Thread by @leosiligato

#Robinhood just cut its workforce for the second time this year. The wave of layoffs hitting tech is unveiling a simple truth: the whole startup-to-unicorn capitalist model is intrinsically flawed, because it is based on promises that rely on overly optimistic assumptions. 1/

https://twitter.com/CNBCnow/status/1554560635270209537

The world is complex. Sh*t happens. Good investors and good managers should know that and prepare for the worst scenario. That clearly wasn't the case at Robinhood and in many other tech companies.

Now the question is - why? Why these leaders weren't prepared for this kind of scenario?

The answer is easy: they only optimise for growth, disregarding business sustainability. But how do you define growth?

Traditionally, a manager would optimise for earnings growth. That's how you make investors happy. But in the startup-to-unicorn model, investors are kept happy with the promise of earnings, not earnings themselves.

That is achieved by optimizing for the growth of other metrics such as monthly active users, assets under management, or revenues if you're lucky.

These metrics only tell part of the story, they only account for part of the equation. Investors should know that. Yet, In the last ten years or so, they kept feeding companies based solely on such numbers.

Why? - you might ask. No better alternatives, plus a good dose of some sort of delusional faith in "disruption", used as a synonym for innovation. Low interest rates and expansive monetary policies all over the world did the rest. In other words...

Some pockets found themselves filled with too much money and didn't know how to invest it, so they started gambling. Their favourite bet: "disruption". The narrative behind disruption has been so enticing and pervasive that it became a quasi-cult.

And like all cults, it didn't need proof. When you join a cult, you don't ask why, you start doing things only driven by faith. That seems to be the missing component in the equation: faith. Investors only needed soft numbers as MAU because they had faith (and money to waste).

That explains why they didn't ask managers for sound business plans including extreme scenarios, which is something any rational investor would have done. They just wanted to believe.

Now that believing is becoming increasingly hard due to the circumstances (war, lack of supplies, power prices, inflation), the whole startup-to-unicorn model is coming down like a house of cards.

Investors are suddenly waking up and asking for harder numbers. It's like a bank run. And like in a bank run, these businesses were not prepared to give investors what they're asking for. That's why we're witnessing this dreadful show.

The silver lining: from now on, investors will probably spend their money more wisely, rewarding more sustainable businesses, at least for a while.

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