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Last month, federal prosecutors accused the founder of Mozido of criminal fraud and money laundering. The company was once one of the most highly valued financial startups in the U.S. Founded in 2008, its backers included asset management giant Wellington Management Co. and MasterCard. The charges come amid what appears to be a crackdown by the U.S. Department of Justice on privately held technology companies—the latest development in what has been widely seen as a tech backlash around the world.
Yet the romance of the tech startup remains as robust as ever, despite governments and activists seeking to reign in the tech giants. Young would-be entrepreneurs still come to me for advice about how they, like Facebook’s founders, can “move fast and break things” while making the world a better place. The deification of Steve Jobs continues. Venture capital continues to flow to tech startups in record amounts—Q3 2018 was the most active quarter in history for venture investors around the world. Universities, accelerators and incubators continue to teach and promote the high-tech Silicon Valley business model.
Why the widespread blindness to the ethical and social dangers of tech startups specifically? Here are five of the principal causes:
Tech startups see themselves as saviors of the world. The view expressed by the co-founder of a company whose technology is aimed at revolutionizing bulk buying in grocery stores is typical.At a recent event in Sunnyvale, California, where entrepreneurs pitched their ideas to a roomful of investors, he said, “I can tell you, at least the tech community I’m in, everybody is in here to make the world a better place.”
Over the years, Facebook’s stated aims have grown steadily more grandiose: from “make the world more open and connected” in 2009 to giving people “the power to build community and bring the world closer together” in 2017. And now, with founder Mark Zuckerberg’s bombshell blog that seemingly turns the company’s business on its head from an open platform to “privacy-focused communications,” we’re told that “privacy gives people the freedom to be themselves and connect more naturally, which is why we build social networks.”
Complex technology and tech business models deflect investor due diligence. Many investors, even experienced ones like Wellington, focus on the great financial promise of tech business models, instead of on setting up rigorous controls. In some cases, otherwise sophisticated people make no attempt to understand the technology they eagerly back.
Theranos, the blood testing company whose founder Elizabeth Holmes could face up to 20 years in jail, drew the likes of Henry Kissinger, James Mattis and George Schultz to sit on its board and attracted early funding from Rupert Murdoch and the Walton family. But it fell to John Carreyrou, an enterprising reporter for the Wall Street Journal, to raise questions about whether the company’s technology actually worked. Theranos needed to miniaturize by a hundred-fold the various machines required to perform the blood assays Holmes claimed would be performed in a box the size of a microwave oven. No amount of money could have accomplished that vision—the underlying technologies hadn’t even been invented—and yet no one asked any questions.
Expectations for technology startups encourage expedient, not ethical, decision making. As people in the industry are fond of saying, the tech world moves at “lightspeed.” That includes the pace of innovation, the rise and fall of markets, the speed of customer adoption, the evolution of business models and the lifecycles of companies. Decisions must be made quickly and leaders too often choose the most expedient path regardless of whether it is safe, legal or ethical.
This “move fast and break things” ethos is embodied in practices like working toward a minimum viable product (MVP), helping to establish a bias toward cutting corners. In addition, many founders look for CFOs who are “tech trained—that is, people accustomed to a world where time and money wait for no one—as opposed to a seasoned financial officer with good accounting chops and a moral compass.
The host of scandals at Zenefits, a cloud-based provider of employee-benefits software to small businesses and once one of the most promising of Silicon Valley startups, had their origins in the shortcuts the company took in order to meet unreasonably high expectations for growth. The founder apparently created software that helped employees cheat on California’s online broker license course. As the company expanded rapidly, it began hiring people with little experience in the highly regulated health insurance industry. As the company moved from small businesses to larger businesses, the strain on it software increased. Instead of developing appropriate software, the company hired more people to manually take up the slack where the existing software failed. When the founder was asked by an interviewer before the scandals why he was so intent on expanding so rapidly he replied, “Slowing down doesn’t feel like something I want to do.”
We’ve fetishized disruption. The notion that disruption of an industry is inherently good is the unstated assumption behind a frequently heard mantra of many tech startups: “We aim to become the Uber of the [fill-in-the-blank] industry.” Or the Airbnb. Or the Netflix.
Disruption as the guiding star of tech startups has its origins in Clayton Christensen’s widely misunderstood concept of “disruptive innovation,” which he and a colleague first introduced in 1995. In their hands it was a carefully circumscribed thesis about how small companies with fewer resources can challenge established businesses. Since then, as Christensen himself wrote twenty years later, “too many people who speak of ‘disruption’ have not read a serious book or article on the subject. Too frequently, they use the term loosely to invoke the concept of innovation in support of whatever it is they wish to do.” (And he explicitly says that Uber doesn’t fit his formulation.) From the misunderstanding of disruptive innovation, it’s a short step to fusing the concept with Schumpeter’s ill-defined notion of “creative destruction.” Throw in some free market fundamentalism and you arrive at disruption as an unquestioned good.
What does Uberizing industry after industry really mean for the larger society? Alexis Madrigal of the Atlantic recently looked at 105 companies that adopted the Uber business model—organizing independent contractors to perform a service—during the decade since the ride-hailing service was founded. Four of these—DoorDash, Grubhub, Instacart and Postmates—are “unicorns,” startups valued at $1 billion or more. Twenty-eight others closed down; 19 were acquired, and 53 are still around, enjoying varying degrees of success.
Asks Madrigal, “These companies have done so much—upended labor markets, changed industries, rewritten the definition of a job—and for what, exactly?” The answer: you can now do a lot of stuff you could do before, like hire a dog walker or get food delivered, only now you can do it on your phone. “Is this really the best and highest use of the Silicon Valley innovation ecosystem?” he asks. Worse, these Uber-for-X companies embody widening inequality: “Venture capitalists have subsidized the creation of platforms for low-paying work that deliver on-demand servant services to rich people, while subjecting all parties to increased surveillance.”
Tech promises founders and investors vast—vast—amounts of money. I’ve saved the most obvious—and perhaps the most important—cause of ethical blindness for last in order to underline the scale of the challenge. Money undermining ethics is a story as old as money itself. But the sums that tech success promises are stunning. Staggering. Stupefying.
For most of this century, we’ve been treated to a constant stream of breathless stories of overnight tech billionaires and their insanely valuable startups. Currently, there are more than 300 unicorns around the world. Twenty of them are “decacorns,” valued at $10 billion or more. At $72 billion, the second highest valuation goes to Uber. At number one, valued at $75 billion, is Bytedance. Among its holdings is Tik Tok, an AI-driven online music video and social network. Last month the U.S. Federal Trade Commission fined the company $5.7 million for collecting the names, email addresses, pictures and locations of kids under age 13 in violation of the Children’s Online Privacy Act.
As the muckraking journalist Upton Sinclair famously observed, “It is difficult to get a man to understand something, when his salary depends on his not understanding it.” And when that “salary” is potentially in the tens of billions of dollars and you can earn it while saving the world and heroically disrupting an industry with dazzling technology really fast . . .
Well, you see the problem.
March 11, 2019 at 05:31AM
Forbes – Entrepreneurs