The one-sentence summary

The tech industry solves fake problems, hoards idle workers, and makes doomed bets with other people’s money.

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 WHAT THE BOOK SAYS

  • The tech industry is riddled with hysteria and we all pay the price for it. Tech investment is always on a blind hunt for pipe dreams, unicorns and explosive growth. Shady incentives reward tech investors for burning cash, governments and central banks pour fuel on the fire, and tech companies squander talent while using well-intentioned fads like Agile and Lean to help cover it up.
  • Investors bet huge sums of money on outlandish start-ups that need a miracle to succeed. Tech companies are obsessed with growth, regardless of making any profit. In 2000, the dot-com bubble burst and hundreds of thousands lost their jobs, but by 2021 investors had regained their enthusiasm and injected $681 million into start-ups. 787 start-ups reached unicorn status, which means that investors considered them to be worth over a billion dollars each.
  • Venture capitalists often take a big cut of the money they manage for others even if their investments perform badly, which encourages them to invest as much money as possible instead of doing it judiciously. Some people compare the industry to a dangerous, high-stakes Ponzi scheme.
  • They work to the rule of thirds. They know that a third of their investments will lose money, a third will be okay, and a third will be big winners, so the big winners must return at least 9 times the investment in order to compensate for losses elsewhere. Venture capital funds don’t want to publish their data because it shows their very poor track record. Their approach has been described as spray and pray.
  • A popular metric used to report the performance of venture capitalists is the internal rate of return or IRR, but it is flawed because it converts the return multiple into a percentage and encourages short-termism and short-sightedness.
  • Governments are no better. Using approaches such as quantitative easing and giving so-called ‘free’ money to start-ups, they make taxpayers foot the bill. ZIRP stands for Zero Interest Rate Policy and makes borrowing cheap or even free.
  • Meanwhile the industry has an epidemic of unproductivity which makes techies idle or working on menial tasks or unpromising products that will never be used. Hiring large numbers of people to satisfy scale targets means that thousands do ‘fake work’ – essentially just going to meetings.
  • Task bloating involves using methodologies like Agile, Lean and Scrum – hugely increasing the number of regimented and mandatory meetings, without any noticeable effect on the quality of the result or the speed of delivery.
  • So-called moats are features of a company or product that protect it from competitors in the long term, but many are illusions. Moat illusions include 10x products whose proprietary technology is ten times better than the previous one, scale, and a strong brand name, but none of these guarantee safety.

WHAT’S GOOD ABOUT IT

  • After the injection of initial cash, many companies never make a profit. These include Spotify, Uber, Pinterest, Snapchat, Reddit, Deliveroo and many others.
  • There was uproar when Twitter fired 75% of its employees, but actually it kept running pretty smoothly, because it was so overstaffed in the first place. In the years preceding the 2022 crash when many were laid off, the sector had received more money than ever and splurged it on hiring too many people and equipping offices with lavish supplies.
  • A start-up called Quibi spent over a billion dollars of investors’ money to create short videos featuring A-list Hollywood stars. It collapsed 6 months later.
  • The Greater Fool Theory is the idea that, during a market bubble, one can make money by buying overvalued assets and selling them for a profit later, because it will always be possible to find someone who is willing to pay a higher price, but if the bubble bursts, then of course you lose it all.

WHAT YOU HAVE TO WATCH

  • Not much. This is well researched and sheds a lot of light on how venture capitalists and tech start-ups operate.