New economy: soon we’ll all be wearing shorts
Before I start, here are a few basic reminders on the terminology of the new economy (for those of you living on another planet). The basis of this economy is the start-up: a firm with a high growth potential and whose activity is centered on new information and communication technologies. Let’s call "e-man" the creator of a start-up. He’s usually young and utterly incompetent, but often possesses a lot of nerve and thinks he’s all that (e-man is thus rather befitting). The development of a start-up is financed using capital-risk: investment funds for which the model isn’t stable growth of the firm, but speculation. For the investor incapital-risk, the goal is not to invest in 10 firms that will all manage to develop "normally", but to have, out of the 10, one for which the development will be huge (the other 9 simply disappearing).
The spectacle of life (and death) of start-ups is amazing. The deep idiocy of the "concepts" they propose, the incompetence of the founders, the amount of money spent on advertisement by those nascent (and often dwarfish) firms, and the incredible enthusiasm of the press for that kind of bullshit... But the most amazing is the investments of financial markets, via capital risk, in these firms whose sole existence could be discredited after thinking for 2 seconds. It’s just all so unexplainable. To sum it all up: why does so much money, so much advertisement and enthusiasm for firms that do not show any inventiveness, or any competence of their own, or any physical infrastructure, and create neither wealth nor jobs, go into that?
The answer lies at the end of the chain: start-ups eventually enter the stock market. The whole new economy system is based on that final goal. It’s at that precise moment that participants get their money back and justify the investments they made during the few previous years.
No start-up earns any money through its activity. They’re just not meant to. Advertising costs are such that it’s simply impossible for a start-up to be profitable through the services it delivers. Mediocre portals, online sale of products and displaying of ads are not enough to reach the goal: since only one start-up out of ten survives, this one must have its value multiplied by 10 within a few years (which is, as capitalist societies have demonstrated for centuries, rigorously impossible through productive work). It’s a fact, start-ups spend more than they earn. The ones usually mentioned as examples (Yahoo, Amazon) had a negative balance sheet before they entered the stock market. Therefore, what can the investor count on? On the stock market itself! If he invests $200 millions on a firm that ends up being worth $2 billion on the stock market, he’s done it, he’s earned 10 times his input. The rupture with the usual capitalist model lies there: the capital-risk is not invested so that the firm brings him back some dividends (according to the traditional principle of the market - see article on the pyramidal scam), but so that he gets it all back on the first day on the stock market. The goal is not for the firm to be profitable, but for it to be "bought" by the market.
Same for the e-man. As we know, this young man is rarely rich, he works like a mule and gets paid with stock-options, that is, in virtual shares of his firm. These shares are worth nothing before the firm enters the stock market. Their value will be determined when entering the market. The final goal of the e-man isn’t, as for a beginning entrepreneur, to create a stable activity with an acceptable growth, but to manage, within a few years, to sell his firm at the highest possible price.
The activity of a start-up, from the point of view of the e-man and the capital-risk investor, is totally directed toward the seduction of the financial markets: the goal isn’t to create wealth or jobs, profitable production of goods or progress in competence (let’s leave that to idealists!), but the intoxication of investors. The service provided by the firm (selling stuff, rerouting emails, hosting sites...) takes a backseat (it’s not profitable anyway): it’s just an alibi. It’s not about being worth something, but about making the market believe you are worth something.
First step: creating the start-up. No really original idea or innovating technology is required. Hence the multiplication of nearly identical start-ups based on similar stupid concepts. Then, capital-risk must be found. Let’s be clear: everyone knows that everybody is lying, and pure cynicism reigns. The e-man knows his concept is shit and the investor is fully aware of that. It’s all a big lying game: while pretending to be discussing issues such as quality, innovation, production, everyone knows they’re just helping to set up a scam. Here, the investor doesn’t choose a "good concept", but selects e-men according to their level of cynicism, depending on whether or not they can have him understand, without saying it, that they’re in the know... Initial capital input: $3 millions (i.e., nothing).
This input serves as a test. If the e-man spends $3 millions for formation and technological research, hires journalists to create quality content, pays real salaries, buys machines, that is if he shows a real activity, the adventure stops there. If, on the contrary, he spends $1.5 millions on a subway, bus and billboard ad campaign, puts up three interns in sumptuous buildings in a rich part of a city, invites journalists to press conferences during which the message is "drink Champagne and eat snacks, the new economy is paying for it", distributes expensive promotional gadgets, and if the press starts mentioning with enthusiasm this young and dynamic firm, then he moves on to the next phase.
The e-man has thus spent all his cash in a record time, created no job, developed no competence... and the capital-risk investor is proud of him! Let’s move on to more serious business: hundreds of millions of dollars to come.
What comes next is, again and always, advertising campaigns that are huge compared to the size of the firm. Strangely enough, the target of those ads on billboard, on TV, and in the press is not the Internet user, but the market. Indeed, that spending won’t ever be met by additional activity for the firm. The campaigns cost much more than the added activity they could foster, and this by quite a phenomenal factor. Once again, this is all a lying game: the public campaign serves only to make the market believe that "everyone" knows this firm. When entering the market, the prospective share buyer reacts in this manner: "oh, yes, "Idioticgadget.com", that’s the financial event the whole press has been talking about!" He then goes on to ask his friends about it (because he doesn’t understand a thing as far as Internet is concerned, and has no way of truly knowing that firm’s activity) and his 14 year-old son explains to him "yep, "Idioticgadget.com", the web of astute Internet users, I’ve seen the ad on TV, really cool!" Since his son (who can’t learn his lessons and get decent grades, but is better at using the computer than his dad...) knows about it, the buyer feels better and tells himself that it truly is the opportunity of the week, innovating, dynamic and all... Advertising doesn’t sell the firm’s services to the public, but (indirectly) sells the firm itself to the market.
The press is not going to help prospective share buyers wake up. Indeed, the press lives on the advertising budgets of start-ups and is a big investor in the new economy. Large newspapers create their own portals and multimedia branches. They’re not going to shoot themselves in the arm. The usual alibi which runs something like "the newspaper’s opinion is in no way influenced by sponsors/advertisers" doesn’t hold anymore. In displaying in its columns ads whose sole interest is intoxicating the market, the press becomes an active accomplice to the lie.
One thing though, is that investors are not all just morons obeying the siren song of the market. They want more traditional assurances. Start-ups can get that kind of credibility during the last show of strength that precedes entering the market: fusion-acquisition. Two start-ups with idiotic activities and laughable (and often unknown) results proudly make it known that they’re merging (Champagne and snacks for the press, once more) to the press, which makes this its headline of the day. That’s the ultimate assurance: a large firm buys the start-up(s) (Champagne and snacks...). If a behemoth invests in this firm that must mean it is interesting. The trick is that the capital-risk investors already belonged to those behemoths. The large firm is actually buying something it already possessed just to give it some credibility. The intoxication is over, the excitation of the market reaches a peak, and investors jump for joy as they grab some shares.
The e-man converts his stock-options into shares (real money, now) and the capital-risk investor gets the benefit of his investments. End of story. The market bought nothing but a big ad/communication campaign.
Yes, but... what about the fact that this firm has now entered the market? What will happen when the shareholders understand that they possess firms that have no worth, whose activity is not profitable, and that have developed no infrastructure or competence? What will happen when the truth gets out?
That, you’ll know next time the market crashes.
