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VCs Take the Media

Alex Blumberg wanted to start a business. The veteran radio producer had established himself with such prestige radio programs as This American Life and Planet Money. But in 2014 he decided he was ready to strike out on his own—to build a podcasting network featuring several narrative journalism projects in the TAL style. He began by starting a podcast about starting his podcasting business. He called it StartUp. “Meta, I know,” he says in the first episode.

It’s certainly that, but it’s also a clever proof of concept, illuminating the anything-but-intuitive connection between startup economics and real-world business planning. Whereas most startups fuss obsessively over unreleased beta versions of a new platform or iPhone app, or reconfigure sheaves of worked-over PowerPoint stacks, Blumberg had something to show people. But there was a hitch. Unlike a conventional documentary or reality show, StartUp wasn’t a retrospective chronicle—though it wasn’t quite a real-time narrative either. Blumberg was still building the company and talking to investors when the show aired its first episode on August 29, 2014. More installments followed, one every two weeks. The result was that anyone Blumberg talked to while creating his startup—his wife, potential investors, business partners and their spouses, would-be advertisers—knew they were becoming characters in a piece of narrative journalism. They were facing all the struggles that typically beset a startup project—from disputes over equity to philosophical arguments over how to describe the company’s mission—with the added complication of playing for the audio recorder the role of themselves. The effect was less meta than slightly vertiginous: Where does the media object end and Blumberg’s startup begin? Was this a daring new brand of documentary journalism or a venture-capital road show? Was Blumberg turning the spotlight on himself to chronicle his efforts or to promote them? The answer in all these cases, as one might guess, is both. But more important, StartUp serves as a strange but useful case study in deconstructing startup culture, where the future is anything a rich person promises it to be and a company’s value is a matter of shared hallucination.

Given its public-radio pedigree, StartUp is what you might expect: confessional, insistently self-effacing, and chatty. Blumberg is smart, good-humored, and wears his feelings on his sleeve. He gets choked up, for instance, when he asks a new friend to become his business partner. The podcast milks awkward moments for dramatic effect, and there are more than a few. Blumberg has some excruciating verbal stumbles when first pitching his business to a prominent venture capitalist, and again when his soon-to-be business partner asks for 47 percent equity—a great deal more than the 10 percent stake Blumberg had in mind. In episode 4, he rises at 5:30 a.m., his voice hushed so that he won’t disturb his sleeping family, and spends several minutes solemnly reminiscing about The Giving Tree—Shel Silverstein’s famed children’s fable about unrewarded generosity—which had made him cry the previous day.

Before sending out a term sheet to potential investors, Blumberg has to decide how much his company is worth. The number his team comes up with is $10 million—an essentially arbitrary figure, as he’s quick to admit. “The valuation, like everything in this startup world, is a story you’re telling,” Blumberg says. It’s a promise of future growth. The value isn’t, in any familiar sense, real. But all this is typical for a startup, especially in the midst of the present tech bubble. Even some of Blumberg’s investors admit that his valuation is bubble-inflated, but that doesn’t seem to matter. For one thing, many people in Silicon Valley weren’t around when the last bubble burst. They haven’t been chastened by experience; meanwhile, there’s so much easy money sloshing through the system that it’s entirely plausible for a fortune to be coaxed out of it with little more than a good story and a fistful of podcast destinations.

The Taking Tree

Chris Sacca, the founder of Lowercase Capital, one of Blumberg’s principal investors, acknowledges that Blumberg’s inchoate company is overvalued, but he doesn’t care, in part because his $100,000 commitment is comparatively small by his firm’s standards.

“There are tens of thousands of people who consider themselves to be angel investors,” Sacca says. “There are hundreds, if not thousands, of these seed funds. And so all this money needs to get put somewhere.” So there is a lot of wishful thinking, and even some fantasy, baked into this company, which, after an extensively chronicled search, settles on the name Gimlet Media. (Blumberg features a naming firm that specializes in these matters on his show, and it proceeds to offer its services to him pro bono.) Still, even with its new name and mounting investor interest, Blumberg’s company is a notional, if not strictly fictional, creation. It doesn’t quite exist yet—it was even preceded by its first product, the podcast devoted to the protracted story of its future founding. Blumberg doesn’t find an office and begin hiring people until several episodes in, and it’s never clear exactly how or when Gimlet Media is incorporated as a business.

But this is precisely what’s valuable about Blumberg’s show as a document: all this vague talk and even vaguer follow-through is entirely representative of how startups work. They are as much media phenomena as material concerns. Hype is part of the package, certainly when they are in pre-launch or “stealth mode.” Tellingly, most of the early metrics of startup success are reputational, rather than measurably concrete: a spot in a prized incubator; write-ups on TechCrunch, PandoDaily, Hacker News, or Re/code; mentions on social media; appearances in festival startup competitions; parties thrown. In the tech-bubble redux, these ingredients help to drive irrational valuations as much as new technologies, patents, engineering talent, or bulletproof business plans do.

It’s thus no great surprise that, after several episodes, StartUp the media phenomenon begins to eclipse Gimlet Media the startup. The podcast has ascended to the top tier of the influential iTunes rankings. Investors, some of whom had ignored Blumberg’s earlier entreaties, take notice and begin contacting him. Perhaps it’s because, for all his professed lack of business knowledge and studied displays of on-air humility, Blumberg actually knows how to produce compelling audio. Still, the strangeness of the situation, a kind of quantum entanglement between StartUp-as-podcast and StartUp-as-startup, leaves him surprised. “Somehow a podcast about me failing to generate FOMO”—a.k.a the “fear of missing out”—“in potential investors,” he says, “generated a lot of FOMO in potential investors.” He’s already raised $1.5 million, hitting his initial target.

Venture capitalists have decided that there’s money to be made in media, or at least in starting media companies—a fact that should concern us all.

Blumberg’s efforts also benefited from felicitous timing. The debut of StartUp coincided with Serial, a narrative nonfiction podcast that has become a pop-culture sensation—perhaps the most popular, and most avidly parsed, podcast of all time. Serial goes unmentioned in StartUp until episode 10, but it, too, is made by TAL alums and staffers, some of them former colleagues of Blumberg, and you can’t help but think that its spectacular success expedites Blumberg’s elevator pitches. Suddenly, the flannel-and-jeans world of journalistic podcasts has acquired that most evanescent and valuable quantity in both the media and tech worlds: buzz. But with this excitement comes an air of unreality, and—for those of us on the outside of the bubble—suspicion. How much of the interest in StartUp flows directly from the meta-level conceit of the show? Whatever one might think of TAL’s twee liberalism, can a similarly styled venture be more than a succès d’estime? Since when are venture capitalists interested in funding high-quality journalism? Can Blumberg’s project really make the kind of money that gets VCs up in the morning?

This latter quandary is what worries Sacca. He’s searching for the big payout, and it’s not clear if Blumberg can become a “10x company,” a breakout venture that realizes ten times its original investment. Yet what’s rare about Blumberg’s startup is that it’s already generating revenue. He has advertisers, and he uses the commercial interludes in each episode (which, he says, go for $6,000 per spot) to chat up his sponsors, allowing him to simultaneously learn from and advertise them. But this nascent revenue stream presents a funny, if unacknowledged, problem. Startups aren’t supposed to make money; they’re supposed to spend it. A company’s “burn rate”—how much cash it spends each month—is a recognized metric, a signal of an aggressive growth strategy and investor confidence. With a burgeoning audience, a Rolodex of experienced journalists, and advertising, merchandise, special events, and other amenities planned, Gimlet Media shows potential for growth and even sustainability—yet these aren’t especially valued assets in the startup world.

And that’s why, at least in part, Sacca and his investing partner, Matt Mazzeo, fear that Gimlet doesn’t have the potential for global domination that they seek. It’s “not a venture-scale company,” Mazzeo says. It doesn’t have proprietary technology; it doesn’t intend to be a platform of potentially enormous reach. Why aren’t they trying to create “the Instagram of audio?” The lack of VC approval is disappointing. “I’m describing something that feels like the biggest thing I’ve ever done, and it seems small to him,” a diminished Blumberg tells his wife.

To civilian eyes, that may not be a problem. Before it’s even established, the company is already making money and putting out a popular product. What could be wrong with that? But the truth is that most people surrounding a startup don’t want it to become a viable business. They may not even want it to make money—pie-in-the-sky valuations are easier to justify when there’s no revenue stream, rather than when there’s a modest one, which might put a damper on growth projections. Valuations, ultimately, reflect that great Silicon Valley religion: total faith in the future. They have to remain fantastical so that VCs, company founders, and startup employees paid in equity can get their 10x payout.

And it works. Instagram didn’t make a cent before it was sold to Facebook for about $1 billion, and industry figures now say that it was undervalued. Facebook later spent $19 billion on WhatsApp, which generated only $10.2 million in revenue in 2013. Oculus, a startup developing virtual reality goggles, rode the hype train to one of the biggest crowdfunding appeals of all time before it, too, sold itself to Facebook for $2 billion.

In this environment, what increasingly matters is either building up a user base of millions of consumers (and all the personal data that comes with it) or generating the kind of irrational exuberance that sells investors on the fever dream of future success. This is what drives valuations and attracts ten-figure acquisitions. For all their talk of building great companies, tech startups aren’t seeking to create enduring institutions that will produce reasonable profits and middle-class jobs for decades to come. They operate with shorter time horizons, exercising a particular form of creative destruction. By using cheap cash to subsidize products and services, and then making them available for free or well below market value, successful startups are able to wipe out incumbents and would-be rivals. This, in turn, allows them to concentrate capital and profit potential by achieving great economies of scale. These are the basic steps in the playbook that enabled Amazon to corner the book and online retail markets and Uber to present a mortal threat to the taxi system.

Failure’s Just Another Word

This monopsonistic tendency is just one respect in which Silicon Valley deviates from commonly held notions of what makes for a good business or sensible economics. What’s valuable to a startup and investors in the short-term may not be in the best longer-term interests of customers or the overall economy. The leaders of the tech elite want different things from you and I. Bubbles burst, but until this one does, capital is so cheap and abundant, and potential payouts so enormous, that from inside the bubble, it seems irresponsible not to join the dance. Many bankers similarly knew that the housing bubble was inflated, or that they were selling toxic securities, but they felt they had an obligation to try to extract some value while the going was still good. Someone was going to get rich (and, it turned out, those who failed would simply be bailed out by the rest of us).

Was this a daring new brand of documentary journalism or a venture-capital road show?

In recent months, a number of prominent venture capitalists have sounded warnings about companies’ burn rates and inflated valuations. At the 2014 edition of Techweek New York, an industry conference, I watched as a panel of four VCs reckoned with a simple question from the crowd: Are some companies now overvalued? They each conceded that we are in a bubble and that the prices and reputations of some startups are grossly inflated. But none of them was willing to name an example of such a company. They seemed reluctant to offend any powerful players or miss out on future opportunities. It’s not in their self-interest to speak up; after all, once you start poking around, you might end up popping the whole bubble.

This attitude inevitably influences both how work is done and what kind of culture is created. Startups are about entrepreneurship—hustle, networking, and salesmanship—not business development. As Noam Scheiber wrote last year in a New Republic article about a doomed startup and its deceitful founder, “Every successful startup is in some sense a confidence game.”

Startups, then, are a perfect corporate structure for a lottery economy in which success has been decoupled from merit, crisis is the norm, and income inequality is at record highs. That they tend to waste money and that most of them fail never registers as an indictment of the system; on the contrary, their excesses are regarded as a rationale for making larger bets on fewer companies. Tales of missed opportunity and others making it big only encourage those with means to keep playing the game. If you believe that this world is not random and capricious, that it is essentially a meritocracy, then your number should soon come up. The industry’s fetishization of failure stems from its broader talismanic faith that major setbacks are simply rewards deferred. Failing just means you haven’t won yet—and even if you do fail on a permanent basis, you’re likely doing it with someone’s else money—someone who can afford to lose it.

In his recent book Zero to One: Notes on Startups, or How to Build the Future, Peter Thiel—PayPal cofounder, Facebook investor, billionaire VC—throws some cold water on free-market capitalism. It’s an unexpected move from a noted libertarian. Competitive markets, Thiel argues, reduce profits to essentially zero. When everyone is competing against everyone, particularly in crowded industries, advantages get worn down and no one makes any money. Just look at airlines, he says, which generate billion of dollars in value but make pennies in profits from each customer. Google, on the other hand, has a profit margin around 20 percent. In Thiel’s eyes, Google achieves this success by being a monopoly, relatively unchallenged in online advertising and several associated businesses, like search and email. Any good startup, he says, should find an undercapitalized market it can exploit and work to monopolize it.

Thiel chooses his examples carefully—and not especially responsibly. The airline industry in this country has been notoriously unstable since its deregulation, and many airlines have only recently kept themselves afloat by declaring bankruptcy, merging with other carriers, or soaking passengers for fees. When Thiel says that markets eliminate profits, he proposes an abstract principle, one that applies to perfectly competitive markets, which never have existed, and likely never will. Led by the finance industry (which in turn was aided by Treasury-blessed mergers during the financial crisis), consolidation is certainly in vogue. But it seems disingenuous to say that monopolies are the only route to a valuable business. In this climate of prostrate, industry-captured regulators, seeking to build a monopoly may be smart, even reasonable. But it is by no means standard. Still, Thiel is willing to go even further.

“Monopoly is therefore not a pathology or an exception,” he writes. “Monopoly is the condition of every successful business.” (Emphasis in original.)

In the face of such confident assertions from an industry leader, do we bother to debate the economics or political implications of monopoly-as-usual? Or do we simply concede that, for our purposes, bigger questions involving the public good simply don’t matter much? Thiel has a singularly compelling startup story, after all, and there’s little doubt that he speaks for his class of venture capitalists, who provide the industry’s ideological and financial grounding. Call it 10x or monopoly capitalism—regardless of the nomenclature, under its dispensation, VCs and the companies they steer all seek the same thing: to turn a few big bets into gigantic payouts. In the case of Thiel, whose funds tend to invest in five to seven companies at a time, the chief task at hand is to identify companies that might be acquired—and yield those enormous gains—in less than a decade.

Where the Boys Are

Many VCs share this philosophy because they live in a monoculture that has changed little in the forty years it’s been around. Venture capitalists nearly all look the same and claim similar life experiences, and they hold up the same few companies and prominent moguls as models. According to a recent study by Babson College researchers, women are in charge of only 2.7 percent of VC-backed companies. Ninety-four percent of partners at VC firms are men—a four percent increase since the last bubble.[*] The number of women in college computer science programs continues to decline, while the tech industry has acquired the reputation of a boys’ club, a pipeline for mostly white and Asian American graduates of Stanford, Berkeley, Carnegie-Mellon, and the Ivy League. At Google, Facebook, and Yahoo, African Americans hold 1 percent of technical jobs; the numbers hardly budge when the pool is expanded to include nontechnical personnel at these companies. Although the practice has acquired a whiff of controversy, many tech companies still tout the virtues of “culture fit”—a nebulous designation that, if you’re honest, means hiring people who are just like you.

Old media’s traditional Ivy League power base has simply been updated with bullshit titles like director of digital innovation.

In Zero to One, Thiel says that “the best startups might be considered slightly less extreme kinds of cults.” Because they are supposed to be fanatically dedicated and made up of small teams—“lean,” in the industry parlance—startup employees should be of a similar mind. Everyone at PayPal, he says, was “the same kind of nerd.”[**] Thiel is dubious about people who look different. At Thiel’s Founders Fund, he writes, his team “instituted a blanket rule: pass on any company whose founders dressed up for pitch meetings.”

This kind of willful myopia may explain why Silicon Valley has been terribly uncreative in its business models. Most new startups either seek to monetize user data (through ads or selling personal information) or are part of what’s been called the “1099 economy”—platforms that farm out precarious contract workers to clean houses, drive cars, assemble furniture, cook meals, and perform other basic chores for a high-end clientele. In neither case do startup employees create revenue for the company; instead, they create a vehicle through which to extract value from users and independent contractors. Labor and revenue remain elastic things, which the rentiers presiding over the pertinent servers are able to summon on demand and scale up as needed.

To engineers, entrepreneurs, and other tech elites, this makes a lot of sense. They generally have the right combination of in-demand skills, contacts, and cultural backgrounds to move seamlessly from one job to another—hence the embrace of failure and serial entrepreneurship. Being a contingent worker doesn’t worry an experienced programmer. True, he (and it is almost always a “he” in this instance) might find that his salary has shrunk slightly thanks to the wage-fixing scheme undertaken by Google, Apple, and other industry giants—the subject of a class-action suit currently wending its way through the courts—but he’s still getting six figures.

Yet when managers reproduce this attitude further down the income chain, it creates a frightening form of precarity. This applies equally to the seventy members of the Intel cafeteria staff laid off just before Thanksgiving (the company switched to a different catering vendor who declined to keep these workers on) and to the long-term unemployed twenty-eight-year-old doing microwork under the direction of Amazon’s Mechanical Turk.

Some industry executives must be calculating in their decision to pamper engineers and managers while squeezing practically everyone else. But one wonders if they have also insulated themselves from seeing the consequences of their model. For these people—the “founders” mythologized by Thiel, even in the name of his VC fund—the boom-and-bust startup cycle is nonthreatening because they are generally well paid, some of them end up very rich, and risk is pooled mostly in the hands of major investors. The precariousness of employment, in which one is bouncing from job to job and might be involved with several early-stage companies at once, is a kind of art project. It’s all a lark. This is what Nathan Heller, writing in The New Yorker, called “the new mode of American success,” where people appear “to float above the exigencies of career.”

Blumberg’s Gimlet Media partakes in these same labor relations and in this same vision of the startup as a kind of Platonic form—the ultimate proving ground of individual ambition. His company deviates slightly in that it doesn’t have the potential to become a monopoly. That also means there’s less opportunity to extract value from unwitting customers or contingent workers—thank goodness for that. He’s hiring journalists, audio engineers, salespeople, and the like. But one gets the sense that Blumberg himself is also not risking much—that, aside from his cultural bona fides and lack of ego, he is only one degree removed from a conventional Silicon Valley founder. He has a family to support and indicates that he has gone into modest debt—factors that no doubt heighten his anxieties about seeing his business through. But such concerns also loom larger by virtue of their on-air dramatization; with his fundraising goal achieved, the stakes aren’t material so much as emotional. There’s little doubt that should Gimlet Media collapse, Blumberg would have a soft landing at This American Life, or find his way to some new media startup. Venture capitalists have decided that there’s money to be made in media, or at least in starting media companies—a fact that should concern us all.

The Journalism App

Indeed, Gimlet Media is not merely following in the wake of Serial. Today’s VC landscape is studded with journalism startups like Vox, The Intercept, Vice, BuzzFeed, Mic, Fusion, Medium, and Business Insider. Some of these outfits do fine work, but they haven’t been able to make up for the industry’s decade-long attrition, and journalism’s stubborn dependence on advertising gives prospective funders ample reason to doubt their long-term viability. Online advertising can support a business only at scale, and to scale journalism, you have to publish a lot of material, and do it cheaply (this is where journalism becomes “content”). The attendant collapse of freelance rates favors those who have money or who can treat journalism as a hobby, and so the barrier to entry remains high. In practical terms, this means that old media’s traditional Ivy League power base has simply been updated with a few new moguls, technologists, and those blessed with bullshit titles like director of digital innovation or entrepreneur-in-residence. Meanwhile, new-media ventures tend to poach from a familiar cohort of established talent, generating excitement and demonstrating the new company’s supposed ambition. As a consequence, like in the tech industry, a small group of people rotate among jobs, often failing upward, while earning good salaries and a reputation of being au courant. When the next venture fund or billionaire with a conscience decides to start a website for “digital storytelling,” they naturally go back to the same well. If you find yourself in this privileged population and have good networking skills, you can play this game for some time. But it is not a way to create enduring institutions capable of both generating profits and fulfilling a civic function.

As the startup model migrates beyond tech and media, it loses its charmed aura, especially as risk devolves from bankers to more important entities like the University of California, which has a $250 million venture fund, or the state of New York, where Governor Cuomo’s START-UP NY program has created tax-free zones for new businesses around the state, leading to a projected loss of $323 million in tax revenue through 2017. But startups continue to be seen as an innovative cure-all for our country’s economic malaise, especially when they can be combined with the false populism of crowdsourcing. It didn’t take long for President Obama and Congress to take note of this. The JOBS Act, signed into law April 2012, called for looser restrictions on individuals investing in “emerging growth companies.” After signing the bill, President Obama announced, “Startups and small business will now have access to a big pool of potential investors, namely the American people.” Yes, now you can plunk down up to $10,000 in a company without needing to be informed of risks or filing paperwork with the SEC.

This possibility excited Alex Blumberg and his listeners alike. He began fielding interest from all over. In the podcast’s seventh episode—the last before Gimlet Media unveiled its first real program, Reply All, “a show about the Internet”—he announced, “Today on the show, we want to bring in our last group of investors: you, our listeners.” He continued, sounding like a cross between an egg-slicer infomercial and an NPR fundraising drive: “That’s right. We want to cut you in on this action.”

To Blumberg’s credit, he went on to survey some of the risks involved in investing in startups. He also explained that the SEC still hadn’t finalized the rules surrounding the JOBS Act, meaning that ordinary people were not yet allowed to put their cash in startups. Aspiring shareholders had to be “accredited investors”—essentially, those who make $200,000 or more per year or are worth at least $1 million. Barbara Roper, director of investor protection for the Consumer Federation of America, told one of Blumberg’s colleagues, “A market that brings together inexperienced issuers with unsophisticated investors and harnesses the power of the Internet for hype is one that is likely to experience a very high volume of problems.” The show then duly recorded one of its trademark moments of stylized awkwardness, with Blumberg forced to acknowledge that he was the inexperienced issuer, his listeners the untutored lenders, and the hype machine the very audio product we were consuming. Oops.

The warnings didn’t seem to matter. Within hours of the episode’s release, Blumberg made an announcement: Gimlet had already raised $275,000 through Alphaworks, an “equity crowdfunding platform.” The window, at least for now, was closed. But inside the bubble, the next opportunity, or the next failure, is never far away.


[*] In Something Ventured, a celebratory tour through the history of venture capital, the lone woman featured is Sandra Lerner, one of the founders of Cisco Systems. Cisco fired Lerner in 1990, with one board member telling the thirty-five-year-old that she should retire. The documentary uses Lerner’s story as a prompt that allows the all-white male cast to explain how hard, but necessary, it is to fire people sometimes.

[**] To illustrate this, Thiel later notes that four of the six PayPal founders built bombs in high school. When the company became locked in competition with, a rival firm led by Elon Musk, a PayPal engineer (one of the founders, perhaps) designed a bomb and presented it at a team meeting with the idea of blowing up their rival. “Calmer heads prevailed,” Thiel says, “and the proposal was attributed to extreme sleep deprivation.”