I’ve discussed a number of problems that businesses face, and started work on at solutions. There’s one major issue that I still need to address. A good organizational culture is expensive. It’s not enormously so, and it pays for itself over time, making it far cheaper than the alternative, but one has to make the conscious decision to pay for culture, or most often it won’t exist. MacLeod pathologies, most pronounced in the stable but undesirable corporate rank culture, seem inevitable because, without ongoing investment in culture, they are. One has to knowingly stand apart from such pathology to prevent it, at least at scale.

Here are a few major ways that it is more expensive for a company to have a healthy organizational culture than the default, broken one. These points are inspired by technology, because it’s what I know. Most of these pertain to risk rather than expense, but the former is generally perceived as the latter, since the real business of business often tends to be risk transfer.

• Thoughtful and strategic growth. VC-istan startups collect smart people and leave them to fend for themselves, as the company grows ambitiously but not strategically. Healthy culture requires personnel growth in tandem with the legitimate workload (essential or interesting work; not fourth-quadrant executive nice-to-haves). If the workload grows, you must hire more people. If it doesn’t, you shouldn’t. Slow growth might seem less risky, but in the context of VC-istan, it’s much more risky; it’s seem as appropriate for niche “lifestyle businesses” but likely to fail in winner-take-all “red ocean” markets. 
• Progressive hiring. Most technology companies look for “plug and play” hires who already know the technologies they have and can turn a profit over salary in 1 month instead of 6 months. The tight deadlines of a VC-istan startup seem to necessitate this adversity to ramp-up time. If you’re hiring for culture, though, you need to take account of future potential and you can’t, in practice, be selective for cultural coherence and plug-and-play. You have to hire the people who will make your company great in the long term, rather than for immediate technical-stack fluency.
• Mentoring. Most companies talk about this lofty ideal, inherited from the guild cultures of old, but few actually do it. One negative side effect of convexity is that, because the time of a seasoned veteran has an order of magnitude more short-term economic value than that of a competent intermediate, mentoring is generally seen as too expensive by executives. Demands placed on the most productive people (by senior people, with power) are already so high that mentorship of new hires (with no power) invariably gets the shaft.
• Open allocation. Employees are directly responsible for making their work useful to the company, without managerial interference. This is more managerially challenging because it relies genuine motivation, rather than extortion. The upshot of it is that even undesirable work will be done well, because if it’s genuinely important, someone will want to do it after some time. The drawback is that, with work direction coming from the demand rather than supply side, it tends toward “eventual consistency” rather than having the quick-but-sloppy immediacy of managerial edict.
• Innovation time. So-called “20% time” is not the same thing as open allocation. A healthy company needs both. Open allocation means that a person has the right to move to another sanctioned project without requiring permission, but it’s not “work on whatever you want”. Innovation time means that the employee can work on anything, as part of a team or entirely self-directed, that benefits the company. It enables people to work on 3rd quadrant (interesting but discretionary) work that might have a major payoff (convexity) in the future, but the limited amount of innovation time keeps divergent creativity (which might never pay off) from going off into the weeds.
• Severance. You’ll need to fire people who just don’t work out. If you fire someone without a severance package, you’re gambling with your reputation. Startups don’t fear termination lawsuits, knowing they’ll either be big or dead by the time that one would conclude– it’s tomorrow’s problem. But severance is also about PR. Reputation risk is more immediate. People talk. Internet happens. If you’re in dire financial straits and everyone knows it, you can lay people off and they probably won’t expect a large package, and the good faith coming from mutual suffering will keep them from disparaging you. If, however, you’re flush with cash and you fire a basically decent “no-fault lack of fit” employee without severance, you’re an asshole and deserve what happens to your reputation.
  • Oh, and don’t even think of using “Performance Improvement Plans”, which allow HR departments to claim they “saved money” on severance while externalizing costs to the team and manager. The morale toxicity of having a “walking dead” employee in the office for one month (hell, even one week) is more expensive than a 3-month severance. Also, most “low-performer initiatives” are dishonest layoffs that turn into politicized witch hunts. You’ve been warned.
• Firing and demoting toxic high-performers. People can be individual high-performers but damaging to the group. If you can isolate them and demote them out of managerial authority, then fine. Often, the only separation that will work is termination. Toxic people tend to have a desire for control over others that exceeds their leadership ability. They need to be fired, even if they seem “essential”. They aren’t. No one is essential. If someone is insistent on controlling others or, worse yet, bullies or harasses them, you must get rid of that person. You’re a business, not a day care.

All of these efforts pay off in the long term, but are costly enough in the short run to introduce risk. VC-istan, with its disposable-company attitude and obsession with fast growth, is rarely going to pay for any of those. This might seem contradictory: isn’t VC-istan all about embracing risk? It’s not that simple. Organizations tend toward “risk-against-risk compensation”, where increasing risk of one variety requires a zero-tolerance crack down on the other forms of risk, in order to keep total risk below some accepted level (“risk budget”). VC-istan loads up on one kind of it– business-model risk– while being extremely risk-averse with regard to the rest, explaining why most of these “VC darling” startups have horrendous corporate cultures. Messianic founders (often, people with VC contacts who are also too narcissistic to be anything but “serial entrepreneurs”, because they can’t keep normal jobs for longer than 3 weeks) have a tendency to take all the creative risk for themselves. At the interface level of the company, they exhibit an extreme (and not always undesirable) affinity for rapid, sudden changes (pivots) in business model and vision. However, the firm’s entire risk budget is allocated to people at the interface. The interior (where engineers live) is neglected and gets no risk budget (read: only what one can hide). While the company is swift and small, it’s more like a tough culture in which it can still be enjoyable to be a low-level employee– one thrives by hiding risks, working very hard, and getting lucky. Once professional managers (who reduce risks, even of the good kind, because it’s what they’re trained to do) are hired, rank culture sets in and the company is no longer with caring about, except for true shareholders (and not people sacrificing their careers to vest tiny slices of equity).

Good and bad risks– and why the distinction used to not matter, and now does

Companies exist to shift around risks, but this raises a question. Is moving risk the only thing we should care about?

Clearly, there are some good and some bad risks. Most business risks that companies take are beneficial to them and, sometimes, to society at large. Those are good risks. Funding basic research is a good risk; the worst-case scenario is a well-understood financial loss, and the upside is immense. Playing Russian Roulette is a bad risk: it has no upside for anyone, and there’s a 1-in-6 chance of a bullet in the head. Risk can have an irremovable moral character, and the business world tends to ignore that.

Financial risk can be commoditized and transferred, due to separability. This leaves the risk (which can be traded on a market) without a directional moral character or color. All that matters is the (explicitly quantifiable) amount of it that there is. With separability, you can take the attitude that there’s a fixed, quantifiable “pool” of risk that may be taken, and risk allowance will be allocated according to political standing. When you’re dealing with separable commodity risk, it doesn’t matter who has the allowance or what kind of risk it is. As an owner or top executive, you set a maximum amount, let the politically empowered or daring take risks (for personal and corporate benefit) until that limit is reached, and hope for the best.

The problem, in a fully convex technological economy, is that most risks are no longer separable, meaning raw amount of risk (e.g. statistical variance) isn’t the only vital concern. Why? First, there are too many important risks to set up a market for transfer. With industrial commodity labor, individual efforts were concave. Now, each employee is a source of convexity. Creative risks, in the technological world, are individualistic and non-fungible. The payoff distributions are not Gaussian. Old models break down, and management according to risk allowances and principled reduction result in lost upside. In the concave, industrial world, this was tolerable. Concavity, which favors risk aversion, means there’s little value to extreme high performance. Taking a haircut on the upper end was fine: a “Maserati problem”. Convexity’s different. Without that “fat tail” upside, one cannot compete. Losing the upper end means losing almost everything.

Good risks generally involve growth and building: “blue sky” R&D is an example. Bad risks usually involve damage and harm: “low performer” witch hunts might reduce costs, but can demolish morale forever. Bad risks tend to be concave (downside-heavy) and good ones convex (upside-heavy) but that isn’t strictly or uniformly true. In any case, typical industrial-era, MBA-toting management never bothered to learn the difference between good and bad risks because, until recently, it didn’t matter. Risk was a measurable but fungible (thus, always financial) quantity to be sloshed around. Loss induced by sloshing costs was minimal: a rounding error. With inseparable risks, sloshing is infeasible. Risk must be “allocated” and executed where it “naturally” lives. The concrete result of this, amid widespread convexity, is that employees must be trusted with their own time and risk. Not taking that approach will hamstring a business.

What do the players want?

MacLeod organizations exist to transfer certain kinds of risk– especially the personal risk of income volatility that has little to do with business, but is a motivating factor for people to go to work, even under disadvantageous (MacLeod Loser) conditions. If one wanted to see it this way, one could perceive the (idealized) corporation as a purification plant that takes peoples’ personal income risks (bad risk) and turns it into an engine that can provide them steady employment while delivering high average returns for those who can tolerate volatility (good risk). This is the sort of thing that becomes possible in a world of separable risks.

Regarding risk, individual people generally don’t want sudden losses of income or painful or disruptive changes in their daily routines. They especially hate involuntary geographical mobility, one of the strongest predictors of mental illness. The first (and legally inviolable) provision of the corporate social contract is that the employee gets paid speedily for work furnished. Implicitly, they also harbor expectations regarding career management, fair warning of job loss, and fairness– those are delivered with less of a scrupulous reliability, because they can’t be legally enforced. Ultimately, however, most people are looking to be separate from the potentially life-ruining risks that they’d face on a daily basis if they interacted directly with the market. These are the MacLeod Losers. They take a steady wage that falls short of their expected productivity (and that they will lose if severely unproductive) and the difference is the risk premium they pay. The risk-seeking and entrepreneurial MacLeod Sociopaths collect these risk premiums and often get rich.

Intermediate management (which, in a risk-analytic perspective, includes executives, insofar as they are “upper management” but sit between risk-exposed owners and risk-selling workers) is a disease and a treatment. The problem with such people is that they often find ways to take upside risks while externalizing the downside (“heads, I win; tails, you lose”). Executives combine the ambition of ownership and the risk-aversion of management, and often the most fit personality type for this is a thief with a mature and nuanced understanding of risk and a preternatural skill for externalizing and hiding risks. At some point, an Effort Thermocline forms and the true executives, collecting only upside, are less accountable and less productive than the downside-laden chumps below them. Those who succeed in the trade of risk and credibility (the right to take organizational risk in one’s own direction) become the MacLeod Sociopaths. Those who fail become the Clueless, who inadvertently serve as a countervailing force to the mounting pathology and sociopathy of the shell-gaming Sociopaths. The Losers, on the other hand, are aware of the risk transfer that’s going on and, as long as their personal risk is reduced, they don’t care who wins or loses.

The new fourth category of the Technocrat has a different attitude. Clueless are laden with bad risk and unaware of it, thinking they’re doing right by their companies. Losers want to get rid of personal income, location, and condition-change risk. Sociopaths try to take existing good risk for themselves and externalize bad risks, but their main goal is their personal balance (good risk, minus bad risk). Technocrats actively seek good risks, biased toward the convex-friendly opinion that taking desirable risks (rather than reducing disliked ones) is the optimal strategy. They want improvement, hard problems to solve, and creative endeavor.

The Miser’s Question: Why you?

When does emotionally neutral (and justifiable) corporate risk aversion turn into resentment, bad faith, and moral corruption? The answer is the Miser’s Question.

When a person tries to pursue creativity that entails risk (especially, the financial kind) for others, he’s going to run to into the Miser’s Question. Why you? It’s not rejection of the idea. It is to say: the idea sounds like it has merit, it could be a good one, but what makes you the one to execute it? What’s your competitive advantage over the other guys? Shouldn’t we bring in an expert to make those calls?

For a brilliant cinematic example of the Miser’s Question, there’s a scene in Fargo where Jerry Lundegaard– the protagonist, an emasculated and fairly stupid man turned to crime in desperation– discusses a business proposal with his father-in-law, a wealthy banker. For maximal humiliation, the banker recognizes the deal as a good one, takes it for himself, and offers Jerry a trivial finder’s fee. The banker didn’t perceive Jerry as having the competence to execute it. (To his credit, the banker was probably right. The movie is about Jerry’s incompetent execution at, well, a lot of things.)

Worse is a move that I call the Miser Bomb. It’s when a boss takes a subordinate’s idea and gives it to someone else he perceives to be more credible. That’s evil. Once the Miser Bomb falls, the relationship between that manager and the employee is over. Having an idea rejected is just business. The Miser Bomb is rejecting (and insulting) a person. It’s a good idea, but we don’t trust your judgement. That wound never heals. It leads irreversibly to resentment, adversity, and sabotage.

A true-blue Sociopath would fire a subordinate as soon as he drops the Miser Bomb. At that point, it’s probably the only reasonable thing to do: summarily terminate this guy who will never be invested in his work, and will almost certainly desire to undermine his superiors.

I don’t like “why you?” and I especially dislike “why you?” cultures. Having grown up in blue-collar Pennsylvania, I can say there’s clearly a set of hard-working, intelligent people who end up not achieving much because they feel that ambition and upper-tier achievement “just aren’t for our kind”. (Of course, that’s bullshit.) In the Philippines, this is referred to as the “crab mentality“, which refers to the tendency for captured crabs in a bucket (that, individually, one could escape) to pull each other down, so that none get out and all die. It’s militant mediocrity. “Why you?” is the crab-mentality conviction that anything interesting (executive-level business problems, hard-core machine learning, self-executive direction of one’s own career) can only be performed by anointed “special” people, rather than learned through trial and error. Startups are supposed to be beyond that, but I find the opposite often be true. Often, a good idea will be met with, “That would require hiring a real X with production experience at scale.” Never is approached the idea that “real X”es didn’t descend from heaven, but learned those skills by, you know, doing X without asking for permission from risk-averse, emasculated imbeciles who use words like “scaling” without knowing that they mean. This “real X” obsession is often related to a disgusting, social-climbing “our people aren’t good enough” attitude that I’ve seen in many startups, and it must be run away from with extreme prejudice.

Given the toxicity of “Why you?”, why does it still exist? There’s an amazing saying (often falsely attributed to Eleanor Roosevelt) that explains it:

The best minds discuss ideas, middling minds discuss events, weak minds discuss people.

Apply this maxim to business and investment. The most progressive thinkers want to participate in human creativity, so their goal is to validate new concepts in a calculus that balances their divergent creative needs (exploration) with the convergent, pragmatic motive of turning a profit (exploitation, here used non-pejoratively). Middling businessmen want to see numbers about the market, some projections and charts, and fetishistic buzzwords that make them feel safe. The small-minded and deficient operate based on emotion, superficial assessments of character, and credibility. They’re the ones who ask “Why you?”

VC-istan, as I see it, is still a “Why you?” culture. Investors are looking for “track record”. What galls me is when they say, “we don’t invest in ideas; we invest in people”. That’s supposed to sound agile and progressive. Actually, the people who say that sound like small-minded dipshits. If you’re an investor or executive, then your goal should be to invest in human creativity (not “people”, meaning resumes or superficial reputations) and, while pragmatic compromise is always necessary, if creative excellence isn’t your aspiration as an executive/investor, you’re a supernumerary, conformist bag of waste and you should just sit this life out. If you’d rather invest in “track record” than potential, then I’m sorry but the future just isn’t for you.

The answer to “Why you?”: Why not?

The problem with “why you?” is that people internalize it, especially after 20 years of disempowerment. If you’re obsessively questioning whether you’re “good enough” to try something, you’re wasting time that could be spent either learning the requisite skills, or just going the fuck out and doing it. There are a million things worth doing, and if we leave them to “special” or “credible” people, most of them will never be done. There are only about 23 people in the world who are perfectly and implicitly credible (Google’s Jeff Dean is one) at any given time, and each can do a maximum of maybe 6 things-worth-doing at a time, which leaves 999,862 things worth doing that won’t be attended.

The only business organizations that are worth caring about have “why not?” cultures where people focus on doing rather than jockeying for permission to do things.

“Why not?” is not about irresponsible permissiveness. It’s a real question, not rhetoric. There are often good reasons not to take risks. That question must always be examined, and any reasons considered. If, however, the worst-case scenario is merely an affordable expense of time, people should go for it. That should be encouraged in all levels of an organization. People should be implicitly trusted with their own time, and encouraged to take beneficial risks.

The reason I don’t see a future in VC-istan is that it’s doomed to continue along with its “Why you?” mentality, if for no other reason than its centralization of power. VC may be a slight improvement over the traditional corporate culture that peaked in the 1970s, but it’s every bit as doomed to MacLeod stratification, upper-crust entitlement, and pervasive mediocrity. It’s so far along that path that it can’t come back. We need a genuine “why not?” culture; that, more than anything, is going to define creative health over the next several decades.

What will overwhelm VC-istan and drive it into obsolescence? I’d put my money on an armada of 50,000 or more small companies, not focused obsessively on rapid growth. These are derided as “lifestyle businesses”, but I trust them more than anything else that is out there to build out the future. The lifestyle business is viewed as a failure because, in the current regime, it’s too small to be safe. A competitor can kill it, and the owners’ lives are probably ruined. That’s a real problem. It makes a lot of great people not want to do lifestyle businesses, because there is this serious risk. VC-istan is there to provide a safety hatch for good-faith business failure, which lifestyle businesses don’t have. Good-faith failure at a lifestyle business still fucks up your life. If we can provide a reliable, working path for talented entrepreneurs to start lifestyle businesses without egregious personal risk, we’re headed in the right direction. Nothing can (or should) protect businesses that fail in the market from dissolution and reallocation of the (underused) resources, but we should make it easier for the people who fail in good faith to try again. We need to make “yeoman capitalism” a legitimate and sustainable mode of existence.

Moreover, a fleet of 50,000 strong but not gigantic businesses is, in my opinion, a hell of a lot more robust than VC-istan’s few hundred red-ocean “X killers”, where X is some giant corporation that, while sluggish and mediocre in the development of internal talent, still has the means and will to fight viciously against (and possibly demolish) anything with any real chance of killing hit. VC-istan despises lifestyle businesses not because there’s anything wrong with them, but because it favors get-big-or-die “X killer” gambits that are continually reliant on external capital.

The solution to our problem is coming into view, but we still have questions to answer. It would be a great thing to have 50,000 lifestyle businesses building real technology. How on earth are we, as a society, going to pay for it? We come back to age-old economic problems of risk and finance. I’ve painted the broad strokes; the finer ones are where I intend to go next.