From Excess to Introspection: Wrapping up 2022
Were there too many frauds?
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We can use a laundry list of stories to make a case for how 2022 was the year of irrational exuberance, shameless scams, egregious frauds, embarrassing disasters, and morally dubious incidents in the world of startups and venture capital. It is tempting to argue how 2022 has highlighted the pitfalls of capital abundance and risk-on behavior and has shown us the dangers of an ecosystem that is too focused on “disruption” at all costs.
You can pick your favorite high-profile example to paint the technologists as irresponsible people abusing the resources at their disposal to cause great harm, intentionally or unintentionally, in their mindless pursuits of creating new things or doing old things in new ways that outsiders thought would obviously not work.
The damage caused by high-profile scandals in 2022 does have an adverse effect on the ecosystem, with venture capital drying up, similar startups struggling for resources, public sentiment souring, cynics feeling vindicated, and the intentions and credibility of honest technologists being questioned. Not to mention the unfair burden placed on the emerging geographies and underrepresented groups that bear the brunt of the fallout.
Over the pandemic years, there was a mind-blowing premium on selling stories detached from reality and historical norms for success on the part of founders. There was desperation and motivation on the part of investors to buy those stories and dismiss one’s own spidey sense about things not feeling right. It was thrilling for the employees to join the cause to make those stories a reality! The unprecedented confluence of market conditions and behavioral patterns created the perfect market to transact on increasingly improbable or delusional stories to have a shot at generational upside and moonshot success.
Even if you tried, you couldn’t have designed a better system to maximize fraud. No wonder we saw the frauds we did this year. All the relevant actors had the incentives to say, do, and hide things they wouldn’t have in a normal environment because they got rewarded for it! Until people caught their cold lies, sneaky manipulation, malicious intent, and reprehensible actions. What’s striking to me, in a macro, boring, rational, amoral sense, is we didn’t see the startup and venture capital system produce 10x more frauds. We saw a few more than normal, but not 10x more, given 10-100x more activity.
Let’s put aside our preconceived notions about the morality of the groups of people in the ecosystem aside. Let’s assume they are purely rational, heartless, profit-hungry (lol), and equity-wealth optimizers.
Shouldn’t we have seen 10x more frauds?
When I say fraud, I do not mean anything one might deem controversial. It’s not being a mean boss on Slack. It’s not having a segment of your employees complain about your leadership style. It’s not setting the policy of no political chatter at work. It’s not being a charismatic fundraiser who is struggling to live up to the absurd valuation of the last round.
I’m talking about straight-up fraud, where the goal is to enrich yourself at the expense of others. The kind that can put you in jail! The kind that makes everyone associated with you feel ashamed and helpless. The kind that makes you a pariah.
And that says something about the ecosystem all of us participate in. It says that there are lines most of us won’t cross. It says there are non-economic values that override decisions we might have made based on purely economic considerations. It says that most of us do not want to abuse the resources available, no matter how easy or tempting, or lucrative doing so can be in the moment.
Our system of dreaming, experimenting, and failing has durable guardrails. Despite having the most primed conditions for those guardrails to crumble, the majority of the participants took the long view, did the right thing, had certain standards they adhered to, and hadn't caved into their worst impulses.
Does this mean the fraudsters should be excused? No.
Does this mean that I'm advocating for ignoring or downplaying the frauds? No.
Does this mean we can’t or shouldn’t introspect on what went wrong and try our best not to repeat the avoidable lapses? No.
Does this mean we should justify morally egregious behavior in the name of making progress? No.
Does this mean this is a strong enough reason to have a balanced view of the ecosystem and be optimistic? Yes.
Does this mean I’m advocating for the victims of fraud to shut up and get on with the program? No.
Does this mean any skepticism is not warranted? No.
Does this mean cynics should get less attention? Yes.
Does this mean I’m suggesting we couldn’t use more humility? No.
Does this mean we should be more tolerant of failure & mistakes made within the bounds of the law? Yes.
Does this mean I’m holding us to extremely low standards that don’t deserve pats on our backs? A yes or no reaction won’t suffice here. Let me explain.
The startup ecosystem is fundamentally about going on all in on a dream and taking risks that defy the rational instincts of the vast majority of people. You are better off not taking the startup risk on a risk-adjusted return basis. It is safe to assume that the startup you are associated with is not the next Google, Facebook, Stripe, Uber, or Airbnb.
If you can make a living predicting what won’t work, you should absolutely be in the business of predicting how every startup will fail! You would be right most of the time! Both the builders and financiers have to dream. Both sides know the reality does not match the story. The entire startup experience is about bridging that gap! In an environment where capital becomes abundant, the tolerance for an increasingly widening gap increases for both sides for every part of the journey. That isn’t a fraud in and of itself! But, every now and then, fraud will likely happen.
Assuming we want to maximize growth and innovation, the most important question is how do we create a system that optimizes for the “right” things and minimizes fraud. Suppose you are looking for a utopian system that prevents any and every fraud. In that case, it is simply not realistic to expect that system to produce previously unthinkable innovations because of the inherent risk aversion and caution built up in such a system at all layers to prevent fraud at all times.
The precautionary principle does not produce innovations that help make technological and societal progress.
This is why I do not believe that a tiny number of frauds in a system that produces a disproportionately higher magnitude of successes is too low of a standard for assessing overall success.
I'm extremely glad that The Good Buy ex-Billionaire will be behind bars soon. People like him should be held accountable to the fullest extent of the law.
We are now entering a period where the conditions are not as ripe for frauds to thrive. The market is more efficient, the regulators are more vigilant, investors are more cautious, journalists are more diligent, founders are more realistic, employees are more discerning, and the public is less gullible.
As we look ahead to 2023, I’m hoping for more people to be more optimistic, less cynical, more grateful, more humble, more forward-looking, more growth-oriented, and more reflective while not sacrificing the naïveté that’s often needed to think big ideas and make progress.
My most recent chat is with Turnip’s co-founder & CEO, Pooja, on the evolution of gaming culture in India and the world, building a mobile-first, global esports streaming platform, and nurturing gaming communities.