Elon Musk is making headlines again. He's being sued by Twitter in order to make him actually buy the company, after he had called off the deal unless he can verify the actual number of bots / fake accounts and whether or not the social media platform is doing enough against the problem.
Of course Twitter has a bot problem. It's the most valuable digital space in the public sphere, so whoever dominates the feeds gets their ideas and opinions spread. There are all sorts of actors from states to lobbies and ordinary marketing departments trying to do that.
This is not a problem unique to Twitter: reddit and Facebook have it too. No wonder the 'Dead Internet Theory' is gaining traction.
But it gets worse. Botting and fake accounts are only the most visible on sites that rely on user generated content - but more likely than not, all sorts of other tech startups have this problem, we just don't see it from the outside.
It's so widespread that there was even a joke about it on Silicon Valley.
So regardless of what Elon Musk's real intentions are and whether or not he ends up owning Twitter, this topic will be all over the place in the coming months. From an investment point of view, Elon is just doing common sense due diligence: what is the underlying value of the company, and whether it's real or not?
Investors will be scrutinizing companies as money dries up, looking for bad signs left and right. We'll see how fast the retail market adapts (if it isn't wiped out entirely...).
So how did we get to a place where there's fake users & accounts and bots everywhere, and nobody was really talking about it and suddenly it emerges as a possible deal-breaker problem?
The short answer is: hype and hypergrowth.
When a startup takes off (finds its product-market fit), investment rounds come in with primarily one idea: to put the pedal to the metal in terms of growth. Doesn't matter if you raise a million, ten million or a hundred million, most of that money will be spent on user acquisition. Sure, development gets expanded because the service itself and the infrastructure has to support that growth, and product features are also expanded - with the idea of increasing growth and user engagement with the product.
The company has an annual growth goal. If it's not profitable yet, it might not be a meaningful revenue goal, but just user related metrics. Indeed, the story of the last ten years will probably be written around how unprofitable companies running on VC funds with proxy metrics instead of revenue might have been a bad idea, but that's a topic for a different day.
Thing is then, that that broad goal of growth gets broken down for each division of the company. And then it will be broken down quarter to quarter, month to month, week to week and day to day.
Now in conditions like these, your top worry is not dealing with bots or fake accounts - unless they strain your system, start to degrade the level of the service (like spamming) or cause other problems.
What's worse though, is that insane growth requirements incentivize you to not look very deep into these kinds of issues. After all, if everybody is just checking whether or not the line is going up, does it really matter if some of it is not generated by genuine humans, but automation?
The ad fraud debacle is related to this. It's very very hard to quantify just how many fake users there are, and how much money is wasted, although the estimations are pretty mind-blowing. But marketers with growth goals are more or less willing to tolerate burning some money on fake traffic, as long as the underlying KPI-s they have are satisfied - eg. until the problem is kept at an acceptable level.
And the investors don't mind either. Their mind is on the exit. And for a big exit, you need a good growth story. And all good stories have some elements of fabrication, does a fake user or two (or a couple of hundred thousand) really matter?
Well, turns out in some conditions, it does. And that condition is called a downturn with rising interest rates and fleeing capital. That means more scrutiny, and the bot / fake account problem that everybody has been throwing around like a hot potato is about to explode like a hand grenade.