The end of an era

Collapse, layoffs, fraud, prison and the richest man alive

Elizabeth Holmes, founder of Theranos, was sentenced to over 11 years in jail this week. It’s news that almost faded into the background, overshadowed by both Elon’s Twitter and the collapse of the crypto exchange, FTX.

FTX, and its founder and CEO Sam Bankman-Fried (SBF), were lauded as the responsible ones in the crypto industry less than a month ago. They were doing commercials with Tom Brady, Steph Curry and Larry David. Their name adorns the stadium where the Miami Heat play basketball. Since then, FTX has collapsed, filed for bankruptcy and replaced SBF after it became clear that he had lost everything by using customer deposits to fund his hedge fund, Alameda. Billions of customer deposits are gone. Today, their new CEO Ray John III, who led the restructuring of Enron, stated that “in his 40 years of legal and restructuring experience,” he had never seen, “such a complete failure of corporate controls and such a complete absence of trustworthy financial information.”

Elizabeth Holmes got 11 years, who knows what’s in store for SBF.

At the same time, Twitter has been in constant and escalating chaos since Elon Musk walked into the office holding a literal sink a few weeks ago. If you are on Twitter, you likely understood and cringed at the reference. If you don’t get it, you are probably better off. Since his takeover, we’ve seen mass layoffs, public firings, advertiser exodus, ultimatums, 1AM “code reviews” and a $1.7B annual billion annual interest payment get hung around Twitter’s neck like a financial albatross. There’s something very special about taking a company with mediocre, but not dire financials (Twitter lost about $200M last year against about $6B in revenue), adding a $1.7B annual interest payment, crushing its primary source of revenue and then deciding that the picture is so dire it requires laying off most of the company and that anyone who stays should expect to be very “hardcore.” Whether he turns Twitter into a thriving business or not is anyone’s guess, but right now Twitter’s biggest financial problems are a direct result of the world’s richest man and the people paying the price are Twitter’s staff.

The FTX and Twitter stories are not equivalent. SBF perpetrated what is quite possibly the largest instance of corporate fraud in history. Elon is the most successful entrepreneur of our lifetimes and a giant ass.

But these stories, with the Elizabeth Holmes perp walk in the background, also live in a broader macroeconomic and political context that has changed substantially over the last year. Inflation is at nearly 10% and interest rates are rising with it. Growth stocks, particularly in tech, have cratered over the course of the year. Exceptional companies like Snowflake have lost more than half their value. Tech darlings like Netflix and Facebook/Meta feel like they are approaching the end of the growth era for their core businesses. Netflix has begun evolving its business model with the introduction of ads and Meta, much to the chagrin of their shareholders, has made the biggest financial gamble in the history of capitalism on the metaverse.  TCI Fund Management owns $6B worth of Alphabet shares and wrote a letter to Sundar Pichai expressing their POV that they have too many employees and pay them too much.

The world of start-ups and VCs are no better and probably much worse. Every start-up is being advised to reduce burn and to try to either get to profitability or at least a multi-year runway. When VC money starts to dry up, everyone doesn’t just raise smaller rounds. Companies stop being able to raise at all unless they have exceptional metrics. Similarly, there is talk about how much trouble VCs are having raising their latest funds and for many of them the reality is that they won’t raise and that will be the end of the firm.

Finally, as we all head into winter, so is crypto. For the third time. A half a dozen major entities have completely collapsed this year. NFT trading volume may as well be zero. The floor price of every ape picture is in your mother’s basement. Tens of billions just vaporized. Crypto madness peaked at the end of 2022, with the most obnoxious and arrogant cloisters of the tech community believing they were moments away from remaking our entire financial system as code. With the collapse of FTX, it hits arguably its lowest point.

Pride comes before the fall.

Almost everyone is predicting 2023 will be a bumpy ride, preparing for it, or both. And bumpy ride is a fun euphemism for a recession.

Tech is still a very good business. Software boasts an incredible combination of great scale and great margins. There is honest to God something real happening in AI right now. The good times are not over.

But watching the drama of FTX and Twitter this past week, it’s hard to shake the feeling that we’ve been watching the final moments of something.

Rising interest rates and the collapse of both FTX and the crypto industry general are the universe letting everyone know that money is not free.

And Twitter may actually provide a real glimpse into what lies ahead for all of us. There’s plenty in the way Elon handled this situation that is somewhere on the spectrum between embarrassing, stupid and cruel. And there’s little question that he contributed substantially to the financial problems Twitter now has.

But had Elon not bought Twitter, it would still be in a lot of pain. Its market cap, if it was still publicly, traded would probably be $30B less than what Elon paid for it. It’s still unprofitable. Every advertiser that left Twitter did so not just do so because they were concerned about brand safety, but because it was easy. Twitter is not an anchor platform for anyone. As anyone that works in digital marketing knows well, Twitter is a small player in the great universe of internet referral traffic.

Big layoffs were coming to Twitter. Hard choices were coming to Twitter. Business model questions were coming to Twitter. Elon behaving like the billionaire caricature of the kool-aid man has, to some extent, obfuscated what would have been a hard road in any world.

Tech companies have been on a phenomenal 20-year run in the wake of the dot com bubble. And everyone gets a little fat, a little soft riding on the back of the bull market. But now it feels like these challenges are coming for everyone.

Everyone will have to be more focused. More resourceful. More intense about scrutinizing what really delivers value. And perhaps most important of all, more honest even with ourselves about what we’re personally contributing.

Hopefully we all manage to handle it with greater professionalism than rocket man, but the macroeconomic context is bigger than the antics of one (very rich) man.

We would all be wise to recognize that the bell has already been rung. It’s not peace time any longer. Welcome to war time.