I’m not going to call it “tech,” because most of the startups in that so-called tech space aren’t tech companies. They’re companies in mundane businesses. And many of these companies aren’t startups anymore but mature companies that have been in business for over a decade and now have tens of thousands of employees. And then there is the entire shale-oil and gas space that has turned the US into the largest oil and gas producer in the world.
They all share two things in common:
Calling these companies “tech” is a misnomer, designed to create hype about them and drive up their “valuations.” They engage in mundane activities such as leasing office space, running taxi operations, doing meal delivery, producing and selling fake-meat hamburgers and hot dogs, providing banking and brokerage services, providing real estate services, and renting personal transportation equipment, such as e-bikes and e-scooters.
And let’s just put this out there right now: e-scooters appeared in public for the first time in the late 1800s, along with electric cars and trucks.
Then there is the endless series of new social media platforms, in addition to the old social media platforms of Facebook, Twitter, WhatsApp, Instagram, and the like, where people post photos, videos, promos, and messages about whatever.
That’s the “tech” sphere mostly today.
There are some tech startups in that group, however. And that technology is about spying on Americans and others and datamining their personal events, purchases, and thoughts to be used by advertisers, government intelligence agencies, law enforcement agencies, political parties and candidates running for office, and whoever is willing to pay for it.
And there is some real tech work going on in the automation scene, which includes self-driving vehicles, but most of this work isn’t done by startups these days – though some of it is – but by big companies such as Google, big chipmakers such as Nvidia, and just about all global automakers.
And there is a slew of big publicly-traded companies that have stopped being startups years ago, that are burning huge amounts of cash to this day, and that need to constantly get even more cash from investors to have more fuel to burn. This includes Tesla, which succeeded in extracting another $2.7 billion in cash in early May from investors. Tesla duly rushed to burn this cash. And it includes Netflix, which extracted another $2.2 billion in April. From day one, these companies – just Netflix and Tesla – have burned tens of billions of dollars in cash and continue to do so, though they’re mature companies.
And it includes Uber which received another $8 billion from investors during its IPO in May, which it is now busy burning up in its cash-burn machine.
Don’t even get me started about the entire shale oil-and-gas space – though there is some real technology involved.
That entire space has burned a mountain of cash. Many of these shale oil companies are privately owned, including by private equity firms, and it’s hard to get cash-flow data on them. But for example, just to get a feel for the magnitude, by sorting through 29 publicly traded shale oil companies, the Institute for Energy Economics and Financial Analysis found that between 2010 through 2018, $181 billion in cash was burned. In 2019, they’re burning an additional pile of cash because oil prices have plunged again. And shale drilling started on a large scale before 2010. Plus, there’s the cash burned by the privately held companies. So, the total cash burned is likely in the neighborhood of several hundred billion bucks.
These companies and industries are “disruptive.” They claim that they change, and some of them actually do change, the way things used to be done.
But they have not figured out how to have a self-sustaining business model, or how to actually make money doing it. It’s easy to quote-unquote “disrupt” an industry if you can lose billions of dollars a year, if you keep getting funded by new investors, while everyone else in this industry would go bankrupt and disappear if they used a similar business model.
The only reason these companies have had such growth is because investors didn’t care about the business model, profits, and positive cash flows. (...)
This scheme is a key feature of the Everything Bubble. And it has had a large impact on the real economy.
When a company has a negative cash flow, which these companies all do, it means that they spend more investor money in the real economy than they take out. This acts like a massive stimulus of the local economy and even of the broader economy.
They’re paying wages, and these employees spend those wages on rent or house payments, on cars, electronics, food, craft beer, shoes, and they’re becoming bank customers and buy insurance and go to restaurants and pay taxes at every twist and turn. Few of those employees end up saving much. Most of them spend most of their wages, and this money goes to other companies and their employees, and it gets recycled over and over again, allowing for more hiring and more wages and more consumption to percolate through the economy.
Some of this money that is circulating comes from revenues, and is thereby extracted from the economy to be recycled. But the rest of the money – the amount that companies spend that exceeds their revenues, so the negative cash flow – comes from investors. And this is pure stimulus.
This is how the $10 billion that Softbank sank into WeWork was and will be recycled via salaries and office leases and purchases, and via local taxes, and purchases of furniture and decorations and rehabbing offices whereby the money was recycled by construction crews and electricians and flooring suppliers. Softbank’s money was routed via WeWork into the various local economies where WeWork is active. And it helped pump up commercial real estate prices and office rents along the way.
The shale oil-and-gas sector spends a lot of the negative cash flow in the oil patch, but also the locations where the equipment they buy is manufactured, such as sophisticated computer equipment, the latest drilling rigs, big generators, high-pressure pumps, and the like.
So an oil driller in Texas will transfer some investor money to manufacturers in distant cities. And the employees at these manufacturing plants buy trucks and boats and used cars, and they buy houses, and all kinds of stuff, and all of those hundreds of billions of dollars that investors plowed into the industry got transferred and recycled endlessly.
This is the multiplier effect of investors plowing their cash into money-losing negative cash-flow operations.
So what happens when investors figure out that this money is gone, and that any new money they might give these companies will also be gone?
They all share two things in common:
- One, they’re fabulously efficient, finely tuned, and endlessly perfected cash-burn machines.
- And two, investors in these companies count on new cash from new investors to bail out and remunerate the existing investors.
Calling these companies “tech” is a misnomer, designed to create hype about them and drive up their “valuations.” They engage in mundane activities such as leasing office space, running taxi operations, doing meal delivery, producing and selling fake-meat hamburgers and hot dogs, providing banking and brokerage services, providing real estate services, and renting personal transportation equipment, such as e-bikes and e-scooters.
And let’s just put this out there right now: e-scooters appeared in public for the first time in the late 1800s, along with electric cars and trucks.
Then there is the endless series of new social media platforms, in addition to the old social media platforms of Facebook, Twitter, WhatsApp, Instagram, and the like, where people post photos, videos, promos, and messages about whatever.
That’s the “tech” sphere mostly today.
There are some tech startups in that group, however. And that technology is about spying on Americans and others and datamining their personal events, purchases, and thoughts to be used by advertisers, government intelligence agencies, law enforcement agencies, political parties and candidates running for office, and whoever is willing to pay for it.
And there is some real tech work going on in the automation scene, which includes self-driving vehicles, but most of this work isn’t done by startups these days – though some of it is – but by big companies such as Google, big chipmakers such as Nvidia, and just about all global automakers.
And there is a slew of big publicly-traded companies that have stopped being startups years ago, that are burning huge amounts of cash to this day, and that need to constantly get even more cash from investors to have more fuel to burn. This includes Tesla, which succeeded in extracting another $2.7 billion in cash in early May from investors. Tesla duly rushed to burn this cash. And it includes Netflix, which extracted another $2.2 billion in April. From day one, these companies – just Netflix and Tesla – have burned tens of billions of dollars in cash and continue to do so, though they’re mature companies.
And it includes Uber which received another $8 billion from investors during its IPO in May, which it is now busy burning up in its cash-burn machine.
Don’t even get me started about the entire shale oil-and-gas space – though there is some real technology involved.
That entire space has burned a mountain of cash. Many of these shale oil companies are privately owned, including by private equity firms, and it’s hard to get cash-flow data on them. But for example, just to get a feel for the magnitude, by sorting through 29 publicly traded shale oil companies, the Institute for Energy Economics and Financial Analysis found that between 2010 through 2018, $181 billion in cash was burned. In 2019, they’re burning an additional pile of cash because oil prices have plunged again. And shale drilling started on a large scale before 2010. Plus, there’s the cash burned by the privately held companies. So, the total cash burned is likely in the neighborhood of several hundred billion bucks.
These companies and industries are “disruptive.” They claim that they change, and some of them actually do change, the way things used to be done.
But they have not figured out how to have a self-sustaining business model, or how to actually make money doing it. It’s easy to quote-unquote “disrupt” an industry if you can lose billions of dollars a year, if you keep getting funded by new investors, while everyone else in this industry would go bankrupt and disappear if they used a similar business model.
The only reason these companies have had such growth is because investors didn’t care about the business model, profits, and positive cash flows. (...)
This scheme is a key feature of the Everything Bubble. And it has had a large impact on the real economy.
When a company has a negative cash flow, which these companies all do, it means that they spend more investor money in the real economy than they take out. This acts like a massive stimulus of the local economy and even of the broader economy.
They’re paying wages, and these employees spend those wages on rent or house payments, on cars, electronics, food, craft beer, shoes, and they’re becoming bank customers and buy insurance and go to restaurants and pay taxes at every twist and turn. Few of those employees end up saving much. Most of them spend most of their wages, and this money goes to other companies and their employees, and it gets recycled over and over again, allowing for more hiring and more wages and more consumption to percolate through the economy.
Some of this money that is circulating comes from revenues, and is thereby extracted from the economy to be recycled. But the rest of the money – the amount that companies spend that exceeds their revenues, so the negative cash flow – comes from investors. And this is pure stimulus.
This is how the $10 billion that Softbank sank into WeWork was and will be recycled via salaries and office leases and purchases, and via local taxes, and purchases of furniture and decorations and rehabbing offices whereby the money was recycled by construction crews and electricians and flooring suppliers. Softbank’s money was routed via WeWork into the various local economies where WeWork is active. And it helped pump up commercial real estate prices and office rents along the way.
The shale oil-and-gas sector spends a lot of the negative cash flow in the oil patch, but also the locations where the equipment they buy is manufactured, such as sophisticated computer equipment, the latest drilling rigs, big generators, high-pressure pumps, and the like.
So an oil driller in Texas will transfer some investor money to manufacturers in distant cities. And the employees at these manufacturing plants buy trucks and boats and used cars, and they buy houses, and all kinds of stuff, and all of those hundreds of billions of dollars that investors plowed into the industry got transferred and recycled endlessly.
This is the multiplier effect of investors plowing their cash into money-losing negative cash-flow operations.
So what happens when investors figure out that this money is gone, and that any new money they might give these companies will also be gone?
by Wolf Richter, Wolfstreet | Read more:
