I’m getting to the point where I think we should add startup to the list of banned words. “High-risk small company”? That’s fine. “Experimental niche endeavor”? Go for it. However, I think it’s time to retire both the word and the baggage associated with “startup”. It implies the existence of a world that isn’t there anymore, and has been grafted on to an undesirable social arrangement: the gradual loss of status for a generation and an important but socially marginal set of people: the most talented technologists. “Startup” used to mean something. It meant, at one time, “what we’re doing requires so much autonomy that we had to spawn our own company.” Now, “startup” is often just an excuse for shitty management, stagnant compensation, unreasonable deadlines, and high turnover, “because we’re a startup.” Or, worse yet, a (shudder) lean startup.
The Golden Age?
I have mixed views about nostalgia in general. It’s a powerful rhetorical appeal to claim that things were better in the past, while people leave out various conditions that make the comparison more balanced (and, usually, favorable to the present). For example, it’s easy to say that college has degraded into an anxiety-fest for young careerists, who mix pre-professional social positioning with empty, forget-the-world debauchery. Sure, that’s true. It’s also easy to compare that to a more genteel time when college students had assured sunny futures, and graduation was a positive event. What’s dishonest about that comparison is the fact that, in “the Golden Age”, very few people had access to college in the first place. It brought access to a better life than it does now, but one had to already be pretty well set to get in.
Generally, when people make nostalgic comparisons, one of two things is happening. The first is that they’re comparing their existences as average peasants to the lives of elite people in the past; that’s obviously an oblique comparison that will produce inaccuracy. The alternative, and less common, possibility, is that they’re missing certain conditions of the earlier time that make comparison difficult. For example, Northern California in the 1970s had a lot more in the way of opportunity than it does now; in large part, that’s because the area was less developed, but also because people were less mobile than they are now. There was a time when only executives did national job searches; now, even grunts do, and the result is that the market equalizes, the superiority of opportunity in one geographical area vanishes, just as an arbitrage does. Now, I’m pretty sure that this pattern of behavior (national job searches for mediocre positions) is too unhealthy to last forever. It seems to be an artifact of a long-standing terrible economic situation and a generational crisis. Cross-country moves have too much of a mental health load for people to continue making them without genuine career progress. Either our economy will heal (making that movement unnecessary, reducing real estate prices, and gradually bringing the country back to prosperity) or it will sicken (leading to discouragement, social decline, and widespread disengagement) and either way that pattern won’t live forever.
The most important thing to remember about Silicon Valley’s “Golden Age” (1970s to mid-1990s) is that the region was only a “hotspot” for a certain set of people. Those who couldn’t stand to work in stifling, hierarchical companies and accept compromises on technical excellence, design, and autonomy gravitated toward a part of the country that, at the time, had a very low cost of living and an educated populace, much like the U.S. Midwest today. The East Coast establishment saw them as weirdos and misfits, and this social disapproval was the “missing” factor that nostalgia overlooks. That’s why so few people gravitated toward what turned out to be an amazing opportunity. In 1975, few financiers would have preferred dealing with nerds out in California over stitching together billion-dollar companies. The former was seen a career sand-trap and a dead end; the latter was what almost everyone wanted. Accent on almost. There are the genuine weirdos (and I mean that positively) out there who can only motivate themselves with the absolute most interesting work. Those were the people who built Silicon Valley– before it devolved into a parody of itself.
A contemporary taxonomy of the StartupFactory
What made startups great, in their Golden Age? And why has this “startup ecosystem” engine ceased producing great things, instead being an HR pipeline for large, dying corporations?
The fundamental trait of startups is that they’re small, but that they believe they have the potential to be large businesses, or even “movements”. They often develop a cult-like narrative surrounding how they will transform the world when they are Google-sized entities. Why are these businesses small? What’s the signal sent by their size? Well, it can mean one of four things, so below is the outline for a taxonomy of so-called “startups”:
- The company requires very high levels of specialized talent, making personnel growth a limiting factor, or wishes to maintain a high-quality culture (cf. Valve) that is incompatible with rapid growth.
- The company is extremely new and has not had an opportunity to prove itself yet.
- The company exists in a niche where business opportunities are limited.
- The company is poorly capitalized because no corporation would accept the idea, and its backers have little faith in it, forcing it to operate on a shoestring budget relative to its ambitions.
Most of the positive associations with “startup” come from Type-1 small companies: those that haven’t grown rapidly because the work they are doing is of very high quality, requiring selectivity in personnel. These startups generally hire conservatively, but they pay well and retain a maker-focused culture for a very long time. If you want to do the best work of your life, choose a Type-1 startup. The downside is that Type-1 startups can rarely grow faster than 30% per year in terms of personnel. There are no hard limits on their economic (e.g. revenue) growth, but this would usually mean a workload that grows faster than the ability to hire.
Next are the Type-2 small companies, which are the genuine prospects. Unlike a Type-1 startup, the work isn’t off-the-charts interesting. In fact, most of it will be mundane and painful. Also, a type-2 startup hasn’t yet been seen by investors, so it usually entails living off of savings. However, the rewards of success are very high. A Type-1 startup will usually evolve into a lifestyle business; a type-2 startup might end up going public.
Type-2 startups will generally evolve into one of a few states after engaging with the market. Some fail, some turn into type-1 “boutique” firms that trade on the high average quality (at a level impossible for a large enterprise to maintain) of their people. More often, investors turn them into Type-4 startups. I’ll get to those, later on.
Type-3 startups are generally not considered to be startups at all. Investors often deride them as “lifestyle businesses”. It might be worth it to work for one for the learning opportunities, or if there is a chance of converting it into a type-1 business; but with a typical subordinate position, use it for recovery if the pace is relaxed, and jump ship if it’s not (don’t work for a “lifestyle business” that expects you to pull all-nighters).
The Type-4 small business is what most so-called “startups” in the VC-funded world are. These are unproven businesses whose ambitions exceed their resources, which means they have to operate on a shoestring budget. They’re constantly working to tight deadlines, asking investors for more money, and piling on technical debt while investing nothing in the career growth of their personnel (except executives, who are setting themselves up to be founders and investors in the next gig).
It might seem like a stretch to call an unproven type-4 business that has raised $50 million “undercapitalized”, or to say it’s on a shoestring budget when it’s paying software engineers 80 percent of what they’d earn on the market, so let me explain what I mean by that. The problem is that, in order to raise such an amount of money, the company has to make promises to investors that would be stretches even with $500 million on hand. Venture capitalists have created a world in which, for all positive values of X, a company cannot raise $X without making promises that leave it disastrously undercapitalized relative to those ambitions, forcing the company into a state of rich poverty. Of course, most of these businesses don’t deserve to exist at all, so my statement that they’re “undercapitalized” is not a normative one.
What kind to work for?
Each of the four types of startups has positives and negatives, so let me get into those for each in assessing the personal decision of whether to work for a small company (“startup”).
Type-1 startups are very selective in hiring, and usually can only afford to hire when there’s a very high degree of fit. You won’t get a job at one of those companies as a generalist or an unproven software engineer, so they’re better places to look once you’ve established your career, and not in the building years. I wish it were otherwise, but the truth is that type-1 startups usually can’t afford (in the way that large corporations can) to hire generalist talent and train it in-house. So the biggest drawback to the type-1 startups is the difficulty of getting in. Even when such a company likes you, you can expect to wait months on a client deal or a change in the business environment before it can take you on.
Type-2 startups pose a different and severe risk. They can’t pay you. You’ll work for nothing and, if the company fails, you’ll have a meaningless name on your resume and your level of credibility is lower than it was when you started. If you’re not a founder, don’t get involved. If you are a founder, make sure you can afford to lose whatever capital you’ve set aside for the effort.
Type-3 small companies don’t have the rapid growth potential that is typically associated with “startup” and, because of this, they’re rarely going to make a person rich. The partners might draw enough passive income to maintain an upper-middle-class lifestyle, but rising from the non-partner ranks to partnership is very rare, and even salary growth will be modest. The negative of these companies is that you tend to hit a ceiling pretty quickly, because the company can’t expand enough to make room for everyone.
So, between types 1, 2, and 3 of “startup”, I’d argue that there’s no reliable way to make a career out of these. Type-1 startups require specialized skills that might not be in demand 10 years from now. Type-2 startups munch your savings, unless they succeed with so much fanfare that you never have to work again, and you’re beating away invitations to venture capital funds. Type-3 startups, unless they have the prestige to make your career, are not an avenue toward growth; you’re best to get in, learn what you can, and move up-and-out because “up” doesn’t happen much in those.
What about type-4 startups, the ecosystem around which I’ve called “VC-istan”? Well, it is possible to make a career (if a declining one, with age) out of those. You can hop from one to another as you wish. That’s the good news. Why? Because they’re always hiring– even when stagnant, they have turnover– and not especially selective. There will always be jobs at the type-4 “startups”. The bad news? They’ll ruin your career, and they have all the negatives of “startup” (poor management, division-of-labor issues, low job security) but none of the benefits. Type-4 startups aren’t small because they’re elite (type 1) or brand-new (type 2) or in niche businesses (type 3). They’re small and “scrappy” (read: poor) because they’re shitty companies working on things no one wants.
Denial
If these type-4 startups are so awful, then why do so many good people end up working for them? The answer is that the U.S. technology economy is already in an undesirable state, and without those crappy companies, could be a lot worse. There just wouldn’t be enough jobs without them there. They don’t do much good for the world or their employees (who often fail to get rich even in the off chances of their startups succeeding) aside from one thing, which is that they prop up salaries for talent in a country that might otherwise be (and I emphasize might because no one really knows) in another Great Depression. If people stopped pumping capital into bad ideas, would they start funding people with good ones? That’s a possibility, but I wouldn’t bet the world on it. It’s equally feasible to believe that they’d just stop funding new businesses, and the economy would fall to pieces.
The “startup scene” is mostly one of denial. Corporate employment has become undesirable for a variety of cultural reasons but largely rooted in one issue: low-level employees (even some with impressive titles and seniorities) don’t get room to experiment anymore. The “intrapreneur” is dead, and basic research funding has been in calamitous decline for quite some time. The “startup scene” is being filled by various classes of people for whom the corporate world no longer affords a place, and who therefore have nowhere else to go. Some of them are the good kinds of unemployable people (eccentric geniuses) and some are the bad kind (arrogant, incapable product managers who become “founders”). Many people are in the type-4 “startup scene” because they have no other options.
As corporate jobs disappear and the industrial edifice that built Middle Class America starts to break off and fall into the ocean, there are a lot of people left wondering what to do with themselves. This could be a really good thing for society. After all, the reason those middle-class jobs are disappearing is that technology has automated most of that work. However, there’s the money problem. If people don’t have income, their lives go to shit rapidly. That’s how it seems to have worked for most of history, and this time period isn’t an exception. What usually happens when people are scared (as they are now, thanks to their enormous psychological and industrial investment in a declining regime) is that those who can offer “protection” set themselves up as the new nobility. In the type-4 startup world, those are the people who can raise funding (enough to pay salaries) for terrible ideas, on account of their connections. That’s where we are, that’s what we’re facing.
The fundamental problem, however, is that none of this self-referential hokum generated by the type-4 startups generates anything that people really want. The only people it’s useful to are other VC-istan social climbers. Because of its self-referential nature, it’s not going to last. It doesn’t have much of a future.
It’s time to talk, instead, about what comes next.
