VC-istan 8: the Damaso Effect

Padre Damaso, one of the villains of the Filipino national novel, Noli me Tangere, is one of the most detestable literary characters, as a symbol of both colonial arrogance and severe theological incompetence. One of the novel’s remarks about colonialism is that it’s worsened by the specific types of people who implement colonial rule: those who failed in their mother country, and are taking part in a dangerous, isolating, and morally questionable project that is their last hope at acquiring authority. Colonizers tend to be people who have no justification for superior social status left but their national identity. One of the great and probably intractable tensions within the colonization process is that it forces the best (along with the rest) of the conquered society to subordinate to the worst of the conquering society. The total incompetence of the corrupt Spanish friars in Noli is just one example of this.

In 2014, the private-sector technology world is in a state of crisis, and it’s easy to see why. For all our purported progressivism and meritocracy, the reality of our industry is that it’s sliding backward into feudalism. Age discrimination, sexism, and classism are returning, undermining our claims of being a merit-based economy. Thanks to the clubby, collusive nature of venture capital, to secure financing for a new technology business requires tapping into a feudal reputation economy that funds people like Lucas Duplan, while almost no one backs anything truly ambitious. Finally, there’s the pernicious resurgence of location (thanks to VCs’ disinterest in funding anything more than 30 miles away from them) as a career-dominating factor, driving housing prices in the few still-viable metropolitan areas into the stratosphere. In so many ways, American society is going back in time, and private-sector technology is a driving force rather than a counterweight. What the fuck, pray tell, is going on? And how does this relate to the Damaso Effect?

Lawyers and doctors did something, purely out of self-interest, to prevent their work from being commoditized as American culture became increasingly commercial in the late 19th century. They professionalized. They invented ethical rules and processes that allowed them work for businessmen (and the public) without subordinating. How this all works is covered in another essay, but it served a few purposes. First, the profession could maintain standards of education so as to keep membership in the profession as a form of credibility that is independent of managerial or client review. Second, by ensuring a basic credibility (and, much more important, employability) for good-faith members, it enabled professionals to meet ethical obligations (i.e. don’t kill patients) that supersede managerial or corporate authority. Third, it ensured some control over wages, although that was not its entire goal. In fact, the difference between unionization and professionalization seems to be as follows. Unions are employed when the labor is a commodity, but ensure that the commoditization happens in a fair way (without collective bargaining, and in the absence of a society-wide basic income, that never occurs). Unions accept that the labor is a commodity, but demand a fair rate of exchange. Professionalization exists when there is some prevailing reason (usually an ethical one, such as in medicine) to prevent full commoditization. If it seems like I’m whitewashing history here, let me point out that the American Medical Association, to name one example, has done some atrocious things in its history. It originally opposed universal healthcare; it has received some karma, insofar as the inventively mean-spirited U.S. health insurance system has not only commoditized medical services, but done so on terms that are unfavorable to physician and patient both. I don’t mean to say that the professions have always been on the right side of history, because that’s clearly not the case; professionalization is a good idea, often poorly realized.

The ideal behind professionalization is to separate two senses of what it means to “work for” someone: (1) to provide services, versus (2) to subordinate fully. Its goal is to allow a set of highly intelligent, skilled people to deliver services on a fair market without having to subordinate inappropriately (such as providing personal services unrelated to the work, because of the power relationship that exists) as is the norm in mainstream business culture.

As a tribe, software professionals failed in this. We did not professionalize, nor did we unionize. In the Silicon Valley of the 1960s and ’70s, it was probably impossible to see the need for doing so: technologists were fully off the radar of the mainstream business culture, mostly lived on cheap land no one cared about, and had the autonomy to manage themselves and answer to their own. Hewlett-Packard, back in its heyday, was run by engineers, and for the benefit of engineers. Over time, that changed in the Valley. Technologists and mainstream, corporate businessmen were forced to come together. It became a colonial relationship quickly; the technologists, by failing to fight for themselves and their independence, became the conquered tribe.

Now it’s 2014, and the common sentiment is that software engineers are overpaid, entitled crybabies. I demolished this perception here. Mostly, that “software engineers are overpaid” whining is propaganda from those who pay software engineers, and who have a vested interest. It has been joined lately by leftist agitators, angry at the harmful effects of technology wealth in the Bay Area, who have failed thus far to grasp that the housing problem has more to do with $3-million-per-year, 11-to-3 product executives (and their trophy spouses who have nothing to do but fight for the NIMBY regulations that keep housing overpriced) than $120,000-per-year software engineers. There are good software jobs out there (I have one, for now) but, if anything, relative to the negatives of the software industry in general (low autonomy relative to intellectual ability, frequent job changes necessitated by low concern of employers for employee career needs, bad management) the vast majority of software engineers are underpaid. Unless they move into management, their incomes plateau at a level far below the cost of a house in the Bay Area. The truth is that almost none of the economic value created in the recent technology bubble has gone to software engineers or lifelong technologists. Almost all has gone to investors, well-connected do-nothings able to win sinecures from reputable investors and “advisors”, and management. This should surprise no one. Technology professionals and software engineers are, in general, a conquered tribe and the great social resource that is their brains is being mined for someone else’s benefit.

Here’s the Damaso Effect. Where do those Silicon Valley elites come from? I nailed this in this Quora answer. They come from the colonizing power, which is the mainstream business culture. This is the society that favors pedigree over (dangerous, subversive) creativity and true intellect, the one whose narcissism brought back age discrimination and makes sexism so hard to kick, even in software which should, by rights, be a meritocracy. That mainstream business world is the one where Work isn’t about building things or adding value to the world, but purely an avenue through which to dominate others. Ok, now I’ll admit that that’s an uncharitable depiction. In fact, corporate capitalism and its massive companies have solved quite a few problems well. And Wall Street, the capital of that world, is morally quite a bit better than its (execrable) reputation might suggest. It may seem very un-me-like to say this, but there are a lot of intelligent, forward-thinking, very good people in the mainstream business culture (“MBA culture”). However, those are not the ones who get sent to Silicon Valley by our colonial masters. The failures are the ones sent into VC firms and TechCrunch-approved startups to manage nerds. Not only are they the ones who failed out of the MBA culture, but they’re bitter as hell about it, too. MBA school told them that they’d be working on $50-billion private-equity deals and buying Manhattan penthouses, and they’re stuck bossing nerds around in Mountain View. They’re pissed.

Let me bring Zed Shaw in on this. His essay on NYC’s startup scene (and the inability thereof to get off the ground) is brilliant and should be read in full (seriously, go read it and come back to me when you’re done) but the basic point is that, compared to the sums of money that real financiers encounter, startups are puny and meaningless. A couple quotes I’ll pull in:

During the course of our meetings I asked him how much his “small” hedge fund was worth.

He told me:

30 BILLION DOLLARS

That’s right. His little hedge fund was worth more money than thousands of Silicon Valley startups combined on a good day. (Emphasis mine.) He wasn’t being modest either. It was “only” worth 30 billion dollars.

Zed has a strong point. The startup scene has the feeling of academic politics: vicious intrigue, because the stakes are so small. The complete lack of ethics seen in current-day technology executives is also a result of this. It’s the False Poverty Effect. When people feel poor, despite objective privilege and power, they’re more inclined to do unethical things because, goddammit, life owes them a break. That startup CEO whose investor buddies allowed him to pay himself $200,000 per year is probably the poorest person in his Harvard Business School class, and feels deeply inferior to the hedge-fund guys and MD-level bankers he drank with in MBA school.

This also gets into why hedge funds get better people (even, in NYC, for pure programming roles) than technology startups. Venture capitalists give you $5 million and manage you; they pay to manage. Hedge fund investors pay you to manage (their money). As long as you’re delivering returns, they stay out of your hair. It seems obvious that this would push the best business people into high finance, not VC-funded technology.

The lack of high-quality businessmen in the VC-funded tech scene hurts all of us. For all my railing against that ecosystem, I’d consider doing a technology startup (as a founder) if I could find a business co-founder who was genuinely at my level. For founders, it’s got to be code (tech co-founder) or contacts (business co-founder) and I bring the code. At my current age and level of development, I’m a Tech 8. A typical graduate from Harvard Business School might be a Biz 5. (I’m a harsh grader, that’s why I gave myself an 8.) Biz 6 means that a person comes with connections to partners at top VC firms and resources (namely, funding) in hand. The Biz 7’s go skiing at Tahoe with the top kingmakers in the Valley, and count a billionaire or two in their social circle. If I were to take a business co-founder (noting that he’d become CEO and my boss) I’d be inclined to hold out for an 8 or 9, but (at least, in New York) I never seemed to meet Biz 8’s or 9’s in VC-funded technology, and I think I’ve got a grasp on why. Business 8’s just aren’t interested in asking some 33-year-old California man-child for a piddling few million bucks (that comes along with nasty strings, like counterproductive upper management). They have better options. To the Business 8+ out there, whatever the VCs are doing in Silicon Valley is a miserable sideshow.

It’s actually weird and jarring to see how bad the “dating scene”, in the startup world, is between technical and business people. Lifelong technologists, who are deeply passionate about building great technology, don’t have many places elsewhere to go. So a lot of the Tech 9s and 10s stick around, while their business counterparts leave and a Biz 7 is the darling at the ball. I’m not a fan of Peter Shih, but I must thank him for giving us the term “49ers” (4’s who act like 9’s). The “soft” side, the business world of investors and well-connected people who think their modest connections deserve to trade at an exorbitant price against your talent, is full of 49ers– because Business 9’s know to go nowhere near the piddling stakes of the VC-funded world. Like a Midwestern town bussing its criminal element to San Francisco (yes, that actually happened) the mainstream business culture sends its worst and its failures into the VC-funded tech. Have an MBA, but not smart enough for statistical arbitrage? Your lack of mathematical intelligence means you must have “soft skills” and be a whiz at evaluating companies; Sand Hill Road is hiring!

The venture-funded startup world, then, has the best of one world (passionate lifelong technologists) answering to the people who failed out of their mother country: mainstream corporate culture.

The question is: what should be done about this? Is there a solution? Since the Tech 8’s and 9’s and 10’s can’t find appropriate matches in the VC-funded world (and, for their part, most Tech 8+ go into hedge funds or large companies– not bad places, but far away from new-business formation– by their mid-30s) where ought they to go? Is there a more natural home for Tech 8+? What might it look like? The answer is surprising, but it’s the mid-risk / mid-growth business that venture capitalists have been decrying for years as “lifestyle businesses”. The natural home of the top-tier technologist is not in the flash-in-the-pan world of VC, but the get-rich-slowly world of steady, 20 to 40 percent per year growth due to technical enhancement (not rapid personnel growth and creepy publicity plays, as the VCs prefer).

Is there a way to reliably institutionalize that mid-risk / mid-growth space, that currently must resort (“bootstrapping”) to personal savings (a scarce resource, given that engineers are systematically underpaid) just as venture capital has done to the high-risk /get-big-or-die region of the risk/growth spectrum? Can it be done with a K-strategic emphasis that forges high-quality businesses in addition to high-value ones? Well, the answer to that one is: I’m not sure. I think so. It’s certainly worth trying out. Doing so would be good for technology, good for the world, and quite possibly very lucrative. The real birth of the future is going to come from a fleet of a few thousand highly autonomous “lifestyle” businesses– and not from VC-managed get-huge-or-die gambits.

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23 thoughts on “VC-istan 8: the Damaso Effect

  1. Do you really think that ‘non-loser’ power-crazed assholes would do a better job? The real problem is that you are dealing with deceptive power-crazed assholes.

    Was slavery OK because some slave-masters treated their slaves better than others?

  2. Zed does not know shit about hedge funds, and the guy was probably making fun of him, if he wasn’t David Shaw himself. D.E. Shaw has $30 billion under management, and Bridgewater Associates, the largest hedge fund in the world, has $120 billion.

    The real competition for talent is with banks, but everyone knows their IT departments are shit.

    • Sure, $30 billion isn’t *actually* that tiny for a hedge fund. At least, it’s sizable for an AUM/account equity. The really huge numbers tend to be an artifact of leverage (see: bond arbitrage). His point still stands. The dollar amounts that VCs put into a company are insignificant by financial standards.

      Quant and quant trader roles can draw and keep talent. Bank IT can draw it, but the best people usually move into quant roles for the same reason that good programmers in startups usually turn into data scientists: more upside and (more importantly, because what good is money if you don’t like what you do) more autonomy.

      • What good is money if you don’t like what you do? Why, it allows you to put food on the table, clothing on your back, a roof over your head, and to do things you enjoy doing outside the workplace. It’s a mistake to identify “what you do” with your job.

        • Yeah sure, you can do all of that while hating yourself and life. We disagree with your view. We (who think what we do ought to be more important than money) believe that life’s meaning and work come from how we spend a majority of our productive waking hours. Our job IS A HUGE part of what we do and defines our life in a big way. If “what we do” is always outside of our job for the rest of our lives, we have failed. Steve Jobs subscribed to this view himself and he said as much in his Stanford address.

          • hating yourself and life

            But I don’t. I enjoy my life, I just don’t identify “my life” with “what $EMPLOYER wants from me”.

            what we do ought to be more important than money

            Indeed. I do enough for $EMPLOYER to keep them happy, and spend the rest of the time keeping myself and my family happy. For this they pay me not magnificently but enough.

            how we spend a majority of our productive waking hours

            I’m quite productive in my own sphere, thanks, about which $EMPLOYER neither knows nor cares.

            If “what we do” is always outside of our job for the rest of our lives, we have failed.

            Why? If all I ever did was work, shit, and sleep, I’d agree. But that’s not even close to being the case.

            Steve Jobs

            You want to model your life on a salesman’s, a guy who made his mark by cheating his partner (who forgave him, but still)? Go right ahead.

            • But all that this means is that your personal tradeoff between the relative tolerability of your work and your working environment is favorable *for you*. You seem to be going one step further and trying to insist that others must value it the same way. For someone else, their preference for doing work they are proud of might be so significant that it actually trumps “putting food on the table.” They might have to put food on the table so as to not die, but unlike you, they may not be capable of being content, happy, or psychologically functional doing *merely* that. Look, we’re all happy for you that you have a nice system down by which you deal with $Employer to your satisfaction. But just because you happen to have a system like that which works for you, it doesn’t mean that similar standards of how to evaluate whether a job is a healthy activity or not should apply to other people.

  3. Michael, one semi off topic question,

    Why is it that the definition of success in VCistan is different from the definition of success in the professions, mainstream corporate life, and wall street in the following sense:

    A top person in VCistan does not have a full time job and their role cannot be defined in one sentence.

    For contrast, in a profession such as medicine as law, the top guys have full time jobs that are easily defined (i.e. Brain surgeon at NYU or Head Lawyer at the Innocence Project)

    In Wall Street, 3 million dollar a year a traders have one definable job, just like the janitors at the firm. Even the 100 million dollar a year people spend almost all their time at a narrowly defined role such as running a specific hedge fund or private equity firm.

    However, in VCISTAN, with the exception of Zuckerberg who sticks to Facebook, a top person is…an investor in this firm and that firm, advising this firm, managing that VC fund, a board member at these firms, and of course has some charitable and non profit ventures, as well as a book, documentaries, and several TED talks.

    For instance, anyone can state in one second what Warren Buffet;s career is or what Barack Obama’s career is, yet for someone like Peter Thiel, no definable job exists, just tons of investor and advisory roles, and this and that non profit project.

    Al Gore and Sean Parker seem to also lack definable jobs.

    So to clarify, why is it that in say Medicine, the ultimate height is to have a full time job as a top surgeon (actually engaging in medicine), while in VC-istan, the ultimate height is to be a Peter Thiel having no full time job, but being an advisor, investor, or donor in about 12 different projects?

    Thanks

    • Private-sector social climbers (whose success becomes divorced from effort or ability, they are purely political) are the cancer cells of the business world. Medicine and trading have evolved to a state of maturity that the immune system kills some of the climbers (not all). VC-istan embraces permanent immaturity.

    • The richest people in medicine and law don’t have net worths anywhere near Thiel or Parker, so a lot of them lack the funds to have that kind of lifestyle or influence. Also, if you had Thiel’s net worth (after FB became huge), would you then turn around and become an entrepreneur again? Or would you do something that could potentially scale with less risk and effort? Even if a lawyer had an extremely high net worth, what other things could they do in their industry besides keeping on lawyering? Would they invest in other law firms? Advise other law firms? They presumably just spent 20+ years in the same industry, so I think it would be harder to turn around like Parker or Thiel and start doing all the various things they do.

      You brought up Buffet, who does have a high net worth, yet continues in his same role. I think he’s the exception. He really doesn’t have to keep running Berkshire Hathaway at this point, but I think he genuinely loves it and doesn’t want to do anything else.

      I disagree with Michael that it’s because medicine and law are more mature than the VC world, I think it simply comes down to the founder’s passion. Zuckerberg and Buffet’s ego and identity are so tied up in their companies (not a bad thing) that they’re in it for life.

    • What will Obama’s career be in 2017? Unless he does a John Quincy Adams and runs for Congress (which no president has done since), he’ll need a new career, probably as a speechmaker.

  4. $30BN AUM is actually huge for a hedge fund; John Paulson’s fund, PCI, has $35BN under management and it’s the 4th-largest in the world: http://en.wikipedia.org/wiki/Paulson_%26_Co.

    I agree generally with the thesis of this post, but I’ll quibble over one point: I think you may be underestimating exactly how much money VCs (partners) can make at top firms — definitely comparable (if not more than) MDs of TMT groups at bulge bracket investment banks. So while the VC partner at his 20-year HBS reunion won’t be the richest guy in his class, he certainly won’t be the poorest.

  5. Fantastic blog. Very well articulated ideas. You make reading blogs a pleasure and provide a lot of food for thought.

    I think about the plight of true technologists a lot and it warms my heart to know I am not the only one that believes something is fundamentally wrong in this world. A revolution of sorts is needed, nothing less. It is terrible that true technologists/engineers have been made worthless by commoditization. But you know what? That commoditization is not entirely successful in terms of work produced, just look at the Obamacare website woes and many other enterprise produced websites. It is a product of a culture where coming in to work to put up few widgets is all there is to a person’s professional life. Programmers have become a merely appropriately educated and more in-demand janitors.

    In financial services industry, a programmer’s worth increases by how much “business knowledge” he/she has as a programmer. Do you know what Macaulay duration is can you explain Potential Future Exposure back testing methodologies for credit risk? Respect from managers and amongst peers increases as a programmer gets more business-y and talks more business lingo and pursues business knowledge certification. It doesn’t matter jack shit if you don’t quite know when to use hash maps instead of lists. Financial services is where pure technologists should go to bury their passion alive. There is ZERO respect towards programmers. Great work is simply NOT NEEDED or required. They do not care. Something that merely works is just fine. If it barely works, it has met their goals and they can focus on really important priorities like keeping programmers commoditized and increasing their job security by blocking talent from progressing.

    Software managers in financial services industry understand that commoditizing programmers means bad-to-terrible work will be done and they have willingly accepted that choice. There are hundreds of thousands of disgustingly terrible programmers out there that are more than happy to to continue writing horrible code for a decent paycheck and a lovely home. A lot of these god-awful programmers with zero appreciation of abstractions tend to be Indian ( I am an ashamed Indian) though they do not have a monopoly by any means.

    I have thought a lot about start ups and VC funding and so on. Just like you, I came to the conclusion that medium sized slow growth businesses are the way to go. The antidote to the perniciousness is to be part of the solution – create a business to deal with customers/clients directly, hire the best technologists (deeply passionate as opposed to just a strong resume) and create an environment where EVERY single person counts and is appropriately rewarded.

    F*ck man! We can’t let the current state of affairs be the accepted norm, the technologist’s lot in life!

    • Mid-sized mid-growth businesses are one thing.
      You’ve ignored global networks of freelancers.

      As development environments mature, single developers can do much more than they could 2 decades ago. And there will always be niches with enough money to feed freelancers well that are too small to reliably feed mid-sized businesses.

      I guess freelancers can contribute as much to economic growth as mid-sized businesses.

  6. Michael,
    I read your blog regularly since late last year when I was looking for a way to deal with office politics. I’m not in your industry – I work in advertising. However what you write here resonates, and I’m impressed with your knowledge about Filipino culture/literature that you drop here and there once in a while.
    – K

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