The digital economy is breaking things because most people running digital companies aren't
aware of the operating system that's beneath what they're doing.
There's a good old fashion venture capital driven operating system.
It goes back to central currency and corporatism and chartered monopolies and really the way
our economy works, which has worked for a good 400 or 500 years and promoted everything
from the British East India Trading Company right through to Walmart and General Electric.
But when you take that and juice it up with digital steroids, weird things start to happen.
You end up able to tweak and optimize your business so carefully that you can really
see is a growing?
Is it not growing?
What can we do to promote growth?
Growth.
And if your company is not growing you end up in big trouble against all the other players
that are growing.
It's simple power law dynamics.
It's a winner takes all landscape.
So if you have a company like Twitter, which I would see in my old fashion view as a successful
company.
It makes $500 million a quarter based on 140-character app.
Success, right?
No.
In the current environment that's a failure because they don't have a growth strategy.
They don't know how to turn into a video company, a news company, a social company, an everything
company.
And the reason why the digital economy is breaking our businesses is because we're taking
the old agenda of growth and running it on digital platforms and it ends up amplifying
and spinning this priority out of control.
Most of us look at the industrial age as this natural outgrowth of the need to do more and
better business.
But as I researched it I found out that most of the innovations we came up with in the
industrial age were really for the opposite.
There was a thriving peer to peer economy right at the end of the Middle Ages that nobody
likes to talk about.
The soldiers had come back from the Crusades.
They had all sorts of new inventions and technologies and mechanisms; there were new trade routes
that they had opened up.
And they had came back to their towns and they took something that they found in the
Middle East called the bazaar and they revived it as something they called the marketplace.
So now people who had just been peasants working on the land of the Lords started coming together
and trading this stuff that they made.
And they had all of these really interesting instruments from market money and local currency
and grain-based currency and all of these evolved really to promote the exchange of
value and the velocity of transactions between people.
And it started to really do well, which was the problem.
As the peasants became wealthy the aristocracy got scared, who are these people?
They're not going to be dependent on us any more.
So they came up with two main financial innovations to prevent the rise of this peer to peer economy.
The first one was the chartered monopoly, really the parent to the modern corporation.
All the chartered monopoly was was a way to say all of you small businesses are now illegal.
If you want to be in the shoe business you have to work for his majesty's royal shoe
company.
You want to be in the grain business you have to work for his majesty's royal grain company.
So people who were small business people now became employees.
Instead of selling the value they created, now they sold their time as servants, as wage
laborers.
The second invention they came up with was central currency.
Not such a terrible thing in itself.
It's great to have a long distance currency that lots of people can use and value, but
the problem was they made all of the local currencies illegal.
So the only way people could trade with each other, the candlestick maker could trade with
the chicken farmer was by borrowing central currency from the treasury.
So now you had to borrow money at interest just in order to transact.
And that set in motion really a growth cascade.
If you have a currency that has to be paid back with interest, in order to just make
end meet you need an economy that's growing.
You need more money next year than there was this year.
So that worked well for colonial powers, as long as we could extend into Africa and South
America and North America, find slaves, find new resources, we could grow.
But what happens when you reach the end of the planet's growth as we did really at the
end of World War II?
Then we started to look for really virtual surface area, some new way to grow.
And that was the technology.
We believed that digital technology and the World Wide Web and computers would really
create a new place, a new virtual territory for us to colonize.
And it just turns out what we've been colonizing for the last 20 years is human attention and
human time.
And now it looks like we're even running out of that.
Well, when the Internet first emerged people like me thought hooray, now we're going to
have a way to restore all that peer to peer conductivity between people.
And some of the earliest Internet businesses actually sought to do that in one way or another.
If you look at the path of eBay and PayPal and Etsy and Square there are a lot of businesses
that are looking at how can we connect people in a lateral way?
The problem is as those businesses grew and everybody got interested in the net, other
folks, the folks who really who started Wired Magazine or the Global Business Network, a
lot of folks who were from the old NASDAQ stock exchange, which had been really depleted
every sense of the biotech crash of 1987, they sought in the Internet a new avenue for
growth.
So for them it wasn't about how are we going to connect people in new wonderful ways and
let him create and exchange value between them, it was really more how can we use digital
platforms to extract value from people and places?
So if you compare an eBay, which is promoting exchange to an Amazon, which is promoting
extraction, you can kind of begin to see the difference.
What happens is you end up with digital businesses that really are started more in the flip this
house model of business that the I'm going to start a business that helps people and
keeps going for 20 years.
People put money into an Internet business in order to get to acquisition or IPO.
They want to grow this business a hundred times and then get out.
It's called an exit strategy.
Then it doesn't matter what happens.
So, if you have a ride sharing company, are you going to pay your drivers enough so that
they can have an ecosystem that lasts 20 years?
No, you don't care about that.
You can adopt a scorched earth policy towards this because you only need those drivers and
that whole ridesharing sector long enough to establish a monopoly and then move over
into something else.
When the Internet came around we all thought we're all going to work at home in our underwear
in our own time exchanging value with one another, but instead we've ended up with an
Internet that takes more time from us, an Internet that we feel exhausted and drained
when we're done using it.
And that's because we're not using it; it's using us.
The Internet is really just the technological front on a whole series of business plans
that are looking to extract money from us, time from us, attention from us, and if we
have none of those things, at least data from us.
And we're not feeling it creating value for us; we're not feeling it really enhance our
ability to create and exchange value with other people.
It's harder for most of us to make a living now rather than easier.
And that's not because automation is doing things better, it's because we're really facing
very extractive business plans, extensions of that very same late medieval squashing
of peer to peer activity, although now amplify in every device in our arsenal.
The reason I'm optimistic is because the metrics are all on the side of doing business well
rather than this scorched earth short term extractive model that most digital companies
use.
If you look at the data, family businesses do better than shareholder owned businesses
on every single metric except one, they grow slower during bubbles.
And actually you kind of want to grow slower during bubbles because if you grow big during
a bubble then you're part of what pops.
Now, the reason why family businesses do better in the long run than shareholder owned businesses
is because the person running a family business wants it to be around in another generation
or two or three.
The person running a shareholder owned business wants to extract enough money from that business
so their grandchild can be given this wad of cash.
The person with a family business wants the business to be healthy enough so the grandchild
can then run a successful thriving business.
And because your family name is on the business you don't want to do really mean things to
your employees or to the places that where you operate because then people are going
to hate your family.
It's your name.
It's your face.
So a very different dynamic gets set up and one that's ultimately more sustainable as
a business.
And startup, the founders of startups and technology businesses have to come to understand
that taking venture capital and going for the big acquisition, going for that one out
of 10,000 chance of getting a homerun is dumb compared to taking a very small amount of
money and hitting the single or the double, in other words making ten or $20 million is
not tragic, it's still enough.
You can still really – you're going to get by on that.
You're going to be able to send your kids to great colleges.
It's not a failure to have millions of dollars.
But if you have to aim for the billions, if you are forced to your probability is so low
- when I look at these founders running to Sequoia and Flatiron and Y Combinator because
they want to go big and get the homerun, it looks to me like those people you see taking
their welfare checks and going to the bodega and buying lottery tickets because they want
to get the jackpot, the $43 million, they have no chance of doing that.
And they would have a chance of taking their $5 or $10 and actually investing it and buy
a book, learn how to do something, get a job.
They have a much more high probability of succeeding.
And it just breaks my heart when I see a kid have a great app, a great idea and then they
turn to a venture capitalist who gives them a ton of money and a high valuation and then
has them pivot.
The pivot is not to do something better, all a pivot means is you're going to abandon what
your original business was in order to come up with something that's sellable to the next
round of investors, the next round of suckers really.
And do you really want to throw away your business?
Do you really want to dispose of your idea in order to turn it into the brand name on
a Ponzi scheme?
I hope not because there's still so many great things we can do with these technologies.
There's so much money to be made.
There's so much revenue in creating people to one another, in helping people create an
exchange value.
The mantra I would give any startup and any big business is make other people rich.
If you make your users rich they will come back.
If you make them poor you've killed your marketplace.