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This week’s theme: the difference between CEO power and Founder power, and the very important ritual of Everyone Making Fun of Your Startup Idea.
As we continue our discussion around modelled desire, envy, sameness and differentiation in Silicon Valley, and how they all come together into a set of social codes, rules and norms that make the place work, so far we’ve mostly been talking about similarity: how a lot of the undifferentiation around startups is actually crucial to how the whole ecosystem works. This week, we’re going to talk about the one thing in Silicon Valley that everyone agrees is not interchangeable and are in fact truly differentiated and special: founders.
One thing that was implicit in our suggestion last week that the Dot Com Crash was a moment of founding re-differentiation for the modern tech industry is the distinct and lasting change from before to after the 1999 bubble in how the startup economy works. Although there are lots of candidates for what changed (new tech, new business models, the web as an established platform for businesses, and more), one stands out as particularly important for our discussion today: the transformation of the role of the founder / CEO.
In previous iterations of venture capital, from the 60s and 70s through the 90s, the general playbook that we seemed to follow a good percentage of the time was that founders with entrepreneurial spark and a specific technological competency would found the venture, and get it to a point where it was investible. Then the VCs would come in, capitalize the business, and then often bring in a “professional” CEO to manage the business as it grew. In most industries, even today, this is pretty normal! If you’re an investor and you’re looking to capitalize a business, you’re going to look to control as many risks as you can. The biggest risk of all is who’s in charge! Why wouldn’t you want to make sure that the leader the helm is someone who’s done this before, is going to be loyal to you, and has the perspective, maturity, connections, and leadership skills needed to steer a business to a successful outcome?
The modern-day founder is an entirely different sort of creature. Founders are more like little kings: whereas CEO is a title that’s appointed, founder is a title that is bestowed, almost as if by the divine. In some ways, founders have less power than traditional CEOs do. First-time founders will not be fluent in how to manage, how to use their position and their leverage. For all kinds of ways that can only really be overcome with experience, founders have less real power because they aren’t as good at running companies as seasoned CEOs are. But in other important ways, founders have much more power. They command a respect, and a special status in Silicon Valley, that non-founder CEOs do not have. This may be for technological reasons: the founder might have uniquely invented some technology, or it may simply be that they are person with the best technical grasp of what the startup is attempting to build; this certainly commands respect in an engineering-driven hacker culture. But that’s not the main thing.
In the context of our discussion on envy, modelled desire, and similarity versus difference from last week, there’s an important distinction between founders and appointed CEOs that’s sitting right there, in plain sight, but we don’t talk about it very often. CEO is a title that’s earned. It’s bestowed out of merit, presumably; it can be reassigned to someone else if they are of greater merit, or if the winds change for whatever reason. The CEO and her employees, in one crucial sense, are peers: yes, the CEO has a bigger title and more power, but one day down the line, one of them could be CEO instead. And for some of them, the thought has probably crossed their minds. Envy here is convergent: if I’m envious of your CEO title, the natural thing for me to want will be your job, and I’ll be inclined to subtly, perhaps even subconsciously, begin looking to find your weaknesses. Modelled desire will inevitably lead to conflict.
Founder, on the other hand, is not a title that’s earned. It’s a title, like we said, that’s bestowed as if from the divine, at the moment of creation of a startup. (Rewriting the history of who is founder can be done, but only quietly, as dirty work. It’s not something you want to draw attention to, at all.) This has a really important consequence for modelled desire and envy, which is that founder is a title that cannot really be taken or reassigned from one person to another. If I’m envious of your founder title, there’s no point to coveting it; what I need to do is go found a company of my own. Envy here isn’t convergent, it’s divergent. Modelled desire will lead to a different kind of conflict: I’ll go start a startup of my own.
This has a couple of consequences. First, it’s a driving force behind why we create so many startups here. In contrast to elsewhere in the business world, where envy will have convergent consequences that drives everyone to fight upwards to ascend the pyramid in a zero-sum way, the sanctity of the founder title means that envy in Silicon Valley has divergent, positive-sum consequences. Second, it structurally enforces the uniqueness of the founder role: once I’ve become founder of Company X, it is a permanently differentiated title, and it can help grant a particular kind of authority or sway over others when difficult decisions must be made: think stories we lionize like Steve Jobs coming back to rescue Apple, or something more recent like Jack Dorsey breaking Twitter’s seemingly-untouchable 140 character limit. In hindsight, it was a great move, and anyone could have proposed it. But really, only a Twitter founder could have actually made that change. No one else could have pulled it off, in all likelihood.
(There was a fantastic little anecdote that captured this difference between old-school CEOs and new-school founders in Silicon Valley the TV show, in a moment where Pied Piper founder Richard Hendricks is speaking with the newly-appointed CEO, “Action Jack” Barker. At one point, Barker interrupts their conversation and asks, “Wait. You don’t actually understand what our product is, do you?” Hendricks thinks about it for a second and offers: “Is the product… me?” Barker laughs and retorts, “Oh no. God no. Our product is our stock.” Says it all, really.)
We’ve also codified the uniqueness of the founder role into the cap tables, board seats and voting shares of modern startups. Outside of the startup world, it’s pretty normal for the capital versus management relationship to be something along the lines of ‘capital owns 80–90% of the business, and management is given 10–20% “sweat equity” to incentivize their work.’ That’s unheard of here: not only is the expectation for a funding round flipped to essentially the reverse (investors taking somewhere around 20% of a cap table in a funding round) but we’ve also had this recent trend of giving founders Supervoting shares that effectively grant someone like Mark Zuckerberg or Evan Spiegel authoritarian control over their companies. In any other industry, this would be ridiculed! A board of directors would be taken to court by its shareholders for approving such a ludicrous thing. But here? We shrugged our shoulders and said, “yeah, sure. That makes sense.” Founders are differentiated; capital is not.
However, we haven’t gotten to how founders are initially granted this differentiated status: why is it that they earn this special aura, and that other people begin to recognize them as such? Well, remember how last week we talked about one of the Very Important Rituals of Startups, which is all the rites and performances we go through when a company dies? Today, we’re going to talk about another one of those Very Important Rituals, which is what happens at the founding of a startup: the ritual of Everybody Makes Fun Of Your Idea And Calls It Dumb.
Great startups fairly often start out looking quite weird, stupid, trivial, or otherwise unpromising. If you come out as a founder and post a little blurb about what you’re doing on, say, Hacker News, the worst reaction you can get is nothing. The best reaction, funny enough, might be other posters ridiculing the idea and calling it too simple, too obvious, “I could code this on my own in a week”, “no one would ever be too stupid to let strangers sleep in their home”, whatever. (Drew Houston’s post announcing he was working on the product that would become Dropbox has gone down as arguably the most famous reference example of Hacker News posts.)
Now, the ritual of Everyone Calling Your Idea Dumb is secretly more important than people realize. The people who are calling the idea dumb don’t matter, in the sense that they weren’t going to help anyway, and they’re not likely to actually discourage anyone who was legitimately interested in helping. In fact, what they actually accomplish is quite the opposite, which is create an environment and almost an aura around the founder where “only they would be stupid/genius/unique/visionary enough to start this company.” The public ridiculing can be a very helpful part of the founding magic around the company, and it’s useful not because it establishes anything around whether the idea is good or bad, but something much more important, which is differentiation: the sense that the founder is uniquely brave/stubborn/etc enough to pursue it. This attracts other people to the founder and the idea: they see someone so interested in this idea that they’re working on it, for its own sake.
As the company gets started and wins start to accumulate, the founder quickly becomes lionized and enshrined as the focal point of differentiation for the company. In contrast to last week, when we talked about how it’s considered quite gross to specifically criticize founders after the death of a company (instead we ritualistically condemn VC-backed competition and undifferentiation in a broad sense), when fast-growing startups are on the way up, it’s considered quite ok to dish out both very specific praise and very specific criticism, often aimed specifically at the founder. Founders grow into their role as kings, and one of the most important aspects of being king is making sure that other people recognize you as the differentiated king; and one of the best ways to get recognized as king is for people to criticize you for your kingly acts. Often, the strongest way to make sure that everyone sees the founder’s kingship is a potent mix of alternating strong, direct praise, and strong, direct criticism, in public where everyone can see. The practice is particularly obvious during funding announcements, where VCs will write a blog post talking about how great and special the founder is, and how they see something that nobody else does, and how unique unique unique they are. (We’ll talk about this more next week, but the relationships between founders and VCs is quite akin to the ancient power dynamic between kings and priests.)
Next week, we’ll keep digging into this phenomenon of the differentiation of founders, and the special power that this grants them: the power to hustle, and how when we say hustle we don’t just mean “work hard”. We also mean that other thing.
One good piece this week is a recent story from the New York Times about Apple’s manufacturing, and the challenges they faced when they brought production of their Mac Pro (you know, the trash can) into the United States. The piece is really a kind of Rorschach test for how you already felt about Apple and about high-tech globalization in general. One camp of people shared this article as a good anecdotal example of how impressive and interconnected Apple’s offshore manufacturing operation is, especially the importance of the local Chinese supply chains that don’t exist here in the same capacity. (The anecdote in question concerned a particular screw that no local supplier could make at sufficient speed and notice to feed Apple’s line adequately.) The other camp of people took issue with that conclusion, arguing that if Apple had simply picked up the phone book, they could’ve found plenty of local manufacturers capable of meeting their needs, and Apple’s inability to furnish many basic parts revealed either a lack of local competence, or an unwillingness to actually try and make domestic manufacturing work.
Also, a sad story that has taken a truly unexpected twist: when Gerry Cotton, the founder / CEO of Canadian cryptocurrency exchange QuadrigaCX, passed away unexpectedly last month, customers naturally sought to get some of their crypto out of the exchange. But they couldn’t, and now we know why: the private keys are gone! They’re encrypted on Cotton’s laptop, to which no one else had access, and now unless they can find some way to break the laptop open, more than $100 million worth of crypto is probably gone forever.
UPDATE: Hey, apparently someone (somewhere) appears to have figured out how to get into QuadrigaCX’s Litecoin cold wallet (which may to be cold after all, hm.) There are a couple of conclusions you could draw from this, and most of them are conspiratorial in one way or another. Stay tuned.
New frontiers in 3D printing:
Some Super Bowl Sunday reading:
Other reading from around the Internet:
And finally, this week’s “What?” moment in online culture:
This week, it’s time for another edition of Social Capital Book Club! Some interesting topics, books and ideas that have been bouncing around the office:
Some reading about bubbles and financial speculation (including John Law, the architect of the first and biggest bubble there ever was):
Reading about our brains, our minds, our mental health, and the way we think:
Reading about synthetic biology, and how we’re poised to rebuild the building blocks of life itself:
Reading about the city, and hidden aspects of where we live and how they shape our lives:
And other good books that are worth your time:
If you have any book suggestions for us, or feel like sharing whatever you’re reading, send me a suggestion @alex_danco on Twitter, or email email@example.com. We’d love to hear them!
Have a great week,
Alex & the team from Social Capital