The Crumbling Cult of The Founder

Have we reached peak founder yet?

As investors we should certainly hope so. It seems as though we’ve had little choice but to tolerate tech overlords as a new breed of billionaire babies. Why? Because quite frankly the numbers have been on their side. Who can argue with unfettered capital gains? Don’t the numbers determine who is right?

Take 38-year-old Theranos founder Elizabeth Holmes, who awaits sentencing this week after being found guilty of conspiracy and wire fraud. US prosecutors want Holmes to spend 15 years in prison and pay $US800 million to investors defrauded by her start-up, which claimed to be able to run many tests on one drop of blood.

Holmes founded Theranos in 2003 at the age of 19. The company was once valued at $US9 billion, and Forbes magazine put Holmes' net worth at $US4.5 billion in 2015 before the Wall Street Journal published a series of articles suggesting Theranos’s devices were flawed and inaccurate.

Irrational Markets

Financial markets are a curious thing: something can be irrational for an incredibly long time before reality sinks in. As John Maynard Keynes famously said: the market can remain irrational longer than we can stay solvent. More recently, though, it seems to be that founders, CEOs and owners are staying irrational longer than their companies can remain solvent.

Theranos aside, we’ve seen a number of events this past week which have pointed to what megalomaniac founders can do to firms they either own or control, the impacts of which can have a significant contagion effect on entire sectors and related parties. As investors, sometimes the structure of a firm is just as important as its performance.

The Zuck

We have to start with Zuckerberg. In my last Eureka piece I laid out the poor financial performance of Meta since its focus shifted to the Metaverse. And this week Mark Zuckerberg tried to assuage investor concerns by laying off 11,000 employees. At this point, it is not clear if any of these employees will be leaving the loss-making Reality Labs division, or if he is robbing Peter to pay Paul. Included in his public statement was the following:

“I want to say upfront that I take full responsibility for this decision. I’m the founder and CEO. I’m responsible for the health of our company. For our direction and for deciding. How we execute that…”

He even included a rare apology, saying “sorry”.

Here’s what he didn’t apologise for: maintaining full control over a company in which he has only a 13 per cent stake. One of the major problems investors face in the tech sector is super voting rights. The issue of course is that the sector is such a large part of markets we have little choice but to include it in our portfolios. But we end up being subservient to the founders’ whims and fantasies long after they’ve made their billions. Essentially Meta Platforms Inc. has a single point of failure – an immovable CEO.

The usual course of action for disgruntled shareholders would be to force change by waging a proxy battle. At Meta Platforms, they’re reduced to asking nicely, via open letters. Given we’ve seen ethical investment funds – no coal, no tobacco – maybe it’s time they added ‘no super voting rights’ to CEOs and founders. Decision authority ought to be aligned to financial skin in the game.

The Cult of Musk

Since Elon Musk closed on the Twitter deal, it has been absolute chaos inside the little blue bird. Musk has already sacked the board, and after firing around 50 per cent of its workforce, he had to ask back some of the staff critical to holding the service together. A large number of important C-suite executives also handed in their resignations.

On top of this, his first revenue-centric move of charging for verification check marks resulted in a huge number of spam and parody accounts, creating confusion and the opposite effect of what the blue ticks were designed to do. It also seems like advertisers, currently 90 per cent of revenue, are abandoning the platform.

While Musk seemed to be originally oscillating between making Twitter the bastion of free speech or some kind of Super-App, he now concedes it may disappear altogether. In an all-hands meeting, Musk said that he is not sure how much runway the company has and bankruptcy is not out of the question!

Tesla Damage

While this would only make a small dint in his net worth, it may end up causing a rather large fender bender in the Tesla share price. It’s long been said that Tesla’s market capitalisation ($US618 billion at time of writing) is related more to the cult of Musk than it is to any commercial reality. If Twitter falls over while under his control, then we should expect the market to reconsider his genius.

While Tesla has already lost over 40 per cent from its peak value in 2021, it’s not unreasonable to think it could lose a further 80 per cent from where it is today. Mind you, this would still fetch a significant premium over all other car manufacturers excluding Toyota.

Distracted CEOs are a dangerous commodity. 

SBF - Sam Bankman ‘Bankrupt’ Fried

We are now a week into the FTX saga and subsequent bankruptcy filing. There seems to be new revelations in the saga by the hour. When the liquidity issues first came to light, few FTX investors (or customers for that matter) understood FTX was lending huge sums of money to a trading firm Alameda Research which is owned by SBF. Or that most of the valuation was underpinned and secured by SBF’s own made up tokens, FTT’s. Since the bankruptcy filing, the exchange has been mysteriously hacked, with over a billion dollars in remaining capital being drained from the platform. It also turns out that SBF had built a secret back door trading capability into the system.

If this all seems to be bordering on fraudulent, well, trust your instincts. As far as we can tell, FTX had almost zero oversight. No board, no audit committee, no CFO or compliance officers. And yet, SBF managed to convince sophisticated investors like Sequoia Capital to invest. Because well, SBF is (or was) a genius. The long-held retort, when anyone asks seemingly fair questions about risk in crypto markets, is that you simply don’t get it – you’re too old and stupid to understand the new financial and technical realities.

The one thing which seems so obvious that no one ever seems to care about is that a core property of crypto is meant to be that it is a peer-to-peer technology, not requiring intermediaries or exchanges. And yet exchanges keep emerging and doing all the things they claim to be against in traditional finance – except doing it with made-up tokens and without any regulation. If there is one thing we must ‘get’, when it comes to crypto it’s this: ‘Not your key, not your crypto’

We can only hope that long overdue regulation in the sector emerges.

Adam ‘WeWork’ Neuman is back!

Let’s not forget the infamous Adam Neuman who lost $15 billion at WeWork and managed to walk away a billionaire in the process. While you might think this would make it hard for him to raise capital for his next venture, Neuman convinced revered Venture Capital Firm Andreessen Horowitz to part with $350 million to invest in his yet-to-launch real estate venture, Flow, thus giving it a $1 billion valuation. They say that investors fund the person more than the firm in early stage start-ups. Well, this could only suggest that either Neuman is one of the most convincing men on earth, or VC’s haven’t got the memo on the downside of the cult-like leaders.

It seems as though there is another layer which must start coming into play before we invest anywhere – decision control. While public companies used to be just that, it might be time that the investing public ensure their holdings are not exposed to the whims of a single billionaire. If recent revelations are any indication, they tend to be a riskier thing than the markets themselves.