I, like everyone else in Silicon Valley, downloaded Secret last week. It's incredibly well done, certainly the best yet of any of the gossip/anonymous apps.
Thanks to technology, people can create more wealth now than ever before, and in twenty years they’ll be able to create more wealth than they can today. Even though this leads to more total wealth, it skews it toward fewer people. This disparity has probably been growing since the beginning of technology, in the broadest sense of the word.
Technology makes wealth inequality worse by giving people leverage and compounding differences in ability and amount of work. It also often replaces human jobs with machines. A long time ago, differences in ability and work ethic had a linear effect on wealth; now it’s exponential. [1] Technology leads to increasing wealth inequality for lots of other reasons, too—for example, it makes it much easier to reach large audiences all at once, and a great product can be sold immediately worldwide instead of in just one area.
Without intervention, technology will probably lead to an untenable disparity—so we probably need some amount of intervention. Technology also increases the total wealth in a way that mostly benefits everyone, but at some point the disparity just feels so unfair it doesn’t matter.
And critically, without a reasonable baseline of access to wealth, there can be no such thing as equality of opportunity.
Wealth inequality today in the United States is extreme and growing, and we talk about it a lot when someone throws a brick through the window of a Google bus. Lots of smart people have already written about this, but here are two images to quickly show what the skew looks like:
[0]
As the following table shows, wealth inequality has been growing in America for some time, not just the last few years. It’s noticeable between the top 20% and bottom 80%, and particularly noticeable between the top 1% and bottom 99%.
And here is a graph that shows the income share of the top 1% over time:
The best thing one can probably say about this widening inequality is that it means we are making technological progress—if it were not happening, something would be going wrong with innovation. But it’s a problem for obvious reasons (and the traditional endings to extreme wealth inequality in a society are never good).
We are becoming a nation of haves and have-nots—of prosperous San Francisco vs. bankrupt Detroit. In San Francisco, the average house costs around $1mm. In Detroit, the average house costs less than a Chevy Malibu made there. [2] And yet, I’d view a $1mm house in San Francisco as a better investment than 20 $50k houses in Detroit. As the relentless march of technology continues, whole classes of jobs lost are never coming back, and cities dependent on those lost jobs are in bad shape. [3]
This widening wealth divide is happening at all levels—people, companies, and countries. And either it will keep going, or innovation will stop.
But it feels really unfair. People seem to be more sensitive to relative economic status than absolute. So even if people are much better off being poor today than king 500 years ago, most people compare themselves to the richest people today, and not the richest people from the past.
And importantly, it really is unfair. Trying to live on minimum wage in the United States is atrocious (http://www.forbes.com/sites/laurashin/2013/07/18/why-mcdonalds-employee-budget-has-everyone-up-in-arms/). That budget, incidentally, assumes that the worker is working two jobs. Even though they’re outputting less value, that person is certainly working harder than I am. We should do more to help people like this.
Real minimum wage has declined, failing to track real averages wages and massively failing to track the wages of the top 1%.
In a world where ideas and networks are what matter, and manufacturing costs trend towards zero, we are going to have to get comfortable with a smaller and smaller number of people creating more and more of the wealth. And we need a new solution for the people not creating most of the wealth—many of the minimum wage jobs are going to get innovated away anyway.
There are no obvious/easy solutions, or this would all be resolved. I don’t have any great answers, so I’ll just throw out some thoughts.
We should assume that computers will replace effectively all manufacturing, and also most “rote work” of any kind. So we have to figure out what humans are better at than computers. If really great AI comes along, all bets are off, but at least for now, humans still have the market cornered on new ideas. In an ideal world, we’d divide labor among humans and computer so that we can both focus on what we’re good at.
There is reason to be optimistic. When the steam engine came along, a lot of people lost their manual labor jobs. But they found other things to do. And when factories came along, the picture looked much worse. And yet, again, we found new kinds of jobs. This time around, we may see lots more programmers and startups.
Better education—in the right areas—is probably the best way to solve this. I am skeptical of many current education startups, but I do believe this is a solvable problem. A rapid change in what and how we teach people is critical—if everything is changing, we cannot keep the same model for education and expect it to continue to work. If large classes of jobs get eliminated, hopefully we can teach people new skills and encourage them to do new things.
Education, unlike a lot of other government spending, is actually an investment—we ought to get an ROI on it in terms of increased GDP (but of course it takes a long time to pay back).
However, if we cannot find a new kind of work for billions of people, we’ll be faced with a new idle class. The obvious conclusion is that the government will just have to give these people money, and there’s been increasing talk about a “basic income”—i.e, any adult who wanted it could have, say, $15,000 a year.
You can run the numbers in a way that sort of makes sense—if we did this for every adult in the US, it’d be about $3.5 trillion a year, or a little more than 20% of our GDP. However, we’d knock out a lot of existing entitlement spending, maybe 10% of GDP. And we’d probably phase it out for people making over a certain threshold, which could cut it substantially.
There are benefits to this—we’d end up helping truly poor people more and middle class people less, and we’d presumably cut a ton of government bureaucracy. We could perhaps end poverty overnight (although, no doubt, anything like this would cause prices to rise). And likely most of this money would be spent, providing some boost to the economy. We could require 10 hours a week of work for the government, or not. A big problem with this strategy is that I don’t think it’ll do much to address the feeling of inequality.
Many people have a visceral dislike to the idea of giving away money (though I think some redistribution of wealth is required to reasonably equalize opportunity), and certainly the default worry is that people would just sit around and waste time on the Internet. But maybe, if everyone knew they had a safety net, we’d get more startups, or more new research, or more novels. Even if only a small percentage of people were productive, in a world where some people create 10,000x more value than others, that’d be ok. The main point I’m trying to make is that we’re likely going to have to do something new and uncomfortable, and we should be open to any new ideas.
But this still doesn’t address the fundamental issue—I believe most people want to be productive. And I think figuring out a much better way to teach a lot more people about technology is likely the best way to make that happen.
Thanks to Nick Sivo for reading a draft of this.
Follow me on Twitter here: http://twitter.com/sama
[0] http://www.youtube.com/watch?v=QPKKQnijnsM
[1] There are lots of other significant factors that cause wealth inequality—for example, having money makes it easier to make more money—but technology is an important and often-overlooked piece
[2] http://www.huffingtonpost.com/2012/07/20/home-cost_n_1690109.html
[3] I was recently in Detroit and was curious to see some of the neighborhoods where you can buy houses for $10-20k. Here are some pictures:
Value is created by doing.
It’s easy to forget this. A lot of stuff feels like work—commenting on HN, tweeting, reading about other companies’ funding rounds, grabbing coffee, etc [1]—is not actually work. (If you count that as work, think really hard about the value you’re creating in your job.) These activities can be worthwhile in small doses—it’s important to network and meet interesting people to stay in the flow of ideas—but they are not by themselves how new wealth gets created.
Value gets created when a company does things like build widgets and sell them to customers. As a rough guideline, it’s good to stay in roles where you’re close to the doing.
Of course you have to do the right things. Writing software no one wants does not create value—that’s called a class project. So it’s critical to figure out the right thing to work on, and strategy is far more valuable than a lot of pivot-happy companies would have you believe. But strategy alone has no value—value gets captured by execution.
It’s easier to sit around and talk about building a startup than it is to actually start a startup. And it’s fun to talk about. But over time, the difference between fun and fulfilling becomes clear. Doing things is really hard—it’s why, for example, you can generally tell people what you’re working on without NDAs, and most patents never matter. The value, and the difficulty, comes from execution.
There are good tricks for keeping yourself honest here. When I was running a company, I used to make a list of everything I got done at the end of the day. It was remarkable how I could feel like I had a really busy day and realize that night I got nothing done. Similarly, I could have a day that felt only somewhat busy, but accomplish 3 or 4 major things.
Err on the side of doing too much of the sort of work that matters and blowing off all the rest, or as Machiavelli said:
Make mistakes of ambition and not mistakes of sloth. Develop the strength to do bold things, not the strength to suffer.
You build what you measure—if you measure your productivity by the number of meetings you have in a day, you will have a lot of meetings. If you measure yourself by revenue growth or number of investments closed or something like that, you will probably have fewer meetings.
Another example of not-quite-work is every night in San Francisco, there are dinner parties where people get together and talk about the future. It’s always fun and usually not very contentious—most people agree we need to go to space, for example. But at the end of it, everyone goes home and works on something else.
If you believe that going to space is the most important project for humanity, then work on it. If you can’t figure out how to raise hundreds of millions of dollars, go work for SpaceX (joining a great company is a much better plan than starting a mediocre one). If enterprise software is what you really love, then work on that. [2]
If you’re reading this and feeling unproductive, there’s a silver lining. You can just close the browser window. The good news is that it’s easy to course-correct, and it feels great.
[1] I count blogging as a marginal use of time, but the reason I started is because I realized it was important to be good at writing, I was bad at it, and the only way I was going to improve was with lots of practice. And sometimes I meet really interesting founders because of something I wrote.
[2] This isn’t meant as any sort of relative value judgment; if what you want to do is build an enterprise software company, then you should do that. The problem comes when what you really want to do is build rockets. A lot of people feel like they first should do something to make money and then do what they care about (or first work at a company for awhile before starting a company they really want to start). While you of course should take care of your family before anything else, you should try to work on what you really care about. You can usually find a way. The danger is that life is short and you only get to work on a small number of companies over the course of a career—it’s worth trying to make them count.
I spent some time recently thinking about what companies that grow up to be extremely successful do when they are very young. I came up with the following list. It’s from personal experience and I’m sure there are plenty of exceptions. While plenty of non-successful startups do some of these things too, I think there is value in trying to match the patterns.
Most of the time, we worry far too much about tail risk.
When it comes to everything that's not building a great product and getting users, most founders think fundraising is going to be their biggest challenge. And it is, until they raise money, and then it's hiring. Hiring is so hard that founders think nothing else will be harder.
All companies that grow really big do so in only one way: people recommend the product or service to other people.
Maybe bitcoin will be the world reserve currency, maybe it will totally fail, or maybe it will survive in some niche capacity. I don’t know how to weight the probabilities (although I think in the immediate term it's likely to go down), but I do have a thought about the metric to watch: growth in legitimate transactions. A currency without the major use case being legitimate transactions is going to fail.
I frequently get asked by non-technical solo founders if I know any potential hacker cofounders they should talk to. These people give a passionate pitch for the idea and a long list of all the hustling they've done, customers they've spoken to, models they've built, provisional patents they've filed, etc. Most of the time, they are thoughtful and hardworking. But they've often been searching for their technical cofounder for many months, and things have stalled during that process.
When people like this say "I'll do whatever it takes to make this business successful" (which they almost always say), I say something like "Why not learn to hack? Although it takes many, many years to become a great hacker, you can learn to be good enough to build your site or app in a few months. And even if you're not going to build the next version, if you're going to run a software company, it seems like a good idea to know a little bit about it."
Usually the response is something like "That wouldn't be the best use of my time", "I don't like it", or "I don't have that kind of brain". (Earlier today it was "You don't understand, I'm the idea guy. If I'm hacking, who will be talking to investors?", which is what prompted this post.) But every once in awhile people think about it and decide to learn to hack, and it usually works out.
They’re often surprised how easy it is. Many hackers love to help people who are just starting. There are tutorials for pretty much everything and great libraries and frameworks.
As an important aside, if you try to learn on your own, it can be really hard. You’ll hit some weird ruby error and give up. It’s important to have someone—a friend, a teacher at a coding bootcamp, etc.—that get you through these frustrating blocks.
When hackers have to for their startups, they are willing to learn business stuff. Business people should do the same. If you're not willing to do this, you should remember that there are far greater challenges coming in the course of a startup than learning how to code. You should also remember that you can probably learn to code in less time than it will take to find the right cofounder.
Speaking of cofounders, a word of warning: meeting a stranger for the express purpose of cofounders hardly ever works. You want someone you've known for awhile and already worked with. This is another good reason for learning to hack yourself instead of bringing on a cofounder.
You can build the first version of your product, and even if it's terrible (we had a non-technical founder in YC that learned to hack with Codecademy and was still able to learn enough to build a prototype), you'll actually be able to get real user feedback, iterate on something other than mockups, and perhaps impress a great hacker enough to join you. Although you may never win a Turing Award, if you're smart and determined, you can certainly get good enough to build a meaningful version 1.
If you're a solo founder and you can't hack, learn.
One of the most interesting changes in venture capital going on right now is the separation of advice and money. For a very long time, these have been a package deal.
Great advice is really important; some founders don’t appreciate this initially (I was guilty of it) but always learn to. But great advice does not have to come from venture capitalists; it often comes from people like former founders.
There have been a few small indications of the advice/money separation over the past few years, but crowdfunding is now really making it happen. Some companies can raise money on very good terms from investors that don’t know much about startups, and then give equity to the advisors they want to work with.
There are probably going to be big advantages and big disadvantages to this. On the positive side, founders may end up with less total dilution and get to choose whatever advisors they want—not just the people that happen to manage institutional money. Another big positive is that more competition (and more transparency) makes investors behave better. On the negative side, advisors probably won’t work quite as hard for a company that they don’t have a lot of capital invested in. Also in the negative column, this will probably further worsen founders’ disrespect for capital. And perhaps worst of all, I expect a lot of people to lose a lot of money—startup investing is both hard and appeals to gambler’s instincts, and it’s easy to imagine it becoming the new daytrading. At some point, of course, the pendulum will swing back.
Advisors will probably still put in some capital, but probably at a better effective price than people who just invest. The hard part is that everyone thinks they are a great advisor and wants the special treatment.
The bigger force at work is the long-term trend towards founders having more leverage than investors. This change in leverage has happened for a lot of reasons, but specifically, crowdfunding probably would not have been possible if companies needed as much capital to start as they did ten years ago. Also, startups are cool now, so more people want to invest.
Quick and painless fundraising, without advice necessarily being part of the package, is what many founders want. In a sense, VCs sell advice, but founders want to buy money.
Crowdfuding is an answer to this (also, the crowd is willing to fund things VCs are not, pay higher prices and on very clear terms, etc.) Fundraising has not been an efficient market—VCs and angels have been able to corner it with laws, access, and it being the only source of advice. But the Internet continues its never-ending march.
The best VCs are great, and they will probably continue to do well. In fact, they’re so good that they could probably get away with only selling advice—they understand how to build big companies in a way that few other people in the world do. They may have to adapt their strategy somewhat—for example, in response to being able to buy less ownership in earlier rounds, I suspect some firms will shift to writing much larger checks to the obvious winners in later rounds.
The mediocre and bad VCs will have to adapt or die.