Make it up in volume!

The internet age has allowed the perfection of this particular fraud:

  1. I start a company to sell e-widgets over the internet.
  2. I produce e-widgets and sell them for $10.
  3. I pay my buddy $10 million to buy a million e-widgets from me.
  4. My buddy pays me $10 million for a million e-widgets. We do it again next month, but for $20 million and 2 million e-widgets.
  5. I go to investors and say "look I have gone from nothing to $20 million of revenue per month; at 8 times annual revenue that justifies a valuation of $2 billion."
  6. I sell 5 percent of the company to investors for $100 million and spend it on yachts.
  7. E-widget sales dry up (once I stop paying my buddy to buy them), the company shuts down, the investors lose all their money, and we all shrug and say "what can you do, most startups fail." [...]

In fact, markets are now kind of used to the idea of investing large sums of money into companies based on multiples of active users -- not even revenue -- meaning that you can run this fraud by paying your buddy money just to look at your website a lot. [...]

Perhaps it is wrong, and the venture capitalists are confused, seduced by a few examples of success but underestimating the difficulties. Or perhaps it is a charitable redistribution of wealth in which rich venture capitalists effectively donate their money to the middle class in the form of underpriced Uber rides or free movie tickets.

But perhaps the analysis is even simpler: Pay someone a dollar in customer-acquisition costs, have him pay you back a dollar in revenue, sell that dollar of revenue to investors for $8, and you're rich.

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15 Responses:

  1. MattyJ says:

    Being an old guy, it's fun to go back through the memory banks and think of all the cockamamie e-widgets that were the next big thing at one time., grocery delivery, push media, ringtones, Segway, :CueCat, ...

    And, of course, the phase we're in now with scooters. People not yet alive in 1995 don't realize society already went through a scooter phase. It did not persist.

    • dzm says:

      Yeah, but we had to kick-propel our Razers like goddamn ANIMALS. And we had to buy our own.

      • MattyJ says:

        There was a time in the 70's where the kicking part was built into the scooter itself. Might I suggest a 'Honda Kick 'n Go' clickhole?

        That whole 'touching the ground with your foot' thing was a giant step backward for scooter technology.

  2. Bill Paul says:

    It seems like this would only work if you already have $30 million to throw around (plus whatever it costs to make the e-widgets in the first place). I suppose you could borrow it (apparently the trick to being successful in business is to never spend your own money), but I can't help but be reminded of that Steve Martin bit "how can I be a millionaire and never pay taxes" which starts with: "First, getamilliondollars."

    • jwz says:

      But... that is... exactly how this works. Both parts.

    • snert says:

      Money is just accounting. You don't need to have any, you just need to pretend and write everything down. You're only actually out the cost of producing all those e-widgets, which is probably close to zero.

  3. ennui says:

    but sometimes it really works out... see: Amazon

    I think Jeff Bezos is at the "Springtime for Hitler" part of 'The Producers' except that it really is Hitler.

    • ennui says:

      except that Amazon is kind of a mash-up of 'The Producers' and 'Brewster's Millions' where, once Bezos accidentally starts making a profit via AWS, he has to spend it all to convince investors Amazon is still growing and shouldn't start making real money from it's retail operations anytime soon.

      • jwz says:

        Except Brewser's millions actually run the Internet Archive...

        • Thomas Lord says:

          Groan. That was beneath your usual standards, imo.

          (Aside to ennui: when a firm trades cash for other forms of capital such as real estate and very fancy warehouse machinery, that still counts as accumulating - the retail is making a large profit and the shareholders are receiving that profit. Meanwhile, sustained huge dividends would mean the firm is likely to spur price competition that will lead to immense devaluation of the company. Not to mention that investors hate holding cash. Lastly, I don't doubt that Amazon's assets are largely superfluous to any human need but the same is arguably true of most of the economy and most of the value of most firms. Thank you for reading this hobby-horse rant of mine.)

          • MattyJ says:

            I thought that joke was right in jwz's wheelhouse. You must not subscribe to the DNA Lounge mailing list where we get a weekly dose of "Jokes for Blokes" caliber comedy.

  4. Chris Davies says:

    Surely in the perfected version step 8 is IPO, making huge money for the founders and investors and sticking pensioners and middle east wealth funds with the losses. Groupon is the absolute poster child for that game. They spent 10 dollars on user acquisition for every dollar they ever made, but that was good enough to get them to IPO. Since they've floated, they've made staggering net losses and it's only a matter of time until they're bankrupt or pawned off on some other company for pennies on the dollar.

    In the mean time, that IPO cash is being used to acquire a whole raft of other worthless companies and the circle of life continues.

  5. Eric says:

    Was this the business plan of Threatin's European tour?

    • Cat Mara says:

      lol, I was wondering if/when that would get mentioned around here-- and if Jamie would weigh in on if anyone had ever tried pulling that kind of stunt on the DNA Lounge. From what I read, the venues were at least covered on door receipts but lost out on potential bar takings for the night, which is pretty shitty...

  6. Editer says:

    Did someone say blockchain?

    We documented 43 blockchain use-cases through internet searches, most of which were described with glowing claims like “operational costs… reduced up to 90%,” or with the assurance of “accurate and secure data capture and storage.” We found a proliferation of press releases, white papers, and persuasively written articles. However, we found no documentation or evidence of the results blockchain was purported to have achieved in these claims. We also did not find lessons learned or practical insights, as are available for other technologies in development.

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