Disrupted

by Dan Lyons

  I understand why people don’t get my point about the candy wall. But I can’t understand how they overlook the cruelty with which some of the people around them are treated. What kind of company just “graduates” employees, gives them no warning, makes them clean out their desk and disappear immediately, and never mentions them again? Despite all the talk about delightion and creating a company we love, HubSpot is by far the cruelest place I’ve ever worked.

  Again and again I see smart, experienced, accomplished women in their mid-thirties (at HubSpot, these are the old people) get fired, with little or no warning, by their twenty-something managers. In each case the woman getting axed is stunned by the news, devastated, reduced to tears.

  Isabel, thirty-four, has put in three and a half years at HubSpot, has a one-year-old baby at home, and has just returned from a month-long medical leave when her twenty-something boss tells her that she’s not meeting expectations and she’s done. Denise, thirty-five, has been with HubSpot for four and a half years but is told one day (by Jordan, age twenty-eight) that her job no longer exists, even though her department is actively hiring. Denise is allowed to put in two more weeks. During that time, Cranium ignores her. He never pulls her aside to thank her for her service or say that he’s sorry about how things have worked out. He walks right past her desk. He can see her—she’s sitting right there—and he says nothing. He acts like nothing is happening. Meanwhile, Denise can barely hold it together. She cries in her car. She has panic attacks about going to work. She feels humiliated. She has no idea what she did wrong or why she’s being let go.

  Paige, thirty-five, gets tossed on a Friday morning, a few weeks shy of her one-year anniversary, when her first batch of options would vest. Ironically, Zack fires her during Fearless Friday, our feminist empowerment team-building exercise. While a group of women just out of college are downstairs in a conference room making paintings on the floor, Paige, a former Wall Street analyst, is up on the second floor being sacked for an alleged lack of productivity. Zack tells her to clean out her desk and leave. She’s done. Right now. She gets no severance pay. She walks out, fighting back tears, and texts me from her car in the parking garage: You won’t believe this. I just got fired. When I call her, she’s crying.

  A colleague in the marketing department tells me that back in 2011, before my time, another thirty-something woman was fired after only four months on the job. She was pregnant with twins. “The company can do whatever it wants,” one manager tells me, and my jaw drops.

  This is the New Work, but really it is just a new twist on an old story, the one about labor being exploited by capital. The difference is that this time the exploitation is done with a big smiley face. Everything about this new workplace, from the crazy décor to the change-the-world rhetoric to the hero’s journey mythology and the perks that are not really perks—all of these things exist for one reason, which is to drive down the cost of labor so that investors can maximize their return.

  We’re a team, not a family. Just like a Major League Baseball player, on any day, without warning, you might get cut. But hey, enjoy that candy.

  The difference between this kind of capitalism and the kind that Norma Rae encountered is that tech companies know how to spin negatives and present them as positives. HubSpot offers unlimited vacation time and pitches this as a perk. The truth is that this policy saves money for HubSpot. When a company has a traditional vacation plan, it is required by law to set aside a cash reserve to cover the cost of all of the vacation days that it owes to its workers. When employees quit or get fired, the company must pay them for the vacation time they have accrued. But if a company has no vacation plan, it doesn’t have to set aside the cash reserve. Better yet, the company can fire people without having to pay them for any accrued vacation time. Paige, who got canned after eleven months, had taken only five days of vacation. At a traditional company she would have been owed a week or two of vacation pay, but from HubSpot, she got nothing. Think about how many hundreds of people churn in and out of a place like HubSpot, and you can see how the savings add up.

  Another way to drive down labor costs is to deny people employee status in the first place. Uber, the ride-sharing company, saves money by categorizing drivers as independent contractors rather than employees. Uber insists drivers prefer this because they enjoy more freedom. Uber and others in the “share economy” are creating a new form of serfdom, an underclass of quasi-employees who receive low pay and no benefits. As former secretary of labor Robert Reich put it in a June 2015 Facebook post: “The ‘share economy’ is bunk; it’s becoming a ‘share the scraps’ economy.”

  Tech companies also are pushing the U.S. government to increase the number of skilled foreign workers who can enter the country on H-1B visas. Reich says that too is a way to drive down labor costs. In a 2015 Facebook post, Reich recalls that during his time in office in the 1990s Valley employers claimed they could not find skilled workers in the United States, “when in reality they just didn’t want to pay higher wages to Americans.” Foreign workers are “easy to intimidate because if they lose their jobs they have to leave the U.S.,” Reich says.

  Why are tech companies so obsessed with cutting costs? Look at their financial results. Many don’t make a profit. The biggest difference between today’s tech start-ups and those of the pre-Internet era is that the old guard companies, like Microsoft and Lotus Development, generated massive profits almost from the beginning, while today many tech companies lose enormous amounts of money for years on end, even after they go public. They need to constantly drive costs down, using things like Halligan’s VORP metric.

  A more interesting question is why there are so many companies that remain in business while losing money. This seems like a peculiar business model. The point of creating a company is to generate a profit—or that used to be the case, anyway. That changed in the 1990s, during the first dotcom bubble, when Silicon Valley created a new kind of company, one that can lose money for years, and in fact might never turn a profit, yet still can make its founders and investors incredibly rich.

  A watershed moment occurred on August 9, 1995, when Netscape Communications, maker of the first web browser, pulled off a huge IPO and saw its shares nearly triple in their first day of trading. Until then, companies were typically expected to be profitable before they could sell shares to the public. Netscape was gushing red ink. Mary Meeker, an investment banker at Morgan Stanley, which underwrote the IPO, later recalled to Fortune:

  Was it early for the company to go public? Sure. There has been a rule of thumb that a company should have three quarters of obviously robust revenue growth. And you also traditionally wanted to see three quarters of profitability—improving profitability, for newer companies. Netscape was not profitable at the time, so that was certainly a new idea. But the market was ready for a new set of technology innovations, and Netscape was the right company in the right place at the right time with the right team.

  Over the course of its brief existence Netscape lost a lot of money, but nevertheless a few people got rich. In 1999, at the peak of the dotcom bubble, AOL acquired Netscape in a deal worth $10 billion when it closed. After that Netscape more or less disappeared. Yet one Netscape co-founder, Marc Andreessen, reportedly walked away with shares worth nearly $100 million. Another co-founder, Jim Clark, reportedly made $2 billion. “On the Internet, nobody knows you’re a dog” is the famous line from a 1993 New Yorker cartoon. The tale of Netscape added a new twist: On the Internet, at least when it comes to investments, nobody cares if you’re a dog.

  The Netscape IPO set off the dotcom frenzy. In Silicon Valley it was as if someone had flipped a switch. Suddenly there was a new business model: Grow fast, lose money, go public. That model persists today. It’s a simple racket. Venture capitalists pump millions of dollars into a company. The company spends some of that money coding up a “minimum viable product,” or MVP, a term coined by Eric Ries, author of The Lean Startup, which has become a bible for
new tech companies, and then pumps enormous sums into acquiring customers—by hiring sales reps, marketers, and public relations people who can get publicity, put on flashy conferences, and generate hype—brand and buzz, as HubSpot calls it. The losses pile up, but the revenue number rises. Basically the company is buying one-dollar bills and selling them for seventy-five cents, but it doesn’t matter, because mom-and-pop investors are only looking at the revenue growth rate. They have been told that if a company can just grow big enough, fast enough, eventually profits will arrive. Only sometimes they don’t. Zynga, Groupon, and Twitter are a few big examples. In the past five years, from 2010 through 2014, Zynga racked up annual losses totaling more than $800 million; Groupon lost nearly $1 billion; and Twitter reported annual net losses that added up to more than $1.5 billion, according to the 10-K forms they filed with the Securities and Exchange Commission.

  Old-guard tech CEOs seem baffled by the phenomenon of companies that operate for years in the red. “They make no money! In my world you’re not a real business until you make some money,” Steve Ballmer, the former CEO of Microsoft, said about Amazon in 2014, a year when the company lost $241 million yet saw its market value climb to $160 billion. Oracle CEO Mark Hurd, another old-guard business guy, expressed similar astonishment about Salesforce.com. “There’s no cash flow,” he said about that company in April 2015. “What are they worth right now? $35 billion?… It’s crazy, just crazy.” That was nothing. A few months later Salesforce.com was worth more than $50 billion.

  One consequence of not making profits is that companies don’t last as long. In 1960, the average lifespan of a company on the S&P 500 index was just over sixty years, while today it is less than twenty years, according to Innosight, a research and consulting organization. Another consequence is that the spoils are distributed less evenly than in the past. The disparity between CEO pay and the pay of the average worker has been widening since 1965, but the huge leap occurred during the dotcom boom, according to the Economic Policy Institute. In 1965, the average CEO made 20 times as much as the average worker. By 1989 that ratio had edged upward to about 60. But in 1995 things went nuts. The average CEO was making 122 times as much as the average worker. By 2000, the CEO-to-worker compensation ratio reached 383, according to EPI. The ratio now stands at about 300.

  People at the top are taking more of the pie. That’s irksome enough, but even more so when you realize that some of the founders who are raking in so much money for themselves are doing so while running companies that don’t make a profit and that treat employees in ways that would have been unthinkable only two decades ago.

  “Our most important assets walk out the door every night,” was the mantra I heard from tech CEOs when I covered technology companies in the 1980s and 1990s. At Microsoft, “everybody made money, including secretaries,” my friend Mike, the former Microsoft employee, recalls. “Microsoft made tens of thousands of millionaires. The company was incredibly supportive of people facing personal issues. If you had cancer they would keep you on payroll and not expect you to ever come in, while still paying for all of your medical costs.”

  In that era the big obsession among tech CEOs was how to retain talent. No company told employees to think of their jobs as short-term “tour of duty” engagements, or informed them that “We’re not your family.”

  It’s no wonder Reid Hoffman, who is both a company founder and a venture capitalist, espouses the “we’re not a family” approach. He has been one of the biggest beneficiaries of the grow-fast-lose-money-go-public business model. Hoffman’s first big hit company, PayPal, went public while losing money. In 2002 Hoffman co-founded LinkedIn. In three of its thirteen years LinkedIn has reported an annual profit. In the other ten, it has posted losses. Recently the losses have been prodigious—LinkedIn lost $150 million in the first nine months of 2015. Yet Hoffman’s net worth stands at nearly $5 billion. Amazon, the online retailer, is twenty-one years old and has never made huge profits, yet its founder, Jeff Bezos, is worth $60 billion. Salesforce.com, a software company, reported net losses totaling three-quarters of a billion dollars from 2011 through 2014, yet its founder, Marc Benioff, is worth $4 billion.

  Someone has to get left holding the bag. In summer 2015 I speak with Pat, a well-known Silicon Valley serial entrepreneur who is both the CEO of a privately held company and an angel investor. We’re talking about the soaring valuations being placed on privately held companies. Suddenly the Valley is filled with so-called unicorns, privately held corporations that supposedly are worth billions, even tens of billions, of dollars. Fortune says there are now 145 unicorns, nearly twice as many as existed only seven months before.

  “You realize who’s going to get hurt, right?” Pat says.

  “I don’t know. The VCs?” I ask.

  “No! The investors are protected.”

  Pat explains: The funds investing in late-stage start-ups and paying ridiculous valuations are demanding, and receiving, a kind of guarantee called a ratchet. That is a promise that if the company goes public at a valuation lower than what the private investors have paid, the company will grant them enough extra shares to make them whole. Some investors are guaranteed to make at least 20 percent on their investment. Unless there’s an apocalyptic meltdown, the investors cannot lose money on these deals. They are taking pretty much no risk.

  Founders are cashing out too. Groupon raised $1.1 billion in its last private round of venture funding before its IPO, but relatively little of the money actually went to the company. Most of it—$946 million—reportedly went into the pockets of insiders who sold their personal shares to venture capital investors.

  “So the founders are safe. They’re selling their personal shares in these private rounds at these high valuations,” Pat says. “They’re taking money off the table now, instead of waiting for the IPO. So who does that leave to get hurt?”

  I say I’m not sure.

  “Jesus, dumbass. The employees!”

  Pat explains: The employees are paid in part with stock options. The strike price on the options is calculated based on the valuation of the company at the time the options are granted. If you joined the company late, you probably have a high strike price. If the company goes public at a lower valuation—if it suffers a “cramdown,” as it’s called—then your options might be underwater.

  This is definitely going to happen to a lot of the unicorns, Pat says. Every time another late-stage investor comes in and makes another investment at an even more insane valuation, a cramdown becomes more likely. “The probability that employees are going to get screwed,” Pat says, “is very high.”

  The company will go public, and the VCs will make a killing, and the founders will have pocketed their millions. But employees will get little or nothing. By December 2015 Bloomberg will be writing about this phenomenon, in an article headlined, “Big IPO, Tiny Payout for Many Startup Workers.”

  It might be difficult to feel sympathy for tech workers whining that their company went public and they didn’t become millionaires. It depends on your perspective, and whether you view options as a bonus—a potential windfall—or as part of your compensation. Start-up workers often forgo part of their salary in order to get options and view their options as part of their pay. Now some people are discovering that they have been paid with Monopoly money. A cynic might say it’s their own fault; they took a risk on a start-up and it didn’t work out. But the risk is not shared. The people at the top are profiting from this game, which they have rigged in their favor.

  What’s more, the VCs and the founders know what they’re doing, and they don’t care. “I don’t think any founder is really sitting there thinking about how they can screw their employees,” Pat says. “But on the other hand, your friends are doing this, and your peer CEOs are doing this, and so you do it, too.”

  “Don’t these guys feel guilty?” I ask. “They have to go into the office and look their employees in the eye. Right? How do they do that?”

 
Pat takes a deep breath. “I’ve been in the Valley a long time. As far as I can tell, nobody here ever feels guilty about anything they do. What I have observed from these guys is that they have a strong sense that they are moral actors. They believe very strongly that they operate with high integrity. They believe they are the most moral folks on the planet. But they are not.”

  These are the people who claim they are making the world a better place. And they are. For themselves.

  Thirteen

  The Ron Burgundy of Tech

  Imagine Joel Osteen pumped up on human growth hormone. Imagine there’s a secret government lab where scientists have blended the DNA of Tony Robbins with the DNA of Harold Hill, the aw-shucks shifty salesman from The Music Man. Imagine a grizzly bear in a pinstriped suit, standing on his hind legs and talking about changing the world through disruptive innovation and transformation.

  If you can imagine those things then you can almost imagine the horror of seeing Marc Benioff, the billionaire founder and CEO of Salesforce.com, on stage at his company’s annual conference, Dreamforce.

  It’s November 2013, and that’s where I am, along with Cranium and Spinner and a bunch of other HubSpotters, sitting through Benioff’s three-hour keynote speech on the opening day of the conference. I was psyched when Cranium asked me to go to Dreamforce, if only for the chance to spend a few days in San Francisco. I haven’t been back here since I left my job at ReadWrite. I have a list of people I want to see, restaurants I want to visit.

  But San Francisco is a shitshow. One hundred forty thousand people have descended on a one-square-mile area of downtown. Dreamforce takes place over four days, with concerts and comedians and inspirational speakers. It’s basically Woodstock for people who work in sales and marketing. Or, as Benioff has declared, “the largest and most transformational event in the history of enterprise technology.”