Whenever I have a candid conversation with someone interesting in tech, I like to ask: “What are taboo topics in Silicon Valley?”
Unsurprisingly, most of the suggestions I hear are not actually taboo. Controversial, maybe: I hear lots of replies like “Valuations have been too high for years”, or “We’re falling behind China”, or maybe even a dose of self-criticism, like “Venture Capital is a bad asset class” or “Some tech companies are net negative for the world.”
These are fine topics, but they’re not taboo. If you brought them up at a party, other guests would happily engage in that conversation with you. Tech people are all too happy to debate those kinds of ideas. I’m asking, what’s a real third rail topic - like if you brought it up, you’d be met with silence, or hostility.
How about: Are founders allowed to lie?
Many of you reading this will reflexively shout back, no! Of course not! Being a founder does not make lying okay! But before you submit your answer, take a minute to think about it. If you are only allowed to tell the literal, complete truth, and you’re compelled to tell that truth at all times, it is very difficult to create something out of nothing.
You probably don’t call it “lying”, but founders have to will an unlikely future into existence. To build confidence in everyone around you - investors, customers, employees, partners - sometimes you have to paint a picture of how unstoppable you are, or how your duct tape and Mechanical Turk tech stack is scaling beautifully, or tell a few “pre-truths” about your progress. Hey, it will be true, we’re almost there, let’s just say it’s done, it will be soon enough. Here’s Byrne Hobart on Microsoft:
Microsoft’s march to a $1.54tr market value started with the company selling a product it had not, in fact, built. Bill Gates and Paul Allen contacted computer manufacturer MITS to sell them a BASIC interpreter. They scheduled a demo, and built their interpreter. Or rather, first they built an emulator for the Altair (which they didn’t have) to run on Harvard’s computers (which they didn’t have permission to use) in order to write their interpreter (which Allen finished on the flight to the meeting). Subsequent success turned that from a lie to an endearing exaggeration, although Microsoft’s later successes gave the story a sinister cast once again.
Not everyone does this, of course. Some founders keep on the straight and narrow, and only tell the literal truth at all times. (Good luck to them, honestly.) Other founders bend the truth way too much, and end up as high drama like Theranos or laughingstocks like Fire Fest. Some never get the chance in the first place, like any founder from a less privileged background who doesn’t have the financial or social safety net or the nudge-wink fraternal understanding that this is permitted. But in between, there’s a murky grey area of social contracts and soft power, and it’s where the founder-VC relationship gets really interesting.
I’ve written before about how the power relationship between founders and VCs today is a lot like the relationship between kings and priests. VCs don’t just give founders money, advice, and introductions. They give founders something powerful, and almost mystical: they bestow on founders a type of blessing. “You are the founder. You stand apart. Now go make the future real."
You Stand Apart is crucial. The most important pillar of the Silicon Valley Social Contract is that founders are not like other people. Founders are not even like CEOs. CEO is a title that is earned; the CEO is peers with everyone else in the company in that anyone, theoretically, could work their way up and become CEO. Founders are not like that. “Founder” is a title that can only be claimed in one way: by founding the company. They stand apart, like kings.
How do you get to be the King? You get to be king if everyone believes you’re the king. And one powerful way that kings can continually remind their subjects who’s the king is through taboos. When you see the King violate a taboo, but no one else is allowed to, it reinforces that they are different from you. Look at Trump, and how every time some accusation gets bounced off him, his power just grows. Look at Elon, and how every time he breaks some rule and gets away with it, it just reinforces that he is the King of Tesla.
Founders use this soft power to their advantage. When blessed by their VCs, they are uniquely permitted to “pre-tell” the truth in a way that no one else is allowed to do, so long as they observe all of the unwritten rules in doing so. You can’t push it too much; you can only push it in certain ways and not others; and most importantly, you must genuinely do so in an effort to bootstrap the future into existence. You’re not misleading investors; your investors get it: they’re optimizing for authenticity over ‘fact-fulness’. It’s not fraud. It’s just jump starting a battery, that’s all.
You’ve all seen this. It doesn’t look like much; the overly optimistic promises, the “our tech is scaling nicely” head fakes, the logo pages of enterprise customers (whose actual contract status might be somewhat questionable), maybe some slightly fudged licenses to sell insurance in the state of California. It’s not so different from Gates and Allen starting Microsoft with a bit of misdirection. It comes true in time; by the next round, for sure.
Normally, this would be a dangerous game to play. Violating taboos may set you apart as the untouchable King when your stock is high. But if you fall, you are going to fall really hard, because every taboo you broke to be the King is going to make you a scapegoat, and a sacrifice. That’s why there’s zero cognitive dissonance in the hard pivot from “Travis is the greatest founder of our age, because he breaks all the rules” to “Travis was forced out in disgrace because he broke all the rules.”
Fortunately for the tech community, scapegoatings like this only happen rarely. There is a shared understanding that even if you fail in realizing the future you dreamt up (and pre-sold tickets to), so long as you stayed within the guidelines of the social contract, you’ll be supported by everyone with open arms in whatever future career you choose.
Outside of Silicon Valley, such a social contract does not exist. If you pre-tell the truth too much and get caught, you’re going to be in an altogether different kind of trouble. Nikola is in that kind of trouble.
Now, if you’ve been reading this newsletter since the very beginning, you might have already been familiar with Nikola for some time. I wrote about them in the very first issue, back last year:
[Nikola] is building autonomous hydrogen fuel cell electric semi trucks. I’m not sure how much actual progress Nikola in particular has made in the real world, but I have heard some pretty convincing explanations that the larger the vehicle, the less that batteries make sense (which I’m pretty willing to accept) and the more that hydrogen fuel cells emerge as a perfect technology to fill that gap. The refuelling station problem isn’t that big of an issue for trucks, because as Ubben points out, you can just stack refuelling stations all the way down I-80 and solve a pretty substantial chunk of your problem right off the bat - your feeling station infrastructure problem is massively easier than, say, Tesla’s. (Furthermore, the charging time for one of these things is much closer to refuelling a gas-powered car than recharging a Tesla). Does anyone know about this? Please let me me know if you do because I have questions.
Since then, Nikola has been busy. They went public through a SPAC, trading as $NKLA, under the leadership of chairman Trevor Milton. Then the story really took off, as their stock spiked in a flurry of speculation that they’d built the next Tesla, or the next something. Their market cap briefly exceeded Ford’s, and they subsequently scored a partnership with GM. All with no earnings to speak of (aside from $30,000 in booked revenue for installing solar panels on the founder’s roof), but that hardly mattered. It’s the story that matters.
Until the story started to fall apart. Last week the short selling firm Hindenburg Research, normally known for forensic research and short cases on penny stocks and pump-and-dump scams, released a report that I honestly want you to read in full because it’s so, so much fun:
Normally, when a short seller accuses a company of fraud, the case to make is financial: that they’re fudging numbers, juicing quarters, or doing improper accounting of some sort. But here there are no numbers. There’s only story, and promises. So the report walks us through various promises by the Nikola team over that period of time, which included:
Promising that they’d developed a fully integrated powertrain technology in-house (later clarified that Bosch provided around 85% of the parts, but that "Nikola’s parts were the important ones”)
Promising at a press conference that the starting date of construction for their first factory was “tomorrow” (it wasn’t; they were still missing permits)
Promising they’d signed a deal with Anheuser-Busch for a promise to sell ‘as many as 800’ hydrogen-powered beer trucks (but also as few as zero!), and that they’d deliver the trucks by the end of 2020 (revised quietly to 2023).
Promising that real trucks were already coming off an assembly line in a German partner’s factory (later clarified that the trucks were built by hand, but near a factory which contained an assembly line). You get the idea.
But the best promise of all wasn’t a promise made in words. It was this video from 2018, which breathlessly showcased a gorgeous Nikola semi truck cruising down a prairie highway:
In what is some of the funniest professional writing I’ve read maybe ever, the Hindenburg team revealed their biggest red flag: the truck never drove anywhere. They rolled it down a hill.
Of course, nowhere did it actually say that the vehicle was moving under its own power! If you look carefully, it had been advertised as a “road test”. Which, I guess, fair enough! Nikola’s written response to the allegations is pretty great content too:
Hindenburg seeks to portray Nikola as misrepresenting the capabilities of the Nikola One prototype in a 2017 video produced by a third party, as “simply filmed rolling down a big hill.” Nikola never stated its truck was driving under its own propulsion in the video, although the truck was designed to do just that (as described in previous point). The truck was showcased and filmed by a third party for a commercial. Nikola described this third-party video on the Company’s social media as “In Motion.” It was never described as “under its own propulsion” or “powertrain driven.”
So, I mean, look at the bulk of these accusations, and ask yourself: if Elon made any of these not-quite-true claims, would it matter at all in how anyone thought about Tesla? For that matter, if a startup founder showcased their “order for up to 800 product units” (even with none of them hard committed), wouldn’t you just write that off as salesmanship? A lot of these aren’t that bad. I mean yeah, rolling a truck down a hill while filming it from an impossibly upward camera angle to disguise the incline is pretty funny. But is it that different from some demos you’ve seen? Do you think I’m totally innocent here, for that matter?
The thing is, outside of Silicon Valley - and especially in the public markets - it’s a far less forgiving climate. You’re going to get a phone call from the SEC pretty quickly. And that seems to have happened, although where it’ll end up is anyone’s guess.
The problem is that now Nikola, and especially Trevor Milton, are in scapegoat mode. So everything they’ve ever said or promised is now seen in a rather different light. Unfortunately for Nikola, you don’t have to dig very far before you start finding quotes like this, from TruckingInfo.com last year:
"The Nikola truck is more than just a fuel cell vehicle; it’s a rolling super computer. One of the key elements of Nikola’s advanced system is the Bosch Vehicle Control Unit, which provides higher computing power for advanced functions while reducing the number of standalone units.
'The entire infotainment system is a HTML 5 super computer,’ Milton said. 'That's the standard language for computer programmers around the world, so using it let's us build our own chips. And HTML 5 is very secure. Every component is linked on the data network, all speaking the same language. It's not a bunch of separate systems that somehow still manage to communicate.'
See, this is what’s not allowed. You cannot just throw out preposterous line items like “The infotainment system is an HTML 5 super computer that lets us build our own chips.” This disqualifies you! It disqualifies you immediately! If you are caught saying anything like this in Silicon Valley your pre-telling privileges get revoked. And the reason why they get revoked is that saying something like this pretty much reveals that you are not, in fact, building the future. You’re just pretending.
And that, I think, reveals the real principle behind the rule. What’s important in Silicon Valley isn’t quite what’s true right now. It’s a different kind of truth; less about factual truth and more about authenticity. That's why the blessing that VCs grant founders is so important: it's a power, but also an acknowledgement of the burden of authenticity that founders have to carry.
It's not so different from the Kayfabe bargain between pro wrestlers and the crowd. Founders will present you with something pre-true, under the total insistence that it's really true; and in exchange, everyone around them will experience the genuine emotion necessary to make the project real. Neither party acknowledges the bargain, or else the magic is ruined.
That bargain, as subtle and as powerful as it might be, only works when it’s in the dark. Shining light on it makes it stop working. And that’s why the taboo around asking, are founders always supposed to tell the literal truth, is such an important social convention. Of course, I’m not in VC anymore, so I can say it. But be careful if you want to talk about it, too. It’s like the game where very time you think about the game, you lose.
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Some reading and listening for the weekend:
And finally, this week’s tweet of the week, which made me laugh the hardest, although probably not intentionally:
Have a great week,