The Book of Graham
leveragedsellout.com
leveragedsellout.com
The site was quiet for a long time and has very recently re-emerged to take on the tech industry - albeit from the perspective of the New York finance type.
Outlandish and uncomfortably true.
The point of satire is not always to "make a point". I don't think it is in this case anyway. But if you really want to see something you could see a criticism of the startup ecosystem that "puts bright people to work by making them shuffle bits of questionable value".
http://en.wikipedia.org/wiki/Satire
Satire is a genre of literature, and sometimes graphic and performing arts, in which vices, follies, abuses, and shortcomings are held up to ridicule, ideally with the intent of shaming individuals, corporations, government or society itself, into improvement.[1] Although satire is usually meant to be humorous, its greater purpose is often constructive social criticism, using wit as a weapon and as a tool to draw attention to both particular and wider issues in society.
1) The intangible benefits of being at a startup (as a founder or early employee) -- working on interesting problems, with smart people, in a well funded environment. You learn things, meet people, get to use amazing tools. (Startups definitely aren't the only way to do this -- academia or, for engineering, some parts of the military or government or big enterprises have some awesome toys, and some world-class experts, and interesting problems, too. But in Silicon Valley, the barrier to entry is really low, and the problems are generally the right size for individuals or small groups to solve (partially) and quickly.
2) The downside to failure is exceptionally low. It's all other people's money (at least in Silicon Valley); your real cost is opportunity, but generally the market values a failed startup founder or early employee at enough of a premium over a member of a later stage team that you can catch up quickly.
3) The EV of upside is both the odds of success (correctly identified as low) and the magnitude of that success. 1% odds in an even game suck; 1% odds where you're given your wager by someone else and you get to keep 50% of the upside and the upside is potentially 10000:1 is pretty awesome. Doubling down on success, moving away from failure, and you can do this 5-10 times pretty easily.
Oh my!
1% odds in an even game suck; 1% odds where you're given your wager by someone else and you get to keep 50% of the upside and the upside is potentially 10000:1 is pretty awesome.
The fact is is someone else's money directly modifies the costs to you, and therefore changes the risk/reward calculation. There is no implication that you wouldn't work as hard simply because it isn't your money.
Answer quickly - how much of your net worth would you risk on a bet with 1% chance of a 1000X payout? Now how much would you risk if you can hand off 90% of any loss you take to someone else?
The difference is what we call moral hazard: http://en.wikipedia.org/wiki/Moral_hazard
Re-read the comment.
An early employee is paid a salary, and they also get options. The OP's point is that receiving the salary and options means your risk profile is different.
There's no moral hazard here, unless you believe receiving a salary is a moral hazard.
The entire reason VCs give you the money is to take more risk. That's, literally, the point.
So you do understand things correctly, yet came to the wrong conclusion that VC were somehow being wronged by this.
The whole point is rich people, investment portfolios, etc. have an entirely different risk profile than individuals. For an individual, low-probability high EV (high variance) is dangerous, which is why you buy insurance -- essentially negative EV (a 100% chance of losing either $1 or $2, but not losing your $1000).
A great read if you're interested in learning more about the history and operating procedures of the sales & trading side of investment banking is Traders, Guns and Money by Satyajit Das. Its sections on credit default swaps and collateralized debt obligations are particularly interesting when you consider that they were written in 2006, pre-crisis (around the same time that Leveraged Sell Out was getting started, in fact).
I mean, your 2) point is critical: I am in Brazil, I am in a startup because I had no choice, and although I am getting paid with someone else money, if the startup crashes, I will go down with it, and go down I mean, get in worse situation than I already am... currently I am struggling to pay my rent and food, if my startup fails, I won't be able to pay rent and food, at all, considering my parents are having money issues too, this mean most likely I would experience real starvation, something that I am not much keen on experiencing.
The reason SV is relevant is because the article is specifically talking about YC.
Would emigration be an option? Since you are on HN, I assume you can program. There are lots of companies in lots of places world wide looking for talent, and paying for it.
Seemly people don't want remote that is not already in the US, and H1B is very hard to get or something.
Also I don't figured how to get in other countries.
Wall Street is all playing middleman with other peoples' money too.
Hmm. Is "generally" right here? Are founders really getting hired at a enough of a premium to earn the ~$100-200k they lost over 1-2 years while failing?
I think "person who is a top 10% but not top 5 Stanford undergrad CS senior" who then goes to found a YC-backed startup which ultimately fails after 2y is ultimately better off than the person who takes the "good dev job" at Google or Facebook. When the founder is looking for a job 2 years later, if it's via acquihire, it is probably a wash on cash (due to taxes...potentially quite ahead); has almost certainly had more public visibility and thus potentially is in a "bidding" situation for his talent, etc. I doubt the 90th percentile Stanford CS grad gets more than $150k cash, $250k total compensation, in year 1, and probably not more than 200k/300k in year 2, at a tech company.
A person at the 90th percentile, all things being equal, probably isn't good enough to get one of the $250-500k hedge fund programming jobs.
Taking the good dev job/employee #1 at the hot startup which happens to do well is better than being founder of the failed startup.
Obviously, the person who starts Facebook is ahead of everyone.
Partially it's that equity compensation (in an acquihire/earn out) is tax privileged, part is that it's essentially forced savings. From $100k to $200k, you lose a lot of your income to basically bullshit -- US/CA taxes and somewhat higher living standard, higher student loan repayment, etc. -- where if you can essentially bet that "pre-tax" on a startup, you probably come out ahead.
I'm not sure how this applies to someone in the bottom 90% of Stanford, or in the bottom 99% of the world. Probably the best bet is to somehow get into a top startup in a role where performance isn't so critical to the ultimate success of the company, usually after Series B, or at a big company.
Someone who is the top CS grad for the year, or who is later in career with exceptional talent, or who has a burning drive for a specific area (e.g. Steve Mann in wearables), has an entirely different analysis, too. At that point what actually matters is role.
I personally am happy doing a startup to accomplish my specific change-the-world goals and would be equally happy doing so at a large company; it's just that it would be much more difficult in ways I don't enjoy at most large companies (budget and multiple hats at a startup; stupid politics at a big company). (If I had more of an aero/engineering background, I'd probably prioritize space, and try to work for SpaceX; as it is, the only things I'd be qualified for there are IT, and their IT is windows shit, and not core to the success of the enterprise.)
Or just buy a lottery ticket. I'd argue the odds are much similar, with much less effort.
> (If I had more of an aero/engineering background, I'd probably prioritize space, and try to work for SpaceX; as it is, the only things I'd be qualified for there are IT, and their IT is windows shit, and not core to the success of the enterprise.)
SpaceX has several IT positions in roles where you're not going to touch a windows box. I know, because I check constantly. Their HR team is apparently not so hot at getting back to the Jobvite apps though, or the bits are dropping somewhere.
No one pays you a salary to buy lottery tickets.
Wage income or RSUs from Google, Apple, etc. are pretty low risk. Wage income and options from a post-B successful company are pretty low risk, too (e.g. if you're an IT guy at Dropbox, you probably make $80-120k in salary, and the bar to be hired as an internal IT support person is a whole lot lower than lead developer at a 1-10 person startup. You'll get some equity upside which is pretty much guaranteed to be worth something -- if Dropbox IPOs at $10b, it's worth $x, and if it goes up to $30-40b (which is speculative), it's worth more -- but it seems unlikely Dropbox would be worth <$5b, and very unlikely less than $1b, and your salary checks from the previous 4 years would not be taken back even if Dropbox somehow goes out of business.
Good luck picking that 7% that won't, AND that's only Y Combinator startups.
Lottery tickets it is.
Also, I didn't know who I was conversing with. Checked out your profile, and am humbled.
rdl is suggesting you pick top startups that are post Series B and which already have multi-hundred-million to billion dollar valuations (think: Stripe, Pinterest, Airbnb). He is not suggesting you join a 5 person YC startup that is still trying to get product market fit. Hugely different categories. rdl is essentially suggesting you work for the roughly one YC company out of every batch that becomes a great success - and that you make that leap when the startup had already proved itself.
From reading your other posts it seems like you are willfully misunderstanding his point.
This may be true for technical founders/employees[1]. I doubt it is the case for a non-technical founder who would otherwise work in the finance sector - which appears to be the case this story is about.
[1] I'm not convinced, but I'll concede it since there is another thread where that discussion is ongoing.
The more interesting point, I think, is not the entrepreneur side of the equation, but the YC side. The author claims that YC is exploiting entrepreneurs. This claim is more interesting (in the social-studies sense) as it seeks to uncover a particular kind of exploitation that's a feature of our current age. First, it's important to point out that this question is completely orthogonal to whether the allegedly exploited person is better off or not. A capitalist could start an iPhone factory on an island full of starving people and pay each a loaf of bread a day; while the people are certainly better off, they're still being exploited.
YC specifically is most certainly not exploiting anyone, as on average it gives companies much more value than it takes. But the question remains on whether the Silicon Valley ecosystem in general is exploitative, and I think the answer to that is yes, although this kind of exploitation is rather mild – I would call it "taking advantage" more than "exploiting". I think those taking advantage are not VCs, but large tech companies. Rather than paying regular salaries to large research departments, the SV ecosystem encourages a lottery-style payoff. Lots of people work trying to invent a novel product, or find an unexplored market niche, and instead of paying them all for their efforts, there's a large prize offered to those who succeed. I think that large tech companies are taking much more value out of this arrangement than they're putting in, so there's probably some exploitation there (in fact, any lottery-style economic construct, be it based on "merit" or sheer luck, suggests some sort of exploitation taking place).
The theoretical economic model for this case is the dictator game[1]. In the dictator game, one player receives an amount of money, and he has to offer the second player a portion of it. If the second player rejects the offer, neither gets any money. Often, the only distribution accepted will be 50% or close to it, but when a rich person plays a very poor person, the rich person knows that the poor player will take any offer rather than go home empty-handed. That's exploitation.
Now, a misguided free-market advocate, not familiar with both theory and practice might say that the islanders do have bargaining power, as they can invite another employer to their island in exchange for a loaf of bread plus a burger per day. But, of course, this can't happen, as the second capitalist knows the first will retaliate on their own islands. This is a digression, but in fact, in a saturated market, the best strategy for competitors of roughly equal size (even quite far from equal) is almost never to compete, certainly not on price. Lowering prices is not an option as your competitor has the resources to do the same, which will result in the same market distribution, only with all competitors worse off. Again, this is supported both by theory and practice.
FYI, a lot of the regulation in the US government came as a result of the US economy under the rule of the robber barons a little over one hundred years ago. Similar to the island story, some employers would pay their employees not in US dollars, but in their own currency, which the workers could only use in stores owned by the employer ("the company store").
Of course, the situation in Silicon Valley is not that of full blown exploitation, since startup founders are not without options. Still, large tech companies benefit from the lottery model, as they profit more from it than from large research departments; the founders, on the other hand, get an unfair share of the cake. In this case, the large companies are not exploiting the entrepreneurs lack of options, but are simply taking advantage of their psychological preference for the lottery. There is more to that, as all parties know that if the lottery were to go away (say VC money stops), and everyone would have to work for the large companies, salaries would drop (that's a sort of a sword those companies hold over the workers should anyone decide to rebel). We don't even need to speculate, as we know that large SV employers already colluded to lower salaries.
Take the dictator's game. The flaw with your model is that it's not iterated. A more realistic dictator's game would be iterated (repeated). In which case over time a poor party can force the rich party to give it a higher share.
You think of exploitation as just something like slavery.
But slavery is too an example of taking advantage of another's lack of options.
In slavery it is: "You either do this or I kill you".
Which is not that different from "You either do this, or you and your family die of hunger / end up homeless".
You either have options -- so you get to pick and you're not exploited.
Or you don't have options, in which case, you either get a fair price for your work (compared to what value your employer gets out of it), or you are exploited.
Sharecropping, the post-slavery solution to keep poor blacks and whites in their place, was also exploitation, based on their lack of options.
i always feel disgusted by this sort of attitude. sure it mitigates risk, but as secular and reasoned as i like to think i am its just morally reprehensible as an attitude to take...
i treat other people's money with /more/ respect than my own. maybe thats just me being backwards.
always taken the attitude that if you need someone else's money to start then you aren't really ready to enter that business. maybe you should start a small business and build funds first... instead of taking a risk with other people's money when the sum total of your experience is approaching zero.
sure its their own fault for investing the money... but that doesn't make it easier for me to swallow.
i do not consider this irrationality to be a bad thing
This is why you take investment from professional investors on open and honest terms, not from people like "friends and family" who feel pressured to do so and may not be in a good position to accept the risk.
I was at a conference recently organised by University College, London (arguably the top science & engineering school in the UK). With no hint of irony, the organiser welcomed attendees - "we're all here because startups are the best way to get rich after college".
In the last week, I've been contacted by 3 separate people I knew from Law school asking me how they can get into startups.
It doesn't matter though, they still lower my overall risk profile by being involved and (I believe) increase my odds of success. I believe it's a square deal.
I also believe that fundamentally if there's a time to aim high rather than minimizing downside risk in one's life, it's your 20s. Furthermore to a certain type of personality (mine) a secure life making a few hundred thousand dollars a year in an essentially mind-numbing profession that does little for humanity is unthinkably depressing.
It ain't for everyone, but I don't think it's fair to act as if it's some sort of sinister delusion projected by YC in order to benefit Paul Graham.
Age is rarely a factor for those who are shooting for the moon, but it's a great excuse for those who don't.
You realize Wall Street bankers make a few million dollars a year doing mind-numbing work that does little for humanity, right?
Maybe others experience wealth differently but it made substantially no difference to my day to day happiness (once the newness of the money had worn off) - but working on a project I feel strongly about makes a strong and lasting difference.
Man lives not by bread alone. Only a simple hedonist is going to find contentedness through a pallet of cash.
Money gets you access to resources to MAKE things, that is why R&D takes so much money. You have to pay a lot of people to think and work hard - only if it's your money you can pay them to think and work hard on YOUR idea and YOUR dream.
Money also gets you the ability to influence change, politically or otherwise. Right or wrong that is how it works, and deciding you are better than that and not playing the game won't stop that from being true - all that will mean is that it will be that much harder for you to actually influence.
So no, money is worthless, it's the things you can do with it that will find your contentedness.
How will having more money make it so I can better sit in a room with a few people I like and build stuff?
I mean it's not like being wealthier will make my Netflix have cooler stuff in it.
1. Not saying we're actually in a bubble. Just pointing out that the last time he was around, he was poking fun at 22 year olds going into finance for absurdly high incomes.
YCombinator is a pretty low risk deal for entrepreneurs too, come to think of it. Perhaps the author misses this point. If your startup does fail and/or you get tired of the startup game, there's probably a large number of companies willing to take you on as an employee, given the skillset you likely had to get into YC.
My favorite so far is this guy that hangs out at a cafe near Stanford that has alienated everyone in his potential "deal-flow" by anger outbursts on conference calls and generally acting like a dick.
My take is, of course, that the narrator is the villain, but that's just me.
The idea that a life is worthless or wasted if you make less money is beyond flawed. It is the most american/capitalist/rewarding thing to make a go of building something of your own.
Being a wall street banker has virtually no social utility. Airbnb and Dropbox improve the collective productivity of society and make real markets in the case of Airbnb. If it takes hundreds of people and millions of dollars failing in an effort to make a few big winners so be it, and when Yc makes money in the process they deserve it. They are taking REAL risk, and it seems the people who emerge from their program are better for it even if their dreams don't all come true.
Finally, the girl next to him is an important part of this little story. Women love men who are passionate, who are alive and who take risks. If all of society fell apart I'd much rather be with a bunch of hackers than bankers, the hackers are creative, passionate, loving and ruthless when necessary. Women understand this and they they love it... because they know they are always safe with a man who can build something. They'd rather eat Mac & Cheese with a man who puts up a good fight before kneeling down THE MAN... or maybe never has to kneel at all.
This article is satire...
http://www.leveragedsellout.com/2014/01/the-founder-hounder/
That you should go into a steady, well-paying career because then you'll be able to impress women by picking up the tab at a fancy restaurant/bar? Or was it just poking fun at YC-as-a-cult?
Either way, it left something of a bad taste in my mouth for both industries.
That IS the intention of the author (make you feel a bad taste for BOTH industries)
The reality is that the accelerator model has more parallels to the investment banking model than many of the commenters are recognizing. Very entertaining to see some commenters trying as well to justify that startups have more benefit to society than bankers or MBAs, in fact hilarious as the reality is that without those "dumb" MBA investment bankers who can attract IPO money to feed the VC's to fund startups, many with questionable and untested business models, accelerators and most startups wouldn't exist.
Thanks for the entertainment, better not waste too much more time and get back to trying to bootstrap my startup.
> To the uninitiated, this is a humour blog that was active until the debt crisis, focused on made up stories and rumors: http://www.leveragedsellout.com/2008/10/remember-the-titans/ .
Above all, startups in SV is something that doesn't have downside to people coming out of college. Even with miserable failures, you would be most likely get aqui-hired with 3-5X better pay package than someone who had worked for a decade in that same company.
However I totally discourage people dropping out of school to do startup. I get truly disgusted when people suggest that option. As Guy Kawasaki used to say, stay in school as long as you possibly can. Rest of your life is very likely going to be in one job or another unless you hit a lottery.
But to be plausible the author had to reinforce the investment banking alternative with a close personal connection between good cousin Eric and someone already established in the industry. It's not that YC's model is perfect, but at least it is nakedly tuned toward making money for YC rather than providing good jobs for one's buddies.
The author focuses on the tangible benefits of working at a startup vs. working in finance (e.g. corporate card, company car, free food), but leaves out the journey which drive so many entrepreneurs to continue to do what they do and what ultimately makes many of them come alive.
It's a stark contrast to finance where many engage in soul-crushing work and anxiously await their bonuses, so they can find a more fulfilling job.
Entertaining read.
Come and work on Wall Street and be evil yourself.
a lot of what he says is common sense and knowledge though. something lacking massively in this community it would seem...
Oh, it's a sarcastic piece. Phew! Wait a minute...
I'm so glad I seized the opportunity to leave Wall Street.
What is going on around YC is absolutely nothing special from a psychological point of view. "If you want loyal workers pay them less, so they would escape from the pain of cognitive dissonance by leveraging the big idea" a textbook says, and goes on about in-groups dynamics and notion of us versus them.
What is interesting is that all this was not created and orchestrated by the evil mind of Paul Graham, and it is not even a sect with him as a great guru. The whole thing was bootstrapped applying that very same bottom-up process he advocated in his technical books about Lisp.
Another part why the whole thing works, which was not mentioned in the pamphlet, is analogy to insider trading. PG has reputation and connections so he could sell teams and/or technologies to "friends".
So, YC is rather remarkable example that good ideas work, while banal practices of housing young naive fools are exactly the same in investment banking or politics or whatever. And it is not risk offloading, it is mere business among connected guys in a valley.
One more subtle difference. Contrary to investment products, which is a cheating by definition, teams and technologies YC selects and sells are "fair" and we could see and use them in our everyday life. We also could see CDS and HFT and mortgage and stock market scams all over the place. This is the difference between finance and tech - it is much more difficult to cheat, and hence succeeded in tech.
YC is the same kind of success based on proper ideas as viaweb was at its time, you like it or not. The analogy with banking is selling piles of java crap to ignorant fools.
The main question I take away from reading this is how the average payout to a young college grad compares on wall street, to the elite VC/startup track, taking away the unquantifiable benefits and focusing on average hard dollars earned.
Of course - that's probably not the comparison to make. Most of PG's stuff was written for technical folks considering entry level technical jobs. I would guess that even considering survivorship bias, the average outcome for elite startup tracks versus entry level tech track is extremely good, considering the jobs it can lead to (would love to hear if otherwise).
It's a little harder to compare for the theoretical econ major from harvard contemplating a wall street track. wall street is not a normal business environment - oligopolistic, heavy regulatory protections - much more like joining a club earning economic rents off capital flows than a group doing much to change the world.
IMHO the main reason people work 100 hour weeks in finance is to prove they are willing to give up everything in their life to make it to the next rung - not because they are doing anything particularly noteworthy or unusual that demands intensive focus. from first hand experience, I've noted most M&A customers have sophisticated in house teams that can run the numbers plenty well on their own, which does raise the question what the six banks typically advising them are doing.
All I can say is - for the average econ major contemplating the future on wall street - it will be really interesting when Amazon (and/or others) decide to take on financial services. regulations can hold them off for a while, but as they eat the rest of the world, it's inevitable hungry eyes will aggressively turn to where the money is (literally) - only a matter of time I'm sure.
Plan accordingly, I say.
with regards to the content - if you take away the "irony" as cover for a legitimate argument, it's still an interesting question to contemplate. for the average econ major (but not CS major), with no edge in technology, compared to the safe average payouts available on wall street, it is probably a bad decision to pursue a tech startup ... which is what makes the parody work.