Venkatesh Rao - Entrepreneurs Are The New Labor: Part III lyrics

In the first two parts, we covered the history of the entrepreneurs-to-labor dynamic in the Robber Baron era, and how the pattern is roughly repeating itself in our time. I promised a positive vision of the future in this concluding part. For the record, I suspect I have one foot in the obsolete cla**, and one foot in the lifestyle designer cla**. I lack the drive to join the labor entrepreneur cla**, and the sk**s to join the New Engineers cla** at more than an amateurish level. The major part of the story that is incomplete is the emergence of the new financial order and a cla** of new bankers (the J. P. Morgan type figures). What we can safely predict is that the Google-Facebook-Amazon-Apple economy will catalyze the emergence of a new financial world, both because trust in the old financial world has been completely eroded, and also because the Wall Street/DC system of today (even if were capable of operating “honestly” by some definition) is institutionally incapable of managing and regulating the new economy. The new financial order will comprise members representing the largest new economy companies, as well as members of the investor cla** who survive the ongoing collapse of credibility of their home institutions. Political participation in the new order will come not from nation-states or provincial governments, but city/urban political systems. More on that later. There is a vacuum here that will be filled. This part of the story played out differently in the 1910s, when the “old” financial order of the day was simply non-existent (rather than large, mature and untrusted) until the (re-)creation of the Federal Reserve in 1913. The differences do not matter: what matters is that in both cases, there was room and need for a new financial order to emerge. Also note that the new (or rather, new-new) middle cla** today represents a tiny, fringe population, while what I have labeled the obsolete cla** is actually the bulk of the mainstream economy that both Obama and Romney are currently fighting to keep alive on life support. This is a view of what the economy is becoming rather than what it is. So the pattern of emphasis may seem very strange to those of you who don't have much to do with the entrepreneurial fringe of the economy and live in parts of the mainstream economy that are still functioning. This “becoming” may of course falter. But if there is a way out for America, it is entrepreneurs (of both the New Labor and “real” varieties) who will find it. I want to offer a positive and honest vision, not motivational cheerleading. If the diagram above does not materialize in another 20 years, we are in much bigger trouble than we think. With that visual review of the supporting arguments out of the way, let's grab a can of paint and start the visioning. Sam and Frodo Archetypes for the New Economy To paint this vision we need to rise above convoluted insider debates about VCs versus LPs versus entrepreneurs versus angels vs. incubators versus Ashton Kutcher versus Shark Tank and American-Idol entrepreneurship. We also need to rise above acqui-hiring vs. “real” startup debates, and the nitty gritty of Lean vs. non-Lean models. Important as those issues are for practicing entrepreneurs (both real and labor-), they are just fussy details in the model we are building here. To do this rising-above, we need to address two questions. First, how might the new laborer-entrepreneur cla** moving through the acqui-hiring pipeline evolve into a new institution that is recognized as legitimate rather than criticized as a corrupted parody of entrepreneurship? Second, what about “real” entrepreneurs, the ones who hustle for real and have the political sk**s and maturity to engage investors in a true balance-of-power relationship? These might seem like a very narrow pair of questions, but in the stories we imagine for these two archetypes, all hope must rest. They are Sam and Frodo marching into Mordor. If they manage to destroy the One Ring that sustains the increasingly toxic late-stage industrial economy being run by the surreal DC-Wall Street crime syndicate (let's call it the Saruman-Sauron Axis of Evil), there is hope for a rebuilding. If they fail, things will go to hell. The #Occupy hordes at the gates of Mordor cannot do much if Sam and Frodo don't complete their missions. The challenge for the first group is crafting and accepting a new and distinct identity, based on new labor/management archetypes, and a narrative that rejects the romantic allure of a frontier age of entrepreneurship in favor of less dramatic plots that offer more income security. Incidentally, this romanticized self-perception is also something that we've seen before: long after the Wild West had been closed off by the railroads, and the long cattle drives had ended, new-middle-cla** Americans living in emerging industrial towns continued to delude themselves that they were rugged frontier individualists in some vague philosophical sense. It took about 30 years for new, non-ludicrous social identities to emerge. “Entrepreneur” is today's “cowboy.” The challenge for the second group is to find sources of power with which to restore the balance of power with the investor cla**. The specifics of what businesses they build (the perennial “Next Big Thing” question) are less important than the rules they are able to enforce around the Next Big Game to constrain the financial cla**. From this cla**, we can expect the second-tier innovations of the Internet Age, which will build on foundations already laid down. In the 1910s-20s, it was entrepreneurs like these who created the automobile and aerospace industries, household technologies for the new, urban nuclear-family middle cla**, and so forth. On top of the industrial backbone created during the Robber Baron era, they manufactured a new normal for the ma**es. And while no mind-boggling fortunes like those of Rockefeller and Carnegie were created by this second-tier (those levels would not be reached again until the Bill Gates era), the wealth that was created was nothing to sneeze at (and was much larger, in aggregate, than the wealth created for and by the Robber Barons in the nineteenth century). We'll talk about Frodo in a bit. Let's talk about Sam: the laborer-entrepreneur and future middle-cla** citizen. The New Labor Narrative I am going to offer you a narrative of the modern young entrepreneur that is going to sound incredibly patronizing. But there's a point (besides snark) to telling the story this way. This narrative, incidentally, is not an original one. You hear many versions (and specific instances) when you talk to the entrepreneurial-labor cla** these days. They are a partially self-aware bunch, entirely willing and able, up to a point, to recognize their own situation through a mix of CollegeHumor videos, xkcd cartoons and darkly humorous anecdotes shared at online watering holes. The partial self-awareness is a belief system delicately balanced between hipster levels of ironic disengagement, and clueless levels of kool-aid belief. The extremes exist in part to help the middle define itself. The narrative starts with our modern-day Horatio Alger hero, straight out of college (or dropped out from one) and inspired by Seth Godin, Clay Shirky and the rest of the Internet inspiration squad. He (and increasingly, she) has never looked at a truly ugly balance sheet or declared bankruptcy. Or navigated a business situation requiring cooperation with a more powerful adversary whose intentions are somewhere between somewhat misaligned to outright hostile. Or really failed, and acquired political sk**s by being played for a s**er by an older, cannier player. Or learned the value of trust-but-verify. In other words, this is the actor who is brilliantly cast by the spinners of the Silicon Valley Grand Narrative in a role where inexperience is reframed as an a**et. Our hero, the Silicon Valley bard sings, is somebody who does not know X cannot be done and therefore manages to do it. In your face, jaded-cynics. This is the one-in-a-million redemption story sold as an expected outcome. Ironically to an audience that is prized for its statistical sophistication in other domains like A/B testing of websites. As Gordon Gekko remarked sardonically in Wall Street II, our hero is a NINJA: no income, no job or a**ets. If Gekko met Shirky, he'd probably quip, in response to the latter's “Here comes everybody” line, “… so let's take ‘em for a ride.” Our hero works out of a coworking space, rooms in a hacker hostel where he desperately seeks a technical co-founder everyday (a struggle since he has little to offer in the developeronomics game compared to the Googles with their buffets), goes to hackathons to pitch to increasingly mercenary engineers and designers, and stays up nights working on an incubator application. Sometimes he stands by highway ramps, holding up a sign that reads “looking for CTO.” He succeeds. He finds his technical and UX soul-mates (who have temporarily soured on Google and Facebook), gets into a top incubator, bonds with cla**mates, develops a deep admiration for the culture around him, with its various senior figures available for schoolboy crushes, graduates with a few angels knocking at his door, and scores a heart-warming Techcrunch story. Along the way, he has acquired a pa**ing knowledge, from the bleachers, of the Paypal Mafia story, watched a scene or two in the colorful drama of the Ron Conways and Dave McClures, and learned all about the Super-Angel bubble. He has met a few VCs who all insist that the other VCs don't get it. He has devoured everything that Peter Thiel, Marc Andreessen and other wise demigods have to say. He imagines himself an initiate into the inner circles of Bay Area culture. He thinks he has seen the dark underbelly of American innovation (Elon Musk excepted of course, since every functioning subculture needs at least one untarnished idol to sustain hope; Musk today single-handedly sustains the increasingly wobbly belief that the startup world is somehow better than the cubicle-farm world of large corporations), but is motivated to play the game anyway. In many ways, he correctly a**umes, it is the only game in town. He is all pumped up to work hard, swing for the fences and deliver that 10x return that investors encourage him to lie about, well-aware that he is aiming for the moon in order to clear a somewhat high fence. Somewhere in his smart, Stanford-dropout head, he buries a more pragmatic hope of a 2x – 3x acqui-hire exit (with enough of a payout for a down payment on a Valley house, and a job that would have taken twice as long to be promoted into, on the “standard” career path) under layers of denial. The prize is access to what used to be the normal middle-cla** script, which is now out of reach for most (the alternatives to this script are not pretty: parent basements or Afghanistan). It is enlightened, tactical self-delusion. He achieves exactly that: a predictable, planned miss that hits a more probable, less valuable target. The little-startup-that-could gets acquired by a big company, somewhere between the seed round and the first VC round, midwifed into improbable survival by angelic quick-flip artists. The preemie struggles for life in the big company neonatal ICU (with the distraught founder-parents watching through the gla**). Mostly, it dies, but the parents survive. Some cannot wait for their golden handcuffs to come off, so they can ride the roller-coaster again. Some happily accept captivity, quietly dropping the anti-big-company rhetoric of their rent-and-ramen days. If the case has been interesting enough, the Valley engages in another debate where triumphalist rhetoric (“this proves that the system works as it should”) competes with gloomy hand-wringing (“this proves that the system is broken and real innovation no longer happens here; it is just big companies acqui-hiring, and solutions to first-world problems”) for control of the narrative. Curiously, the hand-wringing camp usually wins. Silicon Valley optimism is sustained by constant reinforcement of a rarely-attained ideal, every departure from which reinforces a sense of systemic corruption and crisis. This sense that the system is corrupt and broken, incidentally, serves a purpose that we'll get to. Or, much more likely, our hustler deadpools. His technical co-founder and UX designer decamp to good jobs to recoup. He gamely gets up, dusts himself off, and takes another shot. Possibly at a lower-rated incubator or as a free agent. His chances go down with every crash, rather than up, in contrast to old-school serial entrepreneurs. Or he joins the lecture-blogosphere circuit, haunting the panels of the eternal calendar of Silicon Valley events, retelling his story until it grows stale. If he fails enough times, well: we'll see the first instances of that story-line playing out in a few years, as middle age hits the first generation of entrepreneur-laborers living out this story. Lest you feel inclined to be snarky about this plot, consider this: at least our hero has some believable script to follow. There is some genuine learning, and a real shot at a life in the new economy. What he is gambling for is not the space trip and big fortune, but merely survival. Your typical mid-career layoff, by contrast, faces a hopeless struggle for relevance in an alien economy he is ill-equipped to handle. These are tough times. There are very few winners. Instead, there is a kind of deep social turmoil. You should be happy if you have an opportunity to access any script with some chance of survival. Even if it involves a ma**ive amount of tactical self-delusion. From Patronizing Sarcasm to Post-Industrial Schools This narrative works as patronizing sarcasm precisely because there is an unacknowledged paternal/maternal dynamic to the story that is easy to make fun of. But it is only patronizing if you take words like entrepreneur and investor at face value (it's like mistaking Buffalo Bill's Wild West shows for Wild Bill Hickock's Deadwood; farce for tragedy). Read this instead as the tale of an average (not extraordinary and extraordinarily lucky) individual, dealt an average hand, in his/her early twenties, with words like student and teacher substituted for entrepreneur and angel. Read that way, this is merely a bald narration of coming-of-age events in an adult world. Growing up in a tough economy is hard. There are no weekend crash courses or summer programs that can magically turn a 22-year old into a functioning, economically independent adult. In the best case, this world recognizes itself for what it is: a world of students and middle-manager mentors/teachers, working within a post-corporate ecosystem economy built around experience consumerism. Incubators increasingly act like alternative universities. The honest ones admit what they are. A tiny but culturally significant minority of young people is abandoning college for these alternatives, which are at least somewhat relevant, and far cheaper. Rent, Ramen and being paid to learn programming beats Rent, Ramen and Student Loans incurred while learning art history. What about the demand side? Can acqui-hiring go from being the trickle it is today to huge, broadband labor pipeline comparable to today's traditional university-to-HR pipeline? I think it can, so long as you are willing to sacrifice your treasured notion of “job” in favor of a more flexible idea of “work.” Today's landscape is littered with incubators that are basically feeble jokes, attempting to mimic the success of Y-Combinator. These jokes will learn, grow, proliferate, shed their diploma-mill status and become real. Though Facebook and Google may employ very few full-time employees for their financial size, they do induce ecosystems that contain ma**ive amounts of wealth. Wealth that is accessible to those who attempt to mine it with more agile tools than the rigid ones we know as “jobs.” The standardized term sheets that mark the beginning of the journey will lead on to standardized acqui-hiring terms and policies, so that the transaction costs gradually fall from M&A levels to HR levels. Large companies will start negotiating set agreements with incubators and angel studios. The distinction between angels and headhunters will blur and vanish. Instead of transcripts and term papers, you will have a documentation of student learning in the form of Lean Startup model collateral. Or similar educational paper trails from one of the many other emerging experiential learning models. Instead of being shunned, might-have-been-MBAs seeking out the path primarily for its credentialing benefits will be welcomed. There will be an incubator bubble upstream of the super-angel bubble. It will burst and leave behind a new education infrastructure. I noted earlier that Lean Startup models, viewed as entrepreneurship, are somewhat unnatural things: real hustlers do not reveal their hands, cooperate tamely with investors or work out their strategies via public blogs and transparent, easily-interpreted “pivot” announcements. But there is a category of people who openly work this way: students. Students are used to turning in homework, “showing their work,” getting grades and feedback from more seasoned individuals. They are used to their output being judged by a “student work” standard of quality. They are used to deferential and respectful, rather than adversarial relationships with their teachers. They are used to turning in revisions of their work to thesis supervisors (i.e., “pivots”) based on ongoing feedback. They are used to conforming to the expectations of a thesis committee. And this is as it should be. The only time powerful adults in their prime do not slaughter young ‘uns in competition is when they are teaching them. The last point is important. I have heard many who are even more skeptical than I am of the Lean Startup model make deeply cynical remarks about the lack of evidence of success for the model, especially post-acqui-hiring (which is after all merely a procedural milestone rather than a market success). This is simply the wrong standard to apply. It makes no more sense to ask why a Lean Startup has not returned its investment in a truly spectacular way than to ask why a student term paper or senior thesis in college is not a Harry Potter level bestseller. Different standards apply during training and performance. Already, in the Valley, you will find entrepreneurs with a very clear sense of how acqui-hiring valuation is done in various sectors. The numbers are becoming nearly as clear as information about starting salaries in traditional professions (last I heard, half a million per good engineer is the going rate, which would make sense if viewed as a few years worth of premium back-wages for a talented engineer, being hired a couple of levels above entry-level). Angel investors will also recognize what they are: the equivalent of mid-career middle managers mashed up with thesis supervisors, providing stipends to apprentices on probation. They will start to see what they do — studio startups is the current popular term — as playing graduate school to the undergraduate school role played by the seed-level incubators. So putting it all together, what do we have? Early-exit, highly standardized angel-midwifed lean-legible pipelines, connecting high schools to hacker hostels and coworking/maker spaces (the new dormitories) to a two-layer schooling system that provides a vague mix of lite-liberal (Paul Graham's essays) and vocational (Lean Startup) education, and finally acqui-hiring graduation ceremonies. After their first-blood experiences, our young heroes will live out careers shuttling in and out of different corporate ecosystems around financially ma**ive, but HR-light platform corporations. Every few years, faced with a trough, they will retreat to developing countries as economic exiles, simultaneously diffusing knowledge globally, extending their native platform ecosystems, and recouping their own losses. Instead of a periodically refreshed resume, they will maintain a free-agent life raft in good working order, oscillating between more and less tethered modes of existence. Collectivist institutions — income cooperatives and the like — will emerge to smooth out some of the natural income volatility for older individuals. The unionization of the new labor has barely begun. What about traditional universities? They will once again become what they used to be before a century of prosperity allowed large segments of the population to go to college: preserves of the children of rentier elites. As much of the population retreats to a vocational lifestyle, only dimly aware, through TED talks, Paul Graham essays and Khan Academy videos, of the human civilizational Grand Narrative, scholarship in the old sense of the world will return as an indulgence for the few, rather than an industrial mode of knowledge production. Art History was never meant to be a major for the ma**es. If you got yourself a university education before the ongoing re-elitization, count yourself lucky. I count myself very lucky: I managed to get myself three degrees and ten very rewarding years, at no cost to myself. Today's jury-rigged and somewhat disreputable acqui-hiring pipeline is going to get legitimized as the new education system. It is going to expand to encompa** all the new engineering disciplines that I mentioned in Part II. It will blur and refactor older distinctions like liberal, professional and vocational. And that is Sam's story. He will journey to Mordor, but ultimately settle down as a happy citizen of a new Hobbiton. Let's talk Frodo. Reclaiming the Hustle So what about “real” entrepreneurship? The “what” is becoming clear. Expectations there seem to center around some mix of green-tech, clean-tech and the Maker revolution, all swirling around in some sort of mobile-device centric high-density smart megacity. Nothing on the radar, frankly, is as revolutionary as the things produced by the first few decades of Moore's Law. The total volume of economic activity will likely be far bigger, but individual pie slices will decline. But this stuff on the horizon is more than just the raw material for the Next Big Thing. The structure of entrepreneurship around this stuff is going to be different. The Next Big Game is more interesting to talk about than the Next Big Thing. How, not what, is the interesting question. If the traditional entrepreneurial world is turning into a de facto education and labor market of Sams, where are the Frodos and what are they doing? The key is to ask: where are there still significant unfair advantages to be found, for entrepreneurs, that investors cannot easily neutralize? The answer should not be surprising to those who know their history: politics. After all, real entrepreneurs are ultimately creative scoundrels, and patriotism, in the form of politics, is after all the last refuge of scoundrels. Our young Frodo, rather than focusing on a smartphone app, is busy cultivating ties to a selected city, and learning the ins and outs of a hyperlocal political economy. She or he (I suspect the “she” contingent will play a much bigger role this time around for a variety of reasons, possibly even a dominant role) will figure out some obscure unfair advantage in their local environment that has a political angle (perhaps zoning regulation loopholes, a city-sponsored loan program, privileged access to the traffic light system, an understanding of the school lunch system, a relationship with the taxicab union — things like that). Unlike things like deep knowledge of an industry vertical (there are plenty of desperate, mid-career old-economy types hawking that kind of information advantage for cheap), political advantages are relatively scarce and not easily neutralized once captured. She might even run for office, with an eye to locking in an opportunity. Her eye will likely be on a very different kind of prize: not a billion-dollar IPO, but a new institution that transcends the boundaries between market, state and civic society. When the student loan crisis hits, or the healthcare collapse, she will be ready and positioned. It will be an era for a sort of financial civil war profiteering, sponsored by a state that is powerless to fight the metastasized cancer of a national-global financial system, but capable of providing cohorts of new city-level institution builders with the right protections, to fight in its stead. The result will be a new social-economic-political order. It will be messy and ugly, like the decline of the Roman Empire, with local satraps a**erting themselves all over the place, and a financial Praetorian Guard turning the DC-Wall Street axis into a defensive bastion. I don't know who first said it, but “Mayors are the New Entrepreneurs” is exactly the right idea. The Global City-State Economy I don't quite agree with the statement in its literal form, but the political angle (and the emphasis on the city-level rather than nation-state level) is the right one to bet on. The failure of nation-state and region-based geopolitics will be remedied not by some miraculous reformation sweeping across the world, but a shift of power, in the political sphere, to cities (remember what came after the Roman empire?). While the labor-entrepreneurs are going to flow in larger numbers through increasingly reliable and effective (and easier-to-navigate) acqui-hiring pipelines into large-company ecosystems, real entrepreneurship is going to shift to newly politicized arenas where nations and provinces have failed. In the case of the 19th century, as the first wave industrial landscape around commodities stabilized into a regulated equilibrium, a second wave, relying on the first, took off. During this second wave, politics and institution-building dominated the proceedings. While the first generation of Robber Baron entrepreneurs created new, ungoverned landscapes of wealth with little government presence (engaging the state mostly by enabling corruption), the second wave helped build the new political institutions required to frame, normalize and legitimize the new world order. Viewed purely as a governance mechanism in a new territory, corruption had become too inefficient a regulation mechanism for the increasingly complex new world. How did this happen? Unlike technologies like oil, steel and railroads, which matured far from population centers, the rise of the paradigmatic second-wave technology, the automobile, was inextricably linked with urbanization and suburbanization. Similarly, the aerospace industry grew along with its political sibling, the American military. The second wave happened where people lived and politics naturally happened. Where early Robber Barons effectively ran their own wars (Vanderbilt in Nicaragua for instance) and relied heavily on private actors like the Pinkertons to maintain militarized relationships with the new labor (Carnegie), the later waves relied increasingly on equivalent state infrastructure. The corruption patterns of the frontier days were transformed into the legitimate institutions of the later days. As a general rule in history, patterns of widespread corruption in an early part of an epoch represent the cowpaths that are eventually paved to form new institutions in the later path (or to put it another way, new institutions always first emerge to launder new money, which is always born dirty). The “corruption” of entrepreneurship through acqui-hiring today is actually a great example. Internetization and post-modernity will arrive the same way. The first layer of infrastructure has been laid down. The first Robber Barons of our age are retiring into philanthrophy, intent on earning their halos and saint-hoods. The second wave is starting. For promising sectors like green, clean, maker and biotech to actually work, the actors in those sectors have to build on the affordances of the Internet and within the inevitable vision of high-density megacity futures. That much is obvious by now. But they also have to recognize that they must get involved in institution building and politics. And they must do so by joining the winning side rather than the losing side. Which means cities over nations and regions. They have to play on the landscape created by Google, Facebook, Amazon and Apple, but they also have to work the creative tension between these behemoths and the cities they inhabit to create autonomous maneuvering room for themselves. It is in their interest to help decouple these local economies from the Wall Street/DC governed national economy as much as possible. In a world where both America and China are headed for at least partial failure as nation states (hopefully soft rather than crash landings), it is going to be every city for itself. What form will the city-dominated government role in the new economy take? We've been through some of the early, painful episodes: skirmishes over software patents, anti-trust lawsuits, SOPA and PIPA, the first challenges to, and defenses of, Net Neutrality, wrangling over “startup visas” and the creation of basic new identity systems. These debates may have been misframed and mishandled at the Federal level in the first round, but I believe they will ultimately get resolved at the local level, creating a polycentric landscape of governance. In other words, cities will sort out these issues in locally optimal ways by using the past failures to argue for greater local autonomy. Time is on the side of cities. With every pa**ing year, more Internet activity moves to its wireless, mobile edge, taking over every physical device. The Internet is naturally entering the jurisdiction of cities. Mechanisms are already being talked about, for instance the LEAP Zone (Legal, Economic, Administrative and Political jurisdiction) model proposed by Mark Klugmann, who has supplanted Richard Florida as the most interesting urbanist in my book (Florida's models are under increasing attack these days, but to give him his due, he was the first to herald the age of cities, even if he got many things wrong). National and global political models will change too of course to reflect their new roles. In absolute terms, they will likely remain more powerful than the city-state political order, but the weakening will be sufficient to hand the the initiative to cities. Politicians with national ambitions will increasingly come from the ranks of city governance rather than state/province. Towards a New Normal And that's where we stand today. Between two great waves, on the cusp between old and new institutional orders. Between the waning of national/global power and the waxing of urban power. Between the Old Big Game and the Next Big Game. Between the Last Big Thing and the Next Big Thing. Between an old collapsing middle cla** and a new emerging middle cla**. We live in interesting times.