It’s like Uber, only for election campaigns

A big story in Silicon Valley last year was late-stage growth companies learning that public markets no longer had an appetite for startups that were growing quickly but whose future profitability was dubious. For examples, look no further than the disappointing market debuts for companies such as Uber and Lyft and the withdrawn initial public offering of WeWork. Although that phase may have passed, a similar scenario looks as if it’s emerging in another arena: The presidential campaigns as they seek to tap the market for cash, especially as online fundraising
becomes so important.
Let’s start by describing the landscape for tech startups: With the benefit of hindsight, it’s easy to see how their heavy spending on advertising to win over unprofitable customers had its limits. When the idea of a service such as hailing a car with a smartphone was novel, it may have made sense to offer rides that cost a company more money than the ride generated. Customers would then see the value of such a service and in theory be willing to pay enough at some point in the future to generate a profit without subsidies. But the trouble with this business model is that it’s a bit like offering steak dinners for $10 — the market for this service is well understood, and as a business you’re mostly bringing in marginal customers who will for the most part vanish when asked to pay enough to cover operating costs and produce a profit.
Now consider a similar strategy in the setting of a political campaign. Say someone decides to run for office and their friends, family and some block of core supporters donate $250,000 to the campaign. Maybe all that money is raised even before a candidate has made any hires or opened an office. In a traditional campaign, the candidate then goes out and brings on staff and uses the money to try to win an election, including spending on TV and media ads. Presuming the candidate wins over supporters who donate, the campaign will continue to operate and grow.
Now imagine transplanting a Silicon Valley growth strategy to a campaign that just raised $250,000. Rather than operating in the manner described above, the campaign runs with a bare-bones staff and focuses the vast majority of its resources on social media and online advertising. By posting on Facebook, Twitter and Instagram with messages that activate people who follow politics closely, the campaign gets a burst of support which brings in fresh donations. But it isn’t long before that approach reaches exhaustion: The limited base of activists has been won over, but it’s a cluttered media marketplace and it’s hard to hold people’s attention for long.
Raising millions of dollars and then reporting lots of cash on hand at the end of a quarter suggests robust organic support for a campaign. But if vast amounts of that money are quickly spent, it should raise questions about how effective the campaign really is and whether it’s gaming the system by buying small-dollar donations in the name of making support look broader than it is.
Online advertising is a potent new tool for tech startups and political campaigns alike. Investors and voters alike also deserve to know how effective it is, and whether it’s being abused to make numbers look better than they really are.
—Bloomberg