Startups and The Big Lie
techcrunch.com
techcrunch.com
"Startups run on an alchemy of ignorance and amnesia that is incredibly important to experimentation. Most startups fail. The vast, vast majority of startup employees will never exercise their options, let alone become millionaires while doing it. Mathematically, talented individuals are certainly better off financially going into a profession or working at a large tech company, where pay is higher and more secure."
You will hear again and again and again how "Gee only some choice few people get 'rich' in a startup, everyone else gets 'screwed.'" and people will tell you how the whole "Silicon Valley Myth" is just that, smoke and mirrors designed to dupe fools into giving up their valuable youth so that someone else can get rich.
There is a real problem with the narrative though, its the pesky facts that the Bay Area counties actually have lots of people who have a net worth over a million dollars and a if you count the ones that got that way here and then moved to places like Oregon, Washington, etc. Its an even larger number.
That is because while the typical startup may fail, such that 1 in 10 or even 1 in 15 have successful outcomes, it is "easy" as an employee to work in 5 or 6 of them for the first few years of your career. Just like universities there is a cohort of people about the same age as you, they are all moving through the world, getting older, and then dying. If you are in certain parts of the world the overall probability that you will come out richer than the rest of your cohort is much higher. Three areas that seem to consistently produce durable net worth, banking, politics, and technology.
Next lets talk about lying, which is making a statement you know to be false. Now buy a PowerBall lottery ticket, hand it to your special friend and tell them "This Lottery ticket is a winner." are you lying?
The actual state of things is that the lottery ticket is both a winner and a loser, and doesn't actually become a winning ticket until after a future event, the ability to predict accurately is completely unknown. Your statement has a probability of 1 in 179,000,000 of being true, which means it isn't a lie.
So is this just counting angels on a pin? Yes and no. The reality is that as adults we live in a probability filled universe, will you die today on the Freeway driving to work? Yes you will. Unless you don't.
As a founder, the only way to stay sane, is to invest only in outcomes that are positive, regardless of their probability, until they are proven otherwise. So you absolutely believe that you're going to get the next round of funding to take you to the next level, but that other path doesn't really isn't one where you want to be.
That said, having multiple paths to the winning answer is much better than having only one. Just like having ten lottery tickets is better than just having one, in terms of likelyhood of success, plans that include funding and plans that include restructuring but both end up across the goal should be in your mind. When you have a number of difficult things (with unknown outcomes) in your future that is called "stacking risk", you can succeed but the next step failing kills you, Etc. So as a founder you work to figure out all of the paths that meet at the success side of the equation, all of the events and their outcomes that open or close paths to you, and you run like hell for the goal.
Nobody accuses the quarterback of lying when he tells the wide receiver he is going to through the pass to him, only to be sacked behind his own line of scrimmage.
Startups are risky endeavors in an environment that doesn't care a bit about whether they succeed or fail. And there are a lot of things you can't know about how the future is going to go. But it is also not, in general, a game of abuse where some privileged elite are fleecing the chumps out of their lunch money, despite what some disgruntled people feel about it.
I've been here for nearly a decade now. I know a fair number of people who have become genuinely rich (i.e. have fuck-you money in the bank), and people who are theoretically rich on paper.
With only a few exceptions, the genuinely rich people were either founders, long-time insiders at public companies (i.e. Google, Facebook, etc.), or (very rarely) early employees at smaller companies that had an exit (as in, employee numbers lower than 5).
Of the people I know who are currently theoretically rich, most are tied to "unicorns", because they can't sell their insider shares. Maybe these people will end up actually rich, maybe they won't.
But most of the people I know who match the profile you describe (i.e. worked at a few startups as a not-super-early employee, of which some succeeded), are doing okay, but are nowhere near retirement, and certainly nowhere near fuck-you levels of wealth. The expected value of the lottery seems to be something like a few years of market-rate salary at a big company.
What you're seeing in the bay area is the legacy of decades of this kind of wealth accumulation. Millions of people, taking 50+ years worth of chances, over a series of successive economic bubbles. Said another way: you're underestimating the denominator on the probability.
But I think more importantly we need to differentiate a bit between rich and wealthy. If you want to pick some number and say "that is rich" (which is often the case with 'fuck you' money type statements, that is fine. However I define it a bit differently. Do you own your home outright? Are your kids undergraduate college funds funded so they don't need to take loans to get a degree? Do you have enough money in the bank to pay for food and utilities for the rest of your natural life time? I think of that as "wealthy", you have lots of choices. That number though is a lot lower than the number that typically people use.
For me, when having these discussions it helps to understand the 'expectations'. The number of people who own their own jets, multiple vacation houses, and have paid staff to manage their affairs? Yeah, that is a pretty high level of extreme wealth that you're extremely unlikely to achieve, however I would estimate that every one of the first 2500 employees at Google, NetApp, Sun, Oracle, HP, CA Associates, Electronic Arts, Ebay, Netscape, Amazon, Zappos, hell even pets.com had an option at one point to buy their own mortgage. So were they "rich" by your definition?
And its fair to say "gee Chuck but yeah looking back its easy to see companies that did well, what about these days?" and the answer is really that you only know by looking backward, if you could predict the winners the world wouldn't work quite the way it does.
This the following statement however, deserves special attention.
> But most of the people I know who match the profile
> you describe (i.e. worked at a few startups as a
> not-super-early employee, of which some succeeded),
> are doing okay, but are nowhere near retirement,
> and certainly nowhere near fuck-you levels of
> wealth. The expected value of the lottery seems to
> be something like a few years of market-rate
> salary at a big company.
No one should expect that any more than they should believe that buying one lottery ticket will solve all their financial problems.
However what many have been able to do, is work in technology for 15 - 20 years and get enough money to cover a comfortable existence, save for their kids college, and buy some property. The result of which means that the last third of their life will likely be as comfortable as the middle third.
Certainly some of the current unicorns will likely become non-unicorns at some point by going public or by merging with a public company. At which point some of the illiquid wealth of some of your acquaintances will unlock.
> What you're seeing in the bay area is the legacy of
> decades of this kind of wealth accumulation.
Oddly enough, for many people that is the definition of "winning" in life. Not a big bank balance.
If you're frugal, and invest wisely, you can do the same thing with a plain corporate job. And while it may not be as "cool," at least they don't ask you to work excruciatingly long hours like a startup (well, some do).
Yes. You can say 'I believe/think this lottery ticket is a winner' or 'This lottery ticket could be a winner' and those are not lies. However the statement you discuss is a statement of a fact that you know is extremely unlikely to be true and is thus a lie.
You can make statements of fact about things that you are reasonably certain are true and will generally not be called a liar. However you will be being more honest if you qualify that statement of fact by as to the amount of certainty you have.
The point of this article is that deliberately expressing a level of certainty that you know doesn't match the actual certainty is lying. There are ways to express confidence without expressing certainty.
> Nobody accuses the quarterback of lying when he tells the wide receiver he is going to through the pass to him, only to be sacked behind his own line of scrimmage.
Due to the context people know that "I will throw the pass to you" is intended to mean "I will try to throw the pass to you.". The same thing does not generally apply to interpreting "This lottery ticket is a winner" (a lie) to mean "This lottery ticket could be a winner" (not a lie).
When I tell you that the lottery ticket I'm giving you is a winner, you probably understand that it is only a winner if the numbers are drawn at the correct time. You might ask, has the draw already occurred? (knowing that to be the critical feature) and I would either say "Yes" and you would know that I was literally accurate in my statement, and if I said "No" you would know that I was probabilistically accurate in my statement. You would then act in your own self interest based on your understanding.
So if I'm a founder and tell you that the company I'm trying to hire you to come work for is going to be a huge success. You might ask "What are your current success metrics?" or "How much revenue do you have?" And based on those answers you could tell if I were speaking literally or probabilistically.
The "interesting" (from the philosophy point of view) is the statement "This lottery ticket is a loser" is just as much as accurate as "This lottery ticket is a winner" because the operation is binary.
For every startup (or company) I've ever been in, or recruited people to come work for, I've been very clear about what is the upside and what is the downside. And generally people understand that. And I have heard people (and people have pitched me) with outrageous "sure bet" sort of things. Which I have politely, and respectfully, picked apart at the places where I have concerns. The most recent was last week when I listened to a pitch for a new product idea to connect people and jobs. I idea is really clever, if you have a critical mass of people who are looking for jobs and people with jobs participating. But there is a huge gap between the world of today, and the world where all those people are participating. If that person wanted me to believe that there was any chance it was going to be a huge success, I would have to believe they could get a critical number of people on board. They don't yet have a way to do that, so I don't yet believe they will be successful. They are completely honest and forthright about the potential success, once they have critical mass, so I don't consider them to be lying to me when they say it will be a huge success. I just know that they don't yet know how they are going to get there.
The original article was a sort of 'wake up sheeple' sort of call to action but I felt that was completely unwarranted. Sure there are some new folks who, in their first job, might feel like the possibility to suddenly be a billionaire is just around the corner. Just at one point they may have believed that all college courses are trivial. But experience teaches us to think, and when we think about startups we have to think critically about the likelyhood of various scenarios coming true or not.
> why can't founders disclose more?
Have you heard the paradox about if you found out that in the future you would be able to time travel, and so in the present you slack off on an exam knowing you can come back and fix it later, but slacking off results in you not discovering time travel?
There is a similar one in leadership where if you, as a leader, express doubts about the future your team will have doubts about the future and then they won't be operate at the level they need to in order to succeed. In some cases folks will believe that if they share all the information it will spook their team and make the negative outcome even more likely. Of course you can't know that until you actually try it, and once you try it you can't reverse it. Not surprisingly, one of my personal stress 'nightmares' (dreams I get when I'm under a lot of stress) is that I've just done the one thing that, having done it, it is now clear it is going to make for a worse outcome.
I don't doubt there are times when extra transparency would be a positive, and where it would be a negative. And I understand why people, unable to predict if it would help or hurt, choose not to be more transparent.
Also, I feel like the article directly addressed your, imo, somewhat dated impressions. In the new unicorn world
(1) startups take much longer to go public: there was a recent discussion here about how exits have now become 7-10+ years on average
(2) companies aren't shy about preventing employees from selling: viz examples in the article, or the cto of another startup (I originally wrote slack but my memory was incorrect) on here describing how they effectively prevent even fully vested employees from leaving (while often the cto/ceo/c* are allowed to sell a million or two, if they aren't already wealthy)
(3) unicorns taking huge rounds often give the next round's growth to the current employees and create giant preference overhangs; this is the flip side of raising a huge round if you can
Does the above mean nobody makes $1-2mm? Certainly not, but it does shift the probability distribution.
In (1) the challenge is that internal valuations means that folks who cannot get stock cannot participate in the growth of value, however as an employee with a stock option you do get to participate in value growth. If you join and your option's strike price is $1 and when that company goes publiic its worth several billion, your stock value will reflect the growth during your stay in the company.
In (2) there are things you can do, and things you can't which will be controlled by the company bylaws. That said, if the company has a lot of "sweetheart" deals just for the executives then you already know its a screwed up place and you might want to seek out a different place to accumulate value. Some companies are run by people who are ill suited to be in that position, recognize that and leave, it isn't like there is a scarcity of positions around. Further, if you've been in this situation you can (and probably should) ask when you're interviewing if there are any provisions for employees to see their stock as part of a fund raising round.
Here too, one needs to understand stock and value. Typically a privately held company will have two classes of stock, one called "preferred" and one called "common". Preferred stock is usually sold to investors, and sometimes given to the founders. Common stock is usually given to employees.
Preferred stock carries special "powers" in the privately held company, it may have preferential liquidation rights, it may get to vote on board decisions, it may have resale rights. Common stock typically has no special rights.
But none of that is important when the company goes public, because all shares turn into common shares (although there may be different voting classes like there are for Google shares). It is also true if the acquisition price exceeeds the liquidation preference for the preferred stock. Some money, and/or stock from the acquiring company will filter down to people with common shares.
I completely agree with you on (3). The preference overhangs are bad for employees, and I think they are bad for founders too. So if you are a company that can't go public and you don't have enough revenue to continue operations, that may be your only choice. Or you can just admit you're dead and exit. But back to my original point the founders are going to have to believe that with this next round of funding they can get to a viable selfsustaining business. You don't have to buy into that as an employee, you can say, "I'm just not seeing it." and move on. The founders don't get that choice.
SV's second biggest lie is that you need the so-called "hockey-stick" growth curve to be competitive in order to be successful. This lie is clever because you're so caught on hockey-stick that you forget to question the premise of competitive. In the beginning of founding your startup, knowing about your competition might help you build your own product, but worrying about your competition is worthless because the world is more than big enough for the both of you (especially considering you don't exist yet). And if you don't have overhead (i.e. you didn't take SV money and hire a ton of SV's cleverest and most paid engineers), the world will always be biggest enough for you to survive.
SV's third biggest lie is coffee can replace sleep. That's not true, and one of your organs (usually your liver, but I've heard stories of kidneys, lymph nodes, beards, and even ovaries) will let you know after a bit.
2. The hockey stick is mainly needed to deal with impatient investors, not in itself. If you had a stable supply of money, you could grow over any number of years, but without showing the right graph its hard to raise money.
3. At least in SF you have a pool of clever engineers or cofounders. Its not like that in all places.
I think it really depends on what kind of company you are building. If its something startup oriented like APIs, or any fad (like IoT), SV is your place. If you're in a capital intensive business, SV is again you place. If you're solving problems for tech companies.. then again. And if its social, you'd be cool if you're in SV and backed by an SV firm. You need the networking and coverage to succeed, and its much easier to come by in SV.
If you're making enterprise software, real hardware products, SMB tools and apps, then you can be anywhere else really.
Besides, SV has that startup vibe going for it. Its not quantifiable but it sure energizes to some degree.
It buys you into the echo chamber. Unless your customers are in the startup world, this probably doesn't matter for your business.
Pick a business category that isn't technology or software. Very likely, all of the most recent successes in that category were founded outside of silicon valley.
"At least in SF you have a pool of clever engineers or cofounders. Its not like that in all places."
It's not like that in all places, but it's way better than people pretend. The unemployment rate for a good engineer in the valley is negative -- everyone is being poached by identical-sounding startups, all the time. So you're really just paying substantially more for access to a group of people who have worked at other tech companies.
...meanwhile, many of the best engineers I know continue to live outside of the valley, and work for a fraction of the going rate.
Heh, I've always viewed these people as the people selling shovels during a gold rush. Good on them.
It buys you mass, global media. Its pretty much why AirBnB is anywhere close to as recognizable as VRBO, which has been around and profitable in the same space far longer.
> Pick a business category that isn't technology or software. Very likely all of the most recent successes in that category were founded outside of silicon valley.
Unless you broaden "technology and software" as a "business category" so broadly as to be meaningless (e.g., to include every business that uses technology or software, no matter what it it actually selling), that's rather dubious.
I suspect this might be overrated though. In SF you're competing against a lot of people looking for these people, in the midwest or east coast, not only is a lot of talent untapped, but you're competing against fewer people trying to get that talent.
That's not even greedy...at $3500 a month for the median one-bedroom apartment, even the lowliest employee should be demanding $140k for a job here.
[1] This is not a brown number. It's a salary that I know real, non-exceptional new-grad engineers are getting, in San Francisco, today.
A laid off software engineer will probably have simpler time finding the next gig in SF than Tulsa.
I lived in LA for fifteen years and there was always a sense in the air that your life could change with a chance meeting at a coffee shop. You always wanted to be prepared for that chance. While LA might be (still mostly but changing) about the entertainment industry the same I think can be said about all the large West Coast cities. Opportunity is around the corner. Entrepreneurship is in the air.
I have noticed that vibe in New Delhi, London, Barcelona, and the West Coast where I grew up. I distinctly did not feel it in Spain outside of Barcelona or in Paris. In New York there is a distinct energy but with so much going on there I cannot tell if it is entrepreneurial energy. Same with Tokyo. Where I reside in the Midwest I have to go to meetups to find something close to it but it isn't the same.
(There are so many more places I want to travel!)
Basically, when I am around that vibe I think it unleashes an extra level of creativity within me. That is why I visit as much as I can.
While SFO may have a good talent base, those engineers already have jobs. Fewer and fewer people are willing to relocate not just because the rent is so expensive but because housing is largely unobtainable for any price.
I would love to live in San Francisco but not now. Perhaps after the crash comes.
I don't think anyone in the valley is saying that. I think what they actually do say is that if you want to build a $BN company, the best place to do that is in the valley - which I think is probably true.
Look. Something like 80% of the world's Venture Capital money is in the valley. It has the highest number of exits and the most concentrated group of developers. So if you want to maximize your chances of massive success that's where you go.
Just like if you want to be an actor, you go to LA, or if you want to be an Ibanker you go to NY.
The magic internet hasn't been able to revolutionize away any of the basic realities of economics.
In other news, I hear that Amazon just turned a profit for the first time! ;)
You're right, but it's important to note the distinction between startup and a small business. Category changers generally rely on influx of capital to scale up and gain advantage of economies of scale. Businesses that depend on network effect also require high growth, and it's usually bought with capital.
http://paulgraham.com/growth.html
"Millions of companies are started every year in the US. Only a tiny fraction are startups. Most are service businesses—restaurants, barbershops, plumbers, and so on. These are not startups, except in a few unusual cases. A barbershop isn't designed to grow fast. Whereas a search engine, for example, is."
It's all about what you're aiming for. I have to make a living, but I want to change the world. To do that my company would have to scale more quickly than revenue would allow, so I must raise VC.
While you may not lose actual money with a failed startup - that is, if you have the G-d Given Sense to save some of your salary - failed startups, even many successful ones have many other costs.
A close friend and coworker at Live Picture became homeless. He's doing well now but when he told me of his plight I was concerned he would take his own life.
Consider the essays the Elon Musk's ex-wife likes to write about how to become a billionaire.
My own divorce had quite a lot to do with my own effort to succeed in business. I did not have funding because I did not pursue it, but had I sought funding our marriage would not have lasted as long as it did.
Hahaha, I lost it at this one. Thanks for the laugh!
Why does everyone have to try to be the next Google?
Why isn't it okay to start a company and just want to build it consistently and be profitable from the start?
I get that it's the nature of the types of businesses that get VC money. I just don't get the hype attached to it.
You are setting yourself up for failure, especially by telling everyone that you are "killing it" and your new product is going to "change the world".
That is just asking for failure. You don't have to "Kill it" to be successful and you don't have to change the world to be a good person.
It actually makes you look naive and stupid when your "start-up" fails because you were bragging about it for the year or two that it existed.
It is "ok" and done all the time, all over the world. It's just not exciting or newsworthy. Just look at dry cleaners - they are everywhere, and usually family owned small businesses that do well enough to put kids through college. In some cases they are even using exciting new technologies to make the process more efficient. It's not exciting though Maybe you don't need that, which is also ok, but there is no sense in vilifying that.
The people doing startups are self selecting as people who want to be involved in something that impacts a lot of people, very quickly. The Valley is full of people who want to do moonshot exciting stuff - even if it doesn't seem exciting to a lot of people outside of it.
Early on, it's simpler to function as a small business; one which caters to a niche sector of the target market. One which thoroughly understands the needs and satisfactions of customers in that niche. One that creates a solid, self-sustaining feedback loop within the company to address those needs before moving forward. Putting the cart before the horse hurts worse than dying from not having any customer's at all.
There's a natural progression to how large companies grew from children to fully-functioning adults. It's akin to using a slow cooker vs. throwing the steak into a microwave and wondering why it doesn't taste good.
You will have a hard time attracting good talent if your vision is to become a decent small business.
With startups, we have seen the individual gain success for themselves and the money backing them What we see here finally happening is that the success of startups depends upon people who are becoming more aware of their own contributions to the process. "Technical cofounder", "non-founding cto", early engineers, etc. are starting to question the asymmetric relationships.
Yes, engineering talent is available, but the execution of a startup in this day and age is nearly on par with the idea itself. Those engineers that can take your idea, run with it, help grow the team, and make it successful are aware of their talents and at a premium. Even worker-bees hired for a particular task are understanding their role and often more important than the management layer hired to shield them from the founders.
Interesting times we are in.
"For one of the most hyper-rational populations in the world"
and yet the essay uses that phrase without irony. A better term might be "bounded rationality":
https://en.wikipedia.org/wiki/Bounded_rationality
For certain narrowly defined aspects of career and business, the people in Silicon Valley demonstrate rationality. Yet, as the essay itself makes clear, in many other respects, the people in Silicon Valley demonstrate remarkably high levels of irrationality.
No we don't. What everyone needs is a higher level of tolerance for the risk. The "Big Lie" was simply a way for people to cope with the risk. The over-analyzing is a current way to deal with a risk. Both ways doesn't solve the basic problem: not all humans are ready to take risk.
ps -- valley ethics go like this: my employer just had layoffs; we let an engineer hired 7 weeks previous go. He was an immigrant, and I don't know if he was on an h1b or he'd gotten his green card. It's a giant dick move either way, but a super giant dick move if the former.
The advent of software means more complexity can be codified so we will see smaller firms and more outsourcing (socially beneficial) but, if you need to hire someone, it basically means you cannot find a suitable replacement in the market.
This may of course be your fault - but still :-)
The break down might look like this:
($100-$120/hr contracting + 0.025% equity)
- 20% time to company x
- 20% time to company n
- 20% time to company z
- 40% time to company y
That said, startups are desperate to hire, so it's possible you could pull this off.
That is unfair competition.
The cutthroat business practices of SV seem to be evolving faster than technology itself? I guess it's true with every sector of business these days, including non-profits?
The GOOG shares held by Larry Page and Sergey Brin give them control that its publicly traded shares do not. I don't know either way about the shares obtain through employee option exercises.
Stocks are authorized in a sequence of "series": Series A, Series B and so on. What series are your options from? The corporate bylaws sometimes grant different rights to the shareholders from different series.
http://www.warplife.com/tips/business/stock/venture/capital/...
My Live Picture stock certificate sure looks nice. I dont really know but would be unsurprised were someone to tell me I was the only one to exercise our options.
It's not just startups, most businesses of any sort fail in their first five years. While there are advantages to funding there are disadvantages too. Even if you don't blow your VC on aeron chairs and craft beer you must sell a product or service that, while perhaps not profitable at least conceivably could be, and ship it so that it achieves convincing market penetration by the time you burn rate has burned the round you are presently burning.
Most arguments for self funding focus on the dilution of equity that comes with investment but there are many other arguments. Another is that if you fund your project yourself you don't have to answer to anyone.
Whether that is a good thing depends on your own judgement; don't self fund a product that does no one any good.
Every last one of us has the capacity to create a product that could could earn us a tidy living, maybe pay a few employees. At that point we face a choice: improve that one offering, or use some of the cash to fund something completely unrelated?
There are many good arguments for each of the two choices. Ball Metal Container makes every pop can in America. Nokia at first made rubber boots while the predecessor to IBM made bacon slicing machines.
I grant that there is appeal to working for a startup: it's nice to be noticed. I contributed to some products that were huge hits at trade shows. I would make my Mama proud were I to make front page at the Wall Street Journal.
By contrast self-funders often labor in obscurity, sometimes poverty for years. Even so, many succeed, often spectacularly so, as did the father and son who invented Flow Hive, and improved way to harvest bee honey. Their is some possibility that Flow Hive all by itself will reverse colony collapse disorder, in that it makes beekeeping far more accessible to the nonspecialist.
In my own estimation venture backed startups are no more likely to be in business ten years later than the sole proprietorship.