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.
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.
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.