I’m reading a book called Bad Blood by John Carreyrou about how a fancied billion dollar startup called Theranos run by then feted Elizabeth Holmes was a web of lies and cheat. It’s stunning but not surprising.
Theranos was a biotech startup which claimed to change the way we do blood tests. Instead of needles, it developed a method to prick and draw just a drop of blood which through its invented device can be used to do multiple tests instantaneously. So what went wrong? The device didn’t work. Simple. However, Holmes went around the town claiming it did and convinced everyone through fake data and lies that it did and called herself to be the first female self-made billionaire. Now that’s huge.
Nobody called the king naked. Why? One, most of us have this immense urge to be woke and progressive. So if a woman was doing so well and if you question her, you risk being labelled a chauvinist and worse. Also, in an era of low interest rates post 2008, when Facebook had just gotten public, people rushed in to buy whichever Silicon Valley startup they could lay their hands on. Nobody even bothered to get their blood tests done and get results. Anybody who questioned was either bullied, fired or muzzled. So what happened in the end? Holmes have been convicted in January 2022 on multiple counts of felony and awaits her prison sentence.
Why am I telling you about all this? It’s because the more I read about Holmes, the more I went back to the way some of our startups are going around the town at stupid valuations. If the only question one had to ask Holmes was- Can you do a live blood test for me and give results in ten minutes? The whole lie was woven to somehow not answer this question. In the same way, the only question to ask them is- Can you be profitable? And the moment you ask them this, they will give you everything under the Sun but this answer. Does it ring a bell? Let’s see.
Paytm went around the town saying it’s profitable if you look at something called a Contribution Profits. Now what the hell is a contribution profit? It has invented a way wherein it says if you don’t consider some minor indirect expenses, we’re profitable. So what are these minor indirect expenses? As per Paytm’s latest quarterly results which came out yesterday, they’re- marketing, tech expense, employee costs and some insignificant items. Holy Shit.
If a company which is supposed to be a tech company says, for me my employee cost, tech cost is indirect, what the fuck do you think you’re smoking? It’s like Google saying well whatever I pay my engineers and the cost of building my technology should not be seen as my direct cost. And, for someone who throws money down the gutter to generate publicity says marketing cost is indirect and should not be considered when determining my profitability, it’s easiest the dumbest thing I have heard. Now let’s see how much these insignificant items are? Paytm did a quarterly revenue of 1456crores. These items totalled 845crores. What it calls direct expenses totalled another 1000crores.
This means to generate 1456 crores, it’s burning 1850crores. That’s an operational loss of almost 400 crores a quarter. However, since it can’t justify whatever billions it’s worth by admitting to this, it goes around town inventing accounting terms only it understands. We have multiple occasions when accounting frauds led to downfall of high and mighty- read Enron. The reason everyone agrees on one definition of accounting is to ensure we all value similar things similarly. That’s the reason a profit and loss statement is defined in a particular way on which the whole world agrees upon to prevent accounting frauds like Enron.
All I am trying to say is that if someone doesn’t tell you the most fundamental truth about his company or you feel he’s trying to bulldoze you through jargons or want to make you believe that you with your limited understanding can’t understand his invention or product which is going to change the world- guys run for your life. It’s a fraud and it will go to zero. It might be valued at ten billion or the biggest names in the world are lining up for it, but if you can’t understand it, just don’t put a penny in it.
There’s one more thing we should work upon. When you can’t understand something, the ability to say I don’t know is a huge challenge. People like to pretend to be knowledgeable and if they say they don’t understand the newest fad or the latest startup, it’s equivalent of saying I’m dumber than the guy selling it and lo and behold, that’s exactly the insecurity these people prey upon. You don’t have to blabber something when you could say I don’t know. This emotional urge to appear to be smart is injurious to your wealth especially in cases when the smartest thing is to see the obvious and say, can you please elaborate and teach me or show me what do you mean.
PS: I’m a bitcoin non-believer. I read quite a lot on it and don’t understand a thing. So I realised if I don’t get it, most people around me also don’t. But all they’re trying is to pretend to get it and try to fit in so that someone doesn’t say oh you’re so dumb. Well, the only way you can buy a bitcoin or its siblings is if you believe in it. Like Justin Beiber’s beliebers. You can’t question, can’t argue, join the movement and change the world.
Well, good luck with that!
Life is all about Compounding! 