Bitcoin Songsheet: Like Altcoins, Startups Are New Money Magnets
This is an opinion editorial by Jimmy Song, a Bitcoin developer, educator and entrepreneur and programmer with over 20 years of experience.
Startups are a giant fiat game. They are seen as the engines of the economy and the innovators who create wealth. They mask the Cantillon effect, making the wealthy richer and the poor poorer. They waste money and burn capital like there’s no tomorrow. Startups are like insecure Hollywood hopefuls.
Even those who make it, they subsidize their product or service with large infusions new-printed money. This enables them to grow and avoid losing profits. In order to price out rivals and eventually become monopolies, it is a constant tradeoff. All of them hope to become stock market darlings like Alphabet, Amazon, and Tesla. Large government interventions are likely to make it more likely that even darlings end up as zombie companies like IBM or GE once their fiat-induced monopolistic edge is dulled. This is the fiat company’s life cycle, which is just as depressing and as gross as factory-farmed chickens.
This is a hard essay for me to write, having been a startup veteran of more than 20 years. But, as I have studied fiat money and how it affects the incentives all over the economy, I have come to the conclusion startups are just as much a grift that can benefit from Cantillon effects than investment banks. Because of the busy people they employ, they have the illusion of being more productive.
Company Valuations, Or Speculations
There are two ways companies can increase in valuation. The traditional way is to make more profit. A higher profit equals a greater dividend, which makes the equity in the company more valuable. Price increases in equity are rational. This is what we would call “having an essential basis”. Think about getting good grades at school because you have actually studied and are knowledgeable in the subject. Boosting investor demand is the second way to increase valuation. Traditional investors have a direct correlation between investor demand and increased profits. However, this is not true for modern investors. Modern investors want to buy what everyone wants, before they have it. This is what we call “speculation.” It’s like getting good grades at school due to grade inflation.
Speculation is a perception game where valuation increases because of the perceived desirability of the asset. The fundamentals of the asset or pictures of a dog could determine the desirability. It doesn’t really matter for speculative purposes. The price is determined by the demand for equity, regardless of the narrative.
Investing is based on sound fundamentals. Money was invested to earn a reasonable return and not for equity price appreciation. Real returns, such as dividends, determined whether money was in. This was how equity pricing used be done.
For the past 40 years, this has decidedly not been the way equities have been valued. Amazon has not paid a dividend ,, but continues to attract investment dollars. Because of the speculation and narrative surrounding the stock, it attracts investment. This is what we call a “Keynesian beauty contest.” The money is invested not for real returns like coupon payments or dividends, but on equity appreciation.
Stock purchases are now like infomercials: far too optimistic and often ending in regret. These stories sound too good to true. Yet, we all recognize that they are appealing to others and will purchase them anyway. These investments often have very few or no fundamentals, but it doesn’t matter if they are compelling enough to make money. This is the most popular investment paradigm because yield has diminished and price appreciation is all that is left.
Fiat Equity Valuations With No Opportunity Costs
Equity valuation has trended away from yield and the culprit, as you might expect, is fiat money. Attracting investment in a hard money system requires a return as the money is scarce. The opportunity costs of buying equity are high because they are scarce.
Capital demand must be met from existing stock, as new money cannot be printed. Attracting investment is more difficult because there are many other investments that anyone with the money could make. In other words, returns must compensate for the lack of money. Equity valuations are therefore based on fundamentals.
A fiat monetary system makes money much more plentiful, which means that there is almost no opportunity cost to money. You can finance investment, which is not investment at all but arbitrage. A bank can offer loans at a low interest rate to smart investors who invest in equities. Their profit is the difference and this is what all fiat investment has become. Every hedge fund, investment bank, and venture capital fund is basically this exact game of arbitrage and leverage at some level. These funds are a deceitful illusion. They created ex-nihilo loans that were then leveraged into assets.
The abundance of money means there is always more money looking for investment opportunities. It’s much easier to attract investment dollars than it is to turn a profit. Monetary expansion is why valuations are higher.
Profit can be difficult and requires the delivery of needed goods and services to market. It is much easier to attract new investment dollars using a fiat currency system. It’s easy: Sell equity to the right people, and watch the money come in. Why sell to the market when you can sell equity directly to Cantillionaires! Why create a product when you can just pump and dump?
Startups Are New Money Magnets
The abundance of money means that the game of attracting money is relatively easy. The new money is always looking to make money and even a weak company will be able to attract money. The speculative bubble will continue to grow as long as investors believe there will be more.
Profit is secondary to the perception or narrative. Popularity will attract more money than something that is profitable. Popularity will be more important than profitability. Profit will not make something more popular, so it is not a priority. This is why so many startups in the past 20 years have been so focused on retail. When selling equity to Cantillionaires, perception of growth is more important that profit. Companies offer subsidized goods or services to attract retail customers. However, the dollar expansion is what gives rise to the discount.
The goal is not to provide a product or service but to attract more new money. Why do investors invest money? Because it is worth more than keeping it in dollars. Every company competes, not to produce the best products and services, rather to be the best value store.
The Moral Quandary Of Insane Startup Valuations
If the asset inflation we’re seeing is funded by dollar expansion, we have to start asking some tough questions about where the insane valuations we are seeing come from. All dollar expansion is theft from current dollar holders. Many of the holders are among the most vulnerable and poorest people on the planet, such as those suffering from hyperinflation. Their refuge currency is the dollar.
The large valuations of equity investments are financed by the poorest of the impoverished. The Silicon Valley’s richest Silicon Valley bros, Wall Street bros, and startups win, while the poorest of the poor lose. Every startup that fails is subsidized by North Koreans who can’t buy rice with the USD in their pocket because prices went up.
Startups have as much to do with Wall Street investment bankers as they are Cantillon winners. All of them, including the low-cost goods and services, as well as the generous perks and high salaries, are subsidized by newly printed money.
Hype Cycles And Narratives
The biggest companies of the last 20 years have something in common: They are really popular at a retail level. B2B companies aren’t as popular as they used to be because they lack enough retail mindshare. It is no accident that some of the most prominent companies in the world, like Amazon, Apple, Google, Facebook and Google, are also household names. Because they are competing to become stores of value, the narrative surrounding these companies is more important than their actual profits.
Think of Snapchat, Netflix, and Uber. These companies all have some mindshare in the minds of retail investors. This mindshare will result in more investor demand for the company, which will lead to a higher stock price and faster profits.
Perception is part of these companies’ DNA. The market caps of these companies reflect how much people believe they will attract new capital, not how much they add value. Their stock prices are heavily dependent on public perception. They’ve become more political and spent a lot of money on PR. This is not surprising since this is how these companies grew.
Startups these days are largely not funded through savings but through venture capital (VC). Most startups are in money magnet mode from the beginning, rather than profit mode. They must play political games in order to attract investment.
The dirty secret about VC firms is their inability to do due diligence. They invest in the same things that everyone else is doing. I called them “monetary aristocrats” because their role is very much political. Their main skill is to get in on “hot deals” rather than finding innovative ideas that will change the economy.
VC companies do this because they know what is going to be popular and will attract more money in the future. It’s more likely to attract money from Cantillionaires if it attracts money now. Popularity is important because newly-printed money is more important than a business model or profit.
What are VCs looking for in startups? It’s not about making money anymore. It’s about who can attract more investment. The story or narrative around the company is far more important than the profit. Even if it is built on smoke and mirrors perception is more important than the underlying business. The whole thing is a game about image.
Unfortunately, most of these startups fail. Most of the capital that is newly printed is used to create unicorn companies. Even unicorns are just a store of value, and their valuations have been inflated by the poor record of the dollar.
If this sounds familiar, it is. This is how altcoins work. It’s not an accident that altcoins follow the startup model so closely. It’s all hype, hype, hype, and the hope that altcoins will become a storehouse of value, while still providing some utility. Altcoins are, in a sense a purer version the game that startups have been playing for years. They are attempts to capture the newly-printed money.
Bitcoin Fixes This
The good news is that with Bitcoin, we have hard money again. All these speculative games are worse when money is scarce. Every equity is competing for the role of a store value. But, there is a better store of value. Why store value in equity that is inflated when you can have something better in bitcoin?
Investment becomes much more competitive again and the high startup failure rates we see now will not be tolerated. Startups that are able to attract investment will not be judged on their ability to attract more capital. To justify investment under the Bitcoin standard, startups will need to make money immediately and pay dividends.
Many will not have investors at all, but be 100% owned by the people who started the company. Capital will be derived from savings, which have an opportunity price, rather than fiat loan, which do not. This will result in more healthy businesses that have positive cash flows right from the beginning, rather than the “expand now, profit later” mentality that so many startups are pursuing.
In the meantime, there are many Bitcoin startups operating on the fiat model. These businesses are the first to need to change to a more rational model for positive cash flow, as they compete directly against bitcoin. This is how Bitcoin fixes our economy. One company at a.
Ten Reasons Your Startup Ran Out Of Money
- Your founder just sucks at pitching
- A prominent VC firm passed on you which is really just a way to blackball your company
- You hired sales people that started promising perpetual motion machines
- Those programmers you hired at $250,000 per year turned out to not be as good as their salaries
- Your company of 30 people somehow had five human resources personnel
- The consultant you hired to accelerate your growth took the money and only accelerated your spending
- You got locked into an expensive lease because VC firms wanted you to project success
- Your customer acquisition cost was $1,000 per user
- You hired your vice president of marketing from a traditional company
- FAANG kept hiring away your engineers
This is a guest post by Jimmy Song. You do not represent BTC Inc or Bitcoin Magazine ..
The author of 5 books, 3 of which are New York Times bestsellers. I’ve been published in more than 100 newspapers and magazines and am a frequent commentator on NPR.