The Rebellion Against China’s 996 Culture

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Jack Ma, co-founder and executive chairman of Alibaba Group. Credit: Wikimedia Commons.

“To be able to work 996 is a huge blessing. If you want to join Alibaba, you need to be prepared to work twelve hours a day, otherwise why even bother joining.”

Jack Ma

996.

That terminology means 9AM to 9PM, 6 days a week. A 72 hour work week with little time for much else. Once sleeping and commuting to the office is accounted for, one might wonder how ambitious tech workers fit in the rest of their lives. Is this the price it takes to get ahead in the booming Chinese economy, or is this a symptom of a hustle culture that has gotten way out of hand?

Nobody can doubt that Jack Ma is successful. As the co-founder of Alibaba, one of the world’s largest e-commerce businesses, and with an estimated net worth of around $40 billion US Dollars, Ma often makes lists of the world’s most powerful people. However, his recent comments on the company’s WeChat account about 996 working culture, which is becoming increasingly prevalent in China, have sparked outrage.

Ma states that “many companies and many people don’t have the opportunity to work 996. If you don’t work 996 when you are young, when can you ever work 996? In this world, everyone wants success, wants a nice life, wants to be respected. Let me ask everyone, if you don’t put out more time and energy than others, how can you achieve the success you want?”

Ma isn’t the only notable businessman advocating for long hours. A reportedly leaked email from JD.com, another Chinese e-commerce company, noted that the employees considered to be underperforming are staff that don’t keep “fighting” to do more work “regardless of performance, position, tenure, personal well-being issues or family reasons”. Youzan, a Hong Kong-listed e-commerce giant was reported to have demanded that employees also follow the 996 routine at its end of year gala event. Their CEO, Bai Ya, then defended these comments on the grounds that it would expose more people to the company’s culture and help people truly decide whether they want to work there.

Online protests

The 996.ICU website. Screenshot taken at time of writing.

Recently a website went live at 996.ICU, believed to have been created by protesting Chinese tech workers. The website is hosted on Github and has been created by an anonymous user that joined the site on March 25th 2019.

The name “996.ICU” refers to the phrase “work by 996, sick in Intensive Care Unit”, which succinctly describes how the 72 hour a week working culture touted by the Chinese tech giants as the recipe for success is anything but; it’s a recipe for burnout and serious health problems.

At the time of writing, the repository on Github currently has over 214,000 stars. Stars are user-generated “favorites” that serve as a measure of popularity of a given project. In comparison, the JavaScript framework React, the most popular way of building the UI of web applications today, has only 126,000 stars. TensorFlow, the popular open source deep learning framework maintained by Google has 125,000 stars. The 996.ICU project is believed to be the most starred project on Github today.

The website itself highlights that Chinese labor laws state that no more than 8 hours of work a day and no more than 44 hours of work per week are considered legal in a standard contract, and that it is illegal to not offer additional compensation via overtime for those workers that clock up more hours than the legal maximum. The website also claims that although it is a recent phenomena that notable companies have made public statements about the existence of 996 culture, it has long been a secret practiced in many Chinese companies.

There is further information stored in files the Github repository itself. Contributions are accepted for a list of companies that are practicing 996 working hours along with the time it was believed to have begun. It also includes links to evidence of these practices. The list currently contains 110 companies and features globally known names such as Huawei, Alibaba, Baidu and Youzan. Provided evidence ranges from screenshots of “voluntary struggle” agreements from Huawei through to posts from workers on Kanzhun, the Chinese equivalent to Glassdoor.

A contributor to the 996.ICU repository has created a new software license for others to include in their open source projects. It explicitly forbids companies that are not complying with all applicable labor laws and regulations from using that software. There have been requests to add it to projects such as Redis, React and Vue. It has already been added to a whole host of other projects, as noted by 996.ICU’s “awesomelist”.

Controversy has been amplified by reports that the protest website has been blocked by the web browsers of the Chinese technology companies that are under scrutiny. The popular instant messaging program WeChat refuses to open links to the webpage. Browsers such as Tencent’s QQ, Qihoo’s 360 and the native browser of Xiaomi smartphones restrict user access to the site. QQ displays a pop-up message that tells users that the protest page is a “malicious site”. 360 browser blocks the site and displays a message that it “contains illegal information”. Similar messages are displayed by Xiaomi’s browser.

This could suggest that Chinese technology companies are beginning to take the law into their own hands. Not only are they publicly declaring that their culture involves working hours that are deemed illegal by Chinese law, they are deciding to apply their own censorship to websites that they believe to be harmful to their reputation.

How long has 996 been going on for?

In the initial technology start-up boom era of the early 2000s, many companies embraced a culture of working around the clock in order to claim first-mover advantage on their competitors. This period gave birth to Chinese startups that are now some of the most valuable in the world, such as Tencent and Alibaba. Given the astounding growth of these companies, many have since adapted a relentless work culture in the hope that they too can replicate their success.

However, as Bloomberg reports, a commenter on Jack Ma’s Weibo post stated that “the bosses do 996 because they’re working for themselves and their wealth is growing. We work 996 because we’re exploited without overtime compensation.” This observation is not unique.

The BBC report on the story of Li Zhepeng, a 25-year old that moved to Shanghai with the hope to jump start his career. However, the reality was starkly different: he had to commute ninety minutes each way to the outer suburbs, where office space is cheaper, in order to work 12 hour days posting descriptions of items for sale on an e-commerce website. As well as being expected to work on Sundays, he took home ¥3,500 a month, equivalent to $560.

Reports of 996 culture also extend beyond technology companies. Jared Turner, a bakery owner in Shanghai, reports on Quora that when he started his bakery he scheduled shifts for workers to be 5 days a week, only to find that virtually all full-time employees had another part-time job on the side. The key difference here is that the bakery workers chose to work 996. “Chinese people work hard,” he states.

Motivation for an individual to work 996 is varied. Some are in desperate need of the money. Some know that in order to get ahead in their career they need to dedicate themselves to their job at the expense of their outside lives. Some have no choice but to comply to the culture of the company that they work for, lest they lose their jobs.

But does 996 get more done?

On the surface, working 996 is about companies capitalizing on as many hours of the week as possible in order to make progress. It utilizes sheer brute force to beat the competition and to capture a market before the competition. However, knowledge work such as computer programming is unlike factory work: it is not a series of repetitive tasks that can be done by anyone as long as they can stay awake and crank the handle.

Instead, like in many other creative pursuits such as mathematics, writing or designing, a human’s output on a given task depends on many different factors. Some of these key variables include the quality of the working environment, worker’s exposure to stress and the ability to frequently rest well. Sometimes programmers can butt their heads against a problem that they cannot solve for hours, only for the solution to come to them the next morning after having a good night’s sleep.

Working endlessly to a punishing schedule can make an individual less effective than if they were fewer less hours in a calmer manner. Tired employees can do sloppy work and introduce bugs that cause downtime and even more effort to fix. Some of the greatest minds in history – those that have produced defining works for humanity – have vouched for shorter work days in order for them to be at their creative peak. While it is true that Darwin, Poincare and Thomas Mann are geniuses with superior intellectual abilities, they confined their creative output to daily blocks of 3-4 hours, and filled the rest of their days with other activities.

Thus the greatest waste of 996 culture is that it is symbolic overwork that is detrimental to the mental and physical wellbeing of staff. It does not guarantee that those staff are producing better work than their peers who are working saner schedules. This therefore deprives people of their free time and makes families and relationships suffer, for no extra pay and no extra output. It is akin to cultural imprisonment, where staff are either pretending to look busy until it is acceptable to leave the office, or they are literally working themselves to death.

Karōshi

Tokyo rush hour. Credit: Wikipedia.

A friend of mine moved to Japan to begin his career after finishing his Ph.D. He once made the observation that if you visited the train station in my hometown of Brighton, UK at midnight on a Friday, it would be full of people who are traveling home from a night out. In comparison, the platforms of Tokyo train stations at the same time of the week are full of suited employees on their way home from work.

Overwork culture is not new, and it is not a primarily Chinese problem. Japan has long suffered from this issue. Cultural phenomena such as being unable to leave work until one’s boss leaves and regularly clocking more than 80 hours of overtime a month have been reported for decades. In fact, this extreme overwork has caused deaths in seemingly otherwise healthy individuals, and it even has a term: karōshi. Translated to mean “overwork death”, the first case is attributed to a 29 year old male in 1969, with the phrase becoming more widely known in 1978 as multiple individuals died from overwork-related strokes or heart attacks.

The Japanese bubble economy of the 1980s, which brought frantic economic activity, elevated karōshi to national attention with reports of several notable business executives dying suddenly without any previous signs of illness. Given the current Chinese technology boom, it is no wonder to see that working 996 can result in a trip to the ICU.

However, some young Chinese workers are refusing to confirm to the harmful cultural norm. Instead of suffering in silence, they are beginning to speak up or show their disagreement by finding work elsewhere. Li Zhepeng, the e-commerce worker that we mentioned earlier, decided to switch to a different job and then be up front about his working conditions. He spoke candidly with his manager to set a more manageable workload and also to ensure that he was able to occasionally leave earlier. She agreed. His colleagues noted that he was their idol for having the bravery for speaking up.

A 955 future

The 996.ICU Github repository also links to another list of companies: those that are reported to be working a saner 9AM to 5PM, 5 days a week schedule: known as 955. A majority of the companies listed are of Western origin, such as eBay, Oracle, Intel and Apple. With the anti-996 movement creating cultural pressure for non-conforming companies to change their ways, and with younger workers casting their vote for their preference with their feet, we can only hope that those that are employed in 996 workplaces will find the support to challenge those that are setting the agenda.

Although Western technology firms are by no means perfect, there are numerous pro-worker cultural movements that have gained a significant voice. Instead of sitting around until our bosses leave, we are beginning to celebrate bosses that leave loudly. At the time of writing, Working Nomads lists over 10,000 highly skilled jobs that can be done remotely and flexibly from a desk anywhere in the world. Technology companies are beginning to realize that a fridge full of Diet Coke and chocolate is less important than being able to work flexible hours. Jason Fried and David Heinemeier Hansson’s latest book It Doesn’t Have to Be Crazy at Work is a #1 Amazon bestseller.

Work should support and enable lives, rather than claim them. Conditions in Chinese technology companies, as they have done in other countries, will eventually change, as current practices are unsustainable. In August 2018, two Chinese technology founders died in circumstances believed to be related to high-pressure working environments. But, regardless of the bad press, has 996 culture got Silicon Valley spooked?

Many see 996 culture as a threat to Western economies. However, by no means should we cave in to these practices. Instead, we should focus on strategy and efficiency of our workforce. Companies should strive to create the conditions that allow their staff and products to succeed without being shackled to their desks. We should clear out meaningless meetings. We should allow for focussed deep work that moves the needle. We should give staff the flexibility they need to be their most productive. We should work hard, but most importantly, we should go home. That’s how we win the marathon.

The Unhappy Middle of the Gig Economy

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An eclectically decorated Uber ride in San Francisco. Credit: Travis Wise via Flickr/CC BY 2.0

Uber, Lyft, Postmates and Deliveroo. Words that are now part of our everyday lexicon.

We can’t deny that the gig economy has changed the world. In fact, I find it hard to remember when I didn’t see hundreds of delivery scooters zipping around the city near our office. Nor do I easily recall when it was unusual to see somebody happily getting into an unmarked car driven by someone they didn’t know. From Brighton to London to San Francisco, our cities are bisected twenty-four hours a day by the journeys of bicycle couriers, delivery mopeds and taxi drivers.

I previously wrote that the explosion of the gig economy over the last decade has been primarily fueled by the money of venture capitalists (VCs) and the software written by skilled and highly compensated software engineers. There is a notable dichotomy between the job security and income of those that are creating this new economy and that of the gig workers that are generating the revenue, one delivery and cab ride at a time.

In the race to rapidly grow and float the companies that supply gig work, huge net losses are generated, signifying high risk for future investors and workers. The gig economy platforms such as Lyft and Uber, in their sprint for market dominance, dramatically undercut traditional companies such as local taxi and courier firms.

However, this furious competition is excellent for the consumer, who gets cheaper, faster and more technologically advanced services. It also creates new unicorns that grow and become immensely valuable for their founders and staff. The VCs and investors that propelled their growth get significant return on their money.

But what becomes of the human beings that generate revenue by driving and biking day and night, come rain or shine? Are the workers an afterthought in this economy? One could argue that the drawbacks of gig work far outweigh the benefits. There is no job security. There is the stress of unpredictable income. There is a reliance on algorithms to get work. Ratings systems cast their judgement.

If labor laws change and these companies cannot operate like they currently do, or if cities and countries ban them altogether, gig workers may quickly find themselves out of a job with no safety net. Comparatively, the VCs expose themselves to little risk through their diverse portfolios. The software engineers can easily find high paying jobs elsewhere in today’s buoyant job market.

The winners at both ends of the socioeconomic spectrum

We all know that gig workers want better conditions. There have been protests and strikes around the world for many years. A common – and privileged – response to complaints from gig workers over their conditions is that if they didn’t like their jobs, then nobody is forcing them to do them. However, this misses important nuances about the diverse demographic that deliver your food and drive you to the airport.

We should partition those that are working in the gig economy into groups based on their motivation. A 2015 analysis published by Uber’s Head of Policy Research found that 51% of drivers work 1-15 hours a week, 30% work 16-34 hours, 12% work 35-49 hours and 7% work more than 50 hours. It could therefore be observed that a comparably small proportion of Uber drivers are responsible for a majority of rides.

Given that a worker chooses how many hours to drive, we can interpret that choice as an indicator of their needs. Considering the gig economy more broadly than cabs and deliveries, the Pew Research Center reported that 56% of surveyed workers were financially reliant on gig work versus 42% that could live comfortably without the income. Given that 57 million people in the U.S. alone are taking part in the gig economy, 23 million people are using it to earn supplemental income are clearly reaping the reward from the existence of additional, flexible work at the press of a button.

Additionally, there have been studies that show that, for some, gig work can be much better than the available alternatives. A 2018 study of Uber drivers in the United Kingdom showed that the vast majority of the UK’s drivers are male immigrants primarily drawn from the bottom half of the London income distribution. Most of these workers moved into the gig economy from permanent part- or full-time jobs and reported higher life satisfaction. Although the drivers are still in a lower income bracket, many are earning more money through Uber than they were before and were able to do so on their terms. A similar U.S-based study in 2017 reported that driving for Uber gave flexibility unmatched by other working arrangements and often greater pay.

One could posit that these two groups are at the higher end and lower end of the income distribution respectively. Those that are non-reliant and use it for supplemental income are comparatively well-off. Those that find it offers better flexibility and pay than other alternatives are presumably in a lower socioeconomic bracket and have less specialized and transferable skills, meaning that gig work is the best overall option for their income and happiness.

The unhappy middle

Anti-ridesharing protests in Portland, 2015. Credit: Aaron Parecki via Flickr/CC BY 2.0

But, regardless of those that benefit from being able to open an app, jump in their vehicle and immediately earn money, the rapid global proliferation of gig work has created widespread friction and controversy. From protests to sexual harassment to mental health issues to suicides, rarely a week has gone by without a media furore. Although our groups above may report some satisfaction with their arrangement, there are clearly many problems, and workers are starting to take action.

The reality of gig economy conditions – often giving workers less rights, equality and pay – has inspired grassroots action through organizations such as the Independent Workers Union of Great Britain (IWGB). Their stance on the gig economy is that it bogusly classes individuals as “independent contractors” in order to deprive them of employment rights. Local branches of the IWGB, such as the Bristol Couriers Network have organized targeted strikes against particular gig economy platforms such as Deliveroo, demanding minimum payment guarantees and a recruitment freeze to ensure that there is enough work for couriers to have a dependable income.

There is a parallel with the controversy over so-called zero-hours contracts in the UK. Also known as casual contracts, the employee is on call to work when the company needs them. They do not necessarily have to be given any work by the company, and do not have to work when asked. On the surface, this seems like a similar situation to those that are doing gig work: it is flexible work that is there for them to take or leave.

However, the Trades Union Congress argues that these contracts exploit workers, stating that the flexibility that they offer is only good for employers and not for the employees. Increasingly unstable economic conditions have seen workplaces replace traditional full-time or part-time staff with zero-hours contracts meaning that staff cannot guarantee their income. It is reported that 2.4% of the working population in the UK are working zero-hours contracts, but two-thirds of them would prefer fixed hours.

According to the UK Government, zero-hours contracts, despite offering unpredictable hours and therefore unpredictable income, do have to ensure that the National Minimum Wage is paid and that workers are entitled to statutory annual leave. In comparison, one could reason that gig work is even less secure, given that there is no guarantee of any income due to the casual nature of the arrangement, and that the pool of available work is regulated by two uncontrollable forces: the amount of demand for the services and the number of other workers competing for jobs at any particular time.

Have we seen this before?

There have been numerous times in history in which workers were flocking to jobs with poor conditions. One notable period was the Industrial Revolution. “Employers could set wages as low as they wanted because people were willing to work as long as they got paid,” notes Ankur Poddar. Poor conditions for workers led to backlash, protests and attempts at unionization.

“Labor Unions formed because workers finally wanted to put a stop to long hours with little pay. They demanded more pay and fairer treatment. They did not want children to work in factories because of the danger involved. Labor unions organized strikes and protests. However, as more immigrants came to the United States, more workers became available. These workers were willing to work, even if others were not because of unfair treatment. This lessened the effect of the labor unions since businesses had no shortage of workers. This is why most labor unions were unsuccessful.”

Does that sound familiar? Perhaps we find ourselves in another transformational period for our economy and the nature of work. The conditions during the Industrial Revolution gave birth to labor laws that underpin traditional employment today. The series of Factory Acts passed in the 1800s in the UK limited the minimum age of workers, the maximum amount of hours per day that they were legally allowed to work, and limited weekend working hours.

In Lee Fang’s article for The Intercept, he argues that the race for Lyft, Uber and their siblings to IPO is partly driven by investors and founders wanting to cash out at the highest possible valuation before labor laws catch up with them and break the model that has given them their multi billion dollar valuations. If Lyft really do lose $1.50 per ride, how much would they lose if they had to provide securities and benefits for their workers in line with those in permanent employment? In fact, when Uber filed for IPO this week their S-1 filing stated that “our business would be adversely affected if Drivers were classified as employees instead of independent contractors.”

The rise and fall of medallions

Licensed NYC yellow taxis. Credit: Jim Pennucci via Flickr/CC BY 2.0.

Despite our rebellious impulse to root for the underdog, our underdogs have now become the dominant players in the market. For all of our hatred of monopolies, the antiquated NYC taxi medallion system that Uber and Lyft has disrupted did hold a number of benefits for those that worked within it.

In 1937, NYC officials decided that owning or leasing a licensed taxi medallion – displayed on the hood of every working taxi – was legally required in order to operate as a driver in the city. The medallion system was installed in response to the chaotic unregulated taxi situation of the early 1930s. The city was flooded with cabs, congestion was rife, and driving was dangerous.

The number of medallions was capped, which in addition to reducing congestion, meant that medallions became very valuable: in 2013 a medallion sold for $1.3 million at auction. Although a taxi driver’s income is moderate, the medallion system ensured that there was predictable income, since people in NYC always want cabs. Purchasing a medallion was an investment, much in the same way that owning a property is. Upon reaching retirement, selling a taxi medallion meant a secure future. However, the disruption to NYC taxis by Uber and Lyft – these legal but unregulated and uncapped taxi companies – has driven down the price of taxi medallions from the 2013 high of $1.3 million to a recent low of $160,000.

A regulated system, despite its flaws, did provide worker security. Now that taxi medallions are not as valuable as they were in the past, yellow cab drivers will have to work out whether in the long term it remains financially viable to keep it, or whether they would be better off driving in the gig economy. According to Uber, the median wage for an UberX driver working a 40 hour week in NYC is $90,766 a year compared to around $30,000 for a yellow cab driver. Assuming medallions continue to decrease in value, then there may be no choice but to switch.

Similar patterns are repeated the world over. The surge and disruption of gig economy work forces those that are currently working in traditional regulated industries to join it. In doing so they subject themselves to less protection from their employer and open themselves up to high risk if they are unable to keep working. If a medallion-holding taxi driver became too sick to continue working ten years ago, selling the medallion would be a reasonable way to exit with dignity. In the present day, our gig driver will have to hope they can find some other means of income.

The potential for a fairer future

Although the outlook of this article could be considered dreary, I believe that within all disruption and chaos comes opportunity. Indeed, there has been a tremendous amount of opportunity for new economies to be created, for companies to thrive, and for millions of workers around the world to find new ways of making an income for themselves and their families. No new and disruptive thing is ever entirely good, but it will, I believe, in the long term, be better for everyone involved; from the customer to the gig worker to the companies themselves.

The question is how we decide to arrive at this better future. Change in the past has come through legislation, such as the Factory Acts of the Industrial Revolution in the 1800s and the NYC taxi medallion system in the 1930s. We see similar legislative progress today, albeit at a pace that is probably too slow to make a meaningful difference. I believe that the creators of the gig economy platforms have a choice that can become a differentiator in how they grow their businesses over the next ten years: how can they use their position of power to become a force for good? Rather than relying on legislation to curb and cap them, why can they not lead the way with changes that benefit society?

Gig economy platforms are technology giants employing some of the world’s smartest people. They have global reach and vast, deep data sets describing the world’s lifestyle habits. Given that consumers are happy with the services provided, how can companies begin to turn their minds towards creating the best possible experience for their workers?

Within the last year, major gig economy platforms such as Deliveroo have implemented insurance for their riders. Other platforms are following suit. But I believe there are more fundamental changes that could help workers thrive and thus attract customers to the services that have worker wellbeing in mind.

The EU recently published guidelines on creating trustworthy and ethical artificial intelligence (AI) systems. These guidelines seek to ensure that systems support human agency and fundamental rights, that they are be used to enhance positive social change, to increase sustainability and ecological responsibility, and that they should consider the whole range of human abilities in order to ensure non-discrimination and fairness. Gig economy platforms seem rife with opportunities to use AI for good. They could create work that supports families whilst also giving workers a better, safer and more flexible working experience that they could get anywhere else.

Allowing workers to identify as full-time and reliant on their income versus being part-time and earning a supplement could bias gig distribution in favor of those who need the money whilst still supporting the needs of both groups of workers. Additionally, the geographical data available within the system could prevent bicycle couriers from having to ride punishing delivery routes uphill or having to carry challenging and dangerous loads. Instead of fueling a subprime auto loan market, ride-hailing companies could offer better incentives to full-time workers to fund purchasing their own car with competitive loans, or perhaps partner with existing car rental networks to allow people to drive without needing to use their own vehicle.

Why should we wait for legislation to make things better? We as technologists should be trying to address these societal problems ourselves. I’d pay more per ride to ensure that I was properly supporting drivers that are reliant on the income. I’d wait longer for my meal to ensure that an appropriately suitable rider and calm route is chosen. Let’s get to it.

Who Pays the Price for Selling $10 Bills for $5?

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Photo: Photos of Money/Flickr.

So how about this: you and me are going to have a competition to see who is the best salesperson. The winner takes home their day’s revenue in cash. Sound good?

OK, you’re in. That’s great. First off, we each need to pick an item to sell. It can be anything you want. Then we are going to go out on the streets and offload as many of them as we can.

Here’s the thing: I guarantee that I am going to win. Why? Because I am selling $10 bills for just $5. I hit the street and after some initial disbelief, I start selling. Word gets out and people are flocking to me in droves. I sell out before I’ve caught my breath.

Let’s see how I did. Units shipped? 10,000. Revenue? $50,000. That’ll do nicely, thank you! But what about profit? Oh, I made a loss of -$50,000. Hmm. But does it matter? My revenue and growth are wonderful, and my happy customers keep coming back again and again.

Something doesn’t seem quite right, does it? Well, despite the absurdity of this situation, it isn’t too far from the truth for the world of tech unicorns.

Who cares about profit?

Growth is everything in the world of tech startups. The industry’s obsession with lists of the fastest growing companies, such as the Deloitte UK Fast 50 and the Forbes Fast Tech 25, paint success as a hockey stick growth curve combined with equally skyrocketing revenue, regardless of the route in which those companies take to get there.

As I’ve written about previously, the pressure to hit these expectations can lead to bad behavior, such as the proliferation of a growth-or-die mindset: some companies strive for growth at the cost of good business practices, the mental and physical health of their employees, and can have a negative impact on society and the planet.

But even if a hyper-growth unicorn has succeeded whilst doing everything right for their employees, there is one key thing that is often an issue. It happened to me above: in my competition-winning sale of $10 bills for $5, I made a loss of $50,000. If you asked many people – especially those not used to analyzing the world of Software-as-a-Service (SaaS) companies – as to whether a business making a significant and increasing net loss was a good thing, I’m sure that they would say that it isn’t.

Yet look at some of the recent filings for the initial public offerings (IPOs) for tech unicorns:

  • Pinterest, who filed on March 22nd, made $755M in revenue in fiscal year 2018 but a net loss of $63M.
  • PagerDuty, who filed on March 16th, made $79.6M revenue in fiscal year 2018, but a net loss of $38.1M.
  • Lyft, who filed on March 1st, made $2.2B revenue in fiscal year 2019, but a net loss of $911.3M.

In fact, Lyft made the largest ever recorded net loss for a company going public. This raises some questions: what does success mean for start-ups? After all, the companies that ring the NASDAQ bell get the global news headlines and the glittering cascades of ticker tape. Companies that our industry and media celebrate as successful are rarely making a profit, unless they happen to be miracle workers like Zoom.

As Bloomberg reports, Uber lost $1.8 billion in 2018 against $11.4 billion in revenue, and Chinese ride-hailing firm Didi Chuxing lost 4 billion yuan ($585 million) in the first half of last year. WeWork lost a staggering $1.93 billion in 2018 against $1.82 billion in revenue.

These companies are not yet public. But when unicorns do float on the stock market it’s not clear if a path to profit is necessary. As Matt Levine writes, one could argue that tech IPOs are being designed in such a way to protect unicorns from needing to go into the black. More companies than ever are offering non-voting stock to the public, such as Snap in 2017 and Lyft recently following suit.

What this means is that startup founders can still retain control of their companies, and make declarations that said company is less about making a profit and “more about some grand mission”. But what kind of grand mission involves losing huge amounts of money indefinitely?

A race to the bottom for those at the top

Photo: Stock Catalog/Flickr.

I once read a tongue-in-cheek description of San Francisco as “an assisted-living community for tech workers in their thirties”. This snide jab pokes fun at the wave of Silicon Valley startups creating services and products for a stereotypical technology worker in the city. Nowhere to park your car? Uber and Lyft can get you around. Too busy working to cook and do grocery shopping? Postmates can deliver your lunch and dinner. Living in an apartment too small for a laundry room? Rinse can do your washing.

These kinds of startups are not simply selling software. They are leveraging software to scale a traditional service economy. Companies such as Uber, Lyft, Postmates and Rinse use their apps to consolidate what would traditionally be plethora of local businesses serving a local area into a singly held global operation.

All of this is fantastic news for the customer; the typically well-paid, white-collar worker who gets the benefit of high tech, efficient, convenient services. These apps are often involved in a race to the bottom through fierce competition. Joe Bloggs, your stereotypical software engineer, is swimming amongst free ride coupons for Uber and free delivery codes for Postmates. But who is really paying the price for this?

The cost of developing good software is not cheap, especially if your software is being developed by a San Francisco based company. The city has the highest average salary for software engineers in the world, with an average starting salary of $91,738. However, wages rise dramatically at well-funded startups in order to attract the best talent, especially since the average rent of a one-bedroom apartment in the city is $3,360, and the high cost of groceries. A software engineer with a few years of experience could be earning over $200,000 taking vesting stock into account.

This leads into a somewhat paradoxical situation: if the cost of developing software is so high, and the services that are being offered are so reasonably priced, who is funding it? Who is losing out as a result?

The race for market domination

The initial question of who is funding growth is typically straight forward: it’s venture capital (VC) firms. This isn’t surprising knowledge by any means: most hyper growth technology companies since the dot-com boom have expanded rapidly by taking on millions of dollars in VC cash in return for equity in their companies.

These investments unlock hiring, opening offices in new locations, large R&D projects and acquisitions of other companies. They are the nitrous oxide injection into the engine. In the race to be the most dominant player in the market, hence securing the best possible valuation for an exit, speed is key.

So what drives the best valuation for the exit of a SaaS company? Typically, some of the most important metrics are as follows:

  • Revenue: The amount of money made through sales.
  • Revenue growth: How much that revenue has increased year on year.
  • Net retention rate: The percentage of customers who stay with the service rather than cancelling.
  • Total addressable market: The size of the market that is out there for the business, i.e. the revenue opportunity for the future.

If we recall my fantastically silly business selling $10 bills for $5, one could argue that I would be doing very well measured by these metrics. After all, who doesn’t want free money? However, I would clearly be in unrecoverable debt after a very short space of time, but I would dominate the market, unless someone sells $10 bills for less.

In the case of real hyper growth companies, VC firms place a bet that if companies are able to grow quickly and become the most dominant force in the market, even if operating at a heavy loss, then eventually that rapid growth will lead to monopoly profits. However, it can often be unclear how a company will become profitable and how long it will take to get there.

Matt Levine writes that one way of viewing the investment of large sums of money into loss making companies selling desirable products at far below cost price is that the VC firms are essentially subsidizing consumer’s lifestyles. That free ride coupon is less thanks to your friend who gave it to you, but more thanks to the deep pockets of SoftBank, Tencent Holdings or Benchmark Capital.

Of course there is risk in this approach: if I have my silly business selling $10 bills at a loss, then eventually I will go bankrupt, and that’s my fault. If I sell access to my subscription software and raise VC money so I can sell it at a loss to capture market share, then eventually I’ll need to stop raising money and start increasing prices or efficiency so I can claw back losses and start making a profit. If that fails, then I lose and the VCs lose.

But what does losing mean to us? Well, for the VCs, it isn’t too much of a big deal. Usually only a small handful of their portfolio companies need to exit well for them to successfully grow their investment funds. Maybe my failure is a drop in the ocean to them. And what about my own failure? Hurt pride aside, the experience was good, and as long as I didn’t get myself into personal debt then there is a whole world of high tech jobs looking to snap up an ambitious ex-founder.

Who are the real losers?

Photo: Berliners on Bicycles/Flickr.

But the startups that were mentioned earlier in the article – Uber, Lyft and Postmates to name but a few – represent companies that have a gig economy at the core of their business. The gig economy describes employment through the “gigs” that a worker does, rather than being given a regular wage. Uber and Lyft drivers get paid per ride and work as much or as little as they like. Cycle couriers such as those that work for Deliveroo in the UK get paid per delivery, similar to Postmates.

When we look at the effect of a VC-subsidized economy, the consumer wins by getting a better service at a lower price. The companies win by growing at an accelerated rate and capturing market share, and the VCs give themselves a better chance at getting a return on their investment. However, the subsidization of services in the gig economy often hits the workers directly.

According to Recode, gig economy workers are earning half of what they did 5 years ago. In summer 2018, Lyft were required by law to pay their drivers minimum wage in New York. Reviews on Glassdoor from Deliveroo drivers highlight a number of issues: workers reporting that they are paid under minimum wage, have no sick pay, have to pay for wear and tear on their vehicles, are not provided insurance by the company, and the list goes on. Similar feedback has been given for Uber, Lyft and Postmates.

One could argue that the gig economy is ideal for people who want casual, flexible part time work: students, retirees, or people who just want to earn a bit of extra money from time to time. However, this view is blinkered: in the UK, 6 million adults were reported to be working full time via gigs. Given that the barrier of entry to gig economy jobs is low – a worker typically just needs a vehicle – one could posit that a high proportion of the workers are those with the least transferable skills and ability to get secure salaried jobs.

This means their livelihood depends on gigs created by subsidized benefits to the customer, leaving them vulnerable. There is no guarantee of earnings. There is no predictable amount of income for a given day or week. Why should gig workers suffer in the quest for ever more market share and a bigger return for the VCs?

We know that the battle for market dominance requires rocket fuel. However, large cash injections are often not enough: instead, they are often coupled with the cost of the product being subsidized so that it really is a deal that is too good to be true for the consumer. For many startups, the subsidy to the customer manifests in net losses for the company and risks for the investors and founders. However given that most tech companies go public whilst making a loss, one could argue this isn’t even that big of a risk in today’s IPO market.

For companies that generate revenue through a gig economy, there is another party that will always lose: the worker. The moped driver who is trying his best to provide for his family, or the bicycle courier who is trying her best to save for college. When their income and rights are compared to those that fund and develop the software, they are truly a second-class citizen.

One could argue that gig economy companies are in a rush to go public before new labor laws are able to catch up with them. Drivers are not classed as employees as it could be “cost-prohibitive”. Instead, they are classified as independent contractors, which allows companies to avoid being bound to legislation requiring that they provide minimum wage, sick leave, health insurance and other benefits that salaried staff would expect. In March 2019, Uber settled a $20 million lawsuit over driver classification ahead of its planned IPO and Lyft filed a lawsuit against New York over the aforementioned minimum wage laws. They lost.

Those with the most to gain should have the most to lose

As traditional service economies get disrupted by technology-based startups, we need to keep the bigger picture in mind. For investors and founders the implications of losing the battle against competition aren’t fatal. There are always other companies to invest in and other jobs for founders to do. For consumers there is everything to gain through the flood of new technology-rich services at a bargain price. However, those in the middle – the gig workers delivering those services – are the ones that suffer.

We need to call for greater cooperation between governments and technology companies to ensure that those that work gigs for the benefit of the customer and the company’s rapid growth are not left to suffer as unequal. They too are part of our society and should have equal opportunities and rights. There is some progress in this area: this year, delivery company Hermes became the first UK-based company to provide trade union recognition for their gig economy workers. But there is a long way to go.

Workers providing these services have little protection . As Alexandrea Ravenelle writes, the gig economy leaves workers open to sexual harassment, and as other news outlets report, the stress of making money with little safety net can cause mental health issues, and in the extreme, can even lead to suicide.

Services should benefit society as well as generating revenue. Companies should have to have the wellbeing of their workers at the core of their business regardless of the importance of their role. We all have bills to pay and the hope of a better financial future.

Let’s ensure that disruptive, high growth, heavily subsidized services are for society’s gain, rather than for those with the most to gain.