Ask any entrepreneur: The freelance economy is a sucker's game

By Sarah Lacy , written on December 9, 2012

From The News Desk

So much of what information technology and the Web has allowed us to do is break things up into parts.

Whether it's hardware, software, how you purchase our travel, how we consume news, how we watch movies and television, or purchase music: So much of progress has been about liberating bits and pieces of actions or things to give us ultimate control and choice.

So it's not a surprise that, in some senses, that the United States is becoming a nation of freelance and contract workers. It's a cultural change, but one that has clearly been pushed by technology and the Web.

There are forums like eLance where you can find specialized work by the job. Platforms like blogging, iOS apps, and Facebook have opened up new ways for creative people to work for themselves, and coworking spaces have given them places and networks to call home. Sites like TaskRabbit and UrbanSitter are doing the same for people who may want to augment their income in services work. This is getting pushed into the artisan world with mini-economies forming around Etsy and Zaarly. And services like Airbnb, Uber, and the dozens of other car sharing services are allowing you to turn assets into self-managed income streams.

The trend is extreme enough that Naval Ravikant predicted that in the future, people would wake up, see a flood of jobs, pick one, and go do that thing. For some workers, that reality is already close. Studies show that as much as 40 percent of the labor force is freelancing or contracting in some way right now. According to the recently released US Jobs Report only 47.6 percent of people are employed full time.

And it's not just low income people who can't find full time work -- although that's a big part of it. It's glamourous well-paid college grads opting into this as well. Called, flippantly enough, the Gig Economy or the new "hustling class." Harvard Business Review has called them "SuperTemps" in a "free agent nation."

There's a lot to like about this freelance economy. The worker gets to pick and chose his tasks and hours and wages. Gone for many are those "Office Space"-like days of toiling in an office at a job you hate while your rage quietly builds up at the fax machine. At its best, the trend allows people to do what they love and what they're good at, over doing what they have to do to get by.

And, of course, many large corporations have snapped up these workers -- or at least their available hours -- thrilled they don't have to pay benefits, insurance, or deal with problems of old like pensions or unions. Whole third party companies have emerged in the last decade or so, which basically act like employees for all these contractors and freelancers so corporate giants don't have to manage them. The name of the one many large tech companies use is telling: Workforce Logic. It was fittingly just acquired by a company called ZeroChaos. The message from both monikers is clear: Full time employees are messy. Let us deal with them. And it works: The combined company -- one of many in the space-- does more than $2 billion in annual revenues.

It's a Tetris-like employment world, in theory, where a long, yellow rectangle comes onto the Web for hire and a company that needs exactly that rectangle at that time grabs him and speed him into their slot.

This can be great for end consumers in the service economy as well. Consider a service like Zaarly. If I see a table made from reclaimed wood that I love, but isn't exactly perfect for my house. I can snap a picture, and find a local woodworker who can rip it off at my specified dimensions or build something better. How would I have even found a local woodworker before? How would that guy have marketed to me?

But, of course, nothing that sounds like that much of a win-win ever is.

There are three problems with this utopian vision of everyone being his or her own boss. The first is it assumes everyone is equally talented, able to hustle, and self-motivated, and that everyone possesses the interpersonal skills to manage their career. They're not. The big problem with our labor market over the last few years has not be a shortage of jobs, but a shortage of skills to fill the jobs that are open. If it was as easy as assuming everyone was a Tetris piece in need of an exact fitting slot, we wouldn't have had 10 percent unemployment the last few years. Many people will simply not be suited for this kind of work.

It also largely only takes into account the jobs people want to do. An economy runs on people doing many things, some of which are unpleasant. Someone has to pave roads, for instance. There is no guy on Zaarly saying road construction is his passion. Artisanal road construction, perhaps, but not the actually useful sort.

This is that same snobbiness that we saw during that trend of business schools thinking that America would create only knowledge-worker jobs, and the rest of the world could simply do all the grunt work of manufacturing and shipping and logistics. It assumes that America is full of people who are somehow smarter than people in the rest of the world, and by rights they shouldn't have to do manual labor at all. A country filled with only "idea people" is as impractical as it would be insufferable.

Indeed corporations like Apple and GE are now scoring points with the government by promising to bring manufacturing jobs back to America. Those line workers aren't going to wake up everyday and check TaskRabbit -- "WANTED: person to assemble an iMac" -- but the jobs will help a lot of places where manufacturing plants have shut down.

And then there's a third thing that's keeping the American economy from going all contract: Startups.

It sounds counter-intuitive, because startups are the ones pushing a lot of the elements and platforms and ethos that enable a lot of this freelance economy. And, when it comes to large corporations, the supposed benefit is all about making a big organization nimble: You can scale up or scale down as you need, with out the pain of making long term commitments or hiring and firing. How very startup that seems.

But most successful startups I've seen don't rely on freelancers. Instead they fight tooth and nail to hire the best full time talent and lock them up as long as they possibly can. In fact, the more fast-growing, the more innovative, the more nimble a startup is, the more it seems to want to gobble up huge swathes of talent and, with it, acres of office space. Visit any fast-growing startup, and they'll proudly say something like, "We only moved here a week ago and already we're almost out of room!" For many startups, the size that matters isn't just their valuation or users, it's how many of them sit in one physical place everyday.

That's another thing. Startups were largely never hoodwinked by the trendiness around outsourcing either. Nor have they largely been fans of virtual offices -- with a few high profile exceptions like Automattic.

Startups go to great length, trouble, and expense to make sure full time people are all working in the same place. They build out lush campuses with perks-a-plenty to make sure they don't want to leave...ever. They headquarter in expensive places like New York or San Francisco, because they believe the premium they are paying for space and people will make a transformational difference to their companies' performance.

The very nature of startup compensation ties into this obsession with owning people: You don't only want employees, you want people who are invested in the company's success; people whose financial dreams are inexorably tied to how that company performs.

Think for a moment about acqui-hires. Startups actually purchase companies whose products have failed in order to get their full time employees. That couldn't be more counter from a large corporate giant's desire to have disposable labor pools.

If you think about it, this is a very old fashioned way of building a company, compared to how so many others are doing it. And, yet, by and large, this tactic has not been proven wrong. Sure there are companies who get out over their skis. But almost all of the large successful companies have built themselves this way, and they rarely retrench unless they're just wrong on the market or the product, or they fail in some tactical way.

For a long time, in both San Francisco and New York, the glorious Googleplexes meant they got the cream of the talent, and that made a massive difference in Google's success. So much so that Google and Facebook's HR departments have been locked in an absolute war of hiring for years. Airbnb, Dropbox, and the new generation of the $1 billion valuation club have tried to one-up them when it comes to trendy office spaces. Check out Zynga's digs from our Office Crashers series. If you didn't have to actually work trying to turn that company's fortunes around everyday, it'd be like being at a carnival.

There are two simple reasons that startups want -- and are willing to pay so much for -- full time people. The first is that dozens of Web companies all have the same ideas. Execution is what matters. If someone isn't world class, you shouldn't hire them. If they are, why on earth would you share them?

The second is mission and dedication. Even the best funded startups ultimately have to compete on cool not cash. They want to hire people who live and breathe their mission. In a fast growing startup there are a million little details a CEO can't micromanage. You want to be able to trust that your team feels enough desire -- through financial and emotional triggers -- to make this company a success that they will do every little extra thing they can to succeed. Things you'll never even see as the CEO. It's the ultimate honor system in the corporate world: total employee/founder alignment. An employee will work all night to ship code and make sure it's perfect. A contractor who sees you as nothing more than a gig will not.

We always shock reporters when we tell them that we don't hire freelancers, because it's so out of touch with much of the rest of the journalism world right now. We have rare, rare exceptions, and each of them I have tried to convert to full time. Hiring a freelancer is never by choice for us.

Our product isn't about speed and volume. It's about reporting, story telling, intelligence, and depth. We invest heavily in our staff, and the last thing I want is those voices writing anywhere else. Farhad Manjoo is one of the only freelancers on our masthead (not my choice) -- and it drives me nuts ever time I see him write something on Slate that I know would have done well here.

It may seem like the anti-Huffington Post approach, but actually even Huffington Post for its army of free freelancers, insisted people be full-time if they paid them. And, in fact, Arianna Huffington's first order of business upon taking over AOL's editorial was to get rid of freelancers and make people work in the same room.

Great entrepreneurs know they can't be in this alone. When you find talent, you want to possess it and make it even better. Entrepreneurs are jealous, territorial, possessive and competitive when it comes to talent. Is it any wonder one of the only overpaid middlemen that hasn't been disenfranchised by the Web is the recruiter? Ironically, there are few areas where they make more money than placing people at Web companies.

This desire to trap and retain and lock up talent is so deeply woven into the fabric of startups that the most cliche advice you get starting a new company is to hire slow and fire fast. And both are incredibly hard to follow in practice.

It's interesting that this idea of talent as an asset flowing in and between companies freely was really pioneered in the Valley, back in the days of Fairchild semiconductor. Even in the 1990s it was tech companies that pushed the boundaries of loyalty between employer and employee. No one in the Valley was expected to work at one place for five years, let alone 30 years like their parents did. It took many other sectors of the economy a while to catch up.

And yet, it's large corporations that have arguably pushed it too far. The startups themselves fight against this free flow of talent that our economy helped pioneer with everything except actual NDAs and noncompetes and other sticks that held back East Coast ecosystems. Instead, they throw every carrot they can imagine at them.

Now the irony is you have greater job security in the startup world than the corporate world. Even if your company goes under, there's another 20 looking for full time employees.

A contract economy may be IBM's dream, but it's Airbnb's nightmare.