This is a continuation of last week’s analysis of various work cultures and the patterns of degeneracy. I’ve analyzed hierarchies that form in organizational cultures and the relationship between ascendancy and bad behavior (in particular, psychopathy). I’ve touched on the VC-funded startup ecosystem (VC-istan) but don’t think I’ve done it justice. In these small, agile companies, does the MacLeod classification apply? Or has this dysfunctional and unfair arrangement been rendered obsolete? If so, then how? If not, then who are the Sociopaths, Clueless, and Losers? I’ll answer that. Today, I’m going to focus on the sociology of VC-istan, perhaps the first truly postmodern corporate body.

VC-istan likes to believe that it has evolved beyond the traditional corporate dysfunctions, meaning that the MacLeod hierarchy might be outdated or inaccurate. I will show that this is not the case.

VC-istan, as a post-modern corporate organization, has figured out that companies are disposable. I’m not talking about shell companies, but full-fledged corporate organizations where people actually go to work. These firms have a team and a product. People get hurt when they melt down. The product manager gets to call himself a “CEO” and the technical lead is a “CTO”. They identify as “a startup”, which has some attractive features. If it’s a startup, programmers are unlikely to confront 20-year-old legacy code, and divisions of labor may be undefined enough that an engineer who enters in the right way can get a very high quality of work. It almost looks like these entities are free-standing companies, as they would be, were it not for their dependence on continuing financial investment. That need to be hooked in to prominent investors and VC-istan press keeps them from being truly independent, but they have just enough independence that VC-istan looks like a pattern of separate companies merely flying in formation.

At the top of the VC-istan social pyramid are the venture capitalists. Rather than compete with one another, they collude in order to collectively determine which courtier projects deserve funding and which deserve to lose. As such, they’re effectively one executive team. These are the MacLeod Sociopaths and, as discussed, that doesn’t mean they’re all bad people or sociopaths in the true sense– only that bad people have a disproportionately high likelihood of rising to that tier. A better, more neutral, term would be Manipulators.

To understand why VCs behave in this way, it’s important to assess the mechanics of their industry. Most investments will lose, but the few that succeed will return 10, 100, or even 1000 times their original investment, and it’s nearly impossible to predict how a company will perform until it’s flat-out obvious to all in the know. This puts information and social access at a premium. Whether a VC will succeed has more to do with his access to emerging bargains than anything else. Most investors, therefore, would rather do right by other investors (in order to get an allocation in the next great deal) than by their entrepreneurs, who (as social inferiors) have no leverage. This creates the clubby, collusive nature for which VC-istan’s top echelons are known.

Where are the other two MacLeod tiers, the Clueless and the Losers? Here’s where it gets exciting. The rest of VC-istan is (almost) all Clueless– from the independent project managers called CEOs to the lowest-rung entry-level software engineers. Recall that the MacLeod Loser is, because he’s aware that he’s taking a raw deal, rationally disengaged and manages his performance toward socially acceptable averageness. Loser-level employees trade autonomy, time, self-respect and expectancy (average-case compensation) for minimized variance in compensation and social conditions. In The Office, they are the Stanleys and Phyllises and Angelas. They’ll get their assigned work done, stick around till 5:00, and follow orders… but they’re not likely to do more than that. VC-istan doesn’t want people like that.

The VC-istan culture emphasizes “leanness”, which is a code word for “No Losers”. Startups often say they’re looking for “true believers” (read: Clueless). Then there is the “brogrammer” culture (Clueless machismo) and the age discrimination problem, and it should be obvious what that’s about. Older people are likely either to have climbed the ranks (and, yes, VC-istan circa 2013 has ranks and its own ladder) or to be rationally disengaged Losers. Even the perks touted by many startups are aimed toward the Clueless. I know of one startup that brags about its free dinner (lunch is not provided). Losers would rather have more cash than a 7:00 dinner with co-workers; perks like that are for the Clueless. 

Venkat’s theory of corporate genesis ascertains that companies are started by Sociopaths, generate a Loser tier shortly afterward to handle dead-end administrative work, and then (in maturity) build a Clueless middle to handle growth as the social and economic distance between the company’s base and apex expands to the point that a buffer class is necessary. What causes corporate dysfunction, he argues, is the expansion of the Clueless tier, who lack the economic self-sacrifice (in exchange for social approval and comfort) of Losers and execution skill of the Sociopaths. VC-istan seems to prove, on the other hand, that companies can prosper not only with, but because of, a Clueless monoculture, if directed right.

What about the Sociopaths? Does VC-istan function without them? Well, no. There are Sociopathic founders and, among the people who are really in charge– investors, board members– there will probably be quite a few more. In VC-istan, however, they cleverly keep themselves out of view. Typical corporate culture celebrates the Sociopath lifestyle as something to which all should aspire, while tacitly understanding that the Losers, knowing their odds of making it are pathetically low, won’t depart from their rational disengagement. VC-istan, however, is supposed to be for the Clueless. Sociopaths just sign off on executive-level hires, move into top roles at VC-istan companies once they’re de-risked, and sign the checks.

How does VC-istan function without Losers? Or, are Losers necessary? Are they beneficial, or harmful? My opinion is that they’re beneficial to a large or stable organization. Losers are not really losers, so much as they trade opportunities for social status and economic expectancy for risk reduction and comfort. In addition to their desire for stability, they are stable. They’re loyal, willing to follow orders, and capable of delivering more economic value than they expect the company to provide for them (which is why they might be called “losers”). Rather than compete for better positions, they’ll perform well enough in the roles they have. For a stable, well-defined organization, hiring Losers is a winning proposition. You know that, on average, you will get more than you pay. However, fast-growing startups that can’t afford to tackle the communication problems of larger organizations are going to need to focus on average yield per employee rather than total yield. For this reason, they’d rather hire overachieving Clueless than rational Losers.

This Clueless-mania generates, as it were, a lot of terrible startups with stupid ideas. I’ve noted that Clueless aren’t strategic, and that shows. Most of these companies have silly ideas and crash and burn. For venture capitalists, this is not only tolerable but desirable. If VC-istan were a regular company, it would have to pay salaries month-to-month and pay severance when executives lost faith, projects were cancelled, and (for macroscopic reasons) there was no place to put the people. That gets expensive. With disposable companies, there’s no need to “waste” money on these “soft landings”. Investors can stop funding the companies and, to minimize harm to those they care about, soften the landings of any friends in those companies by handing out executive positions in other, healthier, firms.

I am, for my part, not averse to a tolerant attitude toward good-faith business failure. That’s one of the best things about American business culture. We aren’t perfect, but we’re far better than most other societies on this issue with our forgiving bankruptcy laws and (comparably) low level of small-business regulation. That said, I don’t think VC-istan holds moral high-ground here. VC-istan is tolerant of good-faith business failure, but only because companies are disposable. This also means that it’s tolerant of bad-faith business failure, which is what most “acq-hires” (which benefit executives, and screw employees) are. Furthermore, VC-istan’s tolerance of failure is superficial. It’s a world in which one is expected to be a CxO by 35, and in which the only socially acceptable role for someone after age 45 is investor. This harsh age-grading encourages the same kind of risk-aversion and backstabbing as the stodgy, old-style corporate world that VC-istan was supposed to replace. So how much progress has really been made?

There’s a question that remains about VC-istan’s attempt to “lean” itself down by eliminating the Loser class. Is that stable? Losers make a rational trade that has them “losing” from an economic point of view, but provides comfort and risk reduction. Unlike Clueless, they’re low maintenance. MacLeod Sociopaths embrace risk (and the truly psychopathic ones, as Venkat Rao observes, take “heads, I win; tails, you lose” positions) that Losers wish to sell. Clueless, for their part, are unaware of any risk trading that goes on. They are enticed with a delusion. They expect to rise through the ranks and win someday. To keep a Clueless-only world going, no one can lose. Everyone must win. The Technocrat’s positive-sum resolutions are ideal, but those opportunities are rare, and Clueless lack the skills to tell genuine world-improvers from pipe dreams. Also, the flashiest and often most effective Sociopaths are those who generate transfer (beneficial to them) through elaborate networks of zero-sum transactions. That requires that others lose, right? Not if today’s losers can be tomorrow’s winners…

VC-istan works this way. Every VC-istan engineer expects to be a “tech lead” in the next gig. Every tech lead expects to be an executive at his next startup. Every executive expects investor contact in order to be a founder in two years. Most VC-istan founders want to be investors so they don’t have to suffer the 90-hour workweeks, low salaries, and career volatility associated with starting a company. In a 100-person VC-istan company, there are 2 founders and 98 people figuring out a way to turn their current employment into a launch pad for future founderdom. That is the real selling point of VC-istan; the founders (and, later, executives) say, “You’ll have my job in two years.” That excuses the laughably low equity allotments that, otherwise, would in no way compensate for the drop in salary and the risk associated with such unproven businesses. Huge promises are made to attract the Clueless, and delivery almost never occurs.

An effort to propagate losses of zero-sum transactions into the future looks a lot like an economic bubble, and that’s exactly where I intend to go with this analysis. When you have Sociopaths and Clueless but no Losers, that’s BubbleWorld. You have a pipeline of zero-sum transfers that looks like value creation, with the losses merely being propagated into the future and delivered to people who are powerless to retaliate.

The first dot-com bubble was a textbook financial bubble.Wall Street didn’t know how to value this new class of companies, and “mistakes were made”. However, that bubble was a lot less evil than many. First, there was genuine, lasting economic value in the Internet, and the bubble was more of a result of humanity’s collective inability to evaluate this new thing than malicious manipulation. Second, the commodity in which the bubble existed (technology stock) was not something people needed to survive; the ongoing housing bubble has been a different matter. Wall Street, for its part, learned a lesson. In the current technology bubble, valuations have been fairly reasonable– for Facebook investors, disappointingly so. This time around, startups are overvalued by young talent. That’s the bubble. There are a lot of people eager to be Clueless in order to try at “a startup”. Since they have no idea how to evaluate equity allotments, growth companies, or job titles in a world where they are poorly defined, they often fall into jobs that are terrible deals for them.

The dot-com crash of 2000 was ugly, but the loss was in paper financial assets, meaning that most of the cost was borne by wealthy individuals. This one’s different. Some of the most talented young people are wagering their time on “social media” concerns in exchange for executive positions and investor contact that will not be delivered. When this bubble pops, they will have lost time that they can never get back.

In this light, we can understand the function that Losers perform, and arrive at an alternative formulation of how the MacLeod tiers form.

As I’ve discussed, Sociopaths can be split into the true Psychopaths and the Technocrats, but this delineation deserves certain scrutiny. It’s tempting to assume that, because the Psychopaths are clearly “bad guys”, that the Technocrats are the “good guys”. This would require us to make it a “true Scotsman” category of limited use. In fact, there are bad Technocrats. Some are inept, some are ruthless, and some are even unethical. What differentiates a Psychopath from a Technocrat is the type of goal that he has. Psychopaths want to play zero-sum games and win; the millennia-old, zero-sum fight for status is what they live for. Technocrats believe they can profit personally through positive-sum endeavors that enable them to win personally because a surplus is generated. It’s important to note that positive-sum does not mean “good” or “right”. It only means that more value is generated to the winners than is lost by the losers. Add to this the subjectivity of “value” or “utility” and one can see that incompetent Technocrats would be actively harmful. Most left-leaning people dislike Ayn Rand and find her to be psychopathic, but I would hazard the guess that she was actually technocratic in her aim: she legitimately believed that her ideas were the foundation of a superior society.

Psychopaths are harmful and generally evil, and they’re self-consistent in this. Technocrats believe they are doing good. Both categories of people can externalize harm. Psychopaths do it callously because they only care about their personal victories and dominance over other people. Technocrats often do it under the belief that more is being won than lost. Many ugly things have been built by Technocrats who believed they were doing the best thing for the world. Some were right, and some were wrong.

Novel organizations are started by MacLeod Sociopaths– Technocrats who embrace risk and disruption, and Sociopaths seeking new ways to eke out advantages over others– because Losers would rather play on an existing, proven team and Clueless don’t know how to start anything. Shortly after genesis, the organization must define a division of labor. Discrepancies in labor beget differences in leverage, which produce variation in compensation. Inequality forms, and the Sociopaths have two strategies for dealing with it. The first is to set up a trade, in which low-status employees win comfort and stability while relinquishing access to high-quality labor and outsized compensation. They won’t get rich, but they’re unlikely to be fired, and can leave at 5:00. That generates a Loser tier that will happily “eat” economic loss (the difference between wages and value rendered) in exchange for these intangible assets that only exist in a low-importance organizational role. The second strategy is to mislead people about their futures within the company and, because of the natural human tendency toward optimistic bias, this isn’t hard to do. That generates the Clueless tier, which is a mechanism for propagating losses into the future.

The typical organizational hierarchy presents the Clueless and a buffer between Losers and Sociopaths, but the Losers also form a buffer between Clueless and Sociopaths. Measured in social status and economic yield, Clueless outrank Losers. However, measured in hedonic terms (yield minus pain and discomfort) the Losers outrank the Clueless. This is a fairly stable arrangement, because both the Losers and Clueless think they’re getting the better deal.

MacLeod Losers probably comprise 80 percent of what we call “Corporate America”. They show up, do enough work to maintain adequate social standing, and go home. They care enough to want to do a good job, but not enough to fight authority or get into “vision” disputes. They’re the muscle of the working world. So why doesn’t VC-istan want them? The answer is that these companies cannot afford to make the Loser trade. Losers are strategic, and many of them are smarter than the Sociopaths who run companies. They want comfort and stability, so when undesirable change comes their way, they realize that the trade offered to them– low status and compensation, in exchange for a secure job where little changes– has ended, and they react. The Loser deal is just intolerable if the stability disappears. Most leave, and a few “wake up” and try to play the Sociopath game, but the Loser tier, as a bulwark of social stability and continuity, ceases to exist. When it melts down, it also clues-in the (formerly?) Clueless who tend to want to “protect” the Losers (cf. Michael Scott’s paternalism). Fast-changing VC-funded startups would rather that it not form in the first place.

The result is that one must recruit the Clueless solely into a tier that merges Clueless and Loser traits and functionality. However, it’s hard to predict how a person will assimilate into the organization. Since these tiers have a contextual nature to them, the game comes down to “pattern matching”: bring in the ones who look Clueless. This gets gendered and racial (favor the risk-seeking gender and the privilege-associated complexion) but especially ageist. VC-istan luminaries (investors and founders) claim that they prefer young people because they haven’t been “corrupted” yet by dysfunctional corporate cultures. (Yet they have no qualms about creating new pathological cultures.) As I’ve gotten older, I’ve realized that this isn’t what happens. Older people don’t, in general, get “corrupted”. They get less Clueless.

In truth, VC-istan is a society of the Clueless, by the Clueless… and for the Sociopaths (who justify the high housing costs in the Bay Area). The MacLeod hierarchy hasn’t been rendered obsolete. It has only been re-adapted into a different form. The loss of the Loser class induces instability, and VC-istan compensates for this by making companies themselves disposable. VC-istan is a world without MacLeod Losers, but not without losers.