This is an excellent essay, and I’ve been arguing this case for years.
To make a long analysis short(er), it seems that most processes of innovation have a “natural” growth rate. For agriculture, it’s 0.5 to 1 percent per year, which is why agrarian economies had that level of growth. For industry, it’s 1 to 10 percent. For technology, it’s 10 to 50 percent per year. You can get lucky and break that “speed limit”, but not sustainably. The risk levels become unacceptably high — unless you buy into the belief that no one who is affected by failure *cough* actually matters (which seems to be the rarely-admitted attitude of the Silicon Valley elite).
The above is why we distrust “get rich quick” schemes: they usually involve hidden risks, if they’re not outright cons. If someone claims to have an investing strategy that yields 50 percent per year, I’m going to have a lot of questions. Yet technology seems to buy into its own exceptionalism. And, sure, a well-run tech company probably can grow at 25 percent per year without obscene risk, but I’m not going to buy 500 percent.
For low-risk, low-growth businesses like, say, a parking garage empire which will have plenty of collateral even if it folds, you have traditional bank loans. For high-risk businesses targeting 200–400 percent annual growth, with 90% rates of failing before they become anything legitimate, you have VC. (VCs soften the blow of failure by pulling favors and arranging “acqui-hires”.) For mid-risk/mid-growth businesses, there’s nothing. VCs aren’t interested in 40% annual growth, but even an IT consulting LLC is too risky for traditional banks.
The current system, with its emphasis on hockey-sticks and unicorns, excludes everyone but those most willing to throw caution to the wind. Those people tend to be male and they tend to be under 30 and they tend to be privileged. I’d go further and say that the VC’s ideal founder is “semi-privileged”: pedigreed enough not to require too much mentorship in terms of how rich people think and talk, and naive/sheltered enough not to ask questions, but not well-connected enough to threaten the VCs. We certainly have a monoculture in terms of who gets funded, and it’s pumping out a lot of toxic and exclusionary ideas (e.g. open-plan offices, because no one ever gets sick or disabled; “Agile” micromanagement; ageist practices that make it impossible to hire an actual experienced/capable developer) that are now infecting the corporate mainstream (because bad management is “what the cool kids are doing”).
Bootstrapping seems to be uncommon and I think that the problem is that we have an extremely inefficient labor market. Capital markets have become so efficient that it’s ridiculous. When I was in HFT, arbitrage opportunities tended to exist for 50 microseconds. Capital market efficiency is nearly a solved problem. On the other hand, labor markets (except at the abysmal low end) are still based in the 19th-century world of trust, credentials, references, and reputation. This makes bootstrapping-via-consulting extremely difficult, because people have to play these 19th-century side games just to get work, and that makes consulting *as a way to veer toward a product company* even more difficult because it requires playing *three* games: getting the work, doing the work well, and investing in the product. If we could trim that down to two, we’d see a lot of improvement, more innovation, more options for workers, and thus less power in the Sand Hill Road manchild oligarchy.
We absolutely need more diversity in the founding of new businesses. Most important, we need diversity of thought and worldview. It’s not that women are better than men or older people are better than the young. The lack of diversity, however, is symptomatic and causative of a homogeneity in thought that leads to mediocrity and metrics-obsession.
Our current generation of VC-backed startup founders aren’t lifelong technologists (as many previous-generation founders were) and they certainly aren’t challenging the old “Establishment”. They’re spoiled Millennials who want to be part of the Establishment, but just think they deserve to jump queue. In the 1950s, their daddies would make calls and place them in management positions that would take 20 years for anyone else to get. In 2016, they have to make it look like they actually earned it, so their daddies get them venture funding and “acqui-hires” when their bad ideas flop. Say what you want about Steve Jobs — he was many things, and not all good — but he wasn’t one of those glass-elevator brats and he wasn’t going for an “acqui-hire” and his company changed the world more than some damnable sexting app.
At any rate, I’d love to hear more about your proposed way of changing this ecosystem. I think that re-tooling ourselves to focus on the mid-risk/mid-growth business would benefit almost everyone. It’ll lead to more satisfied clients, better (less rushed) technical decisions, more useful products, and more career coherence (no stupid “pivots” or “sprints”) for those actually doing the work. I think the key is tackling labor-market inefficiency. It needs to be easier (a lot easier) to get clients. Right now, I think that many tech startups are pushed in the VC direction because, for all the complaint about VCs, it’s actually often easier to get started by setting off a “herd mentality” among VCs than by building a client base. So that becomes the path of least resistance. Of course, once you do that, you give complete control over your reputation to your backers, and you can no longer say “No” if you’re asked to bet the whole company on 17/Black.