The most expensive lottery ticket in the world

By Felix Salmon
April 21, 2014

No Exit, the new book from Gideon Lewis-Kraus, should be required reading for anybody who thinks it might be a good idea to found a startup in Silicon Valley. It shows just how miserable the startup founder’s life is, and raises the question of why anybody would voluntarily subject themselves to such a thing.

A large part of the answer is that Silicon Valley is gripped by a mass delusion, compounded by a deep “fake it til you make it” attitude toward success. Why do so many people in Silicon Valley want to be founders? Because every founder they meet is always killing it, crushing it, having massive success, just about to close a huge round, etc etc. At some level, they must know this is impossible: if 90% of startups fail, it simply can’t be the case that all of the startups they know are succeeding. After all, failure is not something which just suddenly happens overnight, when you thought you were doing great all along. But people tend to believe the evidence of their own eyes, and what they see is a combination of two things: the founders they know all seemingly doing great, and also a steady stream of headlines showing other founders cashing out for millions or even billions of dollars.

On top of that, startup founders have Silicon Valley cachet: they’re the stuff of legend. Everybody wants to be Mark Zuckerberg or Steve Jobs or Jack Dorsey. There might be a generous paycheck in getting stuck on the Google bus for the next decade, but there sure ain’t any glory in it. And so a huge number of incredibly well qualified engineers, who in previous decades would have put their skills to work being a part of something much bigger than themselves, instead decide to go it alone.

There is no reason whatsoever to believe that computer engineers make particularly good entrepreneurs. Quite the opposite, in fact: engineers tend to do quite well in structured environments, where there are clear problems to solve, and relatively badly in the chaos of a startup, where the most important skills are non-engineering ones, like being able to attract talent and investors. No Exit makes it very clear that the life of a startup founder is a miserable one, and that engineers are invariably happier when they’re working for a big company.

Financially, starting up a company in Silicon Valley makes very little sense. You have a very high chance (indeed, a certainty) of having to scrape by on a very low income in a very expensive city. At a time of your life when you should be out enjoying life and meeting friends and generally having lots of fun, you will instead be unhappily tethered to your laptop at all times. In return for sacrificing a six-figure salary elsewhere and general enjoyment of life, you’re given a lottery ticket: you get a minuscule chance of making untold millions of dollars. Being that rich is, undoubtedly, nice. But is it so much nicer than the life of a well-paid computer engineer that you’re willing to give up your life, and hundreds of thousands of dollars in foregone income, in order to have a tiny chance of grasping that brass ring? I know a lot of happy people; there are a couple of successful technology entrepreneurs among them. But I would never say that the successful entrepreneurs are the happiest people I know. So where does it come from, this intense Silicon Valley desire to buy the most expensive lottery ticket in the world?

To find the answer, you have to look to the people running the lottery. In this case, those people are the angel investors and venture capitalists — the people who are throwing ever-greater sums of money at ever-greater numbers of startups, in the knowledge that the overwhelming majority of the companies they fund will end up failing.

What we’re looking at here is basically the Magnetar Trade, in human form. Magnetar had a long/short relative-value strategy in the subprime market: it was short a lot of subprime securities, while also being long a smaller slice of equity. While Magnetar was putting on its trades, the equity slice would make money; when everything blew up, the shorts made even more.

The Silicon Valley trade is also pretty close to being zero-sum. Even on a purely financial basis, if you add up all the profits from successful investments, they barely cover the losses on all the unsuccessful ones. A few big-name angels and VCs can do OK for themselves, but in aggregate the industry of investing in startups does not make money.

But the reality is much worse than that. Essentially the way that the startup ecosystem works is by taking the valuable labor of thousands of hopeful founders, and converting it into large amounts of capital for a tiny number of successes. The fulcrum of No Exit is the point at which it’s unclear whether the startup being followed by Lewis-Kraus will get its next round of funding: either it will raise a sum in the low seven figures, and survive, or else it will simply fail. And the message of the book is clear: the best possible outcome, in terms of the wealth, health, and happiness of the founders, would be the latter. Their startup fails, they get their lives back. They can work for a living and enjoy themselves and not stay stuck on the evil startup grind. If they do manage to raise their next round, that will only serve to prolong their misery.

Founding a Silicon Valley startup, then, is a deeply irrational thing to do: it’s a decision to throw away a large chunk of your precious youth at a venture which is almost certain to fail. Meanwhile, the Silicon Valley ecosystem as a whole will happily eat you up, consuming your desperate and massively underpaid labor, and converting it into a few obscenely large paychecks for a handful of extraordinarily lucky individuals. On its face, the winners, here, are the people with the big successful exits. But after reading No Exit, a different conclusion presents itself. The real winners are the happy and well-paid engineers, enjoying their lives and their youth while working for great companies like Google. In the world of startups, the only winning move is not to play.

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