A recent newspaper story about the well-publicised travails of two companies facing major challenges carried the headline: “WeWork, Juul Show Downsides of Silicon Valley Success Formula.” This story, and similar pieces larded with schadenfreude about a raft of companies backed by a mixture of venture, growth, petro, hedge and mutual fund dollars, suggests that Silicon Valley has only one recipe for success. Like all soundbites, it is arresting but far from reality.
The popular narrative is straightforward enough: young founders with the gift of the gab seduce investors into backing pipedreams with truckloads of money; investors ignite a bonfire of cash and instruct these youngsters to suspend caution, act irrationally and go for broke. Meanwhile, the pipedreams are pursued with a combination of tequila; coffee breaks for vaping; discrimination in the workplace; personal self-dealing; misappropriation of company money; wanton disregard for rules and regulations; and an absence of stewardship and governance. In some cases all this — and more — is true. However, the formula for the success of Silicon Valley’s real companies is very different.
The genuine formula is longevity and persistence against all odds. It is no coincidence that the greatest companies to emerge from Silicon Valley and its sister regions in China share hallmarks that are very different from popular perception. These companies are never “overnight sensations”, and they have usually had plenty of close encounters of the worst kind.
Their founders will not be leading the lifestyles of the rich and famous. Instead, they will be strapped to the mast displaying single-minded devotion to their business, jealous of every minute that is not associated with the welfare and sustenance of their company.
Their reading lists will be long; they will be voracious in their willingness to learn from others; harbour insatiable curiosity; display a fetching mixture of supreme confidence and humility; and have a keen understanding of how to make the impossible possible.
They will also adopt healthy corporate habits in their early days, have a sound appreciation for how their company will become profitable and refuse to pursue a strategy for growth come what may. The founders of the flagship technology companies of the past 50 years — Intel, Cisco, Qualcomm, Amazon, Facebook, Google, Microsoft, Apple, Oracle, Alibaba and Tencent — have all shared these traits and that is true for today’s best privately held companies.
It is others that get into trouble and become footnotes to history — lost in the rubble of the 1960s growth stocks, the “biotech bubble”, the implosion of the disc drive business, the consolidation of the personal computer industry and, of course, the “dotcom” carnage of two decades ago. Those were the founders who flipped their Ferraris on the freeway and were unable to answer margin calls. Though they garner headlines, they are in the minority.
The same goes for today. Initial public offerings may get chilly responses or be cancelled. Prices in the private market may slide and founders will have a tough time adjusting to the chillier conditions, since they always fear the effects on employee morale if their company valuation does not increase. That is part of life — prices do not go up and down every day in the private market as they do in a public setting.
These days, when an increasing number of “start-ups” spend a decade or more as privately traded businesses, people argue that only public markets can insulate investors from bad behaviour and mismanagement. This is a pretty argument but it falls apart as soon as the names Enron, WorldCom, Freddie Mac, Volkswagen or even Wells Fargo are mentioned. It is not complicated — investors can lose their money whether they are risking it on a rural lane or Main Street.
In the technology world, fatuous slogans, broken promises, unlaced basketball shoes and black turtlenecks can only get you so far. It is then that the absence of a sound business model suddenly becomes evident. It is then that people understand gravity has not been repealed and that patience is the best way to build what you want. Indian new age businesses and startups should imbibe correct lessons from the Silicon Valley and other matured markets. Complete disregard to unit economics, operating expenses, customer acquisition cost and cash flows is a perfect recipe for disaster. On the other hand, paying keen attention to all of the above helps in building a long term viable and sustainable organisation.