Pando

The Difference Between "Entrepreneur Friendly" and Straight Up Coddling

By Sarah Lacy , written on September 11, 2012

From The News Desk

There's been a slow-burn cultural change happening in Silicon Valley that, in my mind, dates back to the days of Jim Clark and Silicon Graphics. In the days before Clark -- the pioneer days of venture capital -- it seemed almost magical that anyone would give you money to start a company based on nothing more than an idea. No bank would do that, and the companies being built weren't like the Web companies today, where building a product is cheap and distribution is even cheaper.

Without VCs, only the independently wealthy or very connected could start cutting edge tech companies. You think people bitch about entrepreneurship being a rigged game, controlled by an in crowd of gatekeepers today? Imagine a startup ecosystem with no venture capital. Sure, there are companies that would make it anyway, like ballsy Ewing Marion Kauffman mixing up pharmaceuticals in bathtubs in his basement. But it's a small number that require insane tenacity (read: simply insanity when it doesn't work) and extraordinary luck. And in a world without venture capital, if it doesn't work someone can be left bankrupt and ruined.

Let's face it: People don't happen to be bigger risk-takers simply because they live in the Valley. Sure, there is some self-selection of people who are interested in tech and company-building, flocking here as their own personal Mecca. But the real reason there are more entrepreneurs per capita here than anywhere else in the world is because it's the only place where being an entrepreneur is a viable, logical career path. It's the only place where you can tell people you are an entrepreneur at a cocktail party -- even if you haven't ever yet started a company yet -- and not be laughed out of the room. Hate on venture capital all you want. A lot of that has to do with the cash that supports the habit.

So a lot of the first wave of Valley entrepreneurs were just grateful -- and a little shocked -- that such a thing existed. But Jim Clark was one of the first major folk heroes of the Valley who thought venture capital was just patently unfair. Throughout "The New, New Thing" he rails to Michael Lewis against the reality that entrepreneurs do all of the work in building a company and make the least money.

So what if VCs took early financial risk no one else would? For Clark, the luxury of just getting to build a startup was no longer enough. That's what makes the great entrepreneurs great. They don't stay satisfied for long. And the right discontented ones with the right leverage can push themselves, their companies and the entire ecosystem forward.

That idea gained more steam in the dot com bubble as capital became "cheap." If capital is cheap, then it has to compete for the best entrepreneurs. And although finding funding was harder in the ensuing crash and terms got a lot harsher, there was never really much of a correction in the amount of money flooding into venture capital coffers. That meant there was still more money than good ideas in the Valley, even if VCs were more reticent to part with it. Then, when the consumer Web took off again in the mid-2000s, that flared into a full-on entrepreneur friendly everything mantra in startup-ville. Today, entrepreneur-friendliness is next to godliness.

We see this everywhere we look around the Valley today, and it's rare that anyone openly comes out against it. That would be marketing suicide in an ecosystem that runs on self-interested goodwill towards a "community".

To wit:

  • The best incubators and accelerators essentially give startups a golden ticket to press and funding before a line of code is written. Every Y Combinator grad gets a favorable term sheet from Yuri Millner and Ron Conway, sight unseen. Sure, not everyone can get in. But for the hundreds who do, the barriers are substantially lowered.
  • Terms. They always swing back and forth based on the ecosystem's macro-economics. But there's a general expectation now that seed funding should be cheap and easy. And plenty of players are vying to be the ones who get credit for making this a reality. There's the rise of convertible notes, new schemes to create "convertible equity," Fenwick's Series Seed documents and AngelList's new simple and free closing documents. There is no better way to get a halo in the Valley then to promote entrepreneurial friendly terms.
  • Getting favorable press attention has never been easier. Not even in the bubble. You used to have to rely on mainstream business press to get credibility, reach investors and potential employees, and of course users. And New York-based media was always skeptical of startups. Culturally, it just didn't get them. And that meant there was a higher barrier startups had to be meet to be considered relevant. Blogs have forever changed that, and clearly since we're building one, we think that's a good thing. But you can have too much of a good thing. Too many tech blogs think supporting an ecosystem means supporting every entrepreneur. When we demand exclusives in exchange for investing half of a reporter's day covering something, we're told that's "anti-entrepreneur." I'm sorry, my job is not to be your publicist. I have a business to build and media is a zero sum game -- like it or not. Slobbering praise is not the same thing as supporting an ecosystem.
  • Demo day mania. If you can't get venture capital or can't get into an incubator or can't get one of the dozens of tech blogs to write about you, all is still not lost. You can participate in one of a million demo days. Demo conferences used to be a rare time and place for startups to get attention. But there is no shortage of ways for startups to get that attention every day now. People bitch at every startup conference that the demoing companies aren't very good, and people have been doing that this week with Disrupt. Considering I used to help plan Disrupt -- by far the best startup competition on the market right now -- I think it's a little unfair. But the people bitching have a point. There's a reason the quality of startups launching at conferences has notably declined: Because there are so many other ways to launch. If you take every company that can get into an incubator out of the mix, that alone means the quality pool just shrinks. I'd initially planned on working demos into our PandoMonthly events, which sponsors and VCs were clamoring for. But the sense I'm getting from actual promising startups is there's just not the need for it there used to be.
  • Soft landings for all....or all "in the system" at least. As I've written about before, there's a real belief in the Valley now that people who fail shouldn't have to actually fail. After my post on acqui-hires I actually got in debates with people who just don't see the value in failure. That reminds me of our joke in this post that a Peter Thiel action figure would lean so far to the right, he'd actually be leaning left. Similarly, something strange has happened where a belief that there should be no stigma attached to failure because the benefits of failing are so important has been pushed to a cultural extreme where we don't even attach a value to failure anymore, we just try to "out-hack" the necessity of it.
I don't mean to say the above is all bad. It's great...within reason. Much of the economy here -- and to a smaller extent the US economy -- hinges on entrepreneurs jumping off the cliff. Since you can't predict who will succeed, people figure the more who do it the better the odds of something huge happening. But the nature of ecosystems like this is the good gets pushed to into the realm of unsustainable.

But there's a difference between being entrepreneur friendly and downright coddling entrepreneurs, and I worry we're stepping over that line. This is supposed to be hard. And no matter how much easy money or free press you get, building a big company still is. Brutally, brutally hard. One of my board members says that being a CEO is like standing in a muddy room with a single bucket and only one mop. No one is ever going to clean up all of the mud; it's impossible. You are judged on whether you pick the most important areas to clean up first. Even the most successful companies are littered with momentary failures every moment of every day. It's making sure you succeed at the most important things that make the difference between a total failure and a billion dollar IPO.

And no one can protect entrepreneurs when it gets to actually building the thing. Ron Conway for all his connections can't call up the American population one by one and ask them to use your app. The mightiest tech blogs are king makers. They're just pretty good about writing about things with momentum and talented people behind them. As much as I argued above companies who get into Y Combinator have barriers lowered, as Paul Graham wrote on his blog a few days ago exactly two graduates make up the bulk of the value of his portfolio. There is simply no way to de-risk a Facebook into existence.

So when you take away the struggle early on, you're setting up false expectations of what's coming and giving people entrance into the game who may not be suited for it. We saw this in the late 1990s: People flooded here who never should have been working for a startup. Back then, it was the success of IPOs driving it. That's clearly not the case now. It's a dramatic lowering of the barriers of entry by making life for entrepreneurs so much easier.

And here's where I disagree with a lot of people in the Valley: I just don't see why that's a good thing. It's like allowing the small kid in eighth grade to play football with high schoolers. You can let him bypass the try-outs and rigorous training and run out on the field in his pads with his proud parents in the stands. Great. But what happens when the game starts?

What helps an entrepreneur push through the crisis of a major business deal falling through is that he already had to push through other stumbling blocks like finding a co-founder, getting early funding, and hiring key employees. It means the entrepreneur is capable of pushing through adversity and wants this badly enough to push through adversity. But not only that. It actually trains him how to do it.

This morning I was watching my one-year-old play with the door to his room. He slammed it pretty hard, and I was impressed that he elegantly pulled his hand out of the way before it clanged to a decisive close. He wasn't born with that instinct. Last week, he was doing the same thing and didn't move his hand. I feared it was coming, but I didn't get up and pull him away from the door. Baby proofing a house is one thing, but I can't follow him around sheltering him from doors his whole life. Last week, he cried for 15 minutes as his fingers throbbed with pain. I hugged his tears away, and it was hard to watch. But now, I don't have to run over and intercede every time he plays with a door. In just a week, he's learned to pull his hand away.

My other issue with this trend is that I see people cynically using it to play for applause. You can cloak any business move into "it's good for startups" and it's like playing the "job creator" card in politics. Everyday, I see investors and other service providers taking self-interested pot shots at competitors complaining that their actions are "hurting the startups."  It's become a get out of jail free card for bad behavior. "But we were just trying to help the startups." Please.

You know what's actually good for the startups? Admitting not everyone should build one.