This is in direct rebuttal to a TechCrunch article by Adrian Fortino that asserts that “Early Exit Disease”, meaning a willingness to sell one’s company at a low price due to risk-aversion and a lack of ambition, is what prevents the Midwest from becoming a center of technical innovation. He’s mostly wrong. It’s not Early Exit Disease that’s killing the Midwest (and New York, and even the Valley). It’s just Exit Disease. In the VC-funded world, these companies are not built to last on their own for ten years. They’re built to be sold, either to dysfunctional large corporations forced to “acqui-hire” talent at a panic price, or to the public markets.
When a company is built to be sold as quickly and risklessly as possible, innovation in a technical or cultural dimension is generally unaffordable. Technology companies should strive for the ideal of open allocation, which enables a large number of employees (instead of a protected, and often resented, few) to participate in innovation, but if anything but a sale in 3 years is to be regarded as failure, you will instead see the aggressive closed allocation of “Agile Scrum“. This is exactly what you’d expect in a world where CEOs plan for sales rather than building toward a long-term vision: a CEO who expects to eject within the next 3 years is not going to give a damn about company culture.
The current startup world, in truth, combines the worst of both worlds between the short-term and long-term orientations. Highly-compensated employees are expected to take most of their pay in the form of illiquid equity that may or may not pay off at some unclear time in the future, but with the aggressive race-to-sale attitude that the VCs require the company to have, they’re all forced to chase after short-term targets and to mind unreasonable deadlines. The result is the proliferation of boring companies (because they can’t afford technical risk) with uninspiring, command-and-control cultures. At one time, the startup world may have been populated mostly by highly-compensated experts at the top of their game, but now it runs on “Agile” commodity labor: inexperienced, cheap, untalented and sloppy programmers hired en masse and steered into open-plan bullpens for reasons that have more to do with appearance (investors like open-plan offices) than productivity (at which, these offices are disasters).
What does this have to do with the Midwest, noting the geographic aspect of Fortino’s claim. What’s wrong with the Midwest? Is there something wrong with the Midwest? That’s a big topic, and I’ll have to take it on some other day. Fortino says, “There will never be a true Silicon Valley clone in the Midwest”. I agree. That’s a good thing. Silicon Valley was at its best when it wasn’t trying to be something else. Now, at the upper levels, it’s a second-chance purgatory for people who couldn’t hack it on Wall Street, and the results are pretty awful. There’s no value in trying to clone Silicon Valley, a process that is likely to transport the negatives as well as any positives of that culture. The current Silicon Valley’s way of doing business is used up, played out, and now in mediocrity mode. There’s still money to be made in that game for the well-connected, but trying to replicate it in Ann Arbor or St. Louis is a waste of time. Beating Silicon Valley requires doing something fundamentally different, and the first step is realizing that (as California entrepreneurs did in the 1980s) top technical talent is, once again, undervalued… and figuring out a way to find, deploy, and compensate such talent in a way that existing players do not.
As far as I can tell, Fortino’s central thesis is that the Midwest lacks the massive exits that “create” millionaires in large numbers. He credits Facebook for turning 1,000 employees into millionaires, and argues that their conversion into angel investing is what keeps the Valley going. There are several problems with this claim. First, which is better for the world: one company making 1,000 people millionaires, or a hundred smaller companies making 10 people millionaires? The former is news-making, the latter is more ordinary, but adds more benefit to society. Second, let’s be honest about who makes most of the money in those big exits, aside from investors (the house always wins): executives, not engineers or technologists. These aren’t garage startups making new millionaires because the core ideas happened to just be that good, but bureaucratic companies that have tens or hundreds of non-technical VPs by the time of liquidity. Now, I’m not saying that these people are necessarily less deserving (that would be another topic) of payoffs, but they’re not exactly the sorts of people who are known for vision. Are VPs of BizDev going to build the future with their million-dollar payouts, or are they going to fund their B-school buddies? Thirdly, it’s not angel capital that makes Silicon Valley what it is (for good and bad) but the local venture capital industry. Angel investors participate because the venture capitalists are there, and not vice versa, so the driver is Sand Hill Road, not the network of well-unemployed new millionaires that liquidity events leave behind.
The Midwest is not, and cannot be, Silicon Valley. It probably has more talent in total, but it’s spread out, and I don’t see that changing. It’s a 7-hour drive between Chicago and Minneapolis. While I think that the long-term economic prospects for this region of the country are strong, I think that it will start to shine when technology moves into a post-locational phase, and not before, because there isn’t an obvious winner (like San Francisco) among the much larger set of high-quality locations. Cities like Chicago and St. Louis are going to need interconnection and alliance on a global scale, and not the insular arrogance that we’ve seen in the Bay Area.
More to the point, though, I don’t think that the build-junk-and-sell-it game has much gas left in it, and I certainly don’t think that there’s enough opportunity for those who enter it, this late in its cycle, to justify the cultural sacrifice. We need to think differently: to get back to creating companies worth caring about, in a technical and cultural sense. This isn’t going to be achieved by chasing “unicorns”. It’s going to require tackling the under-capitalized mid-risk/mid-growth (that is, targeting 20-50 percent annual growth, but without the chronic existential risks of the VC-backed unicorn, and with a focus toward becoming profitable) space; that is, the companies too risky for bank loans but not risky enough for headline-obsessed VCs. It’s going to require transmuting the coming startup downturn into something else: a Flight to Substance. Should it happen, it may or may not occur in the Midwest, but there’s no reason that it can’t.
