Disrupted
Page 3
In the 1980s Silicon Valley technology companies were boring places where engineers worked in drab office parks writing software or designing semiconductors and circuit boards and network routers. There weren’t any celebrities, other than Steve Jobs at Apple, and even he wasn’t such a big deal back then. In the early 1990s the Internet era began, and Silicon Valley changed. The new companies were flimsy, based on hype and grandiose rhetoric and the promise of making a fortune overnight. The dotcom boom of the late 1990s was followed by the dotcom bust, and then came a period when Silicon Valley felt like a ghost town. Slowly, a new generation of Internet-related companies arose, and while this second boom wasn’t a direct copy of the first one, there were some worrisome similarities, chief among them the fact that none of these companies seemed to be generating a profit. They were all losing money, and some were losing shocking amounts—billions of dollars, in some cases—and nobody seemed to mind.
I covered the first dotcom bubble and crash as a reporter at Forbes. Those years have turned out in retrospect to have been a kind of golden age not just for Forbes but for magazines in general. Magazine writers didn’t get rich, but we made a good living, and the perks were amazing. We traveled the world, stayed in first-class hotels, and partied on the Highlander, Malcolm Forbes’s superyacht, with rock stars and heads of state. During my years at Forbes I met my wife, Sasha, and in 2005 we had twins, a boy and a girl. After spending my twenties and thirties bouncing around like a nomad, I settled down in my forties, with a good job and a new family.
In 2006 I created a blog called The Secret Diary of Steve Jobs, where I wrote in a persona called Fake Steve Jobs. The idea was to satirize not just Jobs himself but all of Silicon Valley. I wrote the blog anonymously, and the mystery added to its appeal. Pretty soon it was attracting 1.5 million readers a month.
The blog depicted Jobs as an insufferable, insecure megalomaniac who had turned himself into the leader of a weird cult based around electronics. Jobs ranted and cursed at the people around him; he went drunk-driving with Bono and smashed into other drivers; he threw scalding tea on his long-suffering assistant; he got into trouble with the Securities and Exchange Commission and lied to investigators; he visited sweatshops in China where children made iPhones and came away feeling that he was the victim. With Sting, he traveled to the Peruvian rain forest, where they tripped on ayahuasca and ended up hugging and sobbing on a mud floor. He and his best friend, Oracle CEO Larry Ellison, drove to the Tenderloin in San Francisco and fired water cannons at transvestite hookers. They made prank phone calls, dialing a local Thai restaurants to order “penis sauce” or calling a hardware store in the Castro section of San Francisco to inquire about black caulk.
Eventually I got caught. A reporter at the New York Times figured out who was writing the Fake Steve blog and confronted me, and I came clean. There were profiles about me all over the place, from the New York Times to Der Spiegel in Germany and El Mundo in Spain. Conferences started inviting me to give speeches. Then I got hired at Newsweek, which led to even more speaking engagements, and I was on TV all the time, opining on Fox Business or CNBC or Al Jazeera. I published a Fake Steve novel, sold the rights to a Hollywood production company, and found myself in Los Angeles, developing a cable TV comedy while still working at Newsweek.
Then things went south. My cable TV show got killed before it even got off the ground. The Washington Post, which had owned Newsweek since 1961, sold the magazine to a new owner. The new owner merged Newsweek with a website called the Daily Beast, whose brilliant but crazy editor, Tina Brown, became the editor of Newsweek. Most of my colleagues left or got booted out. I hung on, but things were chaotic. People came and went. During the next two years I had a half dozen editors. Sometimes I had no editor at all and just floated around, trying to place stories into the magazine. It was not a happy time, but I kept hoping that things would turn around.
In March 2012, that seemed to happen. My old pal Abby was hired back and installed as the executive editor, and I was reporting to her. My job, which had felt precarious under the new ownership, began to feel secure. Finally, I had an ally, a friend in New York who would look out for me. That was a foolish thing to believe.
Two
When the Ducks Quack
Losing my job sends me into a tailspin. On the surface I’m okay, or at least I am trying very hard to pretend to be okay. Inside I feel like I’m barely holding it together, even with daily doses of Ativan. “You’ll land on your feet,” people keep telling me, and I want to believe them, but as time goes by I’m not sure. So far I’ve had a disastrous interview at a big PR firm, with a vice president who invited me down to New York, kept me waiting for an hour, then told me that he didn’t like to hire journalists. At Forbes, an editor who less than a year ago was trying to poach me away from Newsweek now offers me a contract job that pays $32,000 a year and carries no health benefits. At night I lie awake in bed, unable to sleep, secretly afraid that I might never get hired again.
That Newsweek story about “beached white males” wasn’t a work of fiction. I know guys my age whose careers are over. They’re in their early fifties and once held senior-level positions, and then got downsized only to discover that no one wants them. Those guys have all been where I am now—freshly out of work, still hopeful, going on interviews. But six months goes by, and then a year, and at some point people stop taking your calls. I’m not there yet. I’ve landed some freelance work, I’m still making money doing speaking gigs, and my lecture agent has promised that he will try to keep me working, but he also has warned me that without the word Newsweek in front of my name those speaking gigs are probably going to dry up. What happens then? Sure, we have savings. But those won’t last forever. For now we’re doing our best to economize.
The kids know what’s going on. We don’t talk about it a lot around them, but I have to say something. I don’t know if talking makes things better or worse. I get the sense that they are a bit freaked out, especially my son. He’s a sensitive kid. One night when I’m putting him to bed I recognize something in his eyes that I’ve never seen before—it’s not that he’s scared, it’s that he knows what I’m going through and he feels sorry for me. It’s almost too much to take. “Come here, dude,” I say, and I give him a hug and try to make him laugh, and he does laugh, and I laugh, too, but I’m also trying not to cry. I realize that the way he sees me now is different from the way he saw me before. For the rest of my life I’m going to remember that flash of pity in his eyes. That look is going to haunt me. I need a job. Any job.
Soon enough, I get one. This happens in September 2012. It’s not a great job. It’s not even a good one. There are a lot of drawbacks, chief among them that the job will take me away from home, but I don’t hesitate. I jump on it. Suddenly I am the editor-in-chief of a struggling technology news website called ReadWrite, a tiny blog with three full-time employees and a half-dozen woefully underpaid freelancers. ReadWrite is based in San Francisco, which means I fly out on Monday and take a redeye back to Boston on Thursday or Friday. On weeks when I’m not in San Francisco I’m either in New York, where ReadWrite’s parent company is based, or in some other city, making sales calls, trying to get tech companies to buy ads from us. It’s not a lot of fun, but I’m making a paycheck and keeping my eyes open for something better.
ReadWrite’s offices are on Townsend Street, in the South of Market neighborhood, where all of the hot tech start-ups are located—Twitter, Uber, Dropbox, Airbnb. While the rest of the country is still licking its wounds from the worst recession in nearly a century, things here are buzzing. Start-ups are everywhere, and they’re all raising money.
For a few years after the stock market crash in 2008, it was impossible for companies to pull off initial public offerings of stock. Without IPOs, the venture capital firms that put money into start-ups could not get a return on their investments, so venture funding fell off. But now things are loosening up. In May 2011, LinkedIn, a social network, went pub
lic and saw its shares more than double in their first day of trading. Later in 2011 Groupon and Zynga floated the biggest IPOs since Google in 2004. In May 2012 Facebook went public, in the biggest IPO in the history of the tech industry, one that placed a value of more than $100 billion on the social network that Mark Zuckerberg had started on a lark in his Harvard dorm room eight years before.
Now everyone is trying to spot the next Facebook, and a new tech frenzy is taking shape. Back on the East Coast, where I spend my weekends, there is a vague sense that maybe things are getting a little bit frothy out in the Bay Area. Here in San Francisco there is no doubt. There’s money everywhere. Any college dropout with a hoodie and a half-baked idea can raise venture funding. Scooter rentals, grilled cheese sandwiches, a company that sends subscribers a box of random dog-related stuff every month—they’re all getting checks. Blue Bottle Coffee, popular among the cool kids in San Francisco, has raised $20 million (and over the next two years will raise $100 million more) and brews coffee using Japanese machines that cost $20,000 each. A cup of joe costs seven bucks. There is always a line.
Thanks to all this new disposable income, San Francisco is bubbling with weirdo delights, like twee little shops selling liquid nitrogen ice cream and trendy bakeries making artisanal toast. Every morning, walking to work, I dodge a river of hipsters in skinny jeans and chunky eyewear riding skateboards—grown men! riding skateboards!—while carrying five-dollar cups of coffee to their jobs at companies with names that sound like characters from a TV show for little kids: Kaggle and Clinkle, Vungle and Gangaroo.
The place feels a bit too much like it did back in the late 1990s, during the first dotcom bubble. I have the eerie sense that we are about to live through that nightmare all over again. Back then I was a technology reporter at Forbes. I had spent years writing about business and learning the traditional methods by which companies are valued. During the bubble I felt like a sane person who had been thrown into an asylum. The economics of these companies made no sense. Their valuations were completely irrational. I wasn’t the only one pounding the table about this. Yet the stock market kept going up and up. Scammers were getting rich, and I was missing out. It’s a tough thing to be a tech journalist during a tech boom. You spend your days talking to people who don’t seem any smarter than you—some don’t seem very bright at all—and yet they are gazillionaires, while you’re an underpaid hack who can barely pay his bills. I wasn’t sure whether to resent them or envy them. In the end I felt a bit of both.
Of course the dotcom bubble finally blew up, and I felt a little bit vindicated and even a bit relieved. Now everything could go back to normal. I figured the dotcom bubble had been a historical anomaly akin to the Dutch tulip mania of the seventeenth century, something we would never see again in our lifetime.
Instead another one is taking shape. People my age, who remember the first dotcom bubble, are walking around San Francisco feeling like the character played by Bill Murray in Groundhog Day. We’ve lived through this before. We reckon it will all end in tears, just like the first one did. The young kids running these new companies, however, have almost no memory of the first crash. They were in junior high school when it happened. One day, Aaron Levie, the twenty-six-year-old CEO of Box, a well-funded new tech company, tells me it’s really important to learn from what happened in the 1990s—which is why he has read a bunch of books about that era.
To be sure, this bubble is different from the first one. The first bubble was a mania driven by a new technology that captured the imagination of mom-and-pop investors. This new bubble contains the same kind of magical thinking, but with an added twist, courtesy of the Federal Reserve. This time around the problem isn’t just that investors have gone a little bit crazy, but also that money is cheap.
That at least is what one venture capital expert tells me. He theorizes that the policy of “quantitative easing” instituted by the Federal Reserve and other central banks after the financial meltdown of 2007 and 2008 is contributing to the stock market boom. By printing more money, the central banks are inflating stock prices. That in turn drives up the value of big pension funds and college endowments. Those organizations thus have more money to put into venture capital funds. As more money flows into venture capital, it becomes easier for start-ups to raise money. The surge of money also causes the valuation of some privately held tech companies to soar. This is an oversimplification, but basically the Federal Reserve is printing money, and a lot of that money is making its way to venture funds and from there into the pockets of a bunch of kids who are building start-ups in San Francisco. As long as the Fed keeps printing money and the stock market keeps going up, the party will continue.
There is more money than there are places to put it, so much that instead of entrepreneurs competing to get funded, the venture funds are competing to get into deals—fighting for the chance to give someone their money. There’s more competition than ever before, not just from venture funds but also from start-up “incubators” and “angel investors” who are popping up all over the place.
Soon even more money will surge into the Valley from mom-and-pop investors, people who previously were prohibited from investing in start-ups because such investing was deemed too risky. In 2012 Congress passed the JOBS (Jumpstart Our Business Startups) Act, which relaxes the rules on private company investing and allows regular folks to pour money into start-ups, usually by pooling their money into syndicates on websites like AngelList. Silicon Valley companies lobbied for the JOBS Act, arguing it would give ordinary people—doctors, lawyers, retirees—the chance to catch the next Facebook or Google. But some Wall Street veterans are worried: “We are talking about companies that in all likelihood are not going to be winners, being invested in by people who clearly don’t have the expertise and financial smarts of venture capitalists,” former SEC chief accountant Lynn Turner tells Bloomberg, adding that the rule change creates “a real opportunity for scams and fraud and significant losses.” The denizens of Silicon Valley see no such problem. “People are gambling in Vegas and blowing their money. They should have the freedom to angel invest with their money,” is how Jason Calacanis, a Valley entrepreneur and investor who is leading a start-up investment syndicate, puts it.
The ranks of new Silicon Valley investors also include Hollywood celebrities and pop stars, the kind of people that Wall Street calls “dumb money.” But in a way it’s all dumb money. Nobody really knows what’s going to work, or which companies are going to succeed. Some investors are just spreading money around everywhere—“spray and pray,” they call it—hoping that somehow, if only through dumb luck, some of their money will land on the next Facebook, and the payoff from that one hit will more than make up for the duds. The biggest risk for venture capitalists is not that they will make a bad bet but that they will miss out on one of the good ones.
A lot of the entrepreneurs are just as inexperienced as the investors. Some raise money without even knowing what product or service they will build. Many have never run companies before. Some have never even had jobs before. On top of that, a lot of these new start-up founders are somewhat unsavory people. The old tech industry was run by engineers and MBAs; the new tech industry is populated by young, amoral hustlers, the kind of young guys (and they are almost all guys) who watched The Social Network and its depiction of Mark Zuckerberg as a lying, thieving, backstabbing prick—and left the theater wanting to be just like that guy.
Many are fresh out of college, or haven’t even bothered to graduate. Their companies look and feel a lot like frat houses. Twitter, at one point, will literally hold a frat-themed party. In 2012 a new word has entered the Silicon Valley lexicon: brogrammer, which refers to a kind of macho dickhead who chugs from a beer bong and harasses women. Soon come the scandals and lawsuits and criminal cases, with tales of sleazy founders sexually harassing female employees or, in one extreme case, allegedly beating up a girlfriend. These are the people who now run tech companies, who have been entrusted
with huge sums of other people’s money. It would be nice to think that when everything falls apart, the only ones who get hurt will be venture capitalists on Sand Hill Road in Menlo Park. But a lot of the money being thrown at these kids originally came from pension funds. The pain, when it comes, will not be confined to Sand Hill Road.
Walking around San Francisco, it strikes me that this cannot end well, that the combination of magical thinking, easy money, greedy investors, and amoral founders represents a recipe for disaster. My first response is to feel the same kind of righteous indignation that I felt back in the late 1990s. (Journalists are really good at righteous indignation. It comes naturally to us.) But this time I also feel something else—maybe because I’m older and more pragmatic, or maybe because I now have kids to support, or maybe because I’m still stung by the loss of my Newsweek job and fearful that there is no future in the media business. Maybe it’s because I hate my new boss at ReadWrite, and every day I slog into the office and bang out blog posts only to have her call me from New York and tell me the site isn’t getting enough traffic. I feel like a hamster in a wheel, running and running, getting nowhere. I’m never going to make any money doing this, and meanwhile all around me there are kids in skinny jeans making millions, tens of millions, hundreds of millions of dollars—money for nothing, as Mark Knopfler sang in that old Dire Straits song.
This time I start thinking that I should get in on that. I should go get a job at one of these start-ups. Tech companies and VC firms are all poaching journalists to pump out blogs and get them some attention. They’re flush with cash and hiring like crazy. Two of my journalist friends have already made the leap. One is working at Evernote, the other at Flipboard. They both live in San Francisco. I see them all the time. These guys aren’t naïve. They just want to cash in on the madness. Out here, making money is the only thing anyone talks about. Funding rounds, valuations, deal terms, equity percentages, who made what—these are the topics of conversations when I visit friends for dinner in Marin County. The coffee shops are filled with techies who are hunched over laptops and frantically dashing out code, or pitching ideas to investors. Every morning when I’m waiting in line for my five-dollar caffè latte I see these meetings taking place.