In two short weeks, Ozy Media went from a healthy mid-sized media company to an ostensibly shuttered media company, to a single executive on a media circuit trying to redeem his disgraced company. Ozy’s reckoning was spurred by the New York Times’s Ben Smith, who reported that the company built around smoke and mirrors, inflated numbers, and lies. Smith’s column included one incident in which Ozy’s co-founder and former COO, Samir Rao, pretended to be a YouTube executive on a conference call with investors at Goldman Sachs so that he could praise Ozy’s viewership and ad sales on the platform. Fallout from Smith’s reporting was swift. Major advertisers like Ford, Airbnb, and Target froze their campaigns with Ozy. Investors fled and at least one filed a lawsuit. Top talent, board members, and investors jumped ship. Ozy co-founder Carlos Watson, even as he was deluged by criticism and allegations of impropriety, tried to defend the company. When Today Show anchor Craig Melvin asked Watson if Ozy had paid for digital traffic, Watson was quick to respond. “Like everyone, 100 percent. This is such a good conversation to get into because guess who else pays? NBC,” Watson said.
While Watson flailed trying to project optimism last week, Elizabeth Holmes endured week five of her trial for wire fraud. For some, Ozy’s inglorious implosion smacked of the “fake it till you make it” attitude that earned Holmes’s company Theranos a $5 billion valuation, before it crumbled under the weight of Wall Street Journal reporter John Carreyrou’s scrutiny. But what if Smith and Carreyrou hadn’t probed a little deeper? Stories abound of well-established Silicon Valley companies that played Catch Me If You Can before they could fly. Apple launched the iPhone before it figured out how to mass-produce them. Before Zappos had warehouses, the company’s founder, Nick Swinmurn, would run to a store and buy the shoe each time his website got an order. Which is why the difference between visionary and fraud isn’t so much a line, but “a blurry house of mirrors,” according to Scott Galloway, co-host of New York Magazine’s Pivot podcast. Intelligencer asked Galloway to help draw a line, as well as explain why markets have started to favor the “fake it till you make it” philosophy.
First off, did you read or watch Ozy? Were you a fan?
I knew almost nothing about it. For me, they were one of these brands where my awareness of them was much greater than my usage. I never used it or interacted with it. I would just hear about a cool party or event they were throwing in Central Park. It was one of those brands where you say, “I need to know more about it,” but I never really touched it in any kind of meaningful way.
I think that’s why a lot of media people were so amazed by this. They hadn’t heard of Ozy and had a hard time figuring out why people were investing in an outlet that produced some original journalism, but was mostly a content farm with events. Why?
A new core competence of CEOs is storytelling, their ability to layer a narrative on top of a business. When Jeff Bezos was selling a non-proprietary product, e-commerce, with a bad website — that’s what he did in the ’90s — it wasn’t that compelling. But when he talked about the future of commerce and how Amazon was going to be maniacally focused on convenience, value, and selection, people started to think, Wow, this guy gets it and they wanted to buy stock. Then he ended up with access to cheap capital so he could pull the future forward and start doing things like building his own warehouses, leasing his own planes, and producing his own original scripted dramas. The CEO has become the chief executive storyteller.
More so than they were 20 years ago?
It’s become much more important. Nobody used to know who CEOs were. Now, CEOs are celebrities in America. Most investors just want you to articulate a vision, wear a turtleneck, have a deep voice, and convince people that you are in fact the next Steve Jobs. Now you have companies that are starting out by saying, “Our brightest people and everything we do is going to be about storytelling,” as opposed to “We are going to build a business.” You need to have an underlying business, but it has gone from dramatic nonfiction, to autofiction, to just pure fiction.
Ozy feels, quite frankly, a bit like Vice. Vice positioned itself as a media company for the new, emerging cohort of millennials. Ozy was “a modern media company.” It was a ton of fun and a great story to spin about the future of media and how millennials wanted to consume news in a different way. But here’s the problem: no one was watching.
You’ve said that the market for years has been favoring “fake it till you make it” companies. Ozy, Theranos, Nikola, WeWork, and others have actually been called out, investigated, or prosecuted. So what’s your evidence?
If a journalist had gone after the wealthiest men in the world, Jeff Bezos and Elon Musk, early on and said, “You’re in a cash crunch, and you’re about to go out of business” — which was certainly true of Tesla, and Amazon went through some pretty rough years in the early 2000s — it could have put those companies in downward spirals that they might not have recovered from. They would have gone from the Edison and Ford of our generation to Elizabeth Holmes of our generation. Sometimes the line between vision and alleged fraud is getting your next round of capital. Conversely, if Elizabeth Holmes had managed to raise another $500 million, and Theranos had shown some progress with the Edison [the company’s blood-testing machine], I wonder if she would’ve given the commencement address at Stanford last spring. Elizabeth Holmes’s defense lawyers are basically saying she isn’t doing anything these guys haven’t done, things just didn’t cut the right way for her.
Visionaries have to have some — and I know this is a strong word — sociopathic tendencies. They have to be able to make statements that are so outlandish and then go to sleep at night and not worry that they’re basically committing fraud. They have to captivate the markets. It used to be that CEOs would underpromise and overdeliver. That has switched in the last 20 years. Now, you have to over-promise and under-deliver while you raise a ton of capital. The difference between a visionary and a fraud isn’t even a blurry line, it’s a blurry house of mirrors.
So clean it up a little. Where do we draw the lines?
There are like 50,000 shades of grey when you’re talking about the differences between being a visionary or fraud. I would argue that it’s the SEC’s job with mandatory disclosures to bring the shades of grey into sharper focus. For example, there’s this company trying to SPAC called Aspiration, which is a “sustainability-as-a-service,” or an ESG [environmental, social, and corporate governance-evaluated investment]. But really it’s just a debit card with a poorly performing asset management business. You want to talk about storytelling? Just like WeWork had community-based EBITDA [earnings before interest, taxes, depreciation, and amortization], where they took out all of the real-estate costs and pretended that it was profit, Aspiration uses something called EBITDAM, which is earnings before interest, taxes, depreciation, amortization, and marketing. They’re pulling out the marketing costs, which is just insane. It’s like saying, EBITDA, but before expenses. EBITDA, but for everything. It’s storytelling. I think the SEC is probably going to step in and draw the line by saying you can use the term EBITA, but you can’t add suffixes and prefixes to it.
In the case of Ozy, there is at least one clear instance of alleged fraud, which is the fake YouTube call. How often do startups actually get away with something like that?
That’s the equivalent of assaulting someone at the airport where there’s a million cameras. It’s not only wrong, but it’s just plain stupid to think that they wouldn’t get caught. Mental illness is a believable defense because who would believe they could get away with that?
Well, Theranos touted a prototype that didn’t work. Nikola used gravity as an engine.
Those are good examples. But I haven’t seen that many instances of something so brazen and stupid. What you do see is millions of little interactions that add up to a lot. I’ll give an example. By some estimates, on certain platforms, 80 percent of the reported views are fraud. They’re bots. But the ad ecosystem online is so complex, there are so many middlemen, it’s hard to pin down where the fraud is coming from. Somewhere between one-third and two-thirds of activity on Twitter is bots. There are small parking tickets, but no one gets in big trouble even though ad fraud is now probably one of the largest examples of organized crime, behind drugs.
You’ve talked a lot about the “algebra of deterrence,” the idea that consequences need to outweigh the upside or else executives will never change. Does that apply to “visionaries”?
I don’t think the algebra of deterrence has kicked in here. The algebra of deterrence is that the likelihood you’re going to be caught multiplied by the penalty once you’re caught must be greater than expected upside. So the conduct in this case is taking exceptional dramatic license with your company’s performance such that it becomes not true. I would argue the upside is still much greater than the probability you’re going to get caught and the subsequent penalty.
The SEC needs to hold directors more accountable, too. Were these guys just asleep at the wheel? When you’re on a board, your obligations are essentially something called care and duty. You’re supposed to represent and be a fiduciary to all stakeholders. You have a duty to perform a certain amount of diligence, especially those on the audit committee, to make sure that there aren’t unwelcome surprises. You’re supposed to be the adult asking the CFO questions, asking the CEO hard questions. If you smell something funny, investigate it, and make a disclosure. The Theranos board was asleep at the fucking switch. It strikes me that they are the group that gets off the easiest.
Is this just the price of innovation?
It’s a symptom of a frothy market where everyone wants to be an investor in Unity Software, Roblox, or Snowflake. They are just so many examples of companies that have returned 10x, 50x, 100x to private investors. Everyone wants to enter into a consensual hallucination with the other directors and the CEO. In media, you see companies that don’t have traditional metrics still manage to get really huge outcomes. A lot of companies are trading on their promise, not their performance, so the rewards for exaggerating the promise get bigger and bigger. What’s driving all of this is that the markets, when valuing companies, have replaced profits with vision and growth. Pets.com says, “Let’s sell a 50-pound bag of dog food for cost even though it’s going to cost us $70 to ship it. We’ll get to show top-line growth.”
The SEC needs to come in and say, “All right, there are some standards around dramatic license you can take with a business when you’re raising money.” And probably that license is greater in the private markets, because you’re dealing with accredited investors and institutions. If Sequoia Capital or Draper Fisher Jurvetson loses money it’s bad but it’s not profound. But when you have firemen and cops losing money in an IPO, that is more a tragedy of the commons. These private market blow-ups have been tragedies of the uncommon, so it’s just not as big of a deal. Most of the major meltdowns have been in private companies and that’s a good thing, it says that the markets are working to a certain extent. These firms are getting caught before they’re out there and can do real damage against retail investors. It reflects a dynamic essentially where the markets have replaced profits with vision and growth, and the demand for vision is so great that oftentimes it goes from vision to fiction.
This interview has been edited and condensed for clarity.