The New York Times responded to Peter Thiel's nascent teachings at Stanford. Specifically, David Brooks was addressing the concept of competition located here. Like the best articles, the comments make for an even better read than the content itself. I included two I thought would be most relevant to making today's post.
So imagine my elation that Thiel and the Times' David Brooks alike are talking about a subject that I think begs so much exploring – value creation. And to show that this discussion has greater scope than Thiel’s blog, look at leading Presidential contender Mitt Romney’s recent comments: “Take a shot, go for it, take a risk, get the education, borrow money if you have to from your parents, start a business.”
All three – Thiel, Brooks, and Romney, are very bullish on entrepreneurship in general. But by contrast to their optimistic theme, look at the comments to Brooks’ article. The comment I’ve highlighted here is representative of the many that were posted:
Richard L. from New Jersey wrote
"I guess my first reaction to this fascinating piece is that it really applies to maybe five people in the whole country. The sheer human capital required to consider a competitive impetus and, rather than succumbing to it, decide to put down the war-axe and successfully invent another game, is rather formidable. And extremely rare.
We certainly need the few who can, at least as much as we need the many who can't and instead merely compete (and win). But let's not lose sight of the reality that very few in any population are so incandescent that they can succeed as "monopolists". Most of us have to make do with being better (or more successful) than others at we do.
I'd suggest that "monopolists", while they create the new games that the rest of us play, are too thin on the ground to secure "the future of the country" without a ton of help from the competitive."
Taken in bulk, the comments of this ilk which represented the majority of those popular enough to float to the surface of all the comments posted, accused Brooks and Thiel of occupying an elite class that actually does have a coveted shot at “hitting it big” with a startup i.e. in Thiel’s case, or in Brooks’ case, with overpromoting the chance of success of those who pursue startups. Indeed, media in general sings the praises of successes for all to read and reference, yet says little of all the startups that failed. Entrepreneurs usually prefer avoiding talking about their failed startups in the past, certainly at the level of national discourse and pop media. I’m 0 for 2 myself, and am on my third . . . but I’m not sure I’d like to talk on national media about it.
Yet as someone who generally promotes startups and the startup lifestyle - with all of its ups, downs, and more downs – I was surprised at how much negative public sentiment lay in wait for a few individuals’ bullishness on startups. And I had to wonder if maybe they were right I mean, *everybody* can’t be a Peter Thiel, can they?
After all, it’s a big world with a huge population. Can a startup culture really sustainably satisfy the needs of everyone? And by needs I mean, at minimum, sustainably put food on the table every night and pay the rent for all concerned? All while simultaneously maintaining a shot at hitting the big-time?
Well sometimes I bite off more than I can chew as an amateur blogger and try to think up quantitative solutions to these problems. I decided to think of 50 startups in the past twenty years and think about the number of people that benefited. I put together that list here. Yes, the list manifests all of my biases on how I think about the startup world: The list is US-centric because I want to compare to the US population, and is centric on either brand names that are well known to consumers in general today, or else only familiar to me and a smaller number of others base on random niche interests. Yet you’ll probably recognize most of the companies on the list, and hopefully you’ll accept that they represent the bulk of popularly-referenced successful ventures over the past twenty years – i.e. I’m addressing the assumption “These companies’ founders had started a venture one day and look how they turned out, so I’m going to start my own venture”.
To make the math easy, I estimated most grossly that, on average, 50 people benefited directly in a significantly material, Peter-Thiel-esque way form participating in the early stages of these startups. So we’re talking founders, early employees, and early investors. At the extremes of these estimates we have Google where about a thousand people benefited significantly at IPO, and at the other extreme Instagram with about 15-20 people benefiting. But on average, grossly, fifty. Well accepted that this metric is very short-sighted, as companies such as those listed can create entire new industries, and in some cases like Google, entirely new forms of economic organization employing millions of people. But I had to generate some kind of heuristic as a starting point for criticism and improvement, so there it is.
So 50 companies x 50 people benefiting significantly at each company equals 2500 people. That’s 2500 people over the past 20 years 1992-2012 of some of the most important technological commercial upheaval the world has ever seen. So what does that tell us? Well, just what question *are* we trying to answer? I offer: “In an age of ongoing and immense tech upheaval, should we all aspire to found ground-breaking companies, or should we take the conservative route and stick ‘conventional’ professional pursuits such as accounting, law, medicine, plumbing, landscaping?” Well, were we to accept the accuracy of the 2500 number (as highly ill-advised as it is to do so), we would have to agree with the NYTimes commenters; In a nation of 350 million people, including some 150 million non-retired, non-child, bread-winners, 2500 is just such an incomprehensibly small number that it would seem like a fool’s strategy to start a business.
But I think we’re not digging deep enough – we’re dealing too grossly with macroeconomic trends and trying to inform individual value-maximizing decision making with them. After all, the decision-making individual doesn’t have to succeed in her first business. She only has to succeed in the last business. That is – the last of a potentially long string of startups to decide that the philosophy was worthwhile to pursue - a pursuit that could last decades.
But the company list is also misleading. (And I even wrote it). There were many companies that one could research that IPO’d or got acquired in the same period that didn’t make my list. Networking technology in general was huge with a lot of unintentionally low-profile brand names (think Brocade networks, Juniper Networks, Qwest). In fact, if we somehow had an exhaustive database of companies that either 1) IPO’d, 2) got acquired, 3) just made a large ongoing stream of cash, or even 4) simply achieved a lifestyle-sustaining stream of cash for the founding individual and his/her family, we would find ourselves with a database of perhaps several gigabytes of information.
All of the principals behind these businesses at some point made a startup oriented decision – whether they wrote up the PageRank algorithm at Stanford or opened an ice cream shop on their local Main Street. The number 2500 looks silly now, don’t you think? I’d reckon we’d be up to several million to several tens of millions of individuals benefiting directly from a startup oriented approach to life. How many precisely? I don’t know. Maybe it’s only 250,000 individuals, and maybe it’s 25 million individuals. That’s two order of magnitude, and that’s still too large a range to say, inform policy or even a political / economic debate. And are there losses along the way? Of course. Do lifestyles, relationships, expectations get disrupted for many along the way? Of course. Can we as a society soften the blows while also increasing the chances of success? OF COURSE. For example, #1:
Eric Ries and his ilk at Stanford and elsewhere champion means of starting up companies that minimally risk valuable resources like cash, time, motivation and focus. Such entrepreneurship strategies (i.e. teaching entrepreneurship as a science / a rubric that can be roughly followed ) simply were not taught before the most recent decades. So despite that their potential for increasing startup success rates (or at least reducing rates of unplanned-for failure rates) are still being borne out, they could have huge impact on our economy and entrepreneurial decision making.
And #2: another individual’s comment from the NYTimes article is illustrative:
Kenneth B. from Ashland, OR wrote
"There are probably people who have inventive ideas but are not able to carry them out because they lack funding. That's where the federal government can have a role, in the form of federal grants through the National Science Foundation and other agencies. There can be problems with such grants, though, in that peers who review proposals are not necessarily innovative thinkers themselves, so they may turn down the most innovative proposals because they're "too far from the mainstream."
There should be a mechanism to fund very innovative ideas that are outside of mainstream thinking. I can envision a special federally funded program dedicated to the most innovative research and development, with evaluations carried out by our most successful innovators: such people as Bill Gates, the Google founder, and Peter Thiel. Candidates would still have to compete for funding, but they would have a better chance of getting their truly innovative ideas turned into tangible results."
Agreed: Basically, many, if not most startups require funding beyond the Eric Ries lean variety to even show proof-of-concept or demonstrate market demand for an innovation. And it’s the only solution to out-and-out socialism I can think of in a tech-dominated economy that continuously disrupts industries and professions that rely on some stability of cash-flows to responsibly sustain families over such long periods as the rearing of a child. And yes, I know there are a million arguments against this approch– government competing with private industry, or effectively causing wealth transfer from taxpayers and the wealthy to startup employees and their CEOs. Why benefit this class (incidentally, ‘my class’)?
Because I think a nationalized venture funding approach is the only means to satisfy our national narrative of entrepreneurship that we can still call marginally responsible, without resorting to old Soviet-style property appropriations on an unprecedented scale or widespread, extremely undignified lifestyles such as similarly unprecedented volumes of people living in the streets. To simplify it to a phrase, if the national motto is encompasses the freedom to life, liberty, and the pursuit of happiness, then summarize this approach as “Give people the means to pursue happiness, or else . . . “
Here’s a quick nod to the libertarians among you – why can’t the private market solve this problem with more venture creation? After all there is a venture capital industry and even the likes of Kickstarter for crowdsourced venture funding. My response is, you guys the private, free market, aren’t working fast enough. Many so-called VC firms only make one investment per year after reviewing 400 business plans, all backed by dedicated, motivated entrepreneurs. Moreover, the Occupy movement is demonstrating that unemployment is way too high for the free-market-solves-all model to act fast enough at sufficient scale. So you can either fund the crowds with welfare payments from your own taxable purse (something I know you find revolting), or ask them to start self-sustaining businesses stimulated from your, you guessed it, taxed funds / income.
It’s just that I think it’s irresponsible for a society to plan on startup capital – the most vital capital needed to fuel a modern nation’s economy – to come from Mom and Dad. Why? Despite after achieving the best, most widespread adoption of Eric Ries’ teachings, I think we’re still going to see high startup business failure rates. The gains to entrepreneurship are socialized, yet the losses are individualized. (Incidentally I wrote on this topic during studies back at INSEAD).
So I’m afraid the New York Times commenters are right. A single individual’s decision to start-up, for the average person (including myself among this lot) is a really stupid idea even under the most forward-looking of today’s norms and resources.
PS. In researching for this post, I found this reference helpful / motivating: "The Market System: What is is, How it works, and What to Make of it" by Charles Lindblom . And thanks to Charles R. of Moscow who highlighted this text in the same NYTimes article.
PPS This post would ordinarily go to my normal blog for economic subject matter at http://prodigalmba.rstoem.com but my Wordpress install won't let me put up new posts for some reason, so here it is on the Walkabout blog.
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