Keil Hubert: The Suicidal Start-Ups of Silicon Valley

Remember how crazy the Dot Com Bubble got before it collapsed? Business Technology’s resident U.S. blogger Keil Hubert noticed that the same irrational enthusiasm that fueled the last one seems to be trying to spin up a sequel. Joy.

I overheard a pair of gentlemen chatting about investing strategies today while I was struggling to enjoy my lunch. Desperate to distract myself from a thoroughly flavourless sarnie, I focused on the two affluent speakers… and almost choked when one of the gents reverently praised the return of the go-go Dot Com bubble. ‘Now’s the time to strike,’ he gloated. ‘Tech start-ups are starting to IPO again, and everyone knows that you can get 10 or 20 times your investment back when they go public!’ I credit my parents for instilling in me the sort of restraint that allowed me to walk politely away from those two gormless twits when all of my business instincts were screaming at me to put the two of them down before they triggered another global financial panic.

This isn’t new. I was neck-deep in the first Dot Com Bubble, and knew that it was collapsing long before the media grudgingly admitted that they might have been a bit… overzealous… in their enthusiasm for the ‘everyone can get rich’ stories. Oddly enough, the market worked out on its own that a poorly-run company with an incomprehensible business plan and an unfinished product isn’t destined to dominate the world and won’t make all of its plank-owners into millionaires overnight. In the end, the standard rules of business success still apply, even when you slap the word ‘Internet’ somewhere on your glossy marketing fliers. Go figure.

If I’m coming across like a cynical old tech sector curmudgeon, that’s entirely intentional – and probably quite accurate. I never went to a b-school; I spent my formative years learning how to lead soldiers instead. I never fell in love with empty buzzwords like ‘synergy’, ‘monetize’, or ‘proactive’ (ack!). So, perhaps I missed the meeting where all the aspiring MBAs learned how to fall in love with their own empty hype and utterly ignore the fundamental truths of running an operation. I didn’t contract the irrational Dot Com infatuation syndrome. It also appears that I’m now immune.

All throughout the last bubble, I tried (and largely failed) to drag my peers and clients away from the metaphorical cliff’s edge. I felt like I was developing a Corporate Cassandra Complex; I can’t remember how many fervent conversations I had with co-workers about why they should dispassionately and rationally evaluate a company’s actual product and leadership team before throwing all their cash at it. Then the bubble collapsed, and horking gobs of wanna-be Dot Coms perished in the economic implosion. I was at Yahoo! at the time, and watched the panic completely overwhelm the naïve kids who had bought into the empty hype about how stocks only ever go up. No, I was not so gracious as to forgo saying ‘I bloody well told you so.’

'Tell me again how being three years late to market with an untested product was going to "guarantee" profitability. Go on, then. Let's hear your "foolproof" plan.'
‘Tell me again how being three years late to market with an untested product was going to “guarantee” profitability. Go on, then. Let’s hear your “foolproof” plan.’

And, so, here we find ourselves again. Enough time has elapsed that folks seem to have forgotten how insanely self-destructive our collective behaviour was during the rise of the last bubble. This is just something that we do. Along those lines, the US Congress passed a 2015 budget earlier this month that insanely gutted elements of the Dodd-Frank Wall Street Reform and Consumer Protection Act:

‘The second rider, custom tailored for the banks of Wall Street, would kill a crucial part of the Dodd-Frank reform law aimed at curbing the banks’ reckless speculation in complex derivatives that fueled the banks’ ignominious collapse in 2008 and fed the great recession. The rider would effectively put taxpayers back on the hook to cushion the banks’ losses in risky derivative deals.’

Oh, goody. Here we go again. We all might want to restock on firewood, diesel fuel, Coke, and tinned spam because we’re hurtling towards another gutting of the middle class by the same greedy investment bankers who eviscerated the economy eight years ago. But I digress.

As far as the Dot Com II bubble, it’s clear that optimism springs eternal in the entrepreneur’s breast; the Legend of the Great and Mighty Amazon.com IPO still pulls at b-school students like a lodestone to a fervently eager crowd of risk-oblivious iron filings. It seems that every other person of working age these days wants to slap out a product design or some mobile phone code, dazzle the Venture Capital crowd, and then get rich selling their company to an industry giant. WIRED’s Gideon Lewis-Kraus wrote at-length about this irrational exuberance and wilful self-delusion back in April in his story ‘No Exit.’ In my favourite paragraph from Gideon’s piece, he said:

‘Silicon Valley is not a place where one is invited to show frailty or despondence. It is… “the place where everybody is killing it all the time”. This might seem peculiar, given that the lot of the small-business founder has always been a fragile one. But in recent years the Valley has successfully elaborated the fantasy that entrepreneurship—and, more broadly, creativity—can be systematized. This is the basic promise of accelerators (Y Combinator et al.), that success in the startup game can be not only taught but rationalized, made predictable. Starting a company was once an urge felt only by the blindly ambitious and slightly unsound, but in the Valley it’s been ostensibly transformed into a scheduled path one can simply elect and apply for, rather as one might choose law school or Wall Street. …Starting a company has become the way for ambitious young people to do something that seems simultaneously careerist and heroic.’

To be clear, I don’t begrudge anyone his or her dreams of business success. I think that it’s great to have lofty ambitions, and that it’s admirable to try (and fail) to create something new that consumers might fall in love with. If you’re up for the risk, I say you should go for it. Trying to build a company and failing at it can be a fantastic learning experience. Building something new is almost always a worthwhile investment of time and effort.

Here, we see a wise mum about to teach her kids how overly-leveraged structures respond to unexpected market shocks.
Here we see a wise mum about to teach her kids how overly-leveraged structures respond to unexpected market shocks.

That said, please don’t expect me to buy into your quasi-religious hype over how your new ‘Dyspeptic Badgers’ app for the Oculus Rift is totally going to take away all of Rovio’s Angry Birds market share. I’m happy for you that you’re excited, however I respectfully decline the invitation to join your hallucination. I’m not going to fund your expedition over the fiscal viability waterfall. Y’all have fun.

I want small business owners to be successful. I really do. My earnest desire to see people succeed, though, doesn’t blind me to the glaring flaws in most business plans. As a painful example, I was once asked by a friend to go over her ‘pitch’ for a new IT services outsourcing company. When I came to the proposed services list and saw that she intended to offer 24/7 technical support to clients, I asked her how she intended to do that with only two employees. She got miffed and wouldn’t speak to me for months afterwards. I felt bad for her, since her heart was in the right place, but there was simply no possible way that she could deliver on her commitments without adequate staff. As I tried to explain, the first time that a client called on her at 03.00 demanding a database fix and she wasn’t able to deliver, she’d lose both the angry client and her professional reputation.

I’ve counselled a great many friends and colleagues over the years about their grandiose plans for world-conquering new businesses. In the end, they’ve all featured at least two of these 10 critical business plan flaws:

  1. The people tapped to run the business have never in their lives run a business before
  2. The brand new company that no one’s ever heard of sees no need to spend money on branding, advertising, or marketing, and yet still assumes that they’ll have paying customers within weeks or months of launch
  3. The staffing levels are set to absolute minimums, on the assumption that none of the critical workers will ever get sick, have a personal problem, or become unreliable
  4. One of the founders has an idea for a killer new product, but hasn’t actually prototyped it – let alone created a working version of it
  5. The plan assumes that the market will immediately fall in love with the new product or service as soon as it’s launched, because reasons
  6. Better-funded, more experienced, and battle-tested competitors already have versions of the new product or service for sale, but that doesn’t matter because consumers will abandoned the existing, known, tested market leaders for a no-name start-up that’s late to the party
  7. Things that the founders never done before (like servicing an Oracle database) are assumed to be be easy for them to learn to do, but impossible for the paying client to learn to do, which is why clients will pay a novice to support their product and not bother to become self-sufficient
  8. There’s no thought given in the plan to essential business protection measures like liability insurance, stock levels, surge capacity, financial oversight, etc.
  9. The plan has no exit strategy – there’s no thought given to when or under what conditions the endeavour should be sold or scuttled. The plan simply assumes that profitability will occur, and then continue indefinitely

    And my favourite:
  10. The key owners, leaders, or decision makers are chosen based upon personal ties rather than demonstrated ability to deliver
All would-be entrepreneurs must eventually learn that compatibility is not a one-for-one substitute for competence.
All would-be entrepreneurs must eventually learn that compatibility is not a one-for-one substitute for competence.

I completely understand why a novice entrepreneur would make these sorts of elementary mistakes; it’s their first time out, and they’re still learning. That’s fine. Listen to the voice of reason, revise your plan, and have at it. That doesn’t fly for people who have already tried running a business before; if you’ve launched a company (or several companies) that failed because of mistakes you made in planning or operations, the you have no excuse whatsoever for trying to build another one when you state up-front that you’re planning to make the exact same mistakes again.

When I run across companies that seem bound and determined to repeat their previous goofs, I have to assume that one of two things is happening: either the people in charge are bloody foolish and can’t be trusted to learn from their mistakes, or they have so little regard for their investors and customers that they’re cynically willing to launch a venture that they know is doomed at the start.

That’s why I find it amusing to read the word ‘Silicon’ (as in Silicon Valley) as a portmanteau of ‘silly’ and ‘con artist.’ Many of the would-be start-up folks that I’ve counselled on new business ventures have fallen into one of those two categories: blind fools or amoral rogues. I’m not staggeringly wealthy, so I can’t afford to put my time or my savings into a venture that I’m reasonably sure is structured from the outset to fail. I may like you, but I’m not jumping aboard the metaphorical car that you’ve already proven you’re unfit to drive. No cliff dive for me, but thanks for asking. [1]

All the best, hope it works out, etc. If you need us, my inadequate sarnie and I will be off doing real work for a real outfit that has a real business plan – preferably one that’s actually making money. Ta.


[1] To be fair, I have known a great many dedicated, seasoned, and self-aware small businesspeople that I would absolutely invest in and agree to go to work for. Those people are absolute gems. They’re also pretty rare.


POC is Keil Hubert, keil.hubert@gmail.com
Follow him on twitter at @keilhubert.
You can buy his books on IT leadership and IT interviewing at the Amazon Kindle Store.

Keil-Hubert-featuredKeil Hubert is a retired U.S. Air Force ‘Cyberspace Operations’ officer, with over ten years of military command experience. He currently consults on business, security and technology issues in Texas. He’s built dot-com start-ups for KPMG Consulting, created an in-house consulting practice for Yahoo!, and helped to launch four small businesses (including his own).

Keil’s experience creating and leading IT teams in the defense, healthcare, media, government and non-profit sectors has afforded him an eclectic perspective on the integration of business needs, technical services and creative employee development… This serves him well as Business Technology’s resident U.S. blogger.

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