The Era of Entrepreneurial Can-Kicking

May 6, 2018

I’ve seen Facebook’s recent mea-culpa television advertisement several times lately, which is actually pretty weird because I watch very little live TV. I guess it’s just on a lot.

The gist of the ad is basically this — Facebook was meant to be a cute wonderful thing for making people happy, and it did that, and everyone loved it, but then a bunch of people started using it to do terrible things, and now Facebook is going to “do more” to try to keep these terrible things from happening. Reasonable people can disagree, but I found the whole thing to be pretty weak tea, infused with a sufficiently on-brand blend of condescension and obliviousness.

One obvious, unanswered question involves what Facebook is actually going to do about this kind of stuff, other than “more”. But a better question is — why do all of these terrible things keep finding a home on a platform ostensibly designed to foster wonderful, magical personal relationships and connections?

The answer, of course, is that Facebook isn’t designed for that purpose at all. It’s designed to get people to stay on the platform specifically so they (a) look and click on as many advertisements as possible, and (b) provide the platform with data about themselves that allows Facebook to charge more money for ads that they see. That’s what the platform is designed for, because Facebook users have zero financial relevance to Facebook, Inc. outside of their ability to be monetized through advertisements.

This has come up a lot in the past, and not just about Facebook, but at this point society seems to have become bored with the lecture and is locking on either (a) Facebook unilaterally acting against the best interests of their primary revenue machine, or (b) the government making some of those best interests illegal and therefore forcing Facebook to either make less money or figure out another way to make it.

the original sin of consumer SaaS

If you were in the software startup space anytime during the last ten years or so, you probably heard a lot about the idea of “monetizing” a business, which basically means figure out something that people wanted to do online first, and figure out how to make money off supplying that thing later. This was a really tempting model for investors because it was obvious that so many industries were being re-positioned online (with new winners and losers), so the hope was basically to get in there first, establish yourself, and then sort out what to do with your market leadership later. If you had enough capital to work with, you could do this, at least for a while.

A couple of interesting models came up over time. Craigslist learned to make quite a bit of money by using technology to run more efficiently, and decouple a cash-cow service (classified ads) from a bunch of expensive, unrelated activities (journalism). A few services like Dropbox, etc., made freemium work by bolting expensive, must-have corporate features onto a nice consumer product people couldn’t resist bringing in to work. Amazon built an innovative technology stack to support a massive, break-even retail business, and then productized the technology stack. Apple kept things simple and just charged people for products and services.

In many cases, though, the clever business models fizzled out (or were never even conceived), and popular products fell back into one of two buckets — making money off of advertising, or selling their company to someone who knew how to make money off of advertising. Facebook, Google, and to a lesser extent well-capitalized weirdos like Pinterest build things for you to use, but ultimately live or die based on what advertisers are willing to pay them.

the problem with advertising

One of the odd things about a business with a purely advertising-driven revenue model is that as a measure of real value, it’s vague, amorphous bullshit. The Facebook user experience is good enough to… warrant usage, I guess? But we have no idea if it’s good enough for people to actual commit resources to, because they don’t have to. So Facebook gets to pretend they are above the idea of creating real, demonstrable consumer value (the kind measured in dollars), when the reality is that they have no idea how to create it and are simply kicking that necessary can down the road for someone else to figure out. If you create a product no one values enough to pay for, and then you cover it with advertisements, it’s true that you may be able to make a lot of money and a run a successful business. After all, Facebook sure has. But you still haven’t actually figured out how to make or do anything that people value enough to pay for — you’ve simply passed that responsibility on to other businesses who are supposed to do that, collect the money, and give you a cut for advertising the valuable-enough-to-pay-for thing. Gee, thanks.

And that’s the real key here. It’d be one thing if there was one weird little tech company inserting themselves into things to make a confusing buck or two. But that’s the standard — that’s the go-to playbook for so many things. The only thing stranger and vaguer than the value of something like Facebook to its users is the value of something like Instagram to its users, which didn’t even bother to put together an advertising model. It just sold to Facebook for two billion dollars once a lot of people were using it. So now Instagram kicks the can of generating demonstrable value to Facebook, who immediately says “noooope!” and kicks it right on by to advertisers.

Even worse, we’re talking about advertising, the very definition of a difficult-to-measure return on investment. The most critical business goal Facebook and Google have really accomplished is the wall of ad-tech and thought leadership that’s convinced marketers they actually know what they’re getting out of digital advertising, when in reality they don’t really know anything. Some business models work great; first-touch attribution to a Google or Facebook ad with properly functioning tracking (easier said than done) that leads to revenue conversion event, like a subscription, or buying a t-shirt or whatever. That’s a pretty clear path. Most paths aren’t like that at all; people are marketing top-of-funnel type activities that kind-of-sort-of lead to revenue, but are massively dirtied and complicated by the use of multiple channels, broken tracking, click fraud, robots, fake accounts, and everything else. Nothing represents the “well, I guess we have to” stupidity of digital marketing quite like companies bidding for the rights to their own name so they can pay Google every time somebody clicks on it.

I get especially riled up by online advertising because I have to deal with it, but the vague, “nibbling at the margins and pretending we’ve made a huge difference” tendency seems to be everywhere. Uber’s another great example — on the surface, it looks like we’ve broken up the taxi lobby, but really we’ve built a generally accessible private car service subsidized by billions in venture capital and lower wages for drivers. Uber isn’t actually any more efficient at all, at least not enough to justify the lower prices it needed (and still needs) to appeal to the market. Tesla has had two major impacts; one, it’s changed the way the media covers the car industry, and two, it’s provided at least some kind of unquantifiable kick in the butt to real car companies who can actually produce in quantity to advance their electric technology. But I don’t think that’s why investors shoveled billions and billions of dollars into it, and I certainly don’t see it as world-changing innovation.

what the hell is going on?

So why is this happening? My theory is this — we’re running into the capitalist equivalent of a communist problem. With a state controlled economy, eventually you run out of obvious, top-down economic investments that make sense for the state to make, especially when there’s only one source of ideas (the government). At that point, you get some combination of stagnation, duplication of effort, or outright corruption as the state struggles to find something — anything — it can do to make a difference and justify the fact that it controls the economy. I’m a child of the 1980s, and this was the narrative we all saw play out in the Soviet bloc. Gray, repressive state apparatus can’t do anything right, suddenly budding entrepreneurs start solving random, long-irritating social problems with a flood of small ideas.

The capitalist equivalent of this is upon us. Instead of the state controlling all the money, we’ve watched it bubble up to a small group of people who are trying to use it to generate additional growth without actually changing too much about the social order, because those people are on top of it. We need consumers to generate more business for our investments, but consumers don’t have any more money than they did ten years ago, so we have to use them as representations of revenue through vehicles like advertising, credit, and “engagement”. Until more money (a lot more money) gets to the masses, you’re not going to see revolutionary ideas; you’re going to see ideas like Elon Musk’s stupid Boring Company, where he — and I guess he’s serious about this — plans to dig special tunnels underground that will transport individual people in their cars and help them avoid traffic for a while. This is not a social improvement wrought by the power of markets; it’s a marginal improvement on the status quo that largely benefits rich guys in big cities with cool cars.

While I don’t blame venture capital for this, I do think VC money (and the high-expenditure runways it allows) can help mask that it’s happening. That may seem pretty rich coming from me, someone whose last three jobs have been at VC backed companies, but the businesses I’ve worked for have each charged real amounts of money for their product, and have had business models dependent on creating enough direct customer value that said customers will pay for it. We might fail, but at least we accept math.

I don’t know how this era ends, to be honest. Maybe radical economic shifts aren’t necessary and I’m just being uncreative — but I don’t think so. If so, until those happen, many of our greatest innovators are going to be stuck reallocating a shrinking pool of consumer money from one shell to the next, and hoping nobody calls them out on it before they figure out what do.