When the music stops

Growth works until it doesn't

A few years ago, a friend showed me an incredible email sent to her company_all listserv. It went something like (edited for tone):

Hey, just as a heads up, no big deal, it turns out our whistleblower system wasn’t recording submissions properly, so if you submitted anything in the last couple months, could you please re-submit it?

Everything’s totally fine, btw.

A few weeks later, the CEO was fired for ‘not cooperating with the board’s investigation’. What’s came out in the later lawsuits is that CEO had done all sorts of things - including some self-dealing, gray area stuff, and technically-not-fraud-but-smells-like-fraud for years. The all-star board tolerated it until growth started slowing, and the stock price went into reverse.

Sketchy stuff happens at pretty much every company, venture-backed or not. Startup or not. Especially when you have incredible pressure to grow. Leadership makes (hopefully) conscious decisions to take on certain risks and tradeoffs in service of the company’s goals.

Typically, investors do too. Their tradeoff is reputational risk vs. chance of returning the fund. Nobody shit on Facebook until recently. I’m sure there were other Susan Fowlers, early on, who disappeared into the void because growth papers over everything. There were few benefits to calling out Theranos. We tolerate a degree abusive behavior, sexual harassment, and fraud as a cost of doing business.

We publicly state that we have zero tolerance. We believe we have zero tolerance. This makes it easier for us to justify our uglier motives. As the music stops, sketchy behaviors both become more tempting (just juice the numbers this quarter, and we’ll make it up in the next!) but also less tolerable.

Employee behavior changes too. Competent players recognize the shift from positive-sum to zero-sum, and either exit for greener pastures, or switch tactics to value extraction. I suggest you get out before this happens.

In my observation, a few behaviors start to emerge:

  1. Savior projects that happen to look good on a resume

    “What’s holding us back is that we don’t have a {microservices architecture, machine learning capability, splashy brand marketing campaign}. If only we had that, all our problems would be solved. I can launch an MVP in ~3 months, I can see if it works in 4 months, and I’ll be out the door in 5.”

  2. Extremely well-compensated savior hires and/or consultants

    The sociopaths have fully recognized that it’s time for value extraction, and line the pockets of their friends. The board hires a niche consultancy and/or their friends from McKinsey. New VPs of Strategy, Product, Chief Architects, CISOs and similar come in to fill the shoes of the departed positive-sum players. They often look like this:

  3. Conversation shifts away from the medium term

    People either start looking for projects that get them immediate reward (short-term) or talk about flashy long-term projects they have no intention of fulfilling. Marketing starts paying more and more for volume, and the exec team gets bogged down in strategic planning reviews.

  4. Empire building

    Because American corporate culture values {having a lot of reports, managing a large budget, having large scope}, the remaining players begin trench warfare fighting over remaining resources. While management is distracted, OPEX inevitably creeps up. Admin teams like Compliance, IT, and HR balloon as they all think of infinite risks to mitigate and how they need more headcount to do so. More ‘offsites’ are scheduled to address the ‘high turnover’ problem. This is also the perfect time for an enterprising Oracle salesperson to start buying people dinner.

Finally, cost cutting. A PE shop comes in, dumps the LaCroix, and manages remaining cash flows until the carcass and IP can be dumped elsewhere.