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Businesses The Almighty Buck

Silicon Valley's Big Lie 129

HughPickens.com writes: Danny Crichton writes at TechCrunch that startups in Silicon Valley run on an alchemy of ignorance and amnesia and that lying is a requisite and daily part of being a founder, the grease that keeps the startup flywheel running. Most startups fail. The vast, vast majority of startup employees will never exercise their options, let alone become millionaires while doing it. But founders have little choice as they sell their company to everyone, whether investors, employees, potential employees, or clients. "Founders have to tell the lie – that everything is fine, that a feature is going to launch even though the engineer for that feature hasn't been hired yet, that payroll will run even though the VC dollars are still nowhere on the horizon," writes Crichton. "For one of the most hyper-rational populations in the world, Silicon Valley runs off a myth about startup success, of the lowly founder conquering the world."
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Silicon Valley's Big Lie

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  • Amnesia? (Score:5, Interesting)

    by postbigbang ( 761081 ) on Saturday August 01, 2015 @09:34AM (#50229067)

    The graveyard from Santa Cruz, San Jose, all the way to Sacramento is huge, but this isn't amnesia. This is hope, and hope sells, and occasionally, hope pays off in huge ways. On the way through the graveyard, you get to learn what worked and what didn't.

    Eventually, a handful get to the Holy Gates of IPOs, and maybe things go well from there. Slashdot, financially, is a mirror of being a member of this very set, a long ago huge IPO that kept becoming sold off in hopes of future success, but now itself is on the block.

    • Itt should also be mentioned that programmers typically still get a huge paycheck in cash, even when they get some stock options.
  • by Anonymous Coward

    "For one of the most hyper-rational populations in the world"

    That's part of the Big Lie, isn't it? Those greedy men who have least to offer will do their best to paint themselves as having the most to offer, and what better weapon has there been since the Renaissance than sophistry disguised as science, pulling those in just clever enough to know what they should be looking for, but too stupid to know whether they're witnessing it? It's the way of every salesman.

    The rational man learns hard, finds an honest

  • by musmax ( 1029830 ) on Saturday August 01, 2015 @09:51AM (#50229123)
    Value needs to be extracted somewhere and if you're not the extractor then chances are you're the chump. The responsibility of not being exploited is mine, and if I drank the koolaid I know who the chump who did the drinking was. Maybe next time I'll learn that my l33t risk analysis skills needs a bit of tweaking, or even better, give up on the self-gaslighting.
    • by Alomex ( 148003 ) on Saturday August 01, 2015 @12:31PM (#50229697) Homepage

      No, value can be created, something that Marxist theory conveniently ignores, just like you did above.

      • Agreed, but a substantial amount is gaming the business and the trick is attracting and extracting investor dollars with full knowledge that there's little chance of success (let alone sustained success) once the money runs out.
        • Agreed, but a substantial amount is gaming the business and the trick is attracting and extracting investor dollars with full knowledge that there's little chance of success

          I'll bet venture capitalists know that game, and are more skilled at avoiding tricksters than you are at tricking them.

      • No, value can be created, something that Marxist theory conveniently ignores, just like you did above.

        I thought in Marxist theory the workers' surplus labour created this added value, which capitalists took as profits?

        It's not my understanding that Marx meant that there was some fixed amount of money which was just being moved from workers to capitalists. It was obvious from the Industrial Revolution that over all economic growth was happening.

        • by Alomex ( 148003 )

          I thought in Marxist theory the workers' surplus labour created this added value, which capitalists took as profits?

          Exactly which ignores that value can be created through trade, capital allocation and scientific inventions. In his world a rich person has money solely because s/he "stole" surplus value from workers.

          In other words, capitalism allows for the creation of wealth in two forms: rent-seeking and creation of value. Marx correctly identified rent-seeking as an indefensible form of profit extraction and set out to vanish the entire system around it, including capital allocation and labor incentives, which are two

  • by SuperKendall ( 25149 ) on Saturday August 01, 2015 @10:07AM (#50229167)

    Sure the chances are, as you say, low that the company you join will IPO and/or make it big.

    That doesn't mea it doesn't happen though, and that the company you are joining might have an idea you like enough that you want to push to make it succeeded.

    But even if you are just being cynical, there are still a lot of rewards to be had from joining a startup as (at least in CA) the pay is still really, really good thanks to large pools of VC money sloshing all over the place. There's a lot of room to navigate there in ways that mean your own personal success even if the company never hits it big.

  • by tompaulco ( 629533 ) on Saturday August 01, 2015 @10:14AM (#50229195) Homepage Journal
    If you believe in the product you are creating, don't build it at a company whose vision is to build the company just to sell it or to IPO it. They don't care about the product, only selling the company. They will shortchange everywhere they can, cut corners, not test or QA, and eventually, once you have the product built, they will let you go before you get a chance to cash in.
    • That's the nature and purpose of your regular everyday Wall Street pyramid/ponzi scheme.

      • Little ability to invest or plan for in the long term Is one of the biggest failures of capitalism. An example is the transcontinental railroad. That railroad was worth building, and unlike a lot of ventures, it could hardly be more obvious that it would be a huge boost to the economy and the nation, yet even with that the market could not raise the money necessary to finance the building of it. By the 1860s, the transcontinental was shifting from a dream to concrete plans, the technologies needed for st

    • by Anonymous Coward

      That's exactly right. The great companies stay private as long as possible. What has happened in SV is that the dogs are over-valued and then dumped on the public via an IPO - IPOs are used as exit strategies instead of a way of getting capital.

      A perfect example is FitBit. There was no real reason for them to go public. They had enough working capital and investors to do anything they wanted. But they IPO'd at a ridiculous price and considering that the fitness band market is starting to slow down, there i

    • once you have the product built, they will let you go before you get a chance to cash in.

      That sounds like a joke, but it's not. I've seen it happen. Never work for a company that rips off its customers, because they will just as surely rip you off when the time comes.

  • It's really the same sort of proselytizing that churches do to get followers. Without any tangible "earthly" benefits, the only option is to offer everlasting life beyond the pearly gates of the IPO and draw in the young wide-eyed dreamers. As they get old and embittered, they get tossed for the next wide-eyed dreamer. Lather, rinse, repeat until A) profit! or B) buyout or C) federal indictment occurs.
    • From your neutral and measured tone, I'll assume you're not speaking from personal experience.

      • From your neutral and measured tone, I'll assume you're not speaking from personal experience.

        Yes, I was smart enough to avoid this sort of crap like the plague. I can't pay my mortgage on hopes and dreams.

  • Big secret: companies run like this even after going public, even after getting large and mature.

    • Re:Big lie? (Score:5, Insightful)

      by Mr D from 63 ( 3395377 ) on Saturday August 01, 2015 @10:20AM (#50229221)
      Elon Musk says shhhhhh.
  • Anyone who has been in a casino can hear all kinds of noise and it is all of people winning. You never hear the noise of people losing. That's only one lie of Silicon Valley and, indeed, of global pseudo-capitalism.

    pseudo-capitalism: capitalism in which the cost of protecting property rights is paid for by taxing economic activity rather than the property rights themselves.

    Which is the bigger lie? That pseudo-capitalism is capitalism or that all that noise you hear is an accurate statistical sample of t

    • capitalism in which the cost of protecting property rights is paid for by taxing economic activity rather than the property rights themselves.

      How do you tax property rights?

      • capitalism in which the cost of protecting property rights is paid for by taxing economic activity rather than the property rights themselves.

        How do you tax property rights?

        Have you ever owned property? It is quite simple and called property tax.

        • capitalism in which the cost of protecting property rights is paid for by taxing economic activity rather than the property rights themselves.

          How do you tax property rights?

          Have you ever owned property? It is quite simple and called property tax.

          I wondered if that's what he was proposing, that all defense of property be funded by property taxes. Property tax isn't really a tax on property rights, though. And in any case property tax does end up being a tax on economic activity also, or at least on economic value, which is determined by economic activity. So I don't see the point.

          • by Baldrson ( 78598 ) *

            All legitimate government is a mutual insurance company.

            One may ask what it is legitimate for a government to insure and that is a good question but if one posits "capitalism" and does not start with property rights, what does the government insure and what is the basis for underwriting hence charging insurance premiums?

            The insurance premium one pays on a property right is going to be actuarially calculated based on multiple factors, one of which is the value of the property. This is the case with _all_ pr

          • by khallow ( 566160 )

            And in any case property tax does end up being a tax on economic activity also, or at least on economic value, which is determined by economic activity.

            The Broken Window Fallacy is the classic counterexample. Among other things, it's a means to disengage (and of course, tax) economic activity from the value of property.

            • And in any case property tax does end up being a tax on economic activity also, or at least on economic value, which is determined by economic activity.

              The Broken Window Fallacy is the classic counterexample. Among other things, it's a means to disengage (and of course, tax) economic activity from the value of property.

              I agree that the Broken Window Fallacy is a fallacy. I don't see how it's a counterexample to the claim that property tax is a tax on economic activity. Can you elaborate?

              • by khallow ( 566160 )

                I don't see how it's a counterexample to the claim that property tax is a tax on economic activity. Can you elaborate?

                Well, first, there is the obvious. Property taxes don't tax economic activity. If I don't own property, I can still generate economic activity, but economic activity that isn't taxed. Conversely, I can own land which is left fallow. The land would have inherent value, despite my lack of use of it, because of potential economic activity and such. So I would pay a tax on something that doesn't actually generate economic activity.

                Second, once a government entity collects taxes via one of these particular me

                • Property tax is still an indirect tax on economic activity, as I pointed out above, since the value of property is defined by economic activity (whether the property is actually used or not), and since property tax directly affects the cost of all economic activity involving property which, ultimately, is all economic activity or so close to all as makes no difference. There may be some business, somewhere, which requires no capital expenditures and takes place entirely on public land, but it certainly isn'

                  • by khallow ( 566160 )

                    since the value of property is defined by economic activity

                    It's not. For example, a fancy mansion is quite expensive, but it doesn't generate or represent economic activity. Instead it is contrary status signaling - namely, I've expended a considerable amount of wealth to build and maintain this mansion.

  • by Goldsmith ( 561202 ) on Saturday August 01, 2015 @10:48AM (#50229329)

    There are a lot of reasons to criticize Silicon Valley, but being positive about a plan and having to deal with difficult term sheets are hollow complaints.

    When you start ANY new project, there is a period of time when the project is not funded and does not have the necessary people to get it done. Startups are no different in selling a dream than any university professor, large company project lead, or government program manager.

    The main point of TFA is that startup employees are starting to get more sophisticated in evaluating stock options coming from the common pool compared to investors' preferred shares. Preferred shares and liquidation preferences are tools investors use to reduce risk, and they are detrimental to employees (and founders) of a startup... except that without those investors, nothing could happen. Investors are going to get leverage somehow, and if you're smart, these clauses are not a problem.

    Inflated valuations compound these issues. It should be obvious that early high valuations are bad for employees. Potential startup employees SHOULD understand that going to work for a company that is highly valued and has large investments offers much less financial growth opportunity than working for a company with a low valuation and small investment.

    If you're a founder, keeping your valuation low during early stages of a startup company is much, MUCH smarter than arguing for a high valuation. This push for early high valuations is driven by lots of money sloshing around looking for a place to sit. That is a legitimate problem in Silicon Valley. As a founder, it may sound great to take in an extra $10 million, but if you don't need that money and can't actually justify that valuation, you've limited your company's future options (no IPO for you) and made it much harder to hire smart employees.

  • by Alomex ( 148003 )

    Contrary to what the article says VCs and employees are very much aware that 1-in-100 startups make it and the rest don't. VCs invest in 100 companies to mitigate the risk, developers keep an eye in other companies in the valley that seem to be well in their way to IPO and switch over. A ton of my friends moved to Facebook and Twitter about a year or two before IPO.

    Really which idiot wouldn't be aware of this... ah the article was written by Hugh Pickens... Never mind.

  • This time it WILL work! The mantra of the developer.

    So is it that difficult to translate the same ethos into business: this time I will make it big! Whether there is any cold, hard, lying involved or whether the person touting for a VC payout truly believes what they are saying - that doesn't matter. A VC would have to be a particular kind of fool to be dragged in by the enthusiasm or "irrational exuberance" (to use a term that described the financial crash) and to simply hand out megabucks because one par

  • Well, he seems to be saying a lot here The myth of startup success is just that: a myth. Declining infrastructure, a confluence of events, absolutely requiring the Big Lie merely for Silicon Valley to function. His conclusion is devastating and disheartening. So, seeing that he has proven his point, why don't we just give up? Silicon Valley is a failure. We need to change to a sustainable, workable system that provides benefits to everyone over the long run, instead of enriching a few people. Let's st
    • You're quite sure that turning the lights off is still up to you? An electric circuit has switches at both ends ;)

      I suspect you're being sarcastic but you might as well be sincere for all the difference it makes. It's the system of continually ramping up the jackpots and pay-outs that is failing. It might be a natural consequence of market capitalism where people cannot fully inform themselves about all things.

      In fact, with regard to public valuation, it's impossible for people to accurately inform themselv

    • The myth of startup success is thinking that any given one is likely to be worth anything. There are always startups that thrive and grow incredibly large.

      The idea that you can start a business, or get in early, and become a billionaire drives a lot of economic growth. People have ideas. Most of them are dumb, but you can't tell the dumb ones from the brilliant ones. (Going up against Altavista in search looked dumb at the time.) People put incredible amounts of work into making their company and id

  • by Ed Tice ( 3732157 ) on Saturday August 01, 2015 @11:06AM (#50229401)
    The job of executive leadership is to tell a nice story and not let facts get in the way. The job of engineering is make factual decisions without letting the nice story get in the way. It's much easier to get people to believe things they *want* to believe. Yeah a lot of the stories are thin and many people see right through them. But remember, in corporate communications, you have four groups of people. Those who want to know the truth and have the acumen to figure it out. Nothing to say to them as they already know. Those who don't want to know the truth but could figure it out. They aren't going to listen. Those who want the truth but don't have the skills to unearth it. They will hang on your every word. Those who have neither the skills nor the desire. I have no idea hos they manage to keep getting paid. Engineers and programmers aren't good at saying yes until they know how, often to our own detriment. I may not know *how* I'm going to meet payroll (Said in the first person, but I've never had one to meet) but that doesn't mean I'm not determined and confident that I will find a way.
  • by bfwebster ( 90513 ) on Saturday August 01, 2015 @11:07AM (#50229403) Homepage

    ...and while it has significantly better odds than the actual lottery, it's much the same thing. Part of what drives the Valley -- and the IT startup industry in general -- is that it's very easy to track down large numbers of people who have, in fact, become millionaires (or better) through stock options and buy outs. It is a siren song that occasionally pays off.

    The problem since the late 1990s is that vast amounts of capital have distorted the natural harsh realities of running a business, not to mention Economics 101. Too many tech startup business plans are, in effect, "Get funding. Create buzz. Get more funding. Sell out to a firm that actually makes money or go public." It occasionally works -- and all you have to do is read the industry press to see the multi-billion-dollar IPOs/acquisitions that never panned out.

    Now, excuse me while I go back to work on my indie game and my graphic novel. :-) ..bruce..

  • by Karmashock ( 2415832 ) on Saturday August 01, 2015 @11:12AM (#50229427)

    Sure things have low profit margins. Things that could turn you into a billionaire or whatever are going to be long shots.

    Ideally what you want to do is hedge. This is not really possible in employment because time is time. But with investments you want to have the bulk of your capital in a sure thing and a reasonable amount in speculative investments.

    As regards employment in a start up the way to manage this is with the ratio of pay versus stock options.

    To the extent that you judge your start up to be a sure thing or a risky proposition... you are going to want to adjust the balance of stock options versus salary. Riskier jobs should have more upfront salary where as more certain enterprises can have more stock options. Obviously it is in the interest of either organization to sell you the opposite.

    A risky venture's interests are in selling you options because if everything goes wrong they paid you with monopoly money. And the reliable entity is effectively paying you more with stock options than with salary so they're going to be inclined to pay you with just straight money instead.

    Part of negotiating for pay is understanding what is in your interests and leveraging your value to get what you want.

    A company that is going down in flames should pay you in cash... even checks bounce. This was something that was going on with General Motors before their last default. They were paying their suppliers with IOUs. That's entirely unacceptable. A company with shaky financials hands you an IOU and you respond with "no sale".

    If the company has solid financials then you say "I'll give this to you on credit"... and then set the interest rate to whatever the banks say is correct... have the bank finance it on the other company's credit rating.

    Anyway... point is... if you're being paid mostly in stock options in a start up in SV... the only companies you want to accept that from are sure things.

    Sure sure... you can win the lottery. Just know that's what you're doing.

  • Just another gold rush, with all the same hustlers you see everywhere else. The Big Lie always works on virtually everybody. Everybody go home now, nothing to see here, *everything is fine*

  • They fight to be the early investors, prime the founder/execs to keep pumping, go through rounds 1, 2, & 3 and keep pumping everyone.

    Standard operating procedure.

  • Hyper-rational? Just because the business is computer software and hardware related? I don't think that necessarily follows.
  • I'd worked at nine different startups until I finally got reasonably lucky. Seriously, that is roughly the odds. Somewhere around ten percent of them are really successful. And that is honestly all you need. Is it really any worse than working as second assistant icon bezel engineer at some giant company on a project that you know will get killed anyway in the next reorg? The pay is roughly the same and the frustration and alienation level are comparable, if for different reasons.

    Startups can be a lot of fun, especially if you don't get too emotionally attached or take it too seriously. And all you need is to be in the right place at the right time once and you can retire to a monastery in Bhutan or go fly-fishing in Montana. That isn't too bad a deal.

    As for the lying part, I'd more accurately describe it as a kind of self-delusion or cognitive dissonance. One of the hard parts about being the founder of a company is that 24/7 you need to be positive and upbeat. My own experience in the founders seat and getting a great many doors slammed in my face by VCs is that if you don't believe in what you are doing, no one else will. Rejection can only make you stronger.

  • Only a small fraction of startups succeed. Obviously, if yours doesn't, your options won't be worth anything.

    And, yeah, planning to launch features that you haven't hired the engineers for yet isn't a lie, it's planning.

  • This is mostly true; I work for a IT outsource company and almost all of our customers are startups that cannot afford to hire a full time IT person. They are constantly going through periods where they need to get funding and when you hit that period everything spending wise stops; You know things are going really bad when they stop filling the break room with soda and snacks; But for every 10 that have failed; 1 has gone on spectacularly. 2 Of the companies we have been supporting will be going IPO in th
  • While I admit things have changed in the past twenty years, my time in Si Valley wasn't all about working for cynical manipulators. As one poster mentioned, the Valley went through various phases. I had the opportunity to work for several companies circa 1980 to 2008. Some were better than others. Some succeeded; others failed in interesting ways -- occasionally snatching defeat from the jaws of victory.

    But in a couple of the cases I saw first hand, the founders had great ideas. And some of them were b

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