Why should we believe any of the people responsible for the ongoing tech bubble when they claim what they’re doing has great benefit for humanity? Listening to them, you might think that rising inequality, rampant tax evasion, and ecological devastation are simply capitalism run amok. This assertion, however, obscures what the bubble has done to “disrupt” our society at an individual, collective, and institutional level.
There is perhaps no better example of how wildly out-of-control venture capital and Silicon Valley have gotten than the slow-moving disaster that is WeWork and the attempt by SoftBank, its largest investor, to save it by burning through an ungodly sum of its near-unlimited money.
Despite its spectacular implosion, WeWork refuses to die. Tuesday, SoftBank closed on a deal that will see it put an additional $10 billion into the company, which is now valued at $8 billion—a far cry from its $47 billion valuation earlier this year. SoftBank's newest deal includes a $5 billion loan, the acceleration of a $1.5 billion investment originally scheduled for next year, and the buyback of up to $3 billion in SoftBank stock from employees and investors. This brings SoftBank’s total investment to over $19 billion.
WeWork has delayed thousands of its scheduled layoffs because it does not have enough cash for the severance costs. Co-founder and former CEO Adam Neumann, however, is receiving a $1.7 billion golden parachute. This does not include the $700 million he already made when he sold stock ahead of the planned IPO. This does include, however, his sale of $970 million of his stock to SoftBank, a credit to repay a $500 million loan from JPMorgan, and $185 million in consulting fees.
What Silicon Valley truly is, once we move past the sales pitch, is not pleasant. We have a closely-knit network of venture capitalists who rarely have to suffer the consequences of their profit-seeking behavior. Their efforts have real-world consequences that have allowed companies like Uber to ignore regulations and create a new underclass of gig workers, WeWork to light money on fire, Airbnb to inflate residential rents, and a host of other corporations to increasingly privatize more and more of our lives.
Behind these firms is a house of cards of funding—angel investors and venture capitalists and firms like SoftBank who use their money to artificially drive the values of companies to absurd levels, with the goal of cashing out before that house of cards crumbles.
With WeWork, SoftBank almost pulled it off, until would-be investors in the company’s IPO realized it wasn’t worth anywhere near SoftBank’s pumped-up valuation.
SoftBank itself is heavily reliant on debt. It is obsessed with debt financing, which means that, in order to make investments, it will take out loans against the equity it has on another company. SoftBank has taken unprofitable companies, pumped them full of borrowed money to turn them into larger, still unprofitable companies, and hoped that with SoftBank’s influx of cash, they can undercut market rates, monopolize an industry, jack the prices back up, and make off like bandits. We’ve seen this strategy with Uber, where SoftBank is the largest investor. And now we’re seeing it with WeWork. Failing monopolization, or basic business stuff like “making money,” SoftBank can at least keep up the smoke-and-mirrors long enough to do an IPO so it, a startup’s founders, and other early investors make a lot of money; later investors, employees, customers, and the public at large get screwed.
But not every industry can be monopolized (or at least, they can’t be monopolized fast enough; even SoftBank CEO Masayoshi Son admitted recently that he is getting tired of losing money). A series of unprofitable startups have been launched in markets that, thus far, haven’t shown that they can be monopolized profitably. These companies, in “disrupting” existing businesses by undercutting them with artificially low prices subsidized by VC cash, destroy the pre-existing firms and devastate the communities that rely on them. With WeWork and perhaps Uber, there’s evidence that this strategy can’t last forever. When these firms inevitably falter or crash or retreat, the cleared ground is just that—cleared ground, littered with corpses of the local businesses and communities and individuals harvested for profits.
Venture Capital Is an Illusion
The idea behind venture capital is simple: raise capital from institutional investors (pensions, endowments, etc.), buy equity stakes in a multitude of start-ups, then oversee operations until the start-ups go public or are sold to a bigger company and investors can cash out. Venture capitalists work under the assumption that most investments will fail and some will show unremarkable returns, but at least one might be the next Facebook or Google and will offset all other losses.
From the dot-com crash of 2000 to 2018, VC has exploded from $100 million annually to $131 billion annually. 80 percent of that spending is concentrated in just four metro areas (the Bay Area, New York, Boston, and LA).
A 2018 study by University of California researchers Martin Kenny and John Zysman maps out the same period and explains that the explosion of the number of start-ups, the proliferation of unicorns (start-ups valued at $1 billion or higher), and the unprofitability of a majority of unicorns when hitting the public market are a consequence of them "each trying to ignite the winner-take-all dynamics through rapid expansion characterized by breakneck and almost invariably money-losing growth, often with no discernible path to profitability."
Much of the returns on VC investments are being grabbed by a close-knit group of investors who get in early, often at the expense of the public. In 1998 a Fortune article noted, “the dirty little secret of the venture business is that VCs can be enormously successful even though most of their portfolio companies may tank in the public markets.” In the dot-com bubble, IPOs enriched venture capitalists and other early investors who cashed out—investors connected enough to get in early, and wealthy enough to be insulated from whatever risks the public would be exposed to as investors or consumers. In today’s bubble, VCs are facing mounting skepticism about these unprofitable enterprises and doubling down to protect their investments.
In the last bubble, companies stayed private for an average of four years; today it is more than 11 years. That longer lead time can inflate valuations as companies draw more funding rounds, each of which necessitates that the company’s value goes up. It also gives these companies more time to construct a narrative about their path to profitability.
But in recent years, the more money that SoftBank has pumped into a company, the worse their returns have been. WeWork is currently losing $5,197 per customer per year, and in many big funding rounds, SoftBank has been its major (and sometimes only) investor. Uber takes a loss on every ride it gives; we are killing Uber simply by using it, with each ride’s true cost subsidized thanks to billions from VCs like SoftBank. SoftBank throws billions at these companies despite no evidence they will ever be profitable. Why?
Deep-pocketed VCs understand that while continually pumping money into a company can prop up valuations, it’s not enough. You also have to pretend business is something that it’s not. Vision Fund investments need a vision, after all. It doesn’t matter whether Uber or WeWork actually work—or what happens when they fail—but that they have a vision that sounds profitable.
One of Uber’s more ingenious moves to preserve its valuation: autonomous vehicles. The only justification for its ludicrous valuation was the dream of a future global monopoly (and subsequent profitability) ushered in by getting rid of Uber’s most expensive cost: its underpaid drivers.
It’s not clear if self-driving cars will ever be possible, but even if they did happen, Uber would on some level just be exchanging the labor costs of human drivers with the capital costs of owning autonomous vehicles and training their software. But the possibility that Uber—a company that, it's all too happy to remind everyone, simply makes a smartphone app—could invent and bring to market a technology that can completely replace human drivers led to ever-increasing valuations. As of August, Uber still had yet to ever turn a profit. When Uber held its IPO, many of its earliest investors made fortunes: co-founders Travis Kalanick and Garrett Camp became multi-billionaires, SoftBank made over $9 billion, Benchmark Capital made over $6 billion, and the Public Investment Fund about $3 billion. Its stock price has since plummeted 30 percent.
Likewise, while WeWork was burning SoftBank’s cash on its core business, it branched out to burn more money on side projects. WeWork bought 20 other companies in the leadup to its IPO, including Meetup, the office cleaning and management company Managed By Q, and a marketing firm called Prolific Interactive. All the while, WeWork was actually just a real estate company that pitched itself as a tech company; it’s still unclear whether WeWork is anything more than an ineffective, deeply indebted landlord.
“At what point does malfeasance become fraud?” asked Scott Galloway, a New York University Business School professor who dubbed the company WeWTF after reading through its financials in the company’s IPO filing. It’s not clear what happens to commercial property since WeWork was the largest tenant in downtown Chicago, New York City, and London. It has stopped signing new leases, and, unless it magically starts making money, it may at some point have to close the majority of its 500+ offices in 100+ cities.
So how did WeWork go from a valuation of $47 billion to an investor coup in just 30 days? People started to realize that WeWork was only “worth” $47 billion because SoftBank said it was.
Matthew Stoller elaborates on this in a fantastic dissection of WeWork and, well, the economy at large:
“There were several 'rounds' of WeWork investment where Softbank was buying more shares at higher valuations,” Stoller points out. “WeWork ostensibly became more valuable because Son said it was more valuable, and bought shares for higher prices. And since there was no public market for these shares, the pricing of the shares was totally arbitrary. WeWork then used this cash to underprice competitors in the co-working space market, hoping to be able to profit later once it had a strong market position in real estate subletting or ancillary businesses."
"The goal of Son, and increasingly most large financiers in private equity and venture capital, is to find big markets and then dump capital into one player in such a market who can underprice until he becomes the dominant remaining actor. In this manner, financiers can help kill all competition, with the idea of profiting later on via the surviving monopoly."
We do not have companies like Uber and WeWork because they’re efficient or innovative or even because we want to, we have them because they are being subsidized by venture capital. And here’s what we have to show for it: an underclass of gig workers, increased traffic congestion and urban pollution, the global suppression of labor standards, hollowed-out public transportation and taxi businesses across the world, and the instability that will come when Uber and WeWork collapse as SoftBank and other investors get tired of losing money from these creatively unprofitable businesses.
It’s easy to take a look at these numbers, and what is happening, broadly speaking, and allow your eyes to glaze over. Some dude who walks barefoot down the streets of New York City becomes a billionaire; some of his investors make a lot of money, some other billionaires lose a few billion. We laugh or decide not to pay attention. The billionaires keep doing what they want and keep finding other companies to pump up.
But the side effects of venture capital’s quest for not just big companies but the biggest companies may haunt us even on the off chance that regulators and politicians decide to try to reign them in. It has created, for example, a world where our individually and socially created data is owned by large corporations like Google or Facebook; perhaps if you’re lucky you’ll be compensated for with a paltry dividend paid out to you. It has created a world where we are inundated with goods and services that are free or subsidized in the short-term (i.e. search, social networks, meal plan boxes, delivery services, video streaming, ride-hailing, etc.) but that we are at some point going to pay for with our data or our jobs or our autonomy or our attention or, eventually, with our money because, once a monopoly is achieved, the price can be increased.
The tech bubble is not simply a market problem. We have allowed venture capital to concentrate power in ways that dictate how our cities work, how our technology is developed, how labor operates, and how we relate to each other. A digital economy where large technology platforms and start-ups turn our public sphere into a series of fiefs rationing out goods and services is not a natural development—it’s not even a progressive one.
If there is a takeaway, it is that this tech bubble is worse than the last precisely because it has incubated for so long. It has naturalized the privatization of our lives as technology’s teleology when really that is a political project being advanced for the benefit and profit of a narrow group of elites at the expense of the public. Getting out of the bubble requires us asking some basic questions that sound revolutionary only because of how much bullshit we’ve absorbed. Do we actually need computers and sensors embedded in every surface? Are there social and political problems that simply cannot or should not be solved within the market? And how are we going to go about rebuilding society if our answers lead us in that direction?