Startups Don’t Fail (Or Succeed) Well

I’ve said more than my piece about startups, and here I include billion-dollar ex-startups that IPO’d decades ago, and more generally I intend to speak about the Silicon Valley culture. These venture-funded startups aren’t small businesses. They’re large companies, but disposable by design. VCs intentionally push these companies to favor rapid growth over sustainability, and therefore keep them in thrall to investors. That way, if one becomes inconvenient, it can be killed easily: just don’t do the next round. Workers unionize? Dead. Sexual harassment lawsuit? Dead. Founder disagrees with investors on strategy? Dead.

That’s all covered territory. People know that venture-funded startups often fail. It’s not news. Still, the more general 1990s-based mythos used to sell these companies to young people is dangerously inaccurate. They often have no idea what ‘success’ and ‘failure’ are going to look like. They go in unprepared. I must call it out.

People join venture-funded companies:

  • knowing that more than 50% of them (arguably 80-98%, depending on terminology) will fail (“Outcome 0”), and
  • knowing that people who get into successful startups, early, sometimes become extremely wealthy (“Outcome 1”), but:
  • believing (falsely) that their work improves their chances of being executives or founders in their next gig,
  • believing (falsely) that personal performance can increase one’s odds of Outcome 1 or 1A,
  • not knowing what nefarious drama unfolds as a startup matures (either to success or failure).

Let’s first talk about the happy case.

Success

What does success look like for a venture-funded company? Usually, it’s a tired slog to the finish line that leaves most people demoralized. Usually, the founders don’t have the experience or charisma necessary to bring about the necessary changes on a timetable their investors will accept. Going public may be profitable, but it isn’t fun.

Founders get rich, some of the time. Sometimes, companies succeed in a way where even the founders get screwed. Employees usually get screwed. There are so many ways it can happen. I’ll list a few, and this list is not all-inclusive, and all of these outcomes have happened. Executives (or founders, or investors) can fire people “for performance” and steal unvested equity. They can force “voluntary” de-equitization by using the above threat– effectively, extortion. They can dilute common shares and issue themselves preferred shares. They can sell the company at a loss (putting common shares to zero) while lining up management positions, in the acquiring company, for founders and executives. These are things that I’ve seen happen.

Most of the time, the only way to get considerable wealth (more than is lost in opportunity cost) from a startup is to be an executive, and venture-funded startups are so bad at promoting within that the only way to make that happen, whether one gets in early or late, is to be good at politics. Can a software engineer make a million when a startup is acquired? Sure, it’s possible, but in addition to the 1-in-10 chance of a decent exit, she relies on the generosity of her bosses, of the founders, and of investors. She’s lucky if she has her job, after the cards fall– and, remember, this is the case where everything goes right for the company and it succeeds.

Failure

Ah, failure. Silicon Valley worships it, without knowing what it means. Fail fast. Go fail, young man.

In the real world, failure is devastating. Jobs end. Sometimes, careers end. Houses get sold at a loss. Kids get taken out of schools and lose their futures. People blow their brains out. Though some of these things are rare, they actually happen. It deserves address.

What does it look like when a startup fails? It’s ugly. Founders and executives put forward a mythos of being on the same ship together, but it rarely plays out that way. When a traditional company has a tough time, there’s a hiring freeze (often, for months before) and a formal layoff with severance. It sucks, but the company does what it can to minimize the damage to employees’ careers.

Venture-funded startups rarely have an honest layoff. They’d rather throw their own people under the bus. Their first instinct is to hide that anything is wrong. They’ll fire 20 percent of their people “for performance” before they admit that they’re in trouble. This is bad for those who lose their jobs. It’s a different kind of unpleasant if you’re in a managerial role, forced to pretend good employees are bad and run bullshit “performance improvement plans” against people who, through no fault of their own, were doomed from the start.

Oddly, hiring rarely freezes or even slows during the startup layoff (that the unethical firm fails to acknowledge as a layoff). Why is that? These companies know that they’re going to lose good people (unplanned losses, that they’ll need to close up) when they start acting that way. In truth, showing loyalty to one of these firms is almost never rewarded. Venture-funded startups know they treat their people badly, and assume that any non-founder who’s with the company after four years just isn’t good enough to get another job.

Up until the point where a venture-funded startup’s in serious trouble, there will be no sign of anything wrong. No hiring freezes, no harrowing corporate speeches, no voluntary separation offers. The firm will be aggressively hiring, advertising, and blowing its own praises… up until the day that payroll checks bounce.

Let’s talk about that outcome: the out-of-business game-over scenario. In today’s startup world, it’s rare. I’ve seen companies fail three or four times– reinventing themselves, changing business models, somehow keeping the rank-and-file unaware that “pivoting” is code for “failing but surviving”– and stick around for 10 years. At a certain point, there’s always venture money in the banana stand. Final shutdown could, at least in principle, at least be graceful.

This is, perhaps, the most emotionally shocking thing people encounter in startup failure. It surprises no one that impersonal business circumstances end jobs. One might imagine it as a stern but respectful conversation in which one learns that one’s company has run out of money, and that one no longer has a job. That’s rare, because a venture-funded startup usually has some book value. The founders and executives, fully aware that the company’s shutting down (or, at least, in a bad enough state that its career value falls below opportunity cost) scrambling to manage up into investors, who will be their prime references and sources of capital in the next gig. Although people will be laid off in restructuring, the words “layoff” can’t be used, for risk of tipping off the few key people the company needs to retain that there might be trouble. Even if the executives and founders don’t believe they can turn the troubled company around, they’re in such an intense investor spotlight that a single unplanned departure can’t be allowed. So, they have to kill the possibility for (true) rumors that the company isn’t doing so well. The workers have to not talk. But they will.

Some of these people will be culled the concealed layoff, but the company still needs some of its productive capacity. How does it prevent its employees from figuring out the company’s true situation? It divides them against each other: teams against teams, people on teams against each other, and so on. Internal competition doesn’t stop rumors from existing, but it floods the channel with so much bad and politically-motivated information that no one knows what’s going on. It also creates a cloud of hate and resentment that makes it easier to fire more people in case things get worse, which they usually do.

Startups tell the young people they’re trying to ensnare that they’ll either succeed or they’ll fail. That’s vacuously true. They promise that if they succeed, they’ll “hit it big”. That’s true insofar as a moderate outcome will be treated by investors as a failure, who’ll gladly put an otherwise-prosperous midsize company at a 90+ percent existential risk if the numbers make sense to them. Startups also say that a success will make regular employees rich. That’s a lie. If they make it far enough to collect anything significant, that’s because it they ceased being regular employees (which means they had to have been good at politics). Startups also lie about what happens when they fail. They prime employees to imagine failure as a regular business shutdown– impersonal, fair, and not especially embarrassing to the average employees– while masking the collateral damage of everything the founders and executives will do, as the company struggles and squirms on the way to that point.

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21 thoughts on “Startups Don’t Fail (Or Succeed) Well

  1. How is the legal standoff with your previous employer going? Have you found a good lawyer yet. Keep us informed on major developments on that front.. if you can.

    • No change. The extortion seems to have been an empty threat. They’re assholes, but they’re not irrational.

      If they were a big company, they’d settle and fire the people who made the threats. Since they’re a small company that’ll probably be bankrupt in 3 months, the only thing I can do is move on.

      • What do you think your next move will look like? Are you thinking of completely exiting the tech industry after your latest experience?

        • Unlikely on complete exit. First, I need to make money somehow. My writing will eventually take off, I’m sure, but that could take 10-20 years. Meanwhile, I need a stable life so I can focus on finishing my book.

          I haven’t given up on “tech”; it’s just this short-term mentality that makes me sick. I have no ideological problem with capitalism. Capitalism worked really well from 1940 to 1975. We should fix rather than get rid of it. In the long term, post-scarcity technological communism is the ideal… but we’re not there yet. So long as scarcity is part of the human experience– I’d argue we’re now trans-scarcity rather than with-scarcity– every large-scale communist experiment (see: Soviet Russia, China, Venezuela) will become a nightmare.

          I’m 100% done with the Agile Scrum nonsense, but I still write code and I read CS books in my spare time. I still care about technology, even if I’ve lost hope in the current leadership. In the long arc of human progress, the ethical calamities of Silicon Valley are tiny blips.

  2. I find weird the idea of hoping to get rich as an employee. The very word “employee” is the antithesys of “rich”. Also, ask a large enough sample of population (like 1000 people, maybe make a poll on your blog) and you’ll notice some 99% of them don’t hold this weird idea. Which may lead you to the conclusion, if your psyche can deal with this level of honesty, that it’s not them, it’s you.

    If you wanna get rich, be a founder. Be the buy side alone. Invest your own money if you got enough of them. If you don’t, stop complaining and do what normal people do: grind trough the gritty corporate or startup or who gives a shit what as long as it’s a job. Cling to your job and save. Switch jobs for raises if you don’t get them fast enough from your employer. Be overperforming if that gets you a raise, else do what the median does to stay afloat. If you’re above median that will at least get you some time to save your energy for intrinsic use (by yourself) rather than waste it on the employer.

    If you don’t have enough money to start a business by youself or don’t have the patience (and mental capacity) to grind over 15-20 years or bullshit but increasingly high paying jobs while staying single, moving a lot and saving aggressively, then do what I do currently: try to associate yourself with equally motivated and capable individuals and be the buy side in a team as co-founders. It’s arguably even harder than doing this alone since just like you’re a fiercely selfish, arrogant and know-it-all individual, so is everyone. Especially those who think of themselves better than “the less than 3-standard deviations in IQ” peasants.

    Either way don’t ever expect anyone to hand you the independence and wealthiness you long for, it’s up to you to do it either as lone wolf or lions pack option. Anything outside that you’re begging for scraps at your master’s table and at least you should wise up enough to stop barking about it if you are going to keep getting at least that.

    • I don’t think michael o church wants to get rich your way. Actually, I think he just wants to live comfortably at this point.

      I think he is exploring alternatives to current economic system for the posterity to pick up.

      As we all know, the current system is not the only possible system.

      • I don’t necessarily want to get rich but if you tell me a way to live comfortable without being rich or having some rich parent / aunt / sponsor (like a welfare state), then you have found the golden goose. Please tell us too how you did it, unless it threatens your comfort, of course.

        And don’t tell me the subservient and uncertain state of an employee is living comfortably.

        • You can, for example, become a one-man entrepreneur.

          Farmers, writers, comics artists, visual artists, webmaster, and so on.

          There are not many of those jobs, but it’s possible to become one if you prepare years in advance.

          It’ll be hard work, but it is a lot better than being subservient. I like working hard for myself.

          • Please consider the probability of becoming at least a viable (as in self-sustaining) writer, comics artist, visual artist, webmaster, and so on, after investing a hell lot of time, effort and money into it.

            Farmer like this guy, quite probable, but you still need a lot of money: https://www.newvision.co.ug/w-images/68164871-1fd8-4df8-8c14-39edcba94269/7/2013_8largeimg216_Aug_2013_182117580-703×422.jpg

            All the others have zero effective causation between effort invested and likelihood of a successful outcome. Might as well play the lottery and save yourself the pain of working for nothing.

            • I have no evidence that you know any of those fields well enough to make the conclusion that those fields have zero relationship between effort and success.

              As far as I know, becoming a self-sustaining comics artist or a self-sustaining visual artist is hard work but far more “predictable” than winning lottery or becoming a writer if I put in years of uninterrupted hard and smart work. I’m hardly rich, but I have enough resources to make it happen. It’s mostly about how effectively you manage your days, whom you know, and whom you learn from.

              Becoming a visual artist is actually a quite predictable process if you were in certain vantage points. In my case, I have enough money and information. I stumbled upon the right people, too. People outside certain vantage points of life see only starving artists and occasional lucky success. I have seen varying degrees of success in visual art. I am in a position where I can predict success.

              • Allright so you admit that the essential ingredient in your success as an artist was luck. AND CONNECTIONS. Thanks, but I need something more controllable / predictable before I invest 10 years of my life into something.

                • Connections are the aspect that no one talks about. I’ve met plenty of successful people from “middle-class” backgrounds (i.e., professors making $80k per year). However, most successful people (95+ percent) I know had family connections. It wasn’t the smoke-filled rooms kind, more of the “I’ll make some introductions for you, so you can focus on your work” kind.

                  I mean, yeah, if I could focus on real work instead of social bullshit, I’d be a Level 99 badass in five things right now.

                  One doesn’t need to be rich to benefit from connections, although the odds are much better. For middle class people, your Poisson parameter is 0.02; upper-middle-class, 0.15; lower-upper-class, 2.0; upper-class, 10+. Sample a zero, and you go back into the cupboard; sample 1+, and you might be able to achieve something.

                  For example, when I finish my book, if I want traditional publishing, I’ll have to query it– just, if you can believe this, to get a fucking agent (i.e., begging for the right to offer someone a job). Querying worked back when agents were easy to get and you mostly queried editors (and didn’t even think about agents until you’d published a few stories in accessible small magazines). You’d still get rejected 9 times out of 10, but your agent would handle the paperwork and keep submitting. These days, you have to query to get an agent, but agents don’t read manuscripts, so it comes down to pure luck. If the unpaid, unqualified 19-year-old reads your submission in the hour before lunch on a rainy Tuesday, you’re screwed. If he reads it at 1:30 pm on a bright Friday afternoon, you might have a chance. It’s gotten to the point where in New York they say your richest, most connected friend is your agent for agents.

                  What has happened in the past 20 years is that, as machines take on more and more of the real work, people are finding new ways to earn their keep as unnecessary gatekeepers. Which is why I look forward to when AI replaces most of the gatekeepers in the world.

              • >> As far as I know, becoming a self-sustaining comics artist or a self-sustaining visual artist is hard work but far more “predictable” than winning lottery or becoming a writer if I put in years of uninterrupted hard and smart work.

                How much hard work (as in time) and what probability? I’d say about 10 years and probability below 1%.

                But if you put 10 years and assuming you start at 20, you only got like 4 or 5 attempts. If you’re not gambling, you need stuff well into 90% territory of probability to be worth taking those paths. Problem’s most of you people are effectively gamblers and like gamblers you don’t admit the astronomically skewed probability of getting bankrupt (wasting your life) compared to making it, that “one-man entrepreneur” chimera.

                And even bigger problem is that HAVING A JOB used to be that 90% probability but it’s just that. Used to. Even if you manage to get a job at 20, holding it until 30 is well below 90%. And the probability of you getting another job as you get older doesn’t decrease linearly but quadratically.

                But instead of rationally admitting how fucked we are and grouping together to correct the problem, the proles happily cling to gambling illusions like the one you ignorantly advertise, illusions who I suspect are heavily nourished and encouraged by the few lucky winners of this lamentable lottery. Not just by “the bad” Trump-alikes but including and especially by self-proclaimed “good people” like you Crocket and MOC. You willingly take part into this divide et impera situation and effectively encourage and advertise it. The powers that be couldn’t be happier, speaking of useful idiots.

  3. I’ve noticed and been oblivious to one of your tendencies.

    It is your tendency to use ‘she’ in place of genderless pronouns. I use `the consultant`, ‘the person’, or ‘it’ as genderless pronouns although I know that people don’t use ‘it’ to refer to other people.

    Is there a specific reason for using ‘she’? Is it simply your region’s dialect?

    • I try to mix it up. “He or she” is clunky, and “s/he” is ridiculous, but I’m sensitive to the matter of sexist prose. I don’t flip out if other people default to “he” or say “mankind”, but I try to hold my writing to a different standard.

      Most people, when they hear “feminist”, think of bra-burners (which never happened) or out-of-touch academics. But if you pay attention to the world, you realize that feminism (meaning gender equality, not necessarily hawk-like attention to pronouns) is one of the most important issues, even today. (Female “circumcision”, which is straight-up mutilation and should never happen, exists today… even in New York!) I’d put it at #2, with #1 being the existential threat of anthropogenic climate change.

      • In my opinion, hawk-like attention to pronouns is not helpful. But, it’s your freedom to pay attention to small details.

        Female circumcision in new york? My parents had my dick circumcised when I was young. My sister wasn’t circumcised. I now know circumcision doesn’t help. In my perspective, my city in asia is better developed than new york. I think female circumcision is unnecessarily demonized while male circumcision is viewed as a mundane utilitarian issue. My opinion is that circumcision shouldn’t be done unless it’s medically necessary.

        By the way, many sectors of feminism seem to have transformed into fascism. In my nation, Title IX, enacted by barack obama, is known to allow female college students to accuse a male student of rape without any evidence and have him suspended or exiled from the college. It can be easily be used as a tool for attacking innocent male students. It destroys presumption of innocence. It seems title IX was made possible because feminists deliberately exposed female students to news about rapists. Fascism involves controlling people with fear.

        In my nation, recently, feminists had protested on streets that men should not be allowed to claim innocence when men are accused of sexual harassment or sexual violence. They are again trying to destroy presumption of innocence. Those feminists filled news headlines for a long while. Statistically, in this country, 33~50% of all sexual crime charges turn out to be fake during investigation. Without presumption of innocence, lots of men will hurt.

        Another thing is that feminists do not get angry when women rape other women, men rape other men, or women rape other men. They get angry only when men rape other women or when there is a slight chance of such a thing.

        Women’s issues are important, but men’s issues are equally important. Actually, everyone is important. I think feminists are not conscious of what they end up doing to men in the quest of enhancing women. They often end up invading men. It seems feminists are biased toward benefits of women to the exclusion of men.

        I think what we need is attention to everyone, not just one gender, or one region. Without broad perspective, we lose sight of what we are doing to external groups.

        What I really wanted to say is that when you pay attention to what women suffer, you should also pay attention to what men suffer, what animals suffer, and so on.

        I believe what feminists say they are trying to do can be done in the name of egalitarianism or humanism.

        I agree that feminism is important, but it is important to me for different reasons.
        I think feminism in practice is not what you think it is in theory. I come from a red-pill perspective. I recommend that you watch http://theredpillmovie.com/

        • You don’t think hawk-like attention to pronouns is useful? You’re the one who brought attention to the topic in the first place! If it truly does not matter, as you say, then why not let it slide because who cares?

          Title IX was enacted in 1972 when Obama was in the fifth grade.

          I suspect you do not know what real feminism is, nor real fascism.

          • My wording was wrong. It was barack obama who made Title IX dangerous. He signed some documents. After that, universities that didn’t suspend or expel male students who were under mere suspicion of sexual harassment or sexual violence got its federal funding cut off. This made it possible for female students to attack innocent male students.

            As far as I know, feminists pressured barack obama into signing those documents.

          • I don’t support trump, but I got the following news article.

            http://www.wbur.org/edify/2016/11/25/title-ix-obama-trump says

            “Just imagine if you were asked to go in to explain why you didn’t commit a sexual assault,” Halley said. With no information as to what you’re accused of, who’s accusing you, or when it allegedly happened, “you’re required to start explaining yourself. And you’re 18 years old, and no one is helping you.”

            Halley describes the new system as all but designed to produce “false positives” — innocent students wrongfully punished — both because of the looser evidentiary standard and because of Title IX officers’ desire to produce numbers that show they’re taking sexual violence seriously.

          • Also, in a recent blog article that michael o church removed promptly, he mentioned feminism as the second most important cause. Normally, I wouldn’t have noticed ‘she’ as a genderless noun. I remembered the removed article when I read ‘she’ in the current article. I wanted to know if ‘she’ had a relation to feminism. Thus, I asked him.

            When I said hawk-like attention to pronouns was not helpful, I meant it didn’t seem to help people who need help.

            Whatever the real feminism is, the feminism I’ve seen in action stokes women’s irrational fear toward men by painting most, if not all, men as potential rapists. Irrational fear toward men makes women want to get rid of potential threats(men). Aggressive expansion of Title IX by obama administration was fueled by this irrational fear. Title IX encourages women to remove men from campus. Fascism works similarly. In a fascist system, people are manipulated into wanting to remove potential sources of stress or threats. Nazis painted the jew as demons and tried to get rid of the jew.

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