain Growth.” Wall Street Journal, 14 February 2022, https://www.wsj.com/articles/food-delivery-startups-look-for-new-ways-to-sustain-growth-11644873173.
Pardes, Arielle. “The Speedy Downfall of Rapid Delivery Startups Like Jokr.” WIRED, 15 July 2022, https://www.wired.com/story/the-speedy-downfall-of-rapid-delivery/.
Cheng, Michelle. “Nobody wants to pay for ultra-fast food delivery.” Quartz, 20 June 2022, https://qz.com/2179069/nobody-wants-to-pay-for-food-delivery/.
Aull, Bill, et al. “Navigating the market headwinds: The state of grocery retail 2022.” McKinsey, 1 May 2022, https://www.mckinsey.com/~/media/mckinsey/industries/retail/how%20we%20help%20clients/the%20state%20of%20grocery%20retail%202022%20north%20america/mck_state%20of%20grocery%20na_fullreport_v9.pdf
Ashley, Sara. “Two ultra-fast delivery startups shut down in one week.” CNN, 11 March 2022, https://edition.cnn.com/2022/03/11/tech/ultra-fast-delivery-startups-fridge-no-more-buyk/index.html
Ashley, Sara. “Ultra-fast delivery was all the rage during the pandemic. Now, these startups are trying to survive.” CNN, 25 July 2022, https://edition.cnn.com/2022/07/25/tech/ultra-fast-delivery-layoffs/index.html
Waters, Richard. “Venture capital's silent crash: when the tech boom met reality.” Financial Times, 31 July 2022, https://www.ft.com/content/6395df7e-1bab-4ea1-a7ea-afaa71354fa0.
Tiku, Nitasha. “Tech Backs Away From Saudis After Journalist's Alleged Murder.” WIRED, 12 October 2018, https://www.wired.com/story/tech-backs-away-from-saudis-after-journalists-alleged-murder/.
Matsakis, Louise. “Tech's Ethical Crisis Over Venture Capital Goes Beyond Saudi Arabia.” WIRED, 27 October 2018, https://www.wired.com/story/saudi-arabia-tech-ethical-crisis/.
Kleinman, Michael. “Venture capital undermines human rights.” Techcrunch, 4 August 2021, https://techcrunch.com/2021/08/04/venture-capital-undermines-human-rights/
Martin, Matthew. “Saudi Wealth Fund Takes $1.5 Billion Stake in Alwaleed Firm.” Bloomberg.com, 22 May 2022, https://www.bloomberg.com/news/articles/2022-05-22/saudi-arabia-buys-1-5-billion-stake-in-prince-alwaleed-s-firm#xj4y7vzkg.
Martin, Matthew. “Saudi Billionaire Bin Talal Made $500 Million Russia Bet Near War's Onset.” Bloomberg.com, 15 August 2022, https://www.bloomberg.com/news/articles/2022-08-14/saudi-billionaire-made-500-million-russia-bet-near-war-s-onset. Accessed 12 September 2022.
“Risky Business: How leading venture capital firms ignore human rights when investing in technology.” Amnesty International, 30 July 2021, https://www.amnesty.org/en/documents/doc10/4449/2021/en/.
“'I stay out of the VC ecosystem because I fundamentally don't believe in it:' Zoho's Sridhar Vembu - TopTekNews.” Top Tech News Network, https://topteknews.net/i-stay-out-of-the-vc-ecosystem-because-i-fundamentally-dont-believe-in-it-zohos-sridhar-vembu-s106371.html.
“European VCs are urging start-ups to cut costs.” CNBC, 1 June 2022, https://www.cnbc.com/2022/06/01/european-vcs-are-urging-start-ups-in-their-portfolios-to-cut-costs.html.