Success, and Farming vs. Mining

For example, for many VC-funded and fast-growing startups, the product is not the website, software, whatever that they're showing users. It's the knowledge that users have a particular need, and that need can be satisfied in a certain way. Startups are effectively outsourced R&D for big companies here.

It's quite possible that the most economically efficient way to satisfy that need is to simply fold the startup into some big company's other products. If that happens, the code, most of the employees, cash, and even existing userbase are essentially disposable. They can all be replaced at a larger scale once the company's been acquired. The actual assets that the acquirer is paying millions for is the detailed knowledge of the problem domain - key employees, key algorithms, history of other ideas that tried and failed, and any patents or other intellectual property. That's why acquisitions usually are contingent upon certain employees coming on-board, yet the acquirer is often all too happy to fire other employees.

The fundamental law of resources in this world is: if you can't farm it, you must mine it. They're a yin and yang. I come from Montana, a state which basically has only two industries: farming and mining. When you live that close to the land, it becomes very apparent who the actual producers are.

Everything else is wanking. Productive wanking, but wanking nonetheless. The welder is nothing without the miner. Without the farmer, he can't even eat. Me, as a software engineer, I'm so far removed from those who are actually producing things that what I do is as ephemeral as the wind. I change states on a magnetic disk all day. I lift weights, run, and have a stand-up desk so my body doesn't decay while I do this ludicrously minimal amount of work each day, but because I know how to shape those bits in a certain way, society values me much more than the guy who feeds me, or the guy who mines the rare earths that make my job possible.

It's hard to tell whether the stock market is a cause or a symptom - our primary mode of 'investing in the future' is so prone to being short-circuited for short term gain.

It started off being only for books, but since has acquired the ability to keep track of just about anything.

Producing software is a capital intensive business with large pay offs that are irrespective of the amount of labour/capital inputted, consulting is a business in which one makes a slight profit over labour. Software that you own outright is a labour intensive capital good. If you're advocating the farming market of the software business then you're advocating consultancy which if done right can make you decent coin, the problem is that if you can actually make software that people want to use then you're generally better off moving towards the mining market.

What the OP is talking about is largely the difference between owning a mine and being a mining industry consultant / mine worker. Mining is an industry that is unpopular and his impression of farming is largely that of something that last existed in the 1920s.

Modern farming has nothing to do with returning the land to it's native state and has everything to do with pumping it full of nitrogen, spraying it with pesticides and hiring low wage workers, applying for gov't subsidies so that you can eek out 1-3% profit with enormous capital costs. The picture in the supermarket of a farmer is not reality.

Firstly there is the prospecting phase. This is akin to customer development. You look for where there might be traces of customers, and if you encounter them you drill a bit further to define the customers a bit better. Next, you do economic analysis to determine whether you are going to make a profit on this, or whether this is the right size/risk for your company. There is also a technical phase where you need to run trials to determine whether you will be able to successfully separate the minerals from the waste given whatever impurities that exist. You keep iterating, drilling, testing until you've hit the equivalent of product-market fit.

Then you have the expensive issue of scaling up. To build a mine takes great investment that will take years before it turns a profit. This is where the model diverges, because at this stage, the mining company has a defined asset but they do not build the mine themselves. These are done by a major contractor. It is like a giant civil engineering project and is managed as such.

When the mine is built (and roads, rails, port facilities are put in), the mining company then operates the mine. Operations is not anything like prospecting. It is dealing with daily issues and doing strategic planning, developing markets etc.. People live and work on a pretty steady basis, with rosters etc. In contrast, life as a prospector can be pretty rough. :)

Many startups function around the prospecting stages, since entry costs is lower but it is very risky. The rewards are high at this stage of course, but the prospectors have little ability to execute if they hit upon a mother load. Outside money will have to be brought in, or the prospector might sell up and get a nice exit.

Reminds me of an interview I heard with Steve Martin (promoting his book Born Standing Up), where he talks about the advice he gives to aspiring comedians. When they ask him what the trick is to getting famous, he just says "hard work". He said they usually seem disappointed, because that's not what they wanted to hear.

Or to receive dividends. Heard of blue chip investors? Buy-and-hold strategy?

"Mining" versus "farming" is disputed in the stock market as well. That's why people talk about P/E ratio.

The dollar amounts attached to these "lottery" startups (whether in investment or in exit) are awesome, but not outrageous, especially given who the investors are. The one thing that Wil said that did bother me was his assertion that a funded started is necessarily a "mining" startup, to use his metaphor. I see it his way, and it brought me down a little bit, even though I already knew it inside.

Wil makes it sound like most mines blow up or explode at the first touch of a nugget of whatever you're trying to uncover. Or alternately that after taking investor money and building all the mine infrastructure, you sell it off as soon as you strike it rich. I would think the opposite is true, the last thing the mine owner would want to do is flog it off just when it starts making big money.

Eventually mines run out this is true, but sometimes they last for decades if not hundreds of years (the hundreds of years was probably more common before modern methods).

Secondly, with the mines if you read Jared Diamond's† book, I think it is called Collapse, he talks about this in great detail. And the biggest problem with mining is actually what happens when the mine closes. According to his research, nowadays the mining company is required to estimate the cleanup costs, and over the lifetime of the mine they contribute to a fund to cover the cleanup cost. Sounds good, right? The problem of course is that it is the company that estimates the costs, and they have an incentive to grossly underestimate the costs of cleanup. The usual discrepancy is something like two orders of magnitude. Ie assuming a large mine the company estimates costs of 10 million, hands the state govt a cheque for that as it closes shop. Then when the state govt discovers the actual cost is approx 1 Billion (maybe more) the company (which has long paid out all its funds as dividends to its shareholders) shrugs and declares bankruptcy.

I don't think that there is really any parallel in IT in terms of cleanup costs. You could argue that Y2K was similar, but I would point out that wasn't a uniquely mining only problem. All kinds of software was effected, from mining (startups on steroids), farming (slow and steady startups, the tortoise vs the hare), vendors, universities, consultants and even your big software retailers (Microsoft) all had this problem.

Okay, he admits he's stretching the metaphor (on the rack as it were). :D

What about farming? Personally I'm a fan of farming in the software sense, but farming in the real world is a nightmare. Assuming you don't manage to destroy the land, farmers I've talked to say that in good years they are making ~4% (return on capital), and in bad years they are losing 2-3%, and there are more bad years than good years. How do they survive? Typically by taking loans out against the (ever increasing) value of the property. But if the value of the property doesn't keep going up, or if the banks decide not to loan the farmers money, or if there is a particularly bad drought... then farming is much worse than mining and you get farmers walking away from their land, or just dying on it. Jared talks a little bit about how bad mining is, but the main thrust of his book is that improperly managed farming KILLS ENTIRE CIVILIZATIONS. In terms of cost/benefit, I think dirty water from mining >>> extinction. :D

He touches on another metaphor, the Lottery. Lotteries are usually regarded as a bad thing (a tax on people who are bad at math). The problem is that for every $1.00 you put in you get back out say $0.40 on average. In other words, all lotteries have a negative expectancy (with the notable exception of the UK Lottery, because even though you are unlikely to win, at the end of the day you can still get back all the money you spent on it (it is more similar to a savings account with pathetically low interest, and a miniscule chance of some excitement).

Okay, fine, lets take it as given that 'lotteries' with negative expectancy are bad....

If the 'software mining' (ie startup) industry was a lottery, would it have a negative expectancy? I suggest probably not. What if there was a lottery that for every $1 ticket there is a 1% chance of winning $200? That'd be a positive expectancy! I'd play that, you'd have to be bad at maths not to. Moreover, even if it was break even (ie for every millionaire ten people have to gamble and lose their house), as the mining example shows, sometimes there are hidden costs/benefits. I'm guessing that the startup 'lottery' has a positive expectancy (especially in silicon Valley, perhaps not everywhere else in the world), but if someone argued that the benefit to society of all the startups is negative I'd think they were crazy.

An example: I've heard it said that since the beginning of commercial flight in the US that the industry as a whole has barely (or not even) broken even. But to suggest that I personally don't benefit from the ability to fly round the world in 30 hours as compared to sailing round the world in six months is ludicrous. Even if the airline industry didn't make their average investor rich, it provided more than enough benefit to society to be able to justify its existence.

Lastly, and I suspect this is very wall of text so I apologise, there is a logical flaw underpinning Wil's entire thesis. He assumes that somehow the IT industry is special. He assumes if you launch a software company with an exit strategy that is somehow different (bad) compared to say launching a furniture company with an exit strategy.

I think that rather than just assuming that software is different in this regard, I think he should at least try to make an argument to that effect.

†If the name is familiar, he wrote Guns Germs and Steel as well, which is one of those books that lots of people have heard of, but few have read :D