Disrupted | Book review | Ruffer | Investment management

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Articles by Alex

Alex Lennard

Fund Manager

1 March 2019

A workplace with unlimited holidays

It sounds wonderful. Yet people tend to take less annual leave once given such freedoms. Less well known, a policy of unlimited holidays also makes firing staff cheaper: when an employee’s contract is terminated, there is no accrued holiday the employer must pay for. This is one of the darker sides of technology start-ups that Dan Lyons brings out in Disrupted.

In 2012, enjoying a successful career, Lyons suddenly became a “beached white male” when he was dumped as technology editor of Newsweek.

Unemployed in his early fifties, Lyons feared he would struggle to find good work again. And so he made the jump from writing about technology start-ups to working for one. From Newsweek to Hubspot, a pre-IPO marketing software company. By December 2018 Hubspot’s market capitalisation exceeded $5 billion, despite the company having never made a profit.

With a technology background, Lyons assumed he would fit in comfortably with his new company’s culture. The book catalogues his experience as a fish out of water.

With great warmth, poking fun both at himself and his new employer, Lyons describes scenes that feel like a family-friendly version of 1990s film American Pie. There’s a candy wall. Beer on tap. Regular parties to celebrate the employees. Teddy bears attending meetings. In this young and sales-focused business, Lyons sticks out.

There is much to find amusing about Hubspot, and Lyons’ tale of his time there. From re-branding spam as loveable marketing content, to Hubspeak, the company’s own form of slang. At times, the company appears cult-like, something the founders don’t seek to dispel. As Lyons details: “Believing that your company is not just about making money, that there is a meaning and a purpose to what you do. and that you want to be part of that mission – that is a big prerequisite for working at one of these places.”

Lyons assumed he would fit in comfortably with his new company’s culture. The book catalogues his experience as a fish out of water

Capital and labour

Disrupted mixes satire with a critical look at the noxious side of much-vaunted start-ups. Tales of misadventure run alongside insight into capital benefiting at the expense of labour.

Hubspot runs at a loss, and is labour intensive. It relies on a young, cheap and disposable workforce, attracted by an environment of free beer and socials. The offer of fun helps the company hire vast numbers of young sales people, who are put under intense psychological pressure, and paid a relatively low wage.

This is a darker side of Silicon Valley. At Hubspot, wealth is distributed unevenly. The benefits of growth accrue to investors and founders. Workers have little recourse or job security. People are “disposable widgets” in an environment of hype, an environment that needs to be sustained long enough for the founders and venture capitalists to reach a pay day. Throughout Disrupted, the acceptance is striking.

Hubspot eventually IPOs in October 2014, despite losing $118 million in five years

Telling stories

Having written about technology companies for more than 20 years, Lyons has an extensive network of industry contacts. Those he asks for advice agree on several things. The Hubspot product is substandard. The founders are mediocre at best. And yet Lyons should suffer through his misery – because the Hubspot founders are likely to pull off a successful IPO. As one of his contacts puts it, the founders “are good at telling stories and generating hype”.

Hubspot eventually IPOs in October 2014, despite losing $118 million in five years, with marketing costs absorbing over 50% of revenue. Lyons has share options he can now exercise at a profit. Yet after reading the Hubspot prospectus, Lyons “cannot believe anyone would actually buy shares in the company”. Losses are growing faster than revenues.

His experience highlights the risks to would-be investors in tech IPOs, and the risks in the investment climate that’s prevailed for much of the past five years. Companies are designed around generating huge revenue growth. Hype seems to matter more than actual profits. Some investors have made large paper gains. It all has the feel of the late 1990s.

Should confidence dip, or the cost of debt increase, the window for loss- making businesses may close abruptly, trapping many fingers.

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Book review – Disrupted