The race to the buyout – how we might be in a bubble
Longevity is what I seek. Today, the majority of our social and economic system prizes instant gratification, quick money and the shortest path to completion. This is not a rant against our system or people’s material priorities, rather I hope to discuss the lack of long term vision amongst many of our brighter minds. You will die, but your creations can live on if you build a culture around them. If I had to boil it all down to one phrase it would be to say: We must figure out how to avoid shirtsleeves to shirt sleeves in three generations.
I work in the start-up and software world, which is a place that places IPOs, “fuck-you” money and fast growth as its raison d’être. John Doerr, the famed venture capitalist, proudly stated about his career, “we witnessed the largest, legal creation of wealth on the planet”. Venture capital firms relish in the glow of a fast and profitable sale to a large company. It is sad that so few companies, especially in the technology space, pride themselves on long-term thinking, durability and consistency.
In contrast to start-up culture, Japan prides itself on longevity. The Imperial House of Japan was founded in 660 BC by Emperor Jimma and is still running after nearly 2500 years. The oldest hotel in the world is in Japan and a disproportionate number of the oldest companies in the world are Japanese. Building something that lasts centuries is exponentially harder than building something that lasts decades, let alone years. Americans often criticize Europe and Japan for moving too slowly, having too little GDP growth, and too little speed. But, the real test of a social-economic system cannot be made over 20, 30 or even 60 years – you need centuries.
I am hardly the first to say this. The great minds at the LongNow foundation, which include Jeff Bezzos of Amazon.com, understand this. They wrote a great piece on the history of debt here and are building a clock that will last 10,000 years – that’s what I’m talking about!
Everywhere I look in the tech space I see a dangerous emphasis on speed. Though there is genuine long-term wealth creation going on, I think we are in another tech bubble. Yes, certain companies have a lot of cash, but this partly due to a taxation problem. The main tell-tale signs of a bubble are absurdly high salaries for developers who CEOs feel they can leverage, but are themselves leveraged by investors. There is nothing wrong with working with others to go faster, but it is a bit concerning when so much is being spent so fast. I might be wrong, take a look at the great discussion about a potential 2011 tech bubble at HackerNews here.
Part of the problem with tech investment is that it works. Technology can indeed be incredibly profitable incredibly fast. But those profits can disappear just as quickly as they came. Planning for the short-term has become endemic.
Fundamentally, to build for the long-term requires you need to resist temptation. Temptation comes in many forms – venture capital, buyouts, leverage, credit – but all leads down the same path of destruction as soon as you stop peddling fast enough.
The seminal study on temptation by Michelle vanDellen outlines how children who control temptation to eat a cookie turn out better – health, wealth, happiness – than children who can’t. Leverage is a cookie.
Despite the fact that most people in the tech space are very good at resisting personal temptation, they still seem to emphasize the quick payoff at the corporate level. It seems likely that the high levels of personal leverage from mortgages, credit cards, and student loans push us towards get rich quick schemes. Add onto that the jealousy of your neighbour or office mate’s stock options, car, house or wife. That is the foundation of a bubble.
Sometimes the best indicator of a bubble is your local taxi driver. As gold hit 815$ an ounce in 1980 (2150$ in 2011 inflation adjusted dollars), a Wall Street investor was riding in a taxi cab when the cab driver mentioned he was planning to buy gold as an investment. The investor got out of the cab, went upstairs to his office and sold all his gold positions. Gold plummeted to 300$, where it stayed for over 20 years. When everyone is doing one thing, do the opposite.
Rather than build something durable many companies are created with the aim of being sold to someone bigger, VCs want out in under 5 years, and people jump from one job to another every 6 months. This strikes me as an unhealthy system, but hey, that’s just me.
The second, and potentially worse, impact of short-term thinking is the shift in the workforce. Because of the pressure to relieve debt and the drive to buy the things others have, the smartest people move away from durable businesses that take decades to build and go towards get rich quick social media schemes. Just as Wall Street has absorbed some of the best minds of our generation to do high frequency trading (something that clearly adds no value to society), amazing software developers are being used to build social-media-analytic-optimizational-cross-promotional platforms, whatever that is. These great minds of our generation should be building technology that helps run society – hospitals, education, infrastructure, communication and yet unforeseen things only they can imagine.
I believe in the power of technology to change the world, but we need to frame our socio-economic system to value long-term thinking. As the three pigs should have taught you, you need to build in stone, not wood. The true test of a great company is not how much money it makes today, but how long it lasts as a value creation vehicle for society as a whole.
Think big, move fast and aim long. Maybe I’m just old-fashioned.
For your viewing enjoyment, the The Three Little Pigs.
Published on July 20, 2011
Help, I need somebody!
For the past year I’ve been trying to find a reliable software developer who wants to build a long-lasting sustainable business. Ok, that sounds a bit cheesy, but in contrast to most propositions that start that way, my main company, Nimonik, actually makes money and is growing at 100% a year. It is a painful growth with a long sales cycle, but when we do get a client, they always stick around. We need someone who has the technical chops to tackle iOS – Rails App synchronisation, verification of differences on remote pages, and dynamic linking to content based on semantic algorithms. Don’t say you won’t be challenged!
To better understand my approach to business and why I think this is a great opportunity, take a look at the founder of AutoDesk to his employees way back in the 80s here and see what Stephen Wolfram has to say about building a long-term company.
One main caveat is that we do not believe in external financing and are running everything with real revenues, sweat and our own seed money. Some might say that stunts our growth, but we feel it allows us the independence and freedom to build the business as we see fit. There is a lot of work left to do and a huge market out there, yet few people seem willing to take that jump.
Despite being active in the community, opening up government data, organizing open-data hackathons and personally emailing many developers, I have had a remarkably difficult time convincing them to join us. No doubt, their 150$ an hour rate is hard for us to match, but do people really want to be a consultant all their lives? I know I didn’t and that’s why I quit to start a company. Don’t people want to build a company that they can stand over with pride? Am I crazy?
We believe in long-term hard work, in independence and in doing for others as you would have them do for you. I clean the dishes of my employees, put their pay before mine and strive day in and day out to provide a challenging and dynamic work environment. People before products, but products before money.
We offer strong technical challenges, flexible work schedules and a great team of honest, nice, hardworking people – yet we keep losing talent to social media startups who are financed to the hill. What to do? Does any developer have an interest in building a long-term business anymore? Maybe I’m just old fashioned, but it feels like the ease of credit from banks, VCs, and angels has devalued sweat equity. We can pay a reasonable salary, but what we really want is someone who is passionate about their work and building something that will span generations.
Email me to chat firstname.lastname@example.org about the job posting found here.Published on July 12, 2011
Automation of the workforce
I just read The Lights in the Tunnel: Automation, Accelerating Technology and the Economy of the Future, an exploration of the possible impacts of automation on the economy. The author, Martin Ford, proposes that the accelerating automation of jobs will lead to wide-spread unemployment as computers and robots take over many of the tasks currently completed by humans. This loss of income would significantly reduce the size of the consumer market, which would in turn reduce demand for products and push the economy into a downward spiral.
While the idea is not new (see Luddites), Ford’s main point is that few economists have explored the possible implications in depth. Much of the book outlines the possible consequences of automation, which in my view are very difficult to quantify. A legitimate concern for governments around the world will be the impacts on their tax base as more and more income is generated by software companies, automated warehouses and other online products which rely on limited human intervention. Without human salaries, there is little to tax. Since automation can be located anywhere, companies will lean towards states and countries that offer the lowest tax rates.
To compensate for lost revenue, Martin Ford proposes a gross margin tax, basically a tax on operating profit. He also proposes a sliding scale for deductions of salaries. In his mind, a company would be able to deduct 200% of a 50k salary and not be able to deduct anything above a 400k salary. This would amount to a stunted salary cap and could be a very interesting solution to the growing income inequality in our society. I think both ideas should be investigated in greater depth, the book does not however do so.
While I enjoyed Martin Ford’s exploration of the potential impact of automation on the economy, I do think his timeline is too fast. Technologists and IT people often only see the tremendous automation in their fields and extend it to the entire world. Their lack exposure to some of the more manual jobs – construction, retail sales, product distribution – push them towards very fast timelines (and libertarianism, though that’s another story). The vast majority of the global economy is not software or robotic.
What automation will do is to free up labour for other tasks. Rest assured, there is no shortage of work to be done in this world. The real question is how to allocate resources and motivate companies and people to work in fields that might otherwise not be highly profitable. Lest we forget, as late as 1780, over 90% of society was directly employed in agriculture, today less than 2% of workers create far more food than we ever thought possible. Yet, unemployment is still relatively low.
The reality is that as automation increases we need to put in place mechanisms to train people for other jobs and allocate resources to employ them. It is said that there are two ways to tie up large male populations in developing nations – the military or construction.
The problem of automation and its effect on the tax-base are real. California is home to Apple, Google, Facebook and other tech giants but cannot balance its books, this might very well be the canary in the coal mine. As Bill Gates recently discussed at TED, we need to reconfigure government to ensure tighter oversight and better allocation of resources. Part of the solution is open-data and open-governement (that’s another story).
While I do believe that we need to seriously reevaluate our taxation system and the way government works, I would like to address the core of the book that proposes vast unemployment due to automation.
Ford claims a great amount of labour will be freed up in the coming decades thanks to automation, I will not dwell on this since I think we can agree. The largest places for job cuts probably include automated transportation (Google car), integrated software (Mint, accounting software, medical scanning software…), self-service machines (grocery checkout, ATMs), and coordinated autonomous robots (warehouse clerk robots). Where I differ with Ford is that I think there are already many places these people can go to find new work and even more yet to be created. Notably, a recent McKinsey report suggests the internet has created 2.6 jobs for every job lost – not something Martin Ford would have predicted (executive summary here).
I firmly believe that humans are creative animals. We much prefer to sing, dance, paint, film and express ourselves artistically than fill out Excel spreadsheets. Thus, with increasing automation, we should see increasing amounts of art. Based on the amount of art we see online, this is already happening and is eating up people’s time that has been freed by automation. We simply need a better way to finance the arts.
Second, there are a ton of infrastructure projects to be completed. Most societies, including developed ones, still lack high-speed rail, adequate sewage systems, roads, highways, buildings, housing, ports, energy production, and other essential items to a modern society. This is a massive human employment sink that can be driven by the government.
Third, far too large a portion of society lacks education or could be better educated. Stated simply, we need to allocate far more resources to the education of our children if we want them to build the robots and software Martin Ford predicts will arrive shortly. People in the software and high tech industry tend to be surrounded by educated and motivated people, they then conclude that people who are not highly educated must lack effort or discipline or both. By that logic, we would see far more children of software developers flipping burgers and MacDonalds, but we don’t.
In addition to changing the tax system, we need to change the way we allocate access to opportunity. If we do nothing, automation will drive us towards a plutocratic society with huge income inequality. Education is not just schools and teachers, it is a formative environment which values hard work and discipline. Access to higher education often means access to a network of people who are ambitious, driven and likely to succeed in life. A large part of affirmative action is giving access to these networks to people who might otherwise not have access; affirmative action goes well beyond providing access to educational institutions. If we hope to balance the odds for all members of society, we need a lot more people working in this field.
Efforts by people at the Khan academy (see recent TED talk) both automate the traditional job of a teacher and allow for a wider and more efficient distribution of education, but the end result is a more educated population. We just need to ensure these people can find jobs, a common joke in Russia is that it is the only country where your cleaning lady has a PhD. Again, this becomes a question of financing, but no one questions our need for more education. As George Orwell said, “Human history becomes more and more a race between education and catastrophe.” We need to run faster.
In conclusion, while I do agree that automation will continue to accelerate at an accelerating rate and will replace millions of jobs, our biggest question as a society will be how to tax and allocate resources. Central planning does not work, but neither does a free market. Rapid and vast automation will force us to make decisions sooner than we might think.
See this other interesting rundown of the book here at the Singularity Hub.Published on July 10, 2011