VC-istan 4: Silicon Valley’s Tea Party

The SATs might have left people sour on analogies, but here’s one to memorize: VC-funded technology is to Corporate America as the Tea Party is to the Republican Party. I cannot think of a more perfect analogy for the relationship between this Sand Hill-funded startup bubble and the “good ol’ boy” corporate network it falsely claims to be displacing. It is, like the Tea Party, a more virulent resurgence of what it claims to be a reaction against.

What was the Tea Party?

Before analyzing VC-istan, let’s talk about the Tea Party. The contemporary American right wing has an intrinsic problem. First of all, it’s embarrassed by its internal contradictions, insofar as it fails to implement its claimed fiscal conservatism, instead getting us more indebted through wars fought to serve corporate interests. More to the point, it’s trying to get people to vote for things that are economically harmful to them– and it’s surprisingly good at that, but that requires keeping people misled about what they are actually supporting, which in turn mandates constant self-reinvention. For this reason, the Republican Party has a well-established pattern of generating a “revolution” every decade and a half or so.

First, there was the “Reagan Revolution” of 1980. Then there was the “join the fight” midterm election of 1994– the Republican landslide that brought us our first severe government shutdown. Around 2009, the modern Tea Party was born– and that brought us a second severe government shutdown. At first, this Tea Party appeared to be deeply libertarian, presented as a populist tax revolt without the overt corporate or religious affiliations of the Republican Party. It seems ridiculous in retrospect, but there were left-wing Tea Partiers at the beginning of the movement (there aren’t anymore). In time, the Tea Party was steered directly into the Republican tent, fueling the party’s electoral success in 2010. That’s miraculous for them, when one considers the gigantic image problem that the Bush Era created for that party. In 2008, some commentators believed the Republicans were finished for good, about to go the way of the Whigs; two years later, it had been reinvigorated by a populist movement that, at its inception, seemed radically different from the fiscally irresponsible GOP.

By promising a reduction in taxes and social complexity, the Tea Party managed to remove Bush and Cheney– old-style authoritarian stooges, big-government war hawks, and objective failures even before the end of their term– from the conversation in record time. Of course, time proved the Tea Partiers to be “useful idiots” for a more typical Republican resurgence– a reinvention of image, not of substance– and the most astute observers were not surprised. When the reputations of established players become sufficiently negative, reinvention (and “disruption”) becomes the marketers’ project of the hour.

Venture capital

Corporate America, too, has a severe image problem. The most talented people don’t want to work in stereotypical corporate environments. They want to be in academia, hedge funds, R&D labs, and cutting-edge startups– not dealing with the stingy pay, political intrigue, slow advancement, low autonomy, and archaic permissions systems associated that are stereotypical for large institutions. Of course, companies that need top talent can get it, but they must either (a) pay extremely well, (b) offer levels of autonomy that can complicate internal politics, or (c) market themselves extremely well.

Wall Street can simply buy its way out of the corporate image problem. However, this typically means that employee pay will go up by 20 to 30 percent per year, in order to keep abreast of the rapid hedonic adaptation that money exhibits. Few companies can afford to compensate that generously, especially putting that exponential growth in the context of a 20- to 40-year career. Venture capital’s ecosystem is an alternative solution to that image problem; a corporate system that appears to be maverick, anti-authoritarian and “disruptive”, when what it actually is is dishonest and muddled. The people would have been middling project managers in the old system are given the title of CEO/”founder” in one of VC-istan’s disposable companies. Instead of a team getting cut (and its staff reassigned) as would occur in a larger corporate machine, the supposedly independent company (of course, it is not truly independent, in the context of the feudal reputation economy that the VCs have created) is killed and everyone gets fired. This might seem like a worse and more dishonest corporate system, but it gives the impression of providing more individual prominence to highly talented (if somewhat clueless) people.

Not much of substance has improved in the transition from the older corporate system to the VC-funded world, but I think some things have actually been lost, particularly in reference to fairness. Bureaucracies can be dismal and ineffective, but those that work well are efficient and, most importantly, fair. In fact, attempts to achieve fairness (the definition of which seems, inexorably, to accrue complexity) seem to be a driving force behind bureaucratic increase. Obviously, bureaucracy is sometimes used toward unfair ends, or even designed maliciously (for example, over-restrictive policies are often built with the intentional purpose of making those with the power to grant exceptions powerful) but I would say, in general, that those negatives are not supposed to emerge from bureaucracy, and probably not characteristic of it in general. Bureaucracy is mostly boring, mostly effective, and only maligned because it’s infuriating when it fails (which is, often, the only time when most people notice it; bureaucracy that works goes unnamed). Without bureaucracy at all, however, social processes often devolve into a state where favor trading, influence peddling, and social connections– with those accrued early on (such as in school) and therefore most tied to socioeconomic status rather than merit, being most powerful– dominate.

VC-istan has reduced corporate bureaucracy (because companies are killed or sold before they can accrue that kind of complexity) but done away with the concern for fairness. It claims to be a meritocracy, and only accepts those who refuse to see (much less speak of( the machinations of power. Those who complain too loudly about VC collusion are ostracized. For just one petty example of the VC-funded world’s cavalier attitude toward injustice, people who voice the “wrong” opinions on Hacker News are silenced, “slowbanned” or even “hellbanned”. Injustice, accepted for the sake of efficiency, is tolerated as accidental noise that’s expected to converge over time, as the error from independent coin flips would smooth out as more occurred. The problem with social processes is that the errors (injustices that one hopes will be transient) don’t cancel each other out; they have a long-term autocorrelation.

In truth, what does self-assertion of meritocracy mean? It means that one is not even going to try to strive for additional fairness, under a belief that balance between fairness and other constraints has already been achieved. Of course, anyone who’s paying attention knows that not to be true.

Am I proposing that more bureaucracy is the solution to VC-istan’s moral failings? No. I’m only arguing that VC-istan’s selling point of “leanness” often comes at a cost, which is a sloppier and more unfair ecosystem. The old corporate ladder, with less of the ageism and emphasis on native social class and educational “pedigree”, was actually a much fairer one than VC-istan’s sloppily-built, poorly-thought-out one.

More virulent

The Tea Party turned out to be a more brazen and generally worse Republican Party than the one it supplanted. I’m not a fan of Bushite corporate stooges, but they would not have seriously considered the threat of fucking national default to be a valid negotiation tactic.  

Likewise, the VC-funded ecosystem is generally worse than the older and more stable corporate system that it is attempting to replace. To list some of the reasons why it is worse:

  • less intra-corporate mobility, since most VC-funded startups are built around a single project. As VC-funded companies become large enough that internal mobility would be viable, many develop mean-spirited stack-ranking cultures that keep internal mobility low or nonexistent.
  • the old corporate world’s large, announced layoffs, often with severance, have been replaced by dishonest “performance”-based firings designed to protect the company’s reputation (it may claim it is still hiring, and thus prosperous) at the expense of the departing employee’s.
  • increased social distance– investors vs. founders vs. employees is a much larger (and more permanent) social gulf than executives vs. managers vs. reports, the latter having more to do with seniority while the former is largely an artifact of native social class.
  • extreme ageism, classism, and sexism.
  • low rates of internal promotion, due to the company’s increasing need to validate its status with flashier hires (who get leadership roles as opportunities emerge). External promotion is the way to go in VC-istan, but that creates a “job hopping” impression that makes it hard to move back into the mainstream corporate world.
  • in general, meager benefits in meaningful dimensions (health coverage, 401k matching) matched with cosmetic or meaningless perks.
  • defined (if spartan) vacation allowances replaced by undefined (“unlimited”) vacation policies where social policing keeps everyone under two weeks per year.
  • on average, substantially longer work hours.
  • less working autonomy, on average, due to the tight deadlines faced by startups whose investors demand excessive risk-taking and rapid growth.
  • significantly more economic inequality, when the distribution of equity is considered. A hired (non-founder) executive might only earn 20% more, in salary, than an engineer, but typically receives 20-100 times as much equity in the company.

The future

What has actually emerged out of Silicon Valley is a failed social experiment that has generated much noise, little progress, and immense distraction. The good news is that it lacks comprehension of how to conduct itself outside of its own sandbox. For one small example, economics textbooks might argue that Uber’s “surge pricing” is supremely efficient and therefore right, even though the subjective experience for all who encounter it is extremely negative. I don’t intend to opine on whether Uber’s pricing model is morally right (it’s a useless discussion). I do find the observation valuable: the new economic elite of the Valley is shockingly gauche when it comes to self-presentation. It thinks it’s the height of science and culture, and everyone else finds it to be the worst case of uncultured new-money syndrome in over a century. It won’t last. If the gauche overlords of Silicon Valley– no longer engineers or technologists, but lifelong executives (with all the pejoratives appropriate to that word) who came up via private equity and good-ol’-boy networks– make a serious play for cultural prominence, they will be shoved back into their spider holes with overwhelming force.

The old corporate regime was deeply flawed, and that’s not going to come back either, but there was a certain humanity required of it if such organizations were to survive for the long term. The problem with VC-istan is that these companies don’t care about persistence; they’ll either be gigantic and invincible (and able to pay off old sins via meager settlements) or dead in five years. If VC-istan’s pretenses of building the future are taken at face value, then the future’s literally being built by people who give not a damn about it.

Uber can charge what it wants– that’s a private matter– but I’m disgusted when I see Valley darlings trying to shove their mindless, childish arrogance into politics. That’s actually scary. The price of housing and long commutes for which Silicon Valley is known are solid, incontrovertible proof that their little society is an utter failure.  Whatever they say about themselves is mitigated entirely by the messes– of their own making– in their own backyards. If they can’t even make San Francisco affordable, how are they equipped to handle the problems of the world? They aren’t. Just as the Tea Party proved itself incapable when it came down to the actual inherent complexity of politics in a nation of 315 million, the Valley darlings aren’t fit to rule more than a postage stamp.

VC-istan 3: Performance

No analysis of VC-istan would be complete without confronting the performance of venture capital as an asset class, which is, by all accounts, terrible.

Recall that the VC-istan Hypothesis asserts that the leading venture capitalists have assembled something that, while its disposable companies operate separately and may compete with each other, effectively functions as one postmodern corporate body, of which the leading investors (not founders, who are middle managers given better titles) are the true executives, and in which the nominally separate companies (whose investors and boards all know each other) are more accurately framed as departments. It seems to be, then, a poorly-performing company. It’s worthwhile to analyze that, since I’d argue that the cultural problems with VC-istan are bidirectionally related to its poor performance.

Normally, poor performance of a company is felt in layoffs. In VC-istan, it’s experienced by the shutdown of its subcompanies. This would be tolerable (people go into startups knowing there is risk) except for the fact that the failures are correlated. They happen in waves. Job loss usually isn’t a big deal in Silicon Valley, but is devastating (some people go down 50% in salary when the market tanks) when it happens to a large number of people at once. Indeed, if there’s one sin committed by the VCs against their counterparties, it’s not that they mislead about fair valuations (they don’t) but that they knowingly engage with people who misprice correlations. Savvy investors understand that, to price an asset, one must consider its correlation to others– a portfolio that is likely to tank when the economy tanks (and, quite possibly, you lose your job) is worth less than one with the same return, but that is independent of broad market conditions. The latter is more likely to have the money when you need it.

Venture capital is a fair-weather friend. There’s lot of opportunity when everyone (especially landlords) is getting rich, but it’s very easy (especially considering the age discrimination problem) for a whole generation to be tossed out like yesterday’s dogshit. Venture capital returns are dismal, most venture-funded companies fail, and most of these so-called “startups” are terrible places to be employees. Let’s hope that VC-istan isn’t the new economic regime that it claims to be; it’s not a very good one.

Root causes of poor performance

Why does VC perform so poorly? One might argue that they pay “too much” for companies, but I don’t think that’s true. If anything, they pay too little, because they’re mostly funding crap. After a typical Series A, option pools are so limited that even high-level hires are lucky to get more than $20,000 per year at-valuation– in exchange for an equal or larger pay cut. Startups become stingy not only with pay and meaningful benefits, but also with equity. This makes it hard for them to get the best people.

To be fair, I would argue that a company with outside investors shouldn’t be focused on hiring the best people. Hiring excellent people isn’t a business objective; turning a profit is. It’s quite possible to make a profit without staffing up with top talent; Wal-Mart does it. However, the get-big-or-die startups funded by the most stylish investors often do need the highest levels of talent, and they make two mistakes on that front. The first is that they underpay, not only in terms of salary, but also in terms of the equity that’s supposed to make the wage cut tolerable. This still works sometimes because there are some clueless people (typically, young ones) who are technically talented in spite of being extremely gullible, but it doesn’t scale because the pool of talented suckers is a small one. The second and, in my opinion, more devastating factor is that they grow too fast and overhire. Talented people will work for startup wages for a chance to own, but if you’re offering dimes (0.1% slices) and pennies (0.01%) while underpaying, you will find few talented people, keep almost none, and– if you have to hire fast, because your investors mandate rapid growth and aggressive risk-taking– you’ll flood the company with mediocrity.

Of course, paying more doesn’t guarantee getting good people. If you don’t know what you’re doing, it can have the opposite effect. I’m not going to cover that issue, and my point isn’t necessarily that VC firms give too little money; the problem is that the companies (perhaps due to investors’ demands, perhaps on their own accord) themselves are stingy even with equity, which is the only reason people put up with the shortfalls in wages, benefits, and autonomy. As to whether that’s the fault of the VCs– to whom founders are eager to shift the blame for their terrible employee options grants, but who are rarely in such discussions to defend themselves– or a more general problem with VC-istan culture (whose worst malefactors, in my observation, aren’t themselves VCs) I have no idea.

How could venture capital win?

Venture capital would have two ways of returning a real profit. One would be to buy low: to be better than anyone else at assessing fine-grained variables, such as the talent of the team, and get great companies cheaply. Trust me, they don’t have that skill; I’ve seen plenty of idiots get funded. They’re no better at picking talent than an average college-educated person. In fact, they’re worse, and I’ll get to the reason for that, later on. The other would be to add value to the businesses they fund, and then sell “high”. I don’t think, in general, that they do. On the whole, it seems pretty obvious that they detract. Why? Because the venture capitalists are the true executives of this postmodern entity that I’ve named VC-istan. They succumb to a personal need to manage.

Many day traders and poker players have, despite knowledge and superiority over their domain of confidence, been destroyed by trader boredom– that need to be active at all times, even when the additional work (outside of one’s domain of competence) will, at best, add zero-expectancy variance (noise) and, at worst, cancel out some of the gains. I think this is the case of VC-funded startups. It would be better for investors to give money and advice, but let the companies operate almost completely autonomously. This might not fulfill the emotional need of investors to be decision-making executives, but it would make those businesses a hell of a lot more successful, and that would improve their returns. By removing themselves from active management and taking a strictly advisory role, venture capitalists would do less work and get better returns.

This wouldn’t solve everything, of course, and it probably wouldn’t be enough to fix the VC-funded ecosystem. Founder quality is a much bigger problem than anything having to do with investor involvement. The investors are responsible insofar as they back the wrong sorts of people, but they aren’t directly causing the toxic cultures seen in most of these companies.

Founder quality

What are the causes of low founder quality in the VC-funded world? I think there are a few that deserve mention, and I’ll address them from least to most potent.

First, VC-funded companies are constantly fighting for survival. This might be said of all small businesses, and to some degree it’s true of all, but not in the same way. A non-VC business can grow happily at a “pokey” 32% per year, quadrupling every half-decade, and that’s considered healthy. Hell, most people would the thrilled to have their personal income grow at a mere 10 percent per year. That doesn’t cut it in VC-istan, where 5% per week is expected. That is, of course, utterly unsustainable at scale, and requires aggressive risk-taking for the small.

Additionally, per-week growth is hard to measure for companies that (a) might not have substantial revenues, and (b) aren’t publicly traded. The result is that companies are expected to post these increases in key metrics like “eyeballs” or usage, but before a company is profitable, that actually means that there is an exponential growth in costs (and, therefore, often losses) that keeps the business dependent on external capital, and therefore under VC-istan’s control.

Most small businesses must negotiate the market to survive. In VC-istan, the firm must battle not only the market, but demanding investors (who won’t accept 40% year-on-year growth) as well. What kind of person would sign up for this? In general, it attracts overconfident, exceptionalist people who, given the freedom to do so, will always overpromise (and underdeliver). It’s not that they do so maliciously; that’s the temperament that VC-istan’s way of doing things attracts.

Most investors would agree, privately, that they’re looking for people with the talent to make more with less; in other words, those rare people who can start or run a company on a shoestring budget and, against the odds, give it life. Typically, you won’t be able to hire a competent programmer at 50% of the market wage without offering serious (founder-level) equity. If you did luck into a golden hire, you wouldn’t be able to repeat it, and the bad programmers would sink the enterprise. It’s just very hard, and not at all typical, for a company that poor to have any life, much less rapid growth potential. Venture capitalists want to work with the atypical.

From first principles, I don’t think there’s anything wrong with that. Some people (perhaps 1 in 100,000) do have that sort of personal charisma– the kind that could convince a $200,000 per year programmer to take $80,000 and 0.05 percent– and I can’t blame VCs for wanting to fund those natural arbitrageurs. However, for each of them, there are hundreds of slimy hucksters who use deception (most typically, about the career benefits of the startup job) to bring talent in, and extortion (threats of reputation damage, negative reference, and exclusion from future ability to fundraise) to keep it. Just as 99.99+ percent of people selling $100 bills for $50 should be expected to be counterfeiters, and not charitable; most of these “more-from-less” operators are not preternaturally charismatic, but deceptive shysters.

The most devastating cause of VC-istan’s founder quality problem, however, comes from the fact that the VC-funded world is a feudal reputation economy. The people who excel in such settings tend to fall into two categories. The first are those who use extortion (including, often, hired physical intimidation) to protect and launder their reputations. In larger companies, they’re most likely to hide behind HR and offer generous settlements to wronged employees, but in the VC-funded environment where every company must operate on a shoestring, they have only the stick, and frequently take the extortion route. The second class are those about whom no one can say anything negative. They don’t piss anyone off, because they don’t really do anything, and they tend to thrive in reputation economies by attrition: everyone else is out working and (inadvertently) stepping on toes, while they’re smiling and making nice. These people make great figureheads and can be tapped to lead more established companies, but they’re terrible small-company founders. Those people are risk-minimizers, not excellence-maximizers. If you’re trying to launch a high-risk business, you require excellence-maximizers, but it’s impossible to find one who can thrive in a reputation economy. In a reputation economy, the first rule is never to overperform, but who wants that kind of person at the helm of a high-risk business?

Fixing the problem

There is a way to fix VC-istan’s poor performance, and it’s tied to an issue I’ll keep coming back to: collusion. Namely, before funding decisions are made, the VCs talk to each other and decide, as a group, who they like and who they don’t. This means that the funded people are the ones selected by a committee rather than individuals, giving the advantage to the reliable, affable risk-minimizers who are, to put it plainly, unsuited to lead high-risk technical enterprises.

Given that the flaws of design and selection by committee are well-known, why do venture capitalists collude? Shouldn’t there be a rogue investor or few out there who realizes the flaws of VC-istan, goes off and makes better choices, and shows up all of the established guys? Why doesn’t that happen?

The first thing to note is the distribution of payoff on investments. Stocks in established companies have a bell-shaped and approximately normal distribution in returns. Some will go up 20% in a given year, and others will drop by 20%, but for an established public company to change in value by a factor of 100 will virtually never happen. About half of the choices will outperform the market trend. The venture capital game doesn’t have the normal distribution, and it’s all about the outliers, or “black swans”, because far more than half of the investments are losers, but the winners hit big. These are the Facebooks and Googles of which two or three might exist per decade.

Being an early-stage investor in such a company makes an investor’s reputation and career in a way that a portfolio with more, smaller wins (even if the overall return were higher) wouldn’t. Becoming a partner in a venture capital firm nearly requires being part of a big-ticket item. It’s not about maximizing returns on capital to shareholders. It’s about the needs of the individual venture capitalists, if they want successful careers in that industry, to be involved in the two or three most important deals of the decade. A handful of smaller wins could be equally or more lucrative, but wouldn’t have the same career-making effects for individuals. Not surprisingly, this means they’re not interested in the small, less-risky, wins.

Because the venture capitalists need to know where the top few deals of the decade are coming from, there’s a premium on social access. Founders (much less engineers) are pretty much interchangeable. The talent-centric attitude that VC-funded companies feign is pure marketing, because the truth is that no one can reliably predict the biggest successes– not at that level of risk, and with such a long feedback cycle, it’s almost impossible for anyone to acquire the skill, data being already stale once collected. The best bet is to be near the blockbuster successes as they emerge, and be close enough to the gatekeepers to get involved. That is the source of the collusion.

In other words, VCs don’t collude because they’re exclusive snobs or bad people. They’re not. They collude because their careers mandate it. They don’t win by picking the best people or funding the most viable businesses and, in fact, operate at risk levels that make such predictions useless; rather, they win by being in access to the evident winners as they emerge. Those who can get into access may be able to escape the generally dismal returns that characterize the asset class, while those who remain out of access perish.

The alternative regime would be one in which VC collusion were banned outright. No comparing notes, no deciding as a group who gets to be a founder, none of this co-funding horseshit. It would represent a return to individual decision-making and beneficial (as opposed to degenerate) risk-taking. A legal ban on collusion would make venture capital fundamentally more decent and, quite likely, substantially more profitable on the whole (if disadvantageous to a few prestige investors)  on account of improved prospect selection. It may sound like a drastic move, but a collusion ban just might be the only thing that can save venture capital from itself.

VC-istan 2: The Racist Judges Problem

Previous: VC-istan 1: What is VC-istan?

What is the Racist Judges Problem?

Let’s say that there’s a hypothetical country where everyone is either green- or blue-haired. (For this example, that distinction is “race”.) That nation has fifteen provinces and, each year, there is a nationwide beauty contest with one judge hailing from each province. Additionally, each province only gets to nominate one entrant. Each judge scores the entrants from 0 to 10, but (because these people are regional finalists, an above-average crowd) the contest average is usually around 8.0– meaning that a single zero can cancel out four perfect scores. Finally, while twelve of those provinces are pretty progressive, three of them, in the east, are deeply, obnoxiously, and uniformly racist against blue-haired people. They’re despised and considered unattractive in those parts, and judges hailing from those provinces will never give one a high score. Blue-haired entrants are typically given extreme low scores out of animosity. What happens?

Most likely, winning contestants are going to be uniformly green-haired. Moreover, even the non-racist provinces (though people in them might find the blue-haired to be equally attractive) are almost certainly going to nominate green-haired entrants, because anyone blue-haired will be at such a severe disadvantage that it will nearly impossible for him or her to win the contest. Eventually, it will be decided that blue-haired people just aren’t as attractive, or are otherwise unequipped to win such contests. They won’t even be considered. The biases of the few influence the many. That’s the Racist Judges Problem. It doesn’t require that all or most of the judges have a systemic “racial” bias; it emerges (a) from the biases of the few, and (b) from the forced accommodation of the many. Eventually, they reach a point where blue-haired candidates aren’t even considered, because their inability to sway the racist judges (even if the other judges find those biases abhorrent) renders them nonviable as candidates.

Does it exist in VC-istan?

The Racist Judges problem, of course, doesn’t necessarily need to apply to race.

With regard to specific racism, I’ve seen little evidence that VC-istan is prejudiced in that way. At least, let me put it like this. If you factor out the obvious and extreme classism of VC-istan, I don’t know that there’s much (or any) racism independent of that. There may be, but I haven’t seen evidence. As for the classism, I tend to believe that to be an artifact of the ageism. How so? Well, a person at age 50 has had enough independent influence over his or her level of professional accomplishment that work ethic and intelligence are likely to be as potent as socioeconomic class of origin. There’s been plenty of time for the apple to roll away from the tree. At 25, however, supposed professional accomplishment is almost entirely an artifact of socioeconomic status– did this person enter the first office job knowing how to navigate the scene, or did she have to learn it through trial and error? What schools did she attend? (College matriculation might seem meritocratic, but the US has a lot of extracurricular variables in admissions that, by design, inject socioeconomic status back in to the machinery.) Did her parents hand down powerful connections? After a couple decades of solid work experience, initial conditions get smoothed out a bit; but, by VC-istan’s standard, the time by which that happens is far too late.

In other words, I don’t think VC-istan is intentionally or explicitly classist, either. I believe it genuinely strives to be the meritocracy it claims to think that it is. The classism is an artifact of the brutal age grading, which makes it extremely difficult for those who weren’t born lifted to pass. I would guess that venture capitalists, for the most part, don’t have a specific interest in the native social classes of potential founders; on the other hand, they’re so used to seeing kids whose parents handed them impressive professional tokens that people with normal career histories, who might take 10 years to get where the lifted kids are after four, seem defective in comparison.

So where do the ageism, and the sexism– both of which I’ll cover in more detail, in future essays– come from? I don’t think most venture capitalists harbor either set of prejudices; but a few do, and the most stylish ones seem most ready to announce their prejudices. In truth, if the collusive, scummy culture of co-funding and note-sharing were busted, those issues would likely go away. Investors who harbored those prejudices would lose out to the ones who didn’t. The issue is that the lack of independence in the investor community means that a candidate for support must be broadly acceptable. A VC is unlikely to invest in a talented person that other firms are unlikely to fund. Ultimately, the biases of the few (with regard to, say, age) end up dominating the behavior of the collective.

The Racist Judges Problem is far from unique to venture capital, of course. It’s prevalent in politics and corporate culture, as well. People complain constantly about the bland, uncharismatic mediocrities that tend to rise in institutions simply by being inoffensive, but when you have a flabby culture of consensus that rejects those who offend the few, that’s exactly what you’re going to get: risk-minimizers, not excellence-maximizers. It’s generally agreed upon that some people are too creative, too interesting, to succeed in typical human organizations because of that specific effect. The VC-funded world sells itself as being above that historic problem, but hasn’t been so for a long time.

Sizes of minds and things

This quote has been variously attributed: great minds discuss ideas, middling minds discuss events, and small minds discuss people. I find myself coming back to it regularly. It’s quite true, and it’s sad, because the discussion of people (that is, reputation) is an incredibly powerful force in business– far more potent in its ability to make or destroy careers than the discussions of ideas or events.

Of course, there’s the whole spectrum of minds in every business, including venture capital. There are the few who have (and, boy, do I hate how this world has been overused) genuine vision. I’ve no use for the people who call themselves “big picture people” just because they aren’t smart enough to hack details, but there are a small number of people who have a solid grasp of the big picture (who would never call themselves “big picture”, because they also grok details) and what they’ve got there is an important skill. Those are the great minds. To their detriment, I’d argue that such great minds don’t fare so well in business unless they can pare up with event-aware tacticians, whom the above adage (unfairly, in this example) downgrades to “middling”. Between them, however, the great and middling minds are not enough to direct the behavior of the group. It’s from the people-focused small minds that we get the Racist Judges Problem.

See, judgment of people is the ultimate bike shed. People who have no other competence will, in business, delude themselves into believing that they’re supreme judges of character and talent. They need (1) to justify their existence, and (2) protect their own social status, and declaring oneself a social arbiter (if others accept this arrogation) fulfills both neatly. If anything, I think that these two capacities of judgment (talent vs. character) are antipodal in many ways (assessing people at their best vs. and their weakest) and that almost no one excels in both. However, the perception that one deserves to be the ultimate judge of others is the fundamental wish-fulfillment fantasy of the base-minded social aspirant. After securing their own status, such people develop a thirst for the ability to up- and downregulate the status of everyone else because, in human affairs, that’s what power, fundamentally, is. Such people love to make and break reputations, and its their discussion of people that often dominates a scene, much more than the rarefied and comparatively moderate debate of ideas and events. 

The small minds of Silicon Valley aren’t the only ones out there, of course. They’re probably not even a majority. There are a lot of great human beings in venture capital, no doubt. The good ones just don’t have nearly as potent an effect. That is the problem with VC-istan collusion. When you have a consensus culture, much less the feudal reputation economy that exists out there now, the small-minded few can have disproportionate, and even decisive, effects.

VC-istan 1: What is VC-istan?

This is the first part of a series that was originally intended as one post, but will take more. For obvious reasons, I’d rather run five 1000-word posts than one 5000-word post. This assumes that I can keep a post short, brevity not being my strong suit. So, let’s just go into it. What the fuck is VC-istan?

I’ve used that term a lot, and many take it to be pejorative, as if there were something negative about “stan”. That’s not correct. I frequently use “stan” to describe one metaphorical space of people, and it can be a group that I’m fond of (e.g. “Nerdistan”) or one I dislike. After all, “stan” only means a place where people live. The name, itself, is utterly neutral.

So what is VC-istan? It’s not just a snarky name for venture capitalists and the toxic technology ecosystem that some of them (some, I reiterate, not all) have created. VC-istan means something, and I’m going to explain just what.

The VC-istan Hypothesis

The VC-istan Hypothesis is that the leading venture capitalists, the “cool kids” in that set who all know each other, have created a postmodern corporate entity– possibly the first of its kind. It functions as one company at the top echelon, but has recognized that corporations themselves are disposable (much moreso than projects or departments within a company, which are more difficult to cut). This insight isn’t new (shell companies are disposable by design) but the VC startup is a fully-fledged, single-product enterprise designed entirely to take on a specific high-risk business gambit (usually in a red ocean where first-mover advantages dominate, making VC “rocket fuel” especially powerful). The disposable company inside VC-istan is a true startup, almost free-standing if you don’t see the strings.

The “marquee” investors function as the executives of this larger, shadowy, not-exactly-a-corporation entity that I’ve described. Middle managers, maligned as inefficient, corrupt, and often stupid, have been replaced with founders and startup executives who inhabit about the same economic and social stratum as their gray-suited forebears, but have sexier job titles: Senior VP of something no one outside California has heard of, as opposed to Associate Director at a household name. (In truth, I think those founders are no more virtuous, as a class, than the maligned middle managers of the old companies.) The tech press are a bizarre HR organization, as are the fully-corporate bean-counters who sign of on acquisitions (the bonus committee). To attract top talent, one has to pay for it; the generous annual compensation for which banking is known has been replaced by less generous (but possibly more variable) lottery-ticket allocation given the name of employee equity.

The “one corporation” dynamic is held together by the collusive– and almost certainly illegal– reputation economy that the venture capitalists have created. As a group, they decide whether they like a company or not. If appropriate laws were enforced, stopping all of that anti-competitive note-sharing and forcing them to think independently, the VC-funded world would behave much more like a fair market. Then, there probably wouldn’t be a palpable entity or “scene” that one could call “VC-istan”. There would be a much more heterogeneous array of new businesses, not all concentrated in one sector or geographical area.

Like the Efficient Market Hypothesis, the VC-istan Hypothesis is neither fully true nor fully false. There is truth in it, but it is not absolute. It seems to be mostly true, now. Its truth might change as conditions do.

Why is VC-istan bad?

I find it important to describe VC-istan and why it emerged because, to be blunt, I want to kill it. In order to defeat it, we must know it. I want to bring truth forward, because its particular truth is ugly and, if proper information percolates, it will render the VC-istan route a second-tier career, starving it of talent unless it changes its ways. Every time a smart person learns what VC-istan truly is, its position becomes weaker, because it becomes that much harder for its established caste to peddle unreasonable dreams and broken promises.

It’s not that I want to end venture capital as a financing process. To the contrary, I think it’s a very good concept, if poorly implemented now. So, what went wrong? The feudalistic reputation economy of VC-istan has a simple (and disgusting) rule: the VCs are your owners. They are not partners; they can destroy your whole career by picking up a phone. If you say anything negative about a venture capitalist, much less sue one in the (admittedly, fairly rare) even that he robs you, you’ll never raise money again. This sort of blacklisting could not exist on a fair market, because a small set of people taking the “protect our own at all moral costs” approach could only exclude their enemies from a small social circle, and not preclude venture investment outright.

It is, of course, this collusion that enables investors to establish themselves as the executive suite, to which even the most talented entrepreneurs and technologists (who are too numerous and unruly to hold any kind of collusive arrangement together) are subordinate. On a fair market, investors, entrepreneurs, and technologists would not separate so cleanly into these distinct strata with the bottom of one still above or near the top of the next. Rather, the talented technologists would outrank the untalented investors. The parties involved would have to find mutual respect for one another as doing fundamentally different, but important, jobs.

Investors have always been the top jocks in VC-istan, but the distribution of power between business founders (i.e. people offering connections to investors) and technologists (i.e. those doing the actual work) seems to have evolved out-of-favor for the technologists. Of course, there are plenty of computer programmers (myself included) who frequently turn away solicitations from “idea guys” who “just need a programmer”, so it might seem that tech is hot right now. Not quite; most of those are cases of “8″ technologists turning down “5″ business guys. If you compare at-parity, the business side has much higher status. A Business 8 is on the partner track at a top-5 venture firm and can raise a six- or seven-figure seed round on an idea; a technology 8 cannot afford to buy a house in the Bay Area.

This lexicographic rank-ordering replicates the old industrial regime in which being an “8 worker” just didn’t matter, because a 2 manager outranked you. That led to a collapse of motivation at the bottom, caused a bilateral loss of trust, and produced the Theory X culture of a hundred years ago. It wasn’t pretty. I hope that the software industry doesn’t go that way and, to tell the truth, I don’t think that it will; I take it as obvious that technology is much stronger than VC-istan and will resurrect itself no matter what goes down in the Valley.

That said, VC-istan has replicated all of the worst aspects of corporate life, but almost none of its virtues. The old corporate regime was bureaucratic, slow, and prone to corruption and inefficiency, but there were good things about it. Companies invested in their people, and job losses were a rarity, taken as a sign of business failure, rather than an artifact of the mean-spirited “stack ranking” for which companies like Welch’s GE, Enron, and Microsoft have become notorious. The negatives of the old corporate regime were conformism, short-sighted profit-seeking behavior (externalized costs, mostly), subordination, political corruption and inefficiency, and the emergence of an exclusive, sexist and classist “old boy’s club” at the top. That those failures existed (and continue to exist) in many powerful corporations is not controversial.

Most VC-istan companies, as it turns out, have all of these negative traits as well! Startups who no-hire (or fire) over “culture fit” (often, synonymous with “being old, female, or of low socioeconomic origin”) are taking conformity to a far worse extreme than a 1970s-era corporation, which would make much more of an effort to find a place for a “nontraditional” but talented person. The evidence, in truth, is pretty strong that the stodgy bureaucracies of yesteryear were will much fairer (if frustratingly impersonal, since that is usually a prerequisite for fairness) than the new VC-funded “lean” regime.

Sure, there are excellent startups that are free of the above-mentioned ills. They exist, no doubt. However, it’s no easier to find one of those than it was (or is, now) to find a bullshit-free niche of a large company. On the whole, I think having traded in the large companies of the 1960s and ’70s for VC-istan has not been a good deal.

Then, there’s the issue of age discrimination. This will fuck all of us in the ass, and sooner than most of us think, so we need to address it head on. More importantly, ageism is just terrible for technology. Yes, the modeling profession has an expiration date as well; it’s not only programmers who face that. On the other hand, models get to start working in their teens, and there isn’t much of a learning curve, so the loss to the industry is minimal. In technology, on the other hand, it takes years of dedicated full-out work-your-ass-off experience to get any good. It’s an insult to programmers and technology as a whole that a group of talentless, superficial people who have no fucking idea what it takes to be any good at this work, have decided to impose age-grading that begins to close opportunities almost as soon as one has developed a passable level of skill.

In a later essay, I’ll reveal the true and secret cause of VC-istan ageism. It’s not lower wages or some belief that younger people are more creative. It’s far more damning. Here’s a hint. Watch The Office, pay attention to Michael Scott and Ryan Howard.

I don’t know if I will succeed in killing VC-istan. I don’t know what will replace it if I do. I do know that the guys at the top need us more than we need them. I’ll cover that in a future essay, as well.

What is not VC-istan?

Having described what VC-istan is and why I don’t like it, let me give a few comments on what it’s not. First, it’s not all of venture capital. I don’t consider biotechnology or clean energy to be part of VC-istan. The rules in those industries are different, because one actually has to know something about biology, for example, to launch a medical-device startup. The superficiality, ageism, celebrity culture, and lack of respect for hard work that characterize the current bubble crop are not found there; in fact, it’s the opposite, because there are objective goals to be met. VC-istan is focused on light technology, which I use to describe the marketing experiments using technology that, in 2013, seem to outnumber and outcompete (for funding and attention) true technology companies. In light technology, the sole technical challenge is “scaling”, which can be back-filled once flush with cash and able to hire the Valley’s best engineers; but the glory goes to the investors and founders who “had the vision”. So perhaps I might say, “venture-funded light technology” instead of VC-istan; the former sounds less pejorative; but VC-istan has fewer characters and it’s 10:40 at night so, fuck it, brevity wins.

What is it that marries VC-istan to light technology? After all, shouldn’t profit-maximizing venture capitalists go in search of meatier ideas that actually need the investment? Well, many do, and I’m not writing about them. I’m writing about the starfucker types who want to be profiled in business magazines, the ones who want social access more than success on the market, and who thereby sell out not only their own chances at success, but also human decency by creating the collusion and celebrity culture.

Where this ultimately leads is the Parable of the Bikeshed, or what Freud called the narcissism of small differences. People (even those in power) are generally willing to defer to the experts on the big, infrastructural, but usually aesthetically unpleasing (due to their complexity) matters, like how to design a nuclear power plant. “Just bring me the sausage; don’t tell me how it’s made.” On the other hand, on those matters that seem accessible, people form strong opinions. There is little power in the complex and objective, where those who are blatantly wrong will be punished regardless of who they are, and those who have knowledge generally got it through that rank-middling practice of working very hard; but much more power in the simple and subjective, over which simply having made the decision is victory. (The association of arrogant simplisticism with power seems to be present in literalistic religion, too. Notice how many historical deities had strong and explicit opinions about mandatory metaphysical beliefs and about gender roles; but said not a damn thing about how to make antibiotics, which would have actually been useful.) The consumer-oriented light technology that’s in vogue in modern VC-istan is a realm where it’s easy to debate what color to paint the shed, and that’s why it attracts the biggest narcissists.

Venture-funded light technology is, to put it bluntly, a multi-billion-dollar bike shed. In biotech, one can only fund companies whose founders actually understand the science, and pumping money into smiling, stylish idiots is equivalent to incinerating it. For a contrast, the upshot of VC-istan light tech is that any idiot can come up with a plausible scheme, which is much to the benefit of sad-but-established men who “see things in” mediocre but superficially attractive suitors.

One might prefer that this arrogance remain in light technology, which would render it fairly harmless and, in fact, useful. Light tech isn’t a bad thing. Often, it does a much better job at marketing real infrastructural improvements than the inventors ever could. It also can disrupt established and parasitic rent-seekers. I’m not a fan of Uber, a service used mostly because it confers the value of being able to say one uses it (i.e. is able to afford it) but I do welcome anything that threatens to take down the Medallion Mafia. The problem with light technology’s bubbles is that they overreach and, when they get beyond their natural territory, the marketing wizards become devastatingly incompetent. We see a once-great city ruined by absurd rents due to the complete inability of the supposed wunderkinder to solve the city’s biggest problem: housing scarcity. We see that horrific, Aspergerian foray into politics that is Mark Zuckerberg’s (which I call “fweed-oos” because I refuse to call it “forward” anything). We see a whole society beginning to hate technology because a few hundred overprivileged celebrity jackasses (most of whom haven’t written code for decades, if ever) are going out and making a bad name for all of us. That’s bad for the future of technology. It’s bad for those of us who are coming up.

So… fuck it, let’s see if we can end this shit on our own terms, or at least take it down a peg or few. My job is to bring truth, and then it’s up to us as a group to decide what to do with it.