The early days of the internet were wild. Even the most staid businesses started acting as if all the assumptions behind their business model had suddenly become invalid. I recall rooms full of ageing executives trying to pretend they understood presentations by youngsters full of jargon and devoid of true content. It was the time to be a faker.
I had my best business idea at this time. I made a half-hearted effort to convince Shell that our global station network, with parking, space, security and great locations would make an ideal fit with a start-up few had heard of called Amazon. Amazon worried that people would not order valuable or large things to be left at their homes, and it was holding back their expansion from books. I still think I was right, but knew even then that being right did not win any prizes. Still, I wish I had tried harder. I might have made a real difference.
A year later and the whole edifice collapsed. I had just been given a job trying to create an e-business for a part of Shell, and I think I was lucky. I was one of the many emperors strutting the world at the time with no clothes, and the collapse covered my nakedness and gave me a few months to segway into a more suitable job.
Reading The Economist last week made me wonder if we are in a phase that is a repeat of that frenzy. There are certainly similarities. Every article within the business section carried its own evidence.
Bartleby wrote about Theranos and the trial of Elizabeth Holmes. It seems barely credible that a company could attract such investment when its sole product did not work at all. Surely many of the employees must have suspected this? Surely the endless rounds of due diligence by investors must have included a review of the efficacy of the product? It seems not. The only thing the employees were watching was the company valuation. The only thing the investors were watching were other investors, sure that the herd could drive up the value and determined to be part of the greedy stampede. The story comes straight from 1999.
The main article was about charging electric vehicles. We are supposed to believe that EV’s will dominate the roads within a few years, but it is clear that the business model suffers from a major flaw – charging. Anybody who does not have a charger at home is in big trouble, because currently it takes all night to charge a vehicle just for a typical pattern of use. The next generation of faster chargers might just work if they are at people’s offices, but what about people who live in an apartment and don’t work in an office with a huge car park, ie most of us living in cities? There are on street chargers emerging, but they are too slow, often broken or blocked, and rarely in places where people want to spend a large chunk of their day. The super-fast chargers on highways currently take a full hour to add 400km of range. It takes me two minutes to add that range in my regular car. Who has a full hour to stand around?
No doubt the technology will develop, but wow, it has a long way to go. And my main takeaway is that not enough people are working on these pinch points and the ones that are do not have enough skills. GM’s solution is to put chargers in their dealerships. Think about how dumb that is. Reading this article was one of the few fleeting moments I wished I still worked with Shell. My skills could be helping with this.
Another article discussed phone apps for mental health counselling. This was another typical internet story. Some clever people saw a high demand, piggy backed on the trend for virtual consultations, signed up a few professionals and launched an app. Income immediately resulted, costs were minimal, and investors piled in. But nobody really took the time to make the operation sustainable. In particular, customers found their appointments revoked as the professionals overbooked their calendars and self-selected their client base. Also, privacy is absolutely central to this type of service, but that was largely ignored, with predictable consequences. Various fragile lives have no doubt been damaged, but, hey, somebody made a lot of money. Less flippantly, there is actually a germ of a good idea in here and one day it might actually benefit society.
Then there was an article about gig workers, another mega trend where people are making things up as they go along, meanwhile hoovering up investor capital. This article highlighted the different challenges businesses face in Europe compared with the USA. Even in the USA, nobody is making any money, while volume is king and margin and afterthought. But at least in the USA there is a path forward, because of an easy regulatory environment and large demand hubs full of rich and lazy potential clients who are used to tipping. Today I passed two petrol stations on opposite sides of a corner with a price difference of 14 cents per gallon (4%): that would never happen in Europe, because everybody looks after their pennies. Uber and others are discovering that fact in Europe too, and their business models often seem doomed as a result.
All these stories reminded me of 1999. Ideas and charisma trumped everything, detail and sustainability were afterthoughts, and money sloshed around. Until it didn’t. The whole edifice became unstable, people started realising that, and a crash occurred. Most daft businesses collapsed and naïve investors paid the bill (using our pensions). Might this happen again? The sheer weight of such flimsy stories is one indicator that a crash might come. But there are other indicators as well.
One risk is highlighted, obliquely, in another article ion the same business section of the same Economist. A massive legacy of 2021 will be how the Chinese authorities have acted to fundamentally change their business climate. IT is a miracle how they have achieved this without triggering a domestic or an international crash, and even without sounding warning bells in America. The USA already transfers lots of money to China every month owing to the voracious appetite of its consumers. Now the Chinese are repatriating the listings of many of its businesses, especially the ones of global significance. How is the west responding? The west is run by investors who need those businesses as vehicles to keep the wheels of greed turning. So more of our pension money is now heading for China too. It is part of a brilliant and transparent Chinese strategy to make us need them more then they need us, as insurance against another Trump. One possible outcome is a sulking west imposing all sorts of new restrictions, thereby harming our own economies and creating a confidence crisis.
There are other risk factors too. We have lived through an unusual age of free capital. That might be closing right now, as interest rate signals around the world start pointing upwards. There is nothing like a monthly interest bill for debt to expose flawed business models.
Lastly there is the US government. Even I they don’t panic about China and manage to forestall large interest rate rises, it will be a strange time for businesses. The next three years will produce nothing from Congress, and Biden will respond with executive actions, spraying ill-thought-through short-term incentives everywhere. That will quickly expose flimsy businesses on the wrong side of such incentives, while creating even flimsier new ones on the right side. Altogether this is not a recipe for a stable investment climate.
Given all of this, it might be a good time to recall the fundamental lessons from 1999. We can have fun and grow money based on charisma and ideas for a while, but need to be ready to jump before the music stops, which could be soon or not for a long time yet. And it is a good strategy to focus on companies that will emerge more strongly once the bubbles burst. Amazon was built on solid foundations and still has them in place, and in my opinion still has growth ahead. In this cycle, the same feels true of Tesla, so far ahead in so many critical areas. There are probably other good bets, maybe in digital health or battery technology. Interface bottlenecks are good places to look, and so are businesses relatively immune to the US/China decoupling. It feels a good time to be shopping less indiscriminately and more smartly.
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