Skin in the game

I believe one of the key reasons (in addition to product/market insight and ability to recruit and retain great people) why startups can beat large companies is that founders have skin in the game by owning a large part of the company. Take that away and building or investing in a company becomes quite different.

Ownership with ability to lose and make money is a strong incentive also for board members. This goes both for venture investors and “independent” board members. The paper Eric Jackson wrote, even if it was 23 years ago, says that a board member should have a few percentage points of his or her wealth in company shares. That makes sense today too as it drives engagement and motivation.

Talking about practical things

When it comes to exciting technology, the experts often start to talk about Innovation (with a big I) and the impact on the future of industries or even humanity.

Startup founders more often talk is about the practical challenges of getting a startup and technology to work.

How can I recruit and retain the right individuals? Where can we find a reasonably priced office? Which investors are currently active? How to I expand into a new country? What is a good way to setup an options program? Are there ways we can save money?

For the saving money part, I’d recommend Swedish startups to check out the R&D deduction (sv. forskningsavdrag), which can lower the social security fees for certain engineers to 11.83 % from 31.42 %.

TikTok, the US government and Oracle

TikTok is one of the world’s most popular apps, and the owner (ByteDance) is a Chinese company that acquired an American company ( to partly seed the service. This has led to a very unusual situation.

It started with president Trump’s order in 2020 for ByteDance to divest its U.S. operations for national security reasons. It hasn’t come to that, but Lawfare writes about how TikTok, the U.S. government and Oracle will organize TikTok US’ operations going forward. It’s about containing U.S. users’ data to a U.S. company that operates under special rules (overseen by third party monitors, government to be notified about new hires so they can make security background checks etc).

It is interesting to see a Western government treat a Chinese company in a similar way as the Chinese government treats non-Chinese companies. Do as we say or don’t do business here.

Changing constraints

Building a startup is seeing opportunities and trying to make them come true. How you get there will be impacted by constraints on your behavior. Such constraints might be competitors’ behavior, laws and norms, capital need, access to capital, access to talent and many other things.

For startups and unprofitable technology companies the access to capital has gone down and cost of capital has increased since 2021 (from being extremely cheap and widely accessible to being more normally priced and probably a little less than normally available).

This leads to cash being much more valuable than 18 months ago, as cash is more difficult and more expensive to replace.

The result is that current financial results (cashflow and profit/loss) become more important than revenue growth.

With a recession in the air, the only course of action to lower losses is general cost cuts including layoffs. And that is what are seeing.

Slower smartphone buying

In 2022 the number of smartphones shipped globally fell 11.3 % to 1.21 billion, according to IDC. That is the lowest number since 2013 (!).

The smartphone is a fantastic innovation, but it is now 15 years since the launch of the iPhone and the technology has been getting more mature for many years. Which, in addition to production issues and inflation, might explain lower shipments. Also, spend in smartphone app stores was down in 2022.

To me it feels unintuitive that smartphone usage would be declining. The drops in shipment and app store spend is probably driven by short-term issues rather than changes to the long-term trend, but it is worth following over the next 4-8 quarters and see if something actually is changing.

Looking to replace expensive debt

Twitter is, according to the Wall Street Journal, looking to raise $3 billion in equity to pay back $3 billion of the most expensive loans Elon Musk took to fund his acquisition of Twitter. This out of $13 billion in total debt.

Given Twitters size in revenue (reportedly $4-4.5 billion) and (lack of) profitability, $13 billion is a high debt load.

If Twitter was a stable company (revenue, profitability and cash flow), maybe it could have a 5x debt-to-cashflow ratio (which would be on the aggressive side). As the company is losing money, that ratio doesn’t make sense to look at today.

The question is at what valuation and what terms Twitter can raise money. The $44 billion dollar valuation from the acquisition is unlikely to stand given lower stock market valuation and Twitter’s short-term performance.

Still, I’d guess it is doable to raise capital using preference shares (or convertible debt) with favorable terms for the investors putting new money.

Employees stopped leaving?

One of the more interesting comments on the current layoffs and ‘overhiring’ at the larger technology companies comes from Ben Thompson at Stratechery (paid newsletter). The companies weren’t adding new staff that much faster, but what happened was that their current employees were not leaving at the same pace as before.

The chain of events becoming: new intake as planned, much higher retention of employees, resulting in a higher number of total employees and higher costs than planned, leading to layoffs.

At an initial glance it is a theory that makes sense to me.

Layoffs at Spotify

Spotify became the latest large technology company to annouce layoffs (about 6 % of ca 9,800 employees). The percentage size of layoffs is in the same range as Microsoft/Alphabet, but a bit lower than the ca 10 % layoffs done by other billion dollar revenue companies that have low profitability or are unprofitable (e.g. Saleforce, Twilio etc).

At this point it is still not clear how many of the layoffs will hit Stockholm. Given Spotify’s size in Stockholm, significant layoffs will likely impact the startup ecosystem (exactly how is to be seen, I can see both positive and neutral scenarios).

A slowly Acquired taste

The brilliance in the Internet’s enabling of niche content to become global due to low cost distribution and large platforms like YouTube, Spotify (in addition to the good old web) has is disruptive.

Lately I’ve been listening more to such a niche type of content, the show Acquired, which focuses on the stories behind startups, technology companies and venture. I’ve known about Acquired for a few years and been listening to individual episodes, but it seems like it is moving up in my priority inbox due to strong content and the understanding the hosts Ben and David have.

It is a long-style podcast (one or multiple episodes of more than an hour) that is widely popular.

An interesting aspect of digital content consumption is the barbel shape of its most popular content: on one side TikTok/Reels/Shorts that are very short (a brilliant format) and on the other hourlong, niche, detailed content (also a brilliant format).

Lower costs and lower revenue – problem not (yet) solved at Twitter

An interesting article about Elon Musk’s takeover of Twitter, based on interviews with Twitter insiders. According to CNBC the number of Twitter employees is now about 1,300, down from about 7,500 before the acquisition. Elon Musk says it is about 2,300 (both numbers exclude contractors, of which there are many not least moderation/support).

Other reports say Twitter has lost 40 % of its revenue compared to the same period in 2021.

I’m following the development primarily looking for learnings about two things.

Is there a general learning about a better trade-off staffing/revenue growth/profitability for consumer Internet companies with revenues from a billion dollars up to 20 billion dollars? I’m not sure, but it definitely could be one with less staff/slightly lower revenue growth/higher profit margins.

Will Twitter’s approach work for Twitter? On the cost cutting/layoffs side it seems to work from the point-of-view that the service is operating day-to-day. But the way layoffs has been done at Twitter seems to be a major reason to why advertisers are not spending as much. With the service operating at the same scale in terms of users, a 40 % drop in revenue should not happen at Twitter’s scale.

So while lower run-rate costs is a good thing, it looks like it would have been better business to implement the cost cuts in way that didn’t scare advertisers.