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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