Elon Musk’s New Chance to Walk Away From Twitter

August 24, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on August 24th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

A whistleblower claims Twitter has a bigger spam problem than the company admits — exactly what Elon Musk has been saying. But that doesn’t necessarily mean the billionaire can walk away from the deal to buy the company.

There isn’t a Twitter user in the world who doesn’t know the service has a spam problem. It ranges from Russian bots spreading disinformation to scammers luring people in with cryptocurrency. The phenomenon is well known and beyond dispute. That the service is influential among politicians and media — and therefore a plausible arena for political influence — is equally uncontroversial.

The question that has come into focus lately is more about how big these problems actually are, and how much they affect Twitter as a company.

It’s in this light you can see the latest report from a Twitter whistleblower. And not just any whistleblower — it’s the company’s former head of security, Peiter Zatko. In an extensive document, Zatko goes through a long list of violations, including that the company misled both its board and regulators about its security practices, and that it lacks the resources and tools to understand how big the spam problem really is.

A complicating factor is that Zatko was recently fired from Twitter. After just a few months as new CEO, Parag Agrawal decided to fire both Zatko and the company’s chief information security officer. According to the company, it was due to “poor performance”. This happened in January of this year, so you can’t rule out that the conflict between them still lingers. At the same time, there are considerably less dramatic ways to signal dissatisfaction with being fired than writing an 84-page whistleblower report and going public with your name in CNN and the Washington Post.

At first glance, Tesla CEO Elon Musk looks like a winner in all of this. He is currently in a legal dispute with Twitter as he wants to terminate the deal to buy the company for around SEK 470 billion. Musk claims Twitter’s user numbers are inflated and that the volume of spam bots and fake accounts is far higher than previously stated. Zatko’s report is therefore tailor-made for Musk, and his lawyers have already requested more information from him ahead of the trial that starts on October 17th in the state of Delaware in the US.

It’s not quite that simple, though.

That Twitter has a spam problem is, as noted, well known — including to Musk. He explicitly asked for more information on the volume of spam, which suggests the problem was known before the agreement to buy the company was signed. The question of whether Musk needs to honour his side of the deal isn’t primarily about the volume of spam, either — even if he has tried to make it sound that way.

What will be settled in court is whether what Twitter told Musk affects the company in a “materially adverse” way. So what counts as material, in this context?

According to Matt Levine, a Bloomberg columnist and former lawyer specialising in corporate acquisitions, the Delaware court has previously said that a revenue shortfall of around 40-50 percent can be considered material. A very high bar, in other words. That would mean Musk has to show that the spam volume is so high it would result in Twitter losing half its revenue. That is a considerably harder thing to prove than simply showing there are more spam accounts than previously stated.

The report from the whistleblower could therefore harm Twitter in more than one way. If it turns out that information was withheld from regulators, that alone could result in hefty fines. But if new grounds can be found in the report for why the company has suffered material harm, it may also have given Elon Musk the ammunition he needs to get out of the deal.

Musk’s original bid for Twitter was $54.20 per share. Yesterday’s close was $39.86. He has billions of reasons to look for new arguments, in other words.

How Sweden Went from Startup Paradise to Tech Black Hole

June 24, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on June 24th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

In a matter of months, Sweden went from one of the world’s hottest countries for startups to dark headlines about layoffs and cutbacks. A deeper look shows that what has crashed, above all, is a particular way of building companies.

“AI will affect us all. Get to know it and get to know your path forward.”

In a foreword to a book from 2018, Marcus Wallenberg reflected on the phenomenon that would reshape industries and revolutionise business: AI — artificial intelligence.

The book was written by Luka Crnkovic-Friis, CEO of the AI company Peltarion. On its shareholder register you’d find Wallenberg’s holding company FAM, which alongside EQT invested SEK 110 million in the company that same year. The vision was to build a platform for AI that other companies could use, and so accelerate that transformation of society.

The headlines were big and the customer list impressive. The company was one of Sweden’s most hyped.

Even before Peltarion had even launched its product, NASA, Tesla and General Electric were said to be customers. The company took part in seminars in the Swedish parliament on the opportunities and challenges artificial intelligence could bring to Sweden. The future looked bright — for Peltarion, and for Swedish tech more broadly.

Then came 2022.

The market’s enthusiasm turned abruptly. Tech companies that had listed in 2021 had already started falling in the autumn, and the slides kept coming. Many companies have now lost more than 70 percent of their market value.

Old memes — joking internet phenomena — resurfaced talking about “buy the dip”, buying assets in a downturn. Except now with the pitch-black addition that “the dip keeps dipping”. The declines don’t seem to stop.

And from sending out press releases about helping social services deal with vulnerable children, or building platforms for the education of the future, came a different kind of news. Peltarion had been acquired. The buyer was the games company King, the company behind the mega-hit Candy Crush Saga.

Instead of revolutionising society, they would now build their AI into King’s mobile games. The artificial intelligence — which was supposed to help digitise and transform society — will make sure more candy gets swiped.

What actually happened?

If you listen to the company itself, it is “a monumental chapter in Peltarion’s history” and “King’s scale and reach […] are a good match for our technology”.

Becoming an AI division for a global games company isn’t a bad outcome for a business. But in an interview with Dagens industri in 2018, Crnkovic-Friis said that even if they had tens of thousands of customers on their platform, it would be “a drop in the ocean compared with the companies that could benefit from it”.

The shareholder group had written down the value of their investment significantly in the years before the deal. No price tag has been disclosed either, which usually suggests it wasn’t as high as had been hoped.

Whatever happened behind the scenes, you can tell a big shift has taken place. And it’s probably no coincidence that it’s happening right now.

A lot of startups are in exactly the same situation. The surrounding conditions have suddenly changed. Companies like Peltarion — and many others — may have to pivot on short notice.

Let’s take a quick look in the rear-view mirror.

In 2000 the dot-com bubble was a fact. You could call it a business-model crisis. Many of the companies simply had no real revenue to speak of, and therefore very limited profitability. The companies’ valuations reflected a belief in the future that suddenly went up in smoke. With a weak business model at the core, there was no saving them.

In 2008 came the financial crisis. It had nothing to do specifically with tech companies, except that the whole of society got dragged down in a dark spiral. In hindsight, that period became the start of an enormous boom for tech. One that accelerated further around the Covid crisis in 2020, when central banks printed money like never before and interest rates were at record lows.

Now, in 2022, startups in Sweden and around the world face a funding crisis. The situation is serious, but markedly different from 2000. Today, most companies have more realistic business models at their core. But they may have become overvalued, and forced a type of growth the company can’t quite sustain.

After more than ten years of huge venture investments in growth-at-all-costs, the tap has now been turned off. And it has happened very quickly.

A new report from the investment bank GP Bullhound shows that in the second quarter of 2022, barely half as much money was invested in large venture rounds as just three months earlier.

The IPO window is closed too. In 2021, companies went public for $46 billion. Half a year into 2022, the equivalent figure is one (1) billion dollars. The outlook for the rest of the year doesn’t look much brighter.

What the market is seeing is the effect when very strong momentum turns. Picture a rubber band that can be stretched and expanded. At some point it can’t go any further, and the rubber band flies off in the other direction — or snaps entirely.

In a recent podcast interview, Aswath Damodaran, professor of finance at NYU Stern School of Business in New York, talked about exactly this phenomenon.

“Momentum is the strongest force in the market, much bigger than earnings, cash flows or any other fundamentals. As a trader you live on momentum, but you die with it too. That means you make money when momentum is with you, but if you don’t get out in time, the momentum that was your friend suddenly becomes your enemy.”

The funding crisis companies now face is the effect of momentum that has turned. Over ten years — and the last two years in particular — of access to highly risk-tolerant capital, many companies optimised for the conditions that prevailed. Growth was what was rewarded, and as fast as possible.

The business models may be better this time around, but many need more time to play out. There’s talk of “growing into your valuation”, meaning you need to live up to the promises you made when you took in your investment. But valuations of young companies are highly subjective. Many entrepreneurs are now stuck between the expectations of their previous valuation and the now-sober view the market offers.

LinkedIn co-founder and investor Reid Hoffman published a book in 2018 called “Blitzscaling”. The title referred to growing your business so fast that competition simply couldn’t keep up. It could be expensive and complicated, but once competition was out of the picture you’d catch up.

The clearest example of blitzscaling is the transport company Uber, which grew enormously fast but has also been saddled with enormous losses and big problems around working conditions and regulation. On the surface, though, they’ve been a success. Uber has come to represent a kind of on-demand economy and was used as a reference in thousands of startup pitches. “We’re like Uber, but for X” could be heard in hundreds of meeting rooms around the world.

To be able to “scale” fast, you need lots of staff. Uber was rumoured to send employment contracts to developers before even meeting them, to save time. Even in Sweden, people looked towards Silicon Valley and saw those methods as the ones leading to success, willingly financed by venture capital firms. So they started hiring lots of people and taking bigger risks. Maybe a bit too much — but now the business was going to scale up, and it needed to happen fast.

The difference between the dot-com bubble and now is precisely this. Look at Klarna, for example: they were profitable and growing up until 2019. After that, the growth rate accelerated sharply and losses grew large. A profit of around SEK 560 million over 2016–2018 flipped quickly to a loss of over SEK 9.3 billion between 2019 and 2021.

What has happened now is that venture capital no longer wants to finance this kind of strategy. The same investors who urged speed in growth are now urging speed again — this time in pivoting to profitability. Klarna recently announced it wants to cut ten percent of its roughly 7,000 employees. The online doctor service Kry is doing the same.

Turning around a business that is bleeding money is hard, and takes time. It’s therefore quite possible that ten percent in layoffs won’t be enough. And that the cuts should perhaps have been done differently.

Apple’s former chief evangelist, Guy Kawasaki, put it in the simplest possible way back in 2006:

“Cut deep, and only once.”

Kawasaki argues that companies often start with smaller cuts, believing the wind will turn. But it often doesn’t — or at least not as fast as the company’s leadership hopes. Then you have to make more cuts, which can result in low morale among the employees who remain.

If you can’t turn a company profitable in time, you either have to sell or shut it down.

The tech world doesn’t move in a vacuum — it’s very much influenced by the world economy at large. How inflation, interest rates and the broader business cycle develop will affect how deep, and how long, the industry’s crisis becomes.

But already now you can say with reasonable confidence that the startup world is facing a number of major changes because of what has happened.

To begin with, several industries will face a large consolidation wave. Having eight different e-scooter companies in Stockholm much longer is unlikely. Just this week, one of the market leaders, Voi, announced it’s cutting staff at its head office. The competitor Bird has — since its SPAC listing in November last year — lost over 93 percent of its market value. There will be acquisitions, mergers — and surely a bankruptcy or two.

The funding crisis is most visible among the biggest companies. When the stock market’s valuations set the benchmark, it’s the companies closest to a potential IPO that get hit first.

Brand-new companies that need capital probably have seven to ten years ahead of them before they reach that kind of size, and the market may well have turned again by then. The smaller you are, the less you feel this crisis.

For the somewhat larger companies, timelines get stretched. Blitzscaling is expensive to execute, but it often works in the sense that development happens fast. If the financing for that isn’t there, you have to choose an alternative, probably slower, path forward.

It may therefore take considerably longer to become a unicorn — a company valued at over a billion dollars — now than a few years ago. The next Klarna may well lie a fair distance into the future.

Look one step further back, before companies are even founded, and the sentiment may shift too. Entrepreneurship as a career choice looks different in a downturn, and probably attracts fewer people.

As company valuations fall, more option programs become worthless. The money that previously flowed to startup employees was in part invested in new, smaller companies. The total pool of money for early-stage startups is likely to shrink, and starting a new company may become harder than it was a couple of years ago.

A more positive reading is that the companies being built now will be more resilient. Founders have to choose business ideas that don’t only work in a world of low interest rates. You’re forced to chart a path to more independent financing — and to prioritise it — from day one. You know, the way ordinary companies have always had to do?

A funding crisis is hard to live through, but for the next generation of unicorns it may turn out to be the best thing that ever happened.

Just How Bad Things Are at Klarna

June 17, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on June 17th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

Klarna’s valuation is reportedly collapsing in the increasingly tough climate for tech companies. But what does that actually mean for the company? SvD’s tech analyst Björn Jeffery explains.

What is going on at Klarna?

Klarna is a company that has been saddled with large losses since 2019. As growth has accelerated, losses have ballooned, because investments and an appetite for more risk have contributed to high costs. This is not unique to Klarna — it was a common strategy for tech companies until late 2021, when the market started to wobble. When the stock market — and particularly listed companies in similar businesses, like Affirm — began to fall, the world’s interest in growth quickly swapped for lower risk and profitability.

A shift like that takes time, and has to be financed along the way. It’s in this process that the Wall Street Journal now reports Klarna is considering accepting a valuation of around $15 billion (roughly SEK 153 billion) — significantly lower than the $45.6 billion the last investment round valued the company at in 2021. The year before that, in 2020, the valuation was just over $10 billion, which clearly illustrates how fast things have moved up. By comparison, Affirm’s market cap has fallen more than 82 percent since the start of the year.

What does this mean for the company and its employees?

Taking in money at a lower valuation than before is complicated for several reasons. The valuation affects the staff’s option programs, and it’s possible that several of them will now be worthless. That would mean Klarna’s employees receive significantly lower compensation than originally expected. In similar situations at a company like Amazon, staff have been compensated in other ways — but that too can be costly.

Dissatisfaction can also spread among existing shareholders, who now watch their ownership stake drop in value. As part of accepting a lower valuation, tougher demands may be set on costs, which can lead to layoffs — something Klarna has already started to do.

How serious is it really?

Klarna’s formal name is “Klarna Bank AB”, and seen as a bank they have some challenges ahead. Cash flow in their latest quarter was minus SEK 7.3 billion and credit losses topped SEK 1.1 billion.

Laying off staff may be necessary to appease certain investors, but it’s not personnel costs that primarily drive the losses in the business.

Now, Klarna is a different kind of bank than, say, Handelsbanken or Swedbank, so a direct comparison isn’t entirely relevant. But the reported valuation may suggest that there are question marks around the value of the core business — even with a slimmer cost base and lower growth ambitions.

What happens now?

Klarna’s management and owners need to decide how they want the business to be financed going forward. A new investment at a lower valuation is a big decision, but may be necessary to keep the business running. Interest in investing in Klarna has historically been very high, so this is primarily about the valuation. Depending on the demands from new and existing shareholders, they may also need to cut costs further or lower growth ambitions.

If I shop at Klarna, or have my savings there, do I need to worry?

Because Klarna is a bank it’s covered by the government deposit guarantee, just like the other Swedish banks. Klarna going bankrupt is very unlikely. So there’s no reason to worry about your savings there at present.

Why Your Instagram Feed Has Changed

June 13, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on June 13th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

Suddenly seeing a lot of ads in your Instagram feed? It’s no coincidence. The photo app has become Mark Zuckerberg’s main weapon to turn the bad times around — and to take the fight to TikTok.

“The current plan is for Instagram to exist outside of Facebook for a long time to come,” Kevin Systrom said from a conference stage in Paris in 2012.

Systrom was one of Instagram’s co-founders, and had recently become financially independent. The deal — in which Systrom sold his photo app to Facebook for a billion dollars — had closed less than three months earlier. But what would happen now, on the inside of the social media giant?

For Systrom himself, the model he advocated was clear. “YouTube continued to be a separate product at Google,” he said. He had worked there himself and seen how the video service got to live its own life when it came to product decisions, offices and company culture. People who work at YouTube still feel like employees there — and not of the mothership Google, later renamed Alphabet.

Ten years later, one can note that the comparison didn’t hold up particularly well. YouTube has remained independent, but Instagram is very much woven into Meta, Facebook’s parent company. Both founders, Kevin Systrom and Mike Krieger, left the company several years ago after a conflict about precisely this.

Rather than being an independent satellite in the organisation, Instagram has become one of Meta’s strongest cards to play in trying to reverse the recent trend. Meta has been under heavy pressure on the market — the stock is down more than 45 percent this year — and, for the first time in a long while, faces tough competition from Chinese ByteDance and its video service TikTok.

What does that have to do with the ads and suggested content you might suddenly see appearing all over your Instagram feed? You get the picture when you listen to Meta’s outgoing chief operating officer, Sheryl Sandberg. During the Q&A with analysts on the most recent quarterly report, she said that “monetisation of stories continues to grow on both Facebook and Instagram. And with reels growing quickly, there’s also a big opportunity as we get better at monetising short-form video.”

Better monetisation for Meta usually means more ads for you.

Especially in the more video-heavy features of Instagram, the ones called “stories” and “reels”. And the fact that video is where the bets are being placed is no accident.

Reels — which exist on both Instagram and Facebook — is a feature with video in vertical format, where you scroll video by video. Sound familiar? It’s a near-identical clone of TikTok. At first glance it’s almost impossible to tell which service is which. And that, of course, is the point. Why switch to TikTok when Meta can bring a similar service to you — directly inside Instagram?

But changing Instagram’s user experience hasn’t been popular with everyone. On social media, complaints are spreading about the sheer volume of ads and how the photo app people once loved has been turned into something else entirely.

The question is what other choice Meta’s CEO, Mark Zuckerberg, has. There’s a straight line from your experience inside the app to Meta’s ad revenue.

Logical, but maybe not always desirable for every user.

The risk Meta now runs is annoying and losing the users it had to begin with. Even before its TikTok problems, Instagram was a huge traffic driver and an ad machine. It also solved Meta’s demographic problem, by being a separate product aimed more at younger users than the traditional blue app.

Messing with something this successful is risky. More than anything, it says something about the seriousness of the situation Meta finds itself in.

Apple Pay Later — The Last Thing Klarna Needed Right Now

June 7, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on June 7th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

The advantage of being a tech giant is on full display now that Apple, in a single move, risks turning all of Klarna’s business into just one feature among many.

Every year in June, Apple holds its conference for software developers. It’s called WWDC — Worldwide Developers Conference — and it’s meant for everyone building applications for Apple’s various platforms.

It’s usually a festive occasion at which the otherwise secretive company opens up and talks to the outside world. But there’s always a certain fear that Apple will do what it has done so many times before — take an idea from developers and make it its own. Which usually means your project is doomed.

The process is known as getting “sherlocked”. It’s named after Apple expanding its then-search tool, Sherlock, to include essentially everything the developer Dan Wood had built in his own search product “Watson”. Wood’s app was now worthless. Who would buy software that did the same thing as what Apple was giving away for free?

That was 2002. Exactly 20 years later, it’s Klarna’s turn to be sherlocked. Or at least to get a taste of what it might feel like.

During the keynote on Monday, Apple launched a new product called “Apple Pay Later”. A clear nod to the phenomenon known as BNPL, short for “buy now, pay later”. The launch was expected, but the listed BNPL company Affirm still dropped 5 percent immediately after the news.

But the hit probably landed hardest on Klarna — the market leader in the segment.

Apple Pay Later is launching this autumn, and only in the US to begin with. The service isn’t an immediate threat to Klarna. It will take time for Apple to build both customer awareness and usage, and the market is large and probably far from saturated. Klarna, meanwhile, is available in twenty countries and has an established customer base among both consumers and merchants. The Swedish BNPL giant isn’t about to lose all its customers overnight to Apple — not by a long shot.

The problems are on another level. Klarna has already been squeezed by tougher market conditions, and has been forced to lay off up to ten percent of its staff. The company is also in the process of raising more money from investors, and media reports indicate the valuation is down around 30 percent.

All of this happened before Klarna had to compete with one of the world’s largest and most cash-rich companies. Apple’s definitive entry into this market will make tough conversations with investors even tougher.

Competing with the biggest tech companies is notoriously hard. Their core businesses are so strong they can afford to make bets that lose money for many years. Or simply to keep the existing business intact. Amazon, for instance, has spent billions on its video service Prime Video, which is an add-on to its popular subscription service Prime. But they compete directly with Netflix, whose video service is its only business. Amazon can afford to do things Netflix can’t. And that’s the risk Klarna now faces.

Apple doesn’t need to take Klarna’s customers to become a problem. It’s enough for Apple to subsidise with better terms for a few years to erode margins across the industry. Apple can afford to buy market share for a long time while it builds up its service. And it can roll the service out to all partners that already support its existing payments service, Apple Pay. And who has been one of Apple Pay’s partners? Klarna itself. But biting the hand that feeds you is less of a problem when you’re Apple’s size and wield Apple’s influence.

The BNPL trend is probably here to stay, and Apple’s entry will accelerate it. That can actually benefit Klarna. But history shows that when your core business becomes just one feature among many at the big tech companies, competing gets much harder. And the looming threat was the last thing Klarna needed right now.

Testing Donald Trump’s Social Network

May 31, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on May 31st, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

Kicked off Twitter, Donald Trump filled his own void. But the social network Truth Social is a clumsy copy — and here’s why Trump will almost certainly come back to Twitter.

What is Truth Social? It’s a social network that looks — and in all essentials works — exactly like Twitter. But instead of “tweets” you write “truths”. A “retweet” is therefore a “retruth”. At least it’s consistent.

Trump says he started the service to “stand up to big tech’s tyranny”. In that you can probably read his displeasure at being kicked off Twitter in connection with the storming of the Capitol in 2021. After extensive technical problems, the service is now up and running for real, though only for users in the US (it didn’t, however, take much skill for a Swede to get an account).

Even if the service looks like Twitter, there are a few clear differences. I chose to follow the first 50 accounts that were recommended to me when I logged in, and there was an obvious theme among them. Fox News, Bongino Report, Breitbart and of course Donald Trump himself were among the suggestions. I drew followers of my own like “Redneck Humor”, “Julian Assange Fans” and “Conservativeforchrist”. That last one appears to be some sort of advertisement for a cryptocurrency called “Prayercoin”.

To paraphrase Trump’s former spokeswoman Kellyanne Conway, you could say the site consists of “alternative truths”. It is almost exclusively profiles from the American political right here, and accounts like “The New York Times” are obviously fake — they’ve only posted three times, two of them promoting Florida’s Republican governor, Ron DeSantis. Extra piquant, given that Trump wrote this week that Elon Musk shouldn’t want to buy Twitter precisely because of the volume of bots and fake accounts. Trump’s own service doesn’t seem much better.

Trump has previously been very critical of the American law known as Section 230, because it means social networks don’t have to be held legally responsible for what’s posted on them. Now he benefits from that very same law. The first result after searching for the word “covid” suggests the account “covidtruth”, which in turn posts vaccine-critical information sourced from Russian RT, Russia Today. But this is permitted under American law, and apparently under Truth Social’s own rules too.

For a platform that claims to stand for free speech, however, there are some things that aren’t tolerated. The web developer Matt Ortega tried to register an account referencing a joke about Truth Social’s CEO, Devin Nunes. It didn’t last long — the account was immediately deleted. Free speech has its limits at Trump’s place too.

Yes, most likely he’ll return the moment he’s let back in. The point of social media for politicians is to a large extent reach — being seen by as many people as possible. On Twitter, Trump had over 79 million followers; at the time of writing he has just over 3 million on Truth Social. Those numbers suggest he’s coming back.

Trump will, however, have a hard time abandoning Truth Social, given his financial interests in the service. In a filing with the US Securities and Exchange Commission, he has also promised to post his posts on Truth Social at least six hours before he posts them anywhere else. The exception is “political messaging” — which, generously interpreted, could cover most of what he posts during a coming election campaign.

There’s no word on whether the service will open up in other countries, but don’t count on it anytime soon. Running a social media platform is complex — both technically and legally. Diving into that and having to handle the EU’s legislation on top of everything else is probably very unlikely in the short term.

So how do you sum up Truth Social? It’s a clumsy copy of Twitter, full of Republicans. It doesn’t appear to be particularly satisfying even to them, since they’re still on Twitter too. There’s no innovation to speak of in the service, and no draw beyond Trump posting now and then.

Back in October last year, I wrote — to the dismay of Swedish Trump supporters — that Truth Social would be a flop. After actually using the service, there’s nothing to suggest otherwise.

Cathie Wood Is Losing Billions — But She Won’t Quit

May 27, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on May 27th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

Fund manager Cathie Wood became the face of the tech boom when she pulled in billions to her controversial investment strategy. But when the crash came, she went from superstar to a figure in doubt. Can she turn Ark Invest back to winning?

It’s December 2021. Several of the new tech companies on the stock market have started falling, but it’s partly hidden by tech giants like Apple and Microsoft, whose shares continue to climb.

In hindsight, it’s the calm before the storm. Catherine D. Wood, CEO of the fund manager Ark Invest, is being interviewed on CNBC.

“When traditional fund managers manage their portfolios in a low-risk environment, they diversify. They buy index stocks, and they sell ‘our’ stocks. And then we’re there to pick them up. It usually works very well,” she says.

Cathie Wood, as she’s known, had been celebrated as stock picker of the year by Bloomberg the year before. Three of her exchange-traded funds ranked at the top for returns, a full 60 percent better than the next competitor on the list.

It has been an enormous boom — for the tech sector in general, and for Cathie Wood in particular. But now something strange has happened. The market is suddenly behaving differently, and Wood seems puzzled herself.

“This risk-off period is very unusual for us. I’ve never been in a market before where the market has gone up, while our strategies have gone down,” Wood says.

The CNBC journalist breaks in with the obvious follow-up question: will you then change your strategy?

“We have a five-year investment horizon. Our strategy is our strategy. And we believe that truth will win out.”

Since that interview, the three funds she won with at Bloomberg have fallen by more than 50 percent — in 2022 alone. Looked at on a five-year view, retail investors would have made more money buying a plain index fund tracking the S&P 500 than holding Ark Invest’s funds.

Wood promises a 40 percent upside — per year. And she reached 38 percent, before the crash came.

Is this the end for Cathie Wood? The face of the boom in growth stocks over the past few years, and the one who has taken the hardest hit now that the wind has turned?

Because one thing is clear: from the start she has gone her own way.

Cathie Wood was born in 1955 in Los Angeles. Her parents were Irish immigrants to the US, and her father was a radar engineer for the Air Force. The interest in technology and economics seems to have come from there.

At USC in her hometown she met Arthur Laffer, a professor of economics and the man behind the Laffer curve. In 1974 he had drawn a simple curve on a napkin for Republicans Dick Cheney and Donald Rumsfeld — later vice president and secretary of defense under George W. Bush — to illustrate how high taxes lead to lower tax revenue. A theory that became very influential, but also contested.

Wood talked her way into his class, even though she didn’t officially qualify yet. But she didn’t impress. In the Financial Times, Laffer described her as sub-par — but unlike many other students, she didn’t give up.

“She said, ‘what do I need to do to get better?’ And then she got better. Cathie works harder than anyone I know. She always has.”

Over time Laffer became a mentor to Wood, someone who has followed her throughout her professional career. When she started Ark Invest many years later, he received a small stake in the fund as thanks.

Wood — also a Republican, and a Trump supporter — began working in finance and climbed all the way to chief investment officer at the American investment firm Alliance Bernstein. It was there that her own view of the market began to stand out, and it became a dividing line within the firm.

Wood’s boss at the time, Lisa Shalett, called her investing style “a rollercoaster”, something that appealed more to retail investors than to the big institutions. Several people have described Wood as an evangelist for the tech sector, someone whose enthusiasm easily rubs off on those around her.

“She does her research, she believes what she believes. Sometimes when the market goes against her, she leans in even harder,” Shalett told the Financial Times.

Evangelist is a fitting description in more ways than one. Wood is deeply religious, and has carried her Christian faith with her through her whole life. It also guided her to the next big step in her career.

After a bad quarter at work, she had a feeling — or as she describes it, a voice speaking to her:

“I really felt like it was the Holy Spirit saying to me, ‘Okay, this is the plan.'”

At 57, she started Ark Investment Management LLC, often shortened to Ark Invest. She put all her own money from a long career on the line. The year was 2014, the same year the Chinese e-commerce giant Alibaba went public. Alibaba would come to be a typical example of the kind of stock Wood believed in.

“Most of my friends said I was crazy, but I didn’t listen to them. I knew I had to follow God’s will for me,” Wood said in 2016.

The name of the fund also comes from her faith. It doesn’t refer to Noah’s Ark, however, but to the Ark of the Covenant from the Old Testament. The Ark is said to be where the stone tablets with the Ten Commandments were kept.

With Ark Invest, Wood could carry on her evangelism for tech and innovation companies more freely. She applied the innovation mindset to her own industry too, and became a pioneer with a suite of actively managed exchange-traded funds — ETFs — at a time when passive index funds were the standard.

She talked about her investment strategy in terms of “disruptive innovation”, focusing on high-tech companies that could upend existing markets. That list includes Crispr Therapeutics, which works in gene editing, the video service Zoom, the crypto exchange Coinbase and the drone company Aerovironment.

But no company has fit the mould better — or mattered more to Ark Invest — than Tesla.

Tesla became the archetype of the companies Wood wanted to invest in. A public company, with a clearly future-oriented strategy, something that could revolutionise its environment if it succeeded. And in Tesla’s case it turned out to be hugely successful.

When Tesla’s valuation started to take off in early 2020, Wood’s primary fund, Ark Innovation ETF (ARKK), followed. For roughly two years they climbed together, and Wood became known as one of the few who had spotted Tesla’s true value early. At least that’s how Tesla fans saw it. A seer of the future — with the Tesla investment as proof.

But then the trend turned sharply. And Cathie Wood was being interviewed on CNBC.

Suddenly her strategy wasn’t working the way it had before. Tesla still had a month or two before it started falling too, but Ark Invest felt the hit right then. What added to the risk is that Wood likes to hold the same stocks across several of her funds. Great in a broad rally, painful in the opposite scenario.

Wood didn’t back off an inch, however, and for those who know her the behaviour was familiar.

“Cathie is a ‘boom or bust’ investor because she neither disinvests nor manages risk. That’s the challenge she’s had her entire career,” Lisa Shalett told the Financial Times.

The best-known fund, ARKK, is down roughly 60 percent year to date and has now wiped out all its gains since the start of 2019. Many investors have sweated and wondered if they were on the wrong track.

But rather than rethink, Wood has gone even deeper into the same trade. Since the end of February she has bought more than 1.3 million new shares each in the trading app Robinhood and in Coinbase. All while their share prices fell 50 and 70 percent respectively. A few days ago she wrote on Twitter that artificial intelligence, over a six- to twelve-year horizon, could accelerate GDP growth from 3-5 percent to 30-50 percent — per year. An optimistic view, to put it mildly.

For Wood, it’s self-evident. As she puts it herself: “the future of investing is to invest in the future”.

But aiming at the future is a moving target. When an investor could have made more money in a cheap index fund, patience with Wood’s controversial strategies is tested. Can she come out of the crisis as a winner again? Or will she be written into history as a temporary phenomenon of the tech boom?

With Cathie Wood, it’s all or nothing. That’s how she has always wanted it.

Klarna’s Results — a Warning to Every Swedish Tech CEO

May 24, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on May 24th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

Klarna’s quarterly report and announcement of layoffs isn’t just a rude awakening for one of Sweden’s new flagship companies. The message — despite all the flowery language — will send a chill through every leader and owner of a Swedish tech company.

A good way to understand how a company is doing is to study the euphemisms that turn up in its quarterly report. The document, originally meant to bring clarity about how a company is performing, is often a masterpiece of creative and embellishing prose. Look at Klarna’s latest report for the first quarter of this year and you’ll find a few candidates in that category.

The highest inflation in 30 years and a war in Europe is described as “we acknowledge the global macroeconomic shifts and the headwinds affecting consumers’ daily lives”. The quotes are our translations from English. But doesn’t it sound poetic?

Keep reading and you’ll see that Klarna “has once again tightened its lending parameters to reflect this changing market context”. That sounds considerably better than the numbers, which show that credit losses rose to SEK 1.1 billion during the quarter.

Klarna is by no means alone in this, but when storms roll in across the tech industry it’s natural to look at its leaders for an indication of where things are headed. A quarterly report becomes particularly interesting. And it doesn’t look like the storm is ending anytime soon. Klarna’s loss grew to SEK 2.5 billion, compared with SEK 650 million in the same quarter last year.

Losing money as a tech company has almost been standard practice in recent years. As long as growth was strong, the market tolerated large losses. That era can now be considered over. For companies that have taken on a heavy cost base — or have fundamental problems with their business model — it can be very hard to pivot quickly enough. Yesterday, Klarna announced it would cut 10 percent of its workforce. The week before, the online doctor service Kry did the same. There will be more news of this kind.

Late-stage tech companies now face a complicated balancing act.

There were, however, glimpses of light. Amid the tech chill, the delivery company Budbee raised SEK 400 million in new capital from existing owners like Kinnevik and H&M. The major shareholders clearly believe in a continued strong rise in e-commerce.

If we see more deals of this kind, they’re likely to come from similar lead investors with strong balance sheets or to involve preference shares, which would guarantee investors get their money back before everyone else. As one Swedish VC put it: “I live in a world where every issue is done with preference shares unless the opposite is proven”. Venture capital without so much venture, in other words.

Late-stage tech companies now face a complicated balancing act. The metrics investors will evaluate them on have shifted very quickly. There’s talk of many planned investments dragging out, and even more that won’t happen at all. And if you’ve planned your fundraising poorly, it can be very hard to pivot to this new reality in time. If investments do happen, the terms are likely worse than they would have been six months ago. It’s difficult to navigate, to say the least.

The largest private companies look at — and are affected by — the stock market. When it falls, they fall too. And the smaller companies in turn look at those larger than themselves. The market drop has already cut Klarna’s valuation by 30 percent — a loss of roughly $15 billion. When Klarna now wants to cut staff and warns of tougher times ahead, there isn’t a Swedish startup CEO who won’t read this and think twice. And they’ll see through the pretty phrasing in the quarterly report too.

“Klarna is well positioned to support consumers in managing their cash flow,” you can read. That may well be true. A more interesting question is who will support Klarna’s own cash flow. It has fallen from SEK 7.6 billion to minus SEK 7.3 billion — in a year.

The Tech Hangover Is Here — Now the Layoffs Begin

May 18, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on May 18th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

The tech crash on the stock market is creating domino effects throughout the startup ecosystem. The hangover from the last few years of sky-high valuations is here — and the first wave of layoffs in Sweden has started.

The market sell-off in tech came fast and it was brutal. Zoom, Sinch, Peloton and Truecaller have all lost more than 40 percent of their market cap since the start of the year. Even giants like Apple, Google and Microsoft have shed roughly 20 percent. The hedge fund Tiger Global lost SEK 170 billion on its holdings — in the first quarter alone.

To understand what this means for tech companies, you have to look at how the ecosystem behind them works. When venture capitalists invest in startups, they classify their investments as “rounds”. It used to start with a “seed round” — the first money put into a company. You plant a seed that may grow into a real business. After that came Series A, B, C, and so on. Eventually, depending on how the company developed, you might reach the letter combination IPO — initial public offering.

But it quickly got messier than that. As competition intensified, venture capital wanted to get into the best companies earlier, and a new round appeared — “pre-seed”. On top of that, valuations in every other round kept climbing. An investment that used to count as big enough for a Series A might, in some cases, now arrive at seed.

Inflation hit the startup world early. But it’s only now it’s starting to bite, in combination with rising interest rates.

The big tech drop on public markets has forced a new, tougher environment for raising capital. It’s most visible among so-called cloud and SaaS companies (software-as-a-service), service businesses that sell via subscription. The Bessemer Cloud Index tracks how listed companies in this category are valued, and the curve shows a massive fall. One way to value these companies is to multiply their revenue to get a company value. In May last year, the median company traded at 14.38 times revenue. The equivalent figure this May is 6.46. Prices, in other words, have more than halved in a year.

The halving spreads to private companies too. The result of a tougher public market is increased pressure on later-stage startups — around Series B/C and up. Because they’re closer to either an IPO or a sale, public-market comparables become more relevant.

If you’ve taken in money at very high private valuations — as several large Swedish startups have — you can quickly find yourself in a bind.

They can’t go public, because the market climate isn’t favourable.

They can’t raise more money at a higher valuation than the previous round, because no one wants to invest on 2020–2021 valuations.

They can’t keep spending on unrestrained growth, because the money will run out.

So what do you do?

One option is to do what the digital clinic Kry has done and tighten the belt. On Tuesday, the company announced it would lay off around 100 people, about 10 percent of its workforce. “We need to react to the market dynamics and we need to be more careful with our capital,” CEO Johannes Schildt wrote in a memo. Getting to profitability faster is one way to absorb the shock.

Another option is to raise new money, but at a lower valuation than before. This creates additional dilution for existing shareholders, and so it’s not a popular one. Venture capitalists in Stockholm say many rounds are dragging on right now, and that valuations for later-stage companies have almost halved compared to a year ago.

The consequences of a lower valuation can also hit the employees of these companies. Many startups today have various option programs that let staff share in the company’s success as shareholders themselves. Options count as part of total compensation, alongside salary and other benefits. As long as valuations only went up, this has been very lucrative for many in the startup world. But at lower company valuations, the options may be worthless, and a large chunk of employees’ compensation disappears. The possibility of an option ending up worthless is, of course, part of how they’re designed — but many younger employees are experiencing this for the first time.

Over the past few years, a growing number of companies have reached unicorn status — a valuation above one billion dollars. It has been seen as a proof point and a milestone on the way to becoming a giant. After the tech crash, these unicorns are now wondering whether the valuation was worth what it may end up costing them.

A high valuation can turn into a yoke you have to bear. A weaker investment climate will force many companies to cut hard, to extend the runway before they need more money. But a turnaround takes time and can be expensive. If your timing has been unlucky, the cash cushion may be thin and there may be too little time to make big changes. Then cuts alone aren’t enough. Some unicorns probably won’t survive at all.

Facebook Copies TikTok — and Abandons News

May 13, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on May 13th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

Meta’s new content strategy draws its inspiration from Chinese competitor TikTok. Instead of friends, news and conversation, Facebook’s parent company is now aiming at video and entertainment.

In a dark, church-like building on the prestigious campus of Georgetown University, a large crowd of curious listeners had gathered to hear what was described as “the second act of social media.” Mark Zuckerberg, Facebook’s CEO, stepped up to the podium with a big smile on his face.

It was autumn 2019 and Zuckerberg was heading into a new American election season. He had made up his mind not to get caught in the same crossfire he had three years earlier. Back then, Donald Trump had become president, and many were asking what role Facebook and its algorithms had played in the process.

“We’ve recently clarified our policies,” said Zuckerberg, as so often before. This time the topic was the ability to see politicians and opinion shapers in their original form, to make sure they were presented accurately.

Big words, given the volume of problems the company has had with moderation and the spread of disinformation. What he did not know at the time was that the world was about to enter a polarised era defined by a pandemic. When lockdowns and vaccinations came up for discussion, it didn’t quite turn into the open and civil conversation about the world that the Facebook chief had been hoping for.

To use Zuckerberg’s own terminology, you can describe the first act of social media as friends talking to each other online. The Facebook feed consisted of friends checking in at places and posting status updates. The second act was a bigger — and politically charged — conversation about news and current events. Links were shared and spread eagerly, and more and more material that you hadn’t explicitly followed began showing up in your feed.

There is plenty to suggest we are now moving into the third act of social media. It resembles video entertainment more than it does political debate, and takes another step away from being the meeting place for friends.

You can already start to see the changes taking place.

Facebook parent company Meta’s biggest cloud is called TikTok. The Chinese video app has become a global supersuccess by being the best in the world at presenting content it believes the user will watch. It isn’t necessarily the videos you think you want, but what is tuned to what you will actually end up consuming — even if that can be harmful, as SvD has reported previously.

On TikTok you don’t need a single friend to get relevant content served up. Instead you scroll through full-screen video and the algorithm gradually learns what works for you in particular.

Meta’s counter-move is obvious. The company is currently testing full-screen video on Instagram. Its users are already spending 20 percent of their time on the video feature Reels, which is in large part a TikTok clone. With increased emphasis on video, the photo app is coming to look more and more like its Chinese competitor.

But the shift can be found elsewhere too. At Meta’s most recent quarterly report, Mark Zuckerberg explained the change that was about to happen across all of the company’s products:

“Overall, I’m not just thinking about the artificial intelligence we are building as a recommendation system, but as an engine for discovering the most interesting content people have shared across all our systems.”

Anyone who has shared something interesting could end up in your feed. A familiar content strategy.

This third act of social media, then, looks set to become more entertaining and lighter in tone than the previous one. That would make the content easier to moderate than the news — of varying quality and truthfulness — that was spread and served as the basis for the earlier content strategy. Meta is also rumoured to be reducing and reshaping the partnerships it currently has with media companies.

The question has been sharpened by the war in Ukraine. There, Meta has had to adapt its content rules to function in the new context. On top of that, new European legislation is just around the corner, and the big platforms will need to take greater responsibility for content. Living up to that can be time-consuming, cumbersome and expensive.

Zuckerberg spoke about helping to shape the public conversation. Now it looks more like he is backing out of it entirely. But sidestepping the complexity of political questions is probably attractive, after years of missteps.