On YikYak, Anonymity, and Schadenfreude

Okay, well, I’ve been marinating these concepts in my head for awhile, so this is going to be a long one. Fair warning.

For those of you who don’t follow tech news all of those closely, YikYak shut down last week. At it’s peak, it was used by over one million users per day – mostly college students – and was valued privately at nearly $400 million after having raised $73.5 million in venture capital funding.

I’d like to say that I’m sad about it. I suppose I am in a virtual, detached sense, but I find myself feeling ambivalent at best and not happy but perhaps exasperated at worst, since their failure is just so symptomatic of so many inherent flaws in the way startups are invested in and operated. It’s a failure on multiple levels, levels in which lessons never seem to be learned.

First, it’s important to note whether you’re familiar with the app or not that it was, at least in the era of it’s peak popularity, completely anonymous. It was nicely geofenced into certain locations – such as a college campus – and as such, it spread like wildfire. Hyperlocal memes and gossip and discussion and conversation; all very sticky and moderately useful stuff. Of course, it wasn’t a new idea – gossip-y sites like Juicy Campus and College ACB had mined this area and failed due to bullying, harassment, and general shittiness. This was mobile though! And venture backed! And growing like crazy! Allons-y!

The problem with anonymity however is obvious: it enables people to be their worst. Without some sense of authentication tied to an actual profile of some social worth, there are no negative repercussions for abusive behavior. Go ask Twitter. Go ask 4chan. My reaction is not just pessimistic. The complexity of human behavior in an anonymous environment isn’t something to ignore.

Of course, anonymity also allows for products to grow like wildfire, perhaps because they enable people to be awful publicly, for the same reason a little kid grins whenever he gets away with swearing – it’s fun to be transgressive. After all, 4chan is huge, right? And for VCs, this is music to their ears; growth is valued above all things – at least at stages of earlier investment.

What ultimately happens however is the anonymity that powers the growth also makes it impossible to control abusive behavior and monetize effectively. Advertising is the only business model that works here – because no one in the right mind would ever pay for such an app – and the core hook for why the app is interesting makes that business model impossible. Think about it: what brand wants their product next to something where there is no editorial control of content? Do you think Snickers would be cool with their ad below a post calling someone else a racial slur? Or how about Coke right above an anonymous message saying that so-and-so is a slut?

Beyond the challenge of monetizing an app used for anonymous social commentary, there’s a host of other mountains to climb. Anonymity means no email addresses or any non-notification way of reaching a user, which makes it impossible to get them back if they’ve uninstalled the app. Having no access to any data tied to an actual human’s demographics further hinders marketing, since you have almost no vectors for segmentation beyond geography. I could go on and on.

Interestingly, unlike Secret and a few others, YikYak did try to address these challenges. About eight months ago, amid rapidly declining downloads and usage, they forced user handles on everyone. Users were betrayed that the app that they once loved was taking away the thing that made it interesting, and ultimately it was a nail in the coffin of the fading app.

I’m trying to be reasonable though, because it’s very easy for some to be critical of obvious problems in hindsight. After all, Facebook didn’t look like Facebook when early investors wrote their checks. Of course, to invest in YikYak at the time – assuming they had similar growth patterns, which I doubt – you’d have to simultaneously believe the their founders were product visionaries on the level of Zuckerberg, that the market was as big and that the product team was talented enough to capitalize on it, and that they’d somehow figure out a way to monetize anonymity that no one else ever could. It’s frankly an absurd set of conditions to believe were or ever had the potential to be all true.

YikYak did have pretty explosive growth though, and in case you’re curious and/or ignorant to why that is critical, it’s basically because the people who give the VCs money are doing so to diversify and add risk to their portfolios. I can’t speak for all VC funds, but a decent chunk of them are backed by huge pools of capital, like state pension funds and the like. The managers of those funds likely allocate 99% of their investment to very low-risk things like bonds and mutual funds, leaving a 1% allocation for something specifically high-risk like venture investing. Risk obviously is correlated with big outcomes, ergo a win and the ultimate goal for a VC isn’t a $3 million sale to Square, it’s a $2 billion IPO.

To put it another way, let’s assume that at one point in time, YikYak did reasonable resemble Facebook. Hugely explosive growth, geofenced to a college, and so on. Absurd in hindsight obviously, but go with me. If the market cap of Facebook at their IPO was $104 billion and you thought there was a 0.5% chance that you’ve found the next Facebook, then the imputed value of YikYak even without any revenue, user data, or hard IP would be $520mm. All you would realistically have to do is say, “Alright, this has got a 1-in-200 chance of being the next Facebook, and the limited partners funding my VC firm have told them they want to find the next Facebook, so..”

Thinking like that is very flawed however, because it ignores that most market sectors in tech don’t have the capacity for multiple concurrent winners. We know for example that the era of consumer/social is basically over, and that it was won by Facebook and to a much lesser extent Twitter, Tumblr, and a few others. This is similar to the era immediately before social, search, which was won by Google and to a much lesser extent a few others. It’s a pattern that has existed throughout computing; mainframe was won by IBM, personal computing by Microsoft, web 1.0 by Amazon, search by Google, social by Facebook, mobile by Apple, and the next phases (VR/AR, blockchain) are yet to be decided.

If we agree that each epochal shift in computing has a winner-takes-most pattern and that pattern recognition is basically what VC is all about, how can you reconcile the logic of investing in YikYak based on one pattern (they looked like Facebook, sort of) while ignoring the other, which is that there is usually only one winner and that Facebook already dominated and won social? It’s not just that you’d have to think that there’s a 0.5% chance that you’ve found the next Facebook, you’d also have to factor in the unlikely probability that Facebook falls from it’s perch, since without it, you’d never be able to reach a big enough scale to be able to satisfy the home-run seeking thesis of the investment in the first place.

(As an aside: there are never VC post-mortems about failed investments and the logic behind them, which is a bummer, because that’d be an interesting read and frankly, that level of transparency would not only benefit the VC world and help them build trust among their partners, but could even drive increased deal flow as a function of uniqueness and provide a valuable resource for everyone to learn from. But I digress.)

All of that sort of brings me to my next point: why then did they raise $75 million in funding, given the incredible simplicity of the app from a technical perspective? It’s very unlikely they needed that money for advertising, as it’d be the ultimate fool’s errand to spend money advertising something that has no business model. It’s doubtful that it was for hosting or tech, since even at the speak of ~1m DAU, that’s a blip on any reasonable cloud computing platform.

I would then have to assume it was R&D, but even as an infrequent user of the app, I certainly didn’t notice any fruits of that labor. It seems doubtful they ever really needed it, for any purpose. Given that, $75m seems inordinately high to assign to R&D and/or to a rainy-day/what-if-the-bubble-pops fund – especially given the problems I elucidated above – and if the ultimate sale price was between $1 million and $3 million, I have to wonder where exactly that money went and why it wasn’t shut down well before it got to that point in order to at least return cash to the investors. After all, downloads and usage were plummeting, right? I find it hard to believe the writing wasn’t on the wall with failure inevitable, so why not cut bait and return capital in the same way that Secret did?

This is where it gets a bit sticky for me, because on one hand, as a founder I know how difficult the journey can be and I know that the difference between success and failure can be very slim. With that said, no one forced them to accept the money that was offered with all of it’s attendant expectations, and in general I find it difficult to drum up a lot of sympathy even for their employees as I’m sure they were handsomely compensated.

All of that for me basically adds up to my strong dislike when startups post their “it was an incredible journey!” self-congratulating post-mortem, as if it’s somehow notable or impressive to take in a ton of money and completely waste it. It ties into the weird and extremely troubling belief within the startup world that raising money is an accomplishment unto itself, as opposed to the ticking time bomb that it more accurately is. It’s exacerbated by the news cycle of TechCrunch and the like, with a bit of dick measuring/keeping up with the Jones built into it as well. But it’s still gross and a very misguided way of looking at it; had YikYak raised less and kept to a much lower valuation, their vectors for an exit would have been much broader and certainly less scrutinized by a board that was hungry for a return.

(I suspect this is a trap that first-time founders fall prey to a lot more often than experienced ones.)

As I mentioned in a tweet a few days ago, it’s been a red letter week for fans of schadenfreude. Between the absurdity of Juicero’s DRM for juice packets and the utter uselessness of their beautiful machine, the complete melt down of the Fyre Festival at the hands of the team behind the truly useless Magnises card, and YikYak, it’s very ripe for someone to come in and dive headfirst into the river of smug, hindsight-driven fingerpointing. I find myself very ambivalent on this topic, because on one hand, the problems for all of them were laughably obvious. On the other hand, being negative and cynical is one of my least favorite human qualities – particularly in regards how it fits on me – and too much of it ensures the inability to ever see the positive aspects of something unproven or new ever again.

Because of that ambivalence, I’m having a hard time figuring out how to conclude this post. Is it possible to wonder how in the world YikYak got the funding it did given the obvious problems and still believe in the transformative power of tech entrepreneurship? Is it possible to abhor the startup culture of celebrating fundraising as an accomplishment and celebrating failure as some kind of secret success and still be sympathetic to the amount of work and stress involved in the journey?

As of now, I don’t really know. And I’m not confident at all that I’ll ever know.

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