Martin Shkreli’s Prison Management, A Plague of Millionaires, and the Silicon Valley Ponzi Scheme

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DAYLIGHT  

On a Recode Decode podcast with Kara Swisher, Chamath Palihapitiya, the billionaire venture capitalist, talks about why he’s come to see Silicon Valley as a Ponzi scheme. The basic formula, he says, is this: A VC invests $1 million in a startup and tells it to spend $500,000 on Google and Facebook ads. Why? The VC says it’s all about growth, but it’s also to improve the odds that someone will invest after the first VC. A year later the startup does indeed get another VC to kick in $5 million, this time at a $25 million valuation and the VCs continue to insist that the entrepreneur drive growth through Facebook and Googleeven though the startup isn’t making money.

Eventually, yet another investor, Series C, kicks in $20 million with a $100 million valuation, which means the first VC has a 10x return. “So what has really happened?” asks Palihapitiya. “One, the company is not really any more incrementally successful. Okay? All we’ve done is inflated the cost of him running his business.” In the end, the company loses, but the VCs win.

What’s an entrepreneur to do? “If you’re an entrepreneur, here’s a great litmus test,” says Palihapitiya. “When you go and raise money, ask your [general partner] when you get multiple term sheets, ‘How much of the fund is GP capital?’” The point is, if you really need investment capital, you want investors who are putting their own money on the line.

MANAGEMENT

Believe it or not, Martin Shkreli is running his business and planning his billion-dollar comebackfrom a top bunk in a 12-person prison cell in Fort Dix, NJ: “Wielding little more than a contraband smartphone, the disgraced pharmaceutical executive remains the shadow power at Phoenixus AG, the drug company that became a national lightning rod for jacking up the prices of rare drugs under its former name, Turing Pharmaceuticals AG.

“Mr. Shkreli still helps call the shots. A few weeks ago he rang up his handpicked chief executive during a safari vacation—to fire him, according to a person familiar with the exchange. This is the secret life of inmate 87850-053, 16 months into a seven-year sentence for securities fraud.”

In an interview, Gwyneth Paltrow responds to those who are skeptical about her business skills: “Many deride her lifestyle brand, Goop, as little more than an overhyped e-commerce platform peddling pseudoscience and baubles. California regulators secured a $145,000 settlement from Goop last year after suing the company for false advertising, including claims that a $66 vaginal jade egg could balance hormones, increase bladder control and regulate menstrual cycles.

“Ms. Paltrow is unbowed. Goop is now worth some $250 million, revenues are growing and Ms. Paltrow is looking to Disney for inspiration, visualizing a company that makes money through online retail, offline experiences, ad partnerships and more.

STARTUPS

More female startup founders are going public with their pregnancies: “They’re increasingly talking about the children they’re birthing alongside the companies they’re growing, in the hopes of blowing up the conventional wisdom that says having a newborn and building a startup are mutually exclusive.”

Amy Nelson, the founder of the Riveter co-working network, “is not keeping her pregnancy on the down-low. In 2017, she walked away from a high-powered litigation career, frustrated with widespread bias against mothers. Instead, she started the Riveter in Seattle as a place to re-engineer the future of work. ‘It’s really important to tell the story,’ said Nelson, whose company has raised a hefty $20m in just two years and will spread to six more cities by the end of the year. ‘We have to say, ‘Look, this is doable.’”

HUMAN RESOURCES

BetterUp, a professional coaching startup, is putting a new twist on time off. The company “has been giving its employees five days off a year to ditch their standard day job and instead, take the day to work on themselves. … Some use the free days to meditate or go on hikes. Others stay inside to read. Some go on a digital detox, not checking their phones, emails, or Instagram throughout the day. … The company believes the dedicated time off for self-reflection makes employees more effective when they get back to their desks.”

RETAIL

Millennials will soon be the top demographic for retail, spending $600 billion every year: “But while they may be flexing their muscles in retail, Millennials are highly budget-conscious. Even amid a strong economy, they tell pollsters they’re concerned about the state of their personal finances. The majority of them worry about debt every day, and with good reason: Millennials owe an average of $42,000 each, mostly in the form of credit card debt. In response to these financial woes, millennials are keeping debit cards alive. This generation uses debit cards for purchases more than any other form of payment.”

Philadelphia is the first US city to ban cashless stores: “Starting in July, Philadelphia’s new law will require most retail stores to accept cash. A New York City councilman is pushing similar legislation there, and New Jersey’s legislature recently passed a bill banning cashless stores statewide. A spokesman for New Jersey Gov. Phil Murphy, a Democrat, declined to comment on whether he would sign it. Massachusetts has gone the farthest on the issue and is the only state that requires retailers to accept cash.

“The measures seek to blunt a nascent trend that could rapidly accelerate thanks to Amazon.com Inc.’s power to shape nationwide retail trends. They represent an attempt to strike a balance between equity for lower-income consumers and merchants’ eagerness to embrace technological advances.”

GOING PUBLIC

San Francisco is preparing to be overrun by thousands of new millionaires: “Big wealth doesn’t come in monthly paychecks. It comes when a startup goes public, transforming hypothetical money into extremely real money. This year—with Uber, Lyft, Slack, Postmates, Pinterest and Airbnb all hoping to enter the public markets—there’s going to be a lot of it in the Bay Area.”

ZACK ELLER’S DEAL OF THE DAY

Airbnb, disruptor of the hotel industry, has acquired HotelTonight, the last-minute hotel room service. “Airbnb is kicking off 2019 with an acquisitive streak. In January, the company acquired Danish startup Gaest, a provider of a marketplace-style platform for people to post and book venues for meetings and other work-related events.”

REGULATION

In 2009, Emerson Electric chief David Farr said he would not hire anyone in the US because of taxes and regulations. Now he is pulling a 180 as the company plans to build three new US plants. “Farr saw a new era of US protectionism coming before Trump’s election–and started planning accordingly, he said in an interview with Reuters at the company’s sprawling headquarters near St. Louis, Missouri.

“‘For the first time now, I’m looking for best-cost US locations’ to build factories, he said. Trump’s election, Farr said, accelerated a political shift against free trade policy that is now transforming many US firms’ domestic investment strategy. Protectionist policies—especially toward China—are now a rare point on which many Democrats and Trump agree, relegating formerly bold Republican free traders to the sidelines.”

SPORTS

The NHL just revised its drug policy as the league will no longer punish players for testing positive for THC (the psychoactive chemical in marijuana), for the most part: “Of the 31 teams in the NHL, 28 play in states where players have access to legal marijuana, whether it is for medicinal or recreational purposes. That’s the highest percentage (90.3) of any of the major four North American pro leagues, but hardly an anomaly.”

CLIMATE

Italy might be compelled to import its olive oil because of the weather. And this isn’t a one-off, it might become the reality as “a string of bad weather combined to reduce the annual olive harvest in Italy by 57 percent. That makes it the worst harvest in 25 years and translates to a $1.13 billion loss for olive farmers. The olives took a triple hit in 2018. First, a major cold snap in February 2018 hit the Mediterranean nation, which even led to a rare snowfall in Rome, reports Rob Picheta at CNN.”

ME, TOO

Warner Bros. CEO Kevin Tsujihara allegedly pursued a sex-for-roles agreement with actress Charlotte Kirk. “Kirk issued a statement to the trade paper denying that there was any ‘inappropriate behavior’ on the part of Tsujihara or Packer, and she asserted ‘Kevin never promised me anything.’ However, text messages included in the report indicate Kirk later accused Ratner and Packer of using her with Tsujihara to help close the RatPac deal. … Tsujihara first brought the issue to the attention of his bosses at Time Warner out of concern about Kirk’s behavior after the alleged sexual relationship ended.”

And that’s what’s ahead.

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