Our business models are broken
Who can we blame? Let's look back exactly 26 years ago today, to the day the business model was born.
Who can we blame: The same Silicon Valley and Wall Street hype makers that launched the first internet bubble 26 years ago. And me. You can blame me.
We are looking for someone to blame for the challenges we face today.
Congresswoman Robin Kelley of Illinois blame the “fundamental flaw” in Facebook’s business model that spreads content that is “incendiary, contains conspiracy theories, or violence,”
Activist hedge fund manager Engine No.1 is attacking Exxon from the inside of the board to address an “existential threat to its business model” in a world intent on reducing carbon emissions.
Regulators in Europe are challenging linear business models that extract raw materials from the earth and produce high-intensity consumption and waste as they tax and impose tariffs on carbon-intensive industries.
As we search for ways of thinking about how we organize people and resources to live well on this earth together, we keep repeating the same destructive business model logic.
I think I have been complicit in this game.
Let me explain because I was there. 26 years ago today. The day the business model was born.
August 9, 1995. That was the day Netscape Communications Inc., maker of the first widely adopted Internet browsing software, saw their shares double on their first day of trading on the open market. The company was only 16 months old and was losing lots of money. That might seem normal in today’s frothy tech stock market, but it was Netscape that normalized the high valuation of young tech companies with no profit.
The Netscape IPO market a departure: a sexy business model could be worth vastly more than the present value of the actual business itself.
Granted, I was a bit player. I might as well have been an actual fly on the wall. But I was a fly who could ask questions. Questions that I was told not to utter out loud, again, if I wanted to keep my job.
I was a junior equity analyst working in one of the smaller tech investment banks as part of a syndicate that turned Netscape into a public company so that anyone could purchase shares. Notice that Wall Street leaves clues, hiding in plain sight. They still call the group of banks that take companies public a “syndicate.” An equity syndicate, much like a crime syndicate, happens when investors come together to determine the price of the stock and to sell new Initial Public Offerings or IPOs.
Everyone wanted to own a piece of the stock. People who never owned stock tried to buy Netscape shares that day. The enthusiasm turned to mania before the stock issued its first public share.
The lead banker at Morgan Stanley, Frank Quattrone, sensed the frenzy and urged Netscape to double the share price for that first day, only to see it triple in value, then settle back down again to an unbelievable $3 billion valuation. The founders of Netscape were happy to agree. It’s important to remember that the frenzy was the result of an agreement between Wall Street bankers and Silicon Valley tech founders, who all gave in to what the syndicate wanted to: to sustain disbelief.
I stared at the financials of Netscape with incredulity. I needed to think through how we’d “cover” the company in a research report upon their first public quarterly financial results. Equity Analysts forecast revenues and profits and write research reports in order to give guidance to investors considering stocks.
Prior to that day, I was used to thinking in terms of physical things. I had to reason through investment in things and project the future returns of profit derived from the sale of those things. Apple made computers. Western Digital made disk storage. Intel made semiconductors. Applied Materials made semiconductor capital equipment. Even Adobe depended on the physical distribution of their software in the form of disks inserted into machines.
Netscape seemed to be freed from such constraints. Their Navigator browser could be accessed over a dial-up internet connection free to anyone with a personal computer. I sat looking at my Excel spreadsheet, with all of the potential revenue projections. Netscape was already licensing its software to telecom companies, they were already selling advertising on their browser, and they were charging enterprise and consultancy fees.
The co-founders, Jim Clark, the former founder of Silicon Graphics, and Marc Andreeson, the engineer who created the first free university-based browser, Mosaic, wanted to accelerate the rate of adoption. So they shipped the “beta” version for free. Then their sales teams would review the log files of people and web addresses using the browser and pursue large enterprise companies to become customers and pay a commercial license.
Their total revenues amounted to less than $5 MM, and they were losing money. As an analyst, it was difficult to estimate future cash flows because there was little evidence that they would ever turn a profit. And what about this give-away free strategy? I’d never seen anything like that before. It was certainly working to accelerate adoption, but would that lead to Netscape actually making money that way? How would all of these ideas interlock and connect to grow a real company one day?
I was suddenly business modeling: translating the hopeful narrative of the future and a wide range of optionality into a scenario logic for how Netscape would unfold. Academics and practitioners all point to this day, August 9, 1995, as the moment business modeling began in earnest. But the dark side of the story is rarely told.
Business modeling, it turned out, was overwhelming.
What happened during that first era was a frenzy and land grab in response to a wild internet-based business model offering new variables for speculators to flex, stretch, and even hallucinate as they imagined what the company might be worth one day despite scant financial evidence.
I asked my boss for help.
He sneered, “That carcass will be left for us to spin stories about. There’s no there, there. They’re not going to make enough money to earn that valuation. We’ll be left with the dregs. Microsoft will counter, they will never let them win.”
My boss, the cynic, was directionally correct. While Netscape’s revenue soared from $85 million in 1995 to $346 million in 1996, and then to $534 million the next year, they were soon crushed by Microsoft. By August 1996 Microsoft bundled every PC with the free Internet Explorer 3.0 browser, which crushed Netscape. The company survived and was acquired by AOL for $4 BN in stock.
The company, Netscape, was never really a plausible business from the start, but the company made billionaires and millionaires out of many because the business model was believed for long enough to mint those millions and billions. The same could be said for many public companies today.
Here are my lessons from this day, and how I’ve changed my perspective on what I witnessed:
George Box, the statistician, tells us that all models are wrong, but some are useful.
Wall Street speculators know that these tech business models are wrong, but they are useful tools to make money.
Tech enthusiasts know that internet business models can be wrong, but they model themselves after model storytellers like Elon Musk and convince themselves that they will beat the odds to win the game.
Investors spread their bets so that they own the golden ticket in the company that gets to dominate, and therefore manage the losses of companies that fizzle out along the way.
My confession is that I have allied with tech enthusiasts and served as a booster for all things digital. Digital business models were a creative medium to reimagine what is possible. Connected business models can better help us solve Sustainable Development Goals and decouple carbon from our global economy.
But my reflection, 26 years later, is that the capital model underneath the business model casts a structural shadow. The speculator’s cynical gaze tends to be the more accurate predictor of what will happen in the future. Capital expectations shape the strategic scope of action to define what is possible, what gets funding, and who gets the most funding to own and dominate a sector.
The promise of the exit, managed by the syndicate, whether an IPO, a SPAC, or acquisition, defines the strategic scope of action and business model choices for so many companies.
As we look to the combination of capital and business models to address major existential risks and to create solutions to massive social and environmental challenges, the cynical speculators’ gaze has more power over our overly simplistic business model narratives.
We overlook the effect that capital expectations have on the decisions faced by company owners and investors as they decide to invest. If we want to “fix the business models” of these companies, it starts with telling an honest story about why we keep making the same mistakes.
We wag our finger at Mark Zuckerberg because it’s fun to shame a young billionaire. But we know that it is a dance of complicity between tech founders and their capital backers, just as it was 26 years ago today between Clark, Andreeson, Quattrone, and everyone else on Wall Street, including me. But this time around, we need the tech to work in order to ensure our survival as a species. So let’s be as clear as we can be about what capital is asking us all to do.