“Blitzscaling”: The Silicon Valley Culture Problem
In theory, business interests should align with the interests of their consumers. Supply and demand should balance to deliver resource allocation that maximizes efficiency. However, modern business practices are often at odds with this equilibrium, and in many circumstances, irrational actors act recklessly, harming the general public. Silicon Valley’s success can be attributed to software — none of which require brick-and-mortar locations to distribute their products or manufacturing infrastructure. Commodities tend to be much more stable over time. Coupled with widespread investment interest during the 2010s — a time of extremely low-interest rates — growth was an achievable imperative. Precedents set by companies like Amazon cemented the trend, seeking to achieve as much customer base growth as fast as possible. In this scramble for growth, termed “blitzscaling,” technology startups create a purposely unhealthy dependency on economically and technologically infeasible services leading to widespread political and economic implications such as unstable investments, increased cost of living in urban areas, and anti-competitive pricing schemes. This unwarranted and unchecked growth manifests in several ways:
The Rise and Fall of the Millennial Lifestyle Subsidy
The “Millennial Lifestyle Subsidy” refers to the artificially low prices set by companies with large investments from venture capitalist firms. This large investment allowed them the ability to temporarily lower prices below their costs in order to attract as many customers as possible to their platform. However, because these prices were significantly lower than the market equilibrium, they would eventually need to raise them to become profitable. In response to rising inflation, increased interest rates leading to a drying up of investment funds, and a tight labor market, prices for rideshare companies, food delivery services, and vacation rentals increased by a substantial margin in a short period of time. In the year 2021, Uber and Lyft prices increased an average of 40 percent while Airbnb prices rose by 35 percent in just the first quarter of that year.
This price increase may seem trivial. After all, these services are, in theory, luxuries. However, this rapid and ambitious growth led consumers to believe that these services were affordable enough to fit into their budget in order to grow their customer base. This misguided belief led consumers to make long-term decisions. However, misled by the prices subsidized by tech companies’ growth strategies, consumers would soon discover that rideshare prices faced a sharp increase, leaving them trapped in a lifestyle outside of their means. Further, rising inflation coupled with the ending of subsidization led consumers to find that buying a used car is now significantly more expensive than before. From a supply perspective, individuals with second homes would find increased service prices for services like Airbnb decreasing the demand for short-term rentals. Their income requires a high demand for vacation rentals which is not the case when prices increase so dramatically due to Airbnb taking more fees. This leaves both consumers and producers open to even more drastic consequences as they could potentially no longer afford mortgage payments on the home.
In the broadest sense, the decline of the Millennial Lifestyle Subsidy has made urban living more costly. It places a strain on the economies of cities that can worsen already extreme housing crises or underemployment trends. This is enabled by software companies’ unique ability to scale at rapid speeds. If this speed was achieved at market cost, then consumers could bear the costs as they fit within their price points. However, when companies artificially lower their prices to make consumers dependent on their products, it is a form of deception to consumers, and this deception harbors consequences.
Made infamous by a bestselling novel, podcast, and now a TV limited series, the saga of fraud in Theranos, led by its false visionary Elizabeth Holmes and her partner and CFO at the time, Sunny Balwani, has made its way to the cultural zeitgeist. Theranos purported itself to be a revolutionary blood testing service that could conduct an entire panel of blood tests with one drop of blood on a machine portable enough to fit in any pharmacy. However, the reality of their technology was far from what they claimed to investors or the general public. A significant portion of their tests required outside testing, meaning that they required an intravenous blood draw and then shipped the results to their lab. At their lab, they utilized Siemens and other proprietary testing technology to run tests on what they claimed were their machines. Further, they would run tests on their own machines that yielded false results, leading to negative health outcomes for many consumers who were defrauded. This case of fraud indicates just how far Silicon Valley will go to see growth, especially when led by a confident visionary.
Throughout Theranos’s rise, they faced challenges to their technology from a Stanford professor explaining to Holmes that the fluid mechanics of the device she proposed would not work to silence whistleblower employees sounding the alarm to investors. However, Holmes and Balwani dismissed these questions to the validity of their product, questions that had very real health outcomes attached to them. Very early in their growth, it became clear that the product that they had promised to investors could not run a functional test, so in an attempt to gain more funding, they merely forged the results. Further, investors did not run their own technological audit of the product because they believed so strongly in Holmes’s “vision” she sold for her technology. This culture of Silicon Valley may work for software companies where increased funding can facilitate more staff to fix technical problems in the software, but for a health-focused hardware company like Theranos, technical challenges are harder to surmount and the stakes are much higher.
Perhaps the most confusing aspect of Theranos's meteoric rise as a startup was how, despite their relatively large staff, employees were often unaware of the company’s technological failings or did not report them. They regularly made their employees sign NDAs to work on certain projects and threatened them with legal action if they wanted to come forward, despite California’s antiretaliation protections for whistleblowers. Additionally, the culture Holmes and Balwani created encouraged secrecy as they would regularly individually question employees under threat of termination. They utilized each of these tactics, some of which had devastating consequences for their employees, in order to facilitate continued growth, and therein lies the culture problem of Silicon Valley. Whether or not the technology works, business growth and increased investment are imperative so that the firm can be first to the market and encapsulate as large of a market share as possible in as short a time. However, for Theranos, this meant rolling out technology that was fundamentally unusable, and the intensity of their desire for growth meant that they were willing to deliver false results to patients. While employees eventually came forward and FDA regulators ordered Theranos to cease operations, this was not after they had caused harm to patients, now leading to criminal prosecution for both Holmes and Balwani and a class-action lawsuit by nine of the patients who were harmed by fraudulent results.
Elon Musk and the Hyperloop
Elon Musk, now the wealthiest man in the world, is known for his pet projects. Through companies like SpaceX and Tesla, he has come to the forefront of visionary thought, proposing bold new projects. Many of these present large-scale solutions to global problems. Many are also technologically or economically infeasible. One such example is his proposed “hyperloop.” The proposition referred to a vacuum-sealed train that would enable high-speed transport between Los Angeles and San Francisco. In 2013, Musk wrote a paper proposing the hyperloop project, and while it mentioned some potential problems due to technical challenges, he never followed up with tangible specifics and a plan for a potential build. From there, he continued to promote the project over social media, bringing significant attention to the project.
Concurrently, the California government is in the process of developing a high-speed rail system that would serve a similar purpose, connecting the two most populous cities in California. Notably, this project is not as revolutionary; high-speed rail systems exist elsewhere in the world, and despite California’s large population and GDP, they had not yet invested in a public, high-speed rail system. There were several crucial differences between California’s in-progress high-speed rail program and Musk’s proposed hyperloop. Obviously, the high-speed rail system is a public venture while Musk’s hyperloop is private. Because of this difference, each will have different priorities during construction. While the hyperloop will focus on achieving an economical model, perhaps opting for a faster train or more comfortable seats to charge more to fewer customers, the high-speed rail system focuses on efficiency and expanding access via affordable public transportation to as many people as it can. Moreover, there are technological differences like Musk’s proposed vacuum seal to encompass the hyperloop. This would help it attain greater speeds but would surely require pricier infrastructure. Crucially, however, these two projects would be economically competitive as an affordable public option could likely drive customers away from Musk’s more advanced hyperloop.
Hence, Musk utilized the newfound fame he had received on social media to promote the Hyperloop as much as possible. In his proposal for the Hyperloop, he mentioned California’s high-speed rail program repeatedly, expressing his disappointment about the program. His planned publicity stunt was effective; excitement about his program in comparison to the rail system delayed public funding for the project. However, he admitted in an email conversation with author Paris Marx that he did not currently intend to fund a Hyperloop project, despite the excitement he was building about it. Rather, he wanted to actively work against the public rail system. This move makes sense for Musk: Musk’s most successful venture, Tesla, actively relies on the United States’ lack of an effective public transportation system to promote its monopoly on sustainable transportation.
Musk is frequently lauded as a visionary who promotes a sustainable future, and while he has done much to improve the popularity of electric vehicles, he does so because it makes him profitable. He does not support and rather actively works against an affordable, sustainable, and efficient high-speed rail network that could enable mass transit across the state. Do not be confused: his prerogative is business growth, and that priority coinciding with sustainability was merely a marriage of convenience. What he indicates about the Silicon Valley sphere is that while they talk with lofty goals of betterment for humanity, their actual interests often work in opposition.
What We Can Do About It
The fundamental problem with unrestrained growth in Silicon Valley is the accompanying anticompetitive business practices. Whether it be a blitz to achieve a large market share in an attempt to beat all competition to the market, lying to consumers about the efficacy of the product, or promoting false propositions to distract from a viable public option, Silicon Valley has a culture of preventing competition, negating the most allocatively efficient and overall best outcomes for consumers. Notably, these types of anticompetitive business practices are markedly different from the anti-competitive practices that the US public is used to, and from how it is outlined in legislation such as the Sherman Antitrust Act. This Act authorizes the federal government to take action against large monopolies that “[restrain] trade or commerce.” It also granted individuals the legal authority to pursue compensation due to illegal monopolies. Prior antitrust legislation focuses more specifically on mergers and acquisitions as they relate to monopolies, but the fundamental issue in each scenario is the same: too few or only one firm enables the firm to raise prices unfairly and discourages competitive innovation.
As such, these novel anticompetitive practices require a new era of antitrust and corporate regulatory legislation to address them. To address unfair decreases in price, legislation could regulate a profit-to-investment ratio at later rounds of investment stages to prevent overinvestment in non-research market goods that enable them to sweep the market with artificially low prices. In order to prevent another Theranos, the impetus would fall both on regulatory agencies like the FDA to ensure products are viable before they hit the market and on investors to run independent audits of technology (especially in the health sector) to ensure that products are safe, but also to ensure that they are a viable investment strategy. Finally, to combat claims like Musk’s of revolutionary technology, the responsibility is on the public and on information-sharing platforms to recognize when leaders in the technological sphere are spreading misinformation and either remove their content or, for individuals, simply choose to ignore it. Musk’s recent acquisition of Twitter is also anti-competitive, as it allows him to spread misinformation without oversight. Therefore, this new era of corporate regulation should include a reformation of social media companies and the Section 230 legislation that removes their liability for content posted on their platforms. With targeted expansions of their liability and requirements to separate content moderation divisions from the C-Suite and owners of the company, we could help prevent Musk’s type of deceptive misinformation from being spread online. Silicon Valley’s business practices represent a departure from the norms of capitalism that enable both competition towards innovation and fair pricing, and as such, their interests and practices misalign with the interests of the general public. As such, governmental institutions must act decisively to protect the public interest.
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