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Disrupted should be required reading for any would-be tech start-up backer

Maybe the company at the heart of Disrupted was a one-off but it seems more prudent to view the best-selling exposé as a warning of what can happen to investors’ cash if they do not carry out adequate due-diligence

19/02/2020

Andrew Evans

Andrew Evans

Fund Manager, Equity Value

Shortly after 50-year-old tech journalist Dan Lyons is unexpectedly and unceremoniously let go by Newsweek – “I think they just want to hire younger people,” his boss explains in an early-morning phone call – he swaps writing about life in Silicon Valley for living it. Lyons joins a Boston-based tech start-up backed by $100m of venture capital and his subsequent eye-opening experiences are chronicled in the 2016 bestseller Disrupted.

Should any of the company’s backers have dared to read the book, it seems unlikely they will feel happy with where much of their money went as Lyons shines a light on what can apparently pass for normal in the world of tech start-ups – inexperienced employees, high staff turnover, labour legislation circumvented and some workplace antics that even the frat boys of Animal House might have considered a little on the juvenile side.

Perhaps most extraordinary of all is the revelation the start-up’s first two hires were a director of sales and a director of marketing – despite the fact it did not actually have anything to sell or market. And even when it did come up with some e-marketing software to sell, it still felt it necessary to build up a huge call-centre of telesales staff – ‘boiler room’ would be another description – to drum up customers.

“While people still refer to this business as ‘the tech industry’,” Lyons writes, “in truth it is no longer really about technology at all. You don’t get rewarded for creating great technology, not anymore, says a friend of mine who has worked in tech since the 1980s … It’s all about the business model. The market pays you to have a company that scales quickly. It’s all about getting big fast. Don’t be profitable, just get big.”

And it is here we begin to gain an idea of where – aside from the foosball tables, the beer kegs and the nerf guns – all that venture capital money might be being spent. According to research by hedge fund Bridgewater, tech starts-ups last year spent $44bn (£34bn) on advertising and cloud computing from Amazon, Facebook and Google – equating to some 10% of the three tech titans’ revenues

That $44bn compares with a 2013 figure nearer $9bn – which was 6% of those tech giants’ revenues – and accounted for over 0.4% of global economic activity in 2018. As this FT article notes: “That figure is close to the peak of roughly 0.6% reached during the tech bubble of 2000 and will stoke concerns of overheating in private markets, where deep-pocketed backers are subsidising frequently unprofitable tech business models.”

Which brings us back to Disrupted – and maybe, just maybe, the start-up that hired Lyons to the vague role of ‘marketing fellow’ was a one-off of bizarre work practices and culture. Better, though, to view this great book as a warning to potential investors – whether at the venture capital or IPO level – at least to do sufficient due-diligence to ensure those entrepreneurs they are backing idolise Steve Jobs more than they do John Belushi.

Author

Andrew Evans

Andrew Evans

Fund Manager, Equity Value

I joined Schroders in 2015 as a member of the Value Investment team. Prior to joining Schroders I was responsible for the UK research process at Threadneedle. I began my investment career in 2001 at Dresdner Kleinwort as a Pan-European transport analyst. 

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