Dreams for the tech sector’s rout: The end of founder worship, and a reset of toxic startup values

By now it has become a rite of passage. Every week, without fail, another technology company admits it was overzealous during the pandemic – hiring too many, expanding too quickly – then acknowledges it must focus on making money and announces a round of job cuts.

This week it was Spotify SPOT-N, the music streaming giant that has never turned an annual profit. Last week it was Canada’s Lightspeed Commerce Inc. LSPD-T, which is swimming in red ink, and Clearco (officially CFT Clear Finance Technology Corp.). The list is growing quickly. In January alone, the likes of Benevity, Hootsuite and Clutch also slashed head counts.

When the trend started last year, it was refreshing to see tech leaders admit they had screwed up. “Ultimately, placing this [pandemic] bet was my call to make and I got this wrong,” Shopify Inc. SHOP-T CEO Tobi Lutke wrote in a memo to employees in July, when the company announced it would cut 10 percent of its staff.

“I got this wrong and I take responsibility for that,” Meta Platforms Inc. META-Q CEO Mark Zuckerberg similarly wrote in his own note to employees in November.

But lately it has become so routine, the messages so eerily similar, that it all sounds rather cultish. “In hindsight, I was too ambitious,” Spotify CEO Daniel Ek wrote in a note to staff Monday.

The repeated emphasis on “I,” instead of “we,” embodies a defining characteristic of current startup culture, one that has plagued the tech sector. These companies, the world has been told, aren’t simply run by chief executives or entrepreneurs – they are managed by founders. And founders are very special people who should not be questioned.

How the Liberals’ multibillion-dollar tech plan created ‘chaos’ instead of growth

Last year, Michele Romanow, Clearco’s co-founder, filmed promotional videos dubbed “Founder Diaries.” In one she declares that it is her life’s work to protect her breed. “If I can do anything in this world,” she says, “it is to help and defend founders, because they ultimately build the world we want to believe in.”

Entrepreneurs, of course, deserve some praise. It is scary to venture out on your own, especially when the statistics show the vast majority of startups fail. Economic growth is also becoming more dependent on fresh ideas. In Canada, the oil and gas sector has been a major engine of gross domestic product for decades, but the world is moving away from fossil fuels.

Yet the fawning over founders has become obscene. Even though cult-like admiration has deep roots in the tech sector, worship was once reserved for true visionaries such as Steve Jobs and Bill Gates. Somehow it was co-opted by oodles of entrepreneurs over the past five years – and turned truly perverse during the pandemic. Even Sequoia Capital, one of Silicon Valley’s leading venture capital firms, was seduced by FTX co-founder Sam Bankman-Fried.

The excessive praise is particularly glaring now that so many companies are coming to grips with reality in a world of normal interest rates. Mrs. Romanow stepped down as CEO of Clearco earlier this month after the company announced its second round of deep job cuts in six months. The new CEO, a US finance-industry veteran, will try to turn Clearco around.

Every business cycle has its alleged geniuses. The 1980s were dominated by junk bond specialists, the nineties by investment bankers, the aughts by hedge fund managers. Eventually, they lose some, or all, of their glory. Many of the megamergers concocted by investment bankers blew up, and many hedge fund managers struggled to outperform the broader market for more than a few years. Founders, who personified the past decade, are facing their own comeuppance now.

With some luck, a prolonged rout will humble them. And in the aftermath, a much healthier ecosystem may emerge, because entrepreneurs will refocus on building quality companies.

“The things that were top of mind for founders, and the way they talked about their businesses, changed a lot over the last 10 years,” said Adrian Bartha, the founder of GoodCapital, a Toronto-based private investment firm, in an interview .

When Mr. Bartha set out with a business partner in 2012 to raise some money through a search fund – a form of private capital – and then acquired Calgary-based eCompliance, a small health and safety software company that sought to prevent workplace injuries, the startup scene was a very different environment. Like many other leaders at the time, he was in it to be entrepreneurial and to create something of societal value.

But once the likes of Facebook (now Meta) and Netflix solidified themselves as truly revolutionary companies – and delivered legendary returns for their early backers – money started pouring into the venture capital sector. The influx dramatically altered egos and incentives.

In a flash, founders were put on a pedestal and could raise money just by breathing. Startup valuations turned obscene, and the measures of success became warped. “Something is rotten in tech startup land,” wrote Mark Suster, who runs a well-known venture capital fund, on his blog in 2015.

For one, profit meant nothing more. If anything, making money was frowned upon, because venture capital backers wanted their founders to aim for world domination. It was growth at all costs.

And with so much private capital chasing startups, it became easy for founders to sell their businesses or cash out large chunks of their equity in new financing rounds. Soon it became normal for once-humble entrepreneurs to brag on LinkedIn and Twitter about getting rich, all under the guise of “advice” for other founders. A popular podcast about startups, hosted by two founders, is called My First Million. What used to be unheard is now the norm.

Because startups, and particularly software startups, became so sexy, it was hard to tell what was truly motivating founders any more – the experience or the money.

Does it mean we’ve been building some bad businesses? “I would argue there’s some real truth to that,” Mr. Bartha said. After selling eCompliance in 2019, he launched GoodCapital, which backs founders who try to solve what he describes as “real world problems.”

This theme – using the entrepreneurial spirit to make life better – is having a bit of a renaissance. It’s still early days, but even Mr. Sister is hopeful. For years he has ranted about how the goal of attaining unicorn status – a billion-dollar valuation on paper – destroyed so much of the good that startups can do. “Instead of growing revenue and holding down costs and building great company cultures, the market chased valuation validation,” he reiterated in a post last month.

Lately, though, he believes we’re getting back to building “real businesses.”

“I am having fun again. Truly it’s the first time I’ve felt this way in five years or so.”

mr. Sister did not return a request for comment.

Of course, not all founders have been in it for the money. Loudmouths always get the most attention, and the media eggs them on.

Vancouver’s Jane Software Inc., whose technology is used by health care professionals such as physiotherapists to help run their practices, is one of the software companies that bucked the trend when so many startups were chasing unicorn status. Instead of solely focusing on revenue – something many founders did because financing rounds or exits are based on a multiple of sales – Jane emphasized keeping customer churn low.

The goal was to build a sustainable business, co-founder Alison Taylor recently told The Globe and Mail, and that meant turning down financing offers at insane valuations. Now that the sector is facing a rout, Jane has a much better foundation to build on.

Founders who need some guidance on showing some humility can also learn a thing or two from Ms. Taylor. On stage at a conference in November, she expressed – out loud – the thing far too many software startup leaders try to mask. “Most of us,” she said, “are just making something slightly better than what already exists.” Acknowledging that, en masse, could do wonders for breeding a better culture for the entire ecosystem.