Snap(chat) is the new Enron

Many millennial who are part of this startup movement have probably never heard of Enron (or probably not much anyway).

Enron was a major energy company (a bit of an understatement) that had a spectacular crash. Just before the crash, it (allegedly) reported an annual revenue in excess of 100 billion dollars. When the fraud has come to light, the company has gone bankrupted, thousands of employees lost their jobs and pensions, many investors lost their life savings in the stock market, and one of the big-5 accounting firms got dragged down as well. The incident completely changed the way we look at Corporate America and many of the modern day rules and regulations around corporate governance are actually initiated from this incident. You’ve heard of Sarbanes–Oxley Act? Yeah, it’s because of this.

Without spelling out the details, it involved the typical greed, irresponsibility and abuse of the system.

We may think we must have learnt something from this. Apparently not.

On the first day of the IPO, Snap(chat)’s share price has jumped 44% with a valuation of 28 billion dollars. Yet ironically, they have just lost 514 millions in 2016. Yes, my nephew who made 10 dollars for running my errands has just made 514 millions (and 10 dollars) more than Snap last year. What’s better, in its filing with SEC, it stated, “”If our revenue does not grow at a greater rate than our expenses, we will not be able to achieve and maintain profitability.” In plain language, this means, “If we don’t make money, than we don’t make money”. Yes, it is as ridiculous as that.

But the regulators approved and the investing communities are excited (at least for now), particularly the early investors who have finally found the ultimate suckers to pass this on to — the ill-informed general public.

See, back in the old days, at least one would need to commit a fraud, make some fake entries in the accounting systems and lie about the profitability of the company to get the suckers in. Now you just need to say, hey, we are not even going to make any profits, but just dump your life saving into this hole.

I don’t buy the ‘expectation’ argument too, i.e. as long as you are upfront about the proposition, it is a fair deal. For example, we generally agree that we should not sell alcohol and cigarettes to children. The fact that we come clean and say these products are bad for them, it doesn’t mean it’s ok to sell to them (I know, cigarettes for adult is also a fraud). Particularly to those who have little understanding of what it is set up for them. That’s why we now know CDS was a bad idea. Fooling people who can’t afford a mortgage to get a mortgage is a bad idea. Similarly, offering a business which is not expected to make money to the general public as an “investment” is a bad idea. Really, really bad idea.

You may say, fine, this is just an exception. But as a startup investor myself, I can tell you it is not. There is a reason why many startups love to talk/learn about fund raising (often more than their businesses). If you think about it, when you fund raising, you are literally selling away part of your company. Why would you get excited (if it is good)? Sure enough, sometimes you need the financial capital for research or expansion (and there is always a price for everything). But when the primary goal of the startup is to fund raise and ultimately get to an exit, it tells you how sick the system is. In another words, when the startup (branded as a commodity to be traded) is more valuable than its actual business (a real way for economic growth for our real society), we have a problem. Don’t get this? It’s just like saying when a marriage certificate is more valuable than the marriage itself. Alright, another really bad analogy, but hopefully you get the idea.

This is how sick we are. And we don’t even seem to care about it. But it’s so sick that it’s worse than the boring old fraud. At least those guys tried to hide their tracks.