I see a lot of people base their opinion of the viability of Twitter’s upcoming IPO on the finances provided in their S1. With the financial press leading the cacophony in drawing unknowing readers to their unique nuggets of investment “merit”.
Finance does not make a company
To base the future of a company on its finances is the kind of thing people in business school are taught to do to “predict” success, as I witnessed in person as a judge at VCIC (Venture Capital Investment Competition) a couple of years ago.
In complete ignorance of the fundamental difference between private equity and venture capital, finance people often evaluate a company with the same misguided confidence as one could reliably determine the health of a person by measuring body temperature.
Groundbreaking innovation has no precedent, is non-uniform and therefore cannot be measured or compared to a uniform trajectory or formula of growth. Let alone the forgotten realization that finance is merely a (delayed) derivative of a current business strategy, and therefore a highly inaccurate reflection of the business goals and the efficiency of its operating model going forward.
As such, people’s conclusions from financials yield nothing more than an ill-fated attempt to extrapolate hindsight. All while the merit of investing that produces outlier returns comes from a unique assessment of foresight.
Perhaps because the public is no longer just a public trader, and through crowd-funding now also gets to play private trader with the fallout from subprime venture capital. Alas, let me readjust my aim to improving the exceptionalism of technology innovation.
Dorsey is right
I heard Jack Dorsey, the creator of Twitter, talk at the Clinton Global Initiative (CGI) about how and why he started the company. His rationale, to give people the ability to communicate with each other regardless of device, makes a lot of socioeconomic sense. Especially in underdeveloped countries (the focus of CGI) where the ability to communicate can mean the difference between life and death.
Perhaps desperate venture capitalists, who on the whole have turned the arbitrage of innovation subprime and after 40 years have left the Silicon Valley emperor without many clothes, will finally take note and support what I have been saying and writing for some 15 years; that the low-hanging fruits of technology innovation only ripen quickly when they aim to serve an existing socioeconomic need, rather than attempt to create a new one. Investment opportunities abound.
I enjoyed Jack’s talk in which he describes that his new company, Square, is based on the same premise. To attach technology to an existing socioeconomic need, in this case, to provide modern payment services to anybody who runs a business (80% of companies in the U.S. are considered small businesses).
Nice and “simple”.
Twitter is wrong
Given the praise mentioned above, one would surmise I would classify Jack’s company Twitter as a great investment opportunity. Au contraire.
Our country’s economic systems the world has “blissfully” copied, are seriously flawed. And therefore to understand the authenticity of the many socioeconomic needs technology can serve, one must not tag its desires – nor the implementation of technology – to the wrath of the economic systems that currently holds them both hostage.
Our democracy is not a meritocracy because it violates the economic principles that define a meritocracy. A meritocracy which in turn depends on the principles of a “free-market” we never defined. As a result, our economic systems deploy and stimulate practices that are quite the opposite of “free” and turn the systems that run our democracy steadily subprime.
Twitter fails for the same reason as “our economy”, its communication mechanism promises freedom – yet is not. Simply because a democracy without a (mostly) self-regulating meritocracy can never be renewable and thus erodes freedom.
The ugly symptoms I describe in “Why I don’t follow anyone (on Twitter)”
Using the context of systems that violate economic freedom, I have a big problem with people who refer to their role in the business of innovation as “making money”.
No business that is non-renewable, in violation of “free-market” principles and in violation of a meritocracy, can authentically claim to be “making money”. And while Twitter still has time to adjust course, its violation of these economic parameters will soon make it fail, albeit opulently.
Technologies that (perhaps by economic naiveté) drive nonrenewable values build companies that are nonrenewable and merely become yet another trojan horse entering the castle of meritless populism. Bound to damage the trust of the public soon once again.
If we want technology companies to drive meaningful socioeconomic value, not rob the public’s bank and trust, and provide outlier investor returns, we must design them from the start with economics in mind. Not the stale economic religion from the past that has so poignantly failed us, but with modern economics as renewable as innovation.