(2012-09-04) Rao Entrepreneurs Are The New Labor

Venkatesh Rao thinks Entrepreneur-s are the new Labor. (See related Technological Revolutions And Financial Capital - maybe he's talking about changing power relations as a revolution moves through its phases...).

By entrepreneurs I mean specifically the narrow class the term has come to define in the last decade: specifically technology entrepreneurs who start companies to build products or services with some sort of technological innovation at its core, with the Internet playing an important role in the venture... And within this class I am specifically refering to the sub-category known as hustlers today. Technology Start Up-s typically have a Hacker-and-HustlEr founding pair. Though the Hustler can often do some hacking as well, the term has come to mean the person leading Marketing, Product Management and fund-raising (OPM) activities in the early stages... Investors have won, and their dealings with the entrepreneur class now look far more like the dealings between management and labor (with overtones of parent/child and teacher/student). Those who are attracted to true entrepreneurship are figuring out new ways to work around the traditional investor class.

So a more careful statement of my thesis would be: non-technical hustler founders of technology startups are the new labor. What about the technical CoFounder-s? Because of their very different risk exposures, compared to hustlers, they end up on a different path that effectively makes them mercenaries (Free Agent) rather than entrepreneurs, a path that generally promises smaller jackpots, but better expected outcomes and survivability... The power of the technical community is organizing itself in other ways, which I covered in my earlier post on the rise of developeronomics. 2011-12-05-RaoDevelopernomics

There are many good things about the shift to a de facto Management-labor game. Such a game is sorely needed as industrial models collapse and the work of defining an Internet-era corporate landscape, with new institutions capable of organizing work for a much larger population, begins.

The good news is: this has happened before (in the late 19th century), and the last time around the system naturally self-corrected and defined a new LaborClass on its own terms, with the “entrepreneur” label being reclaimed by those it actually described. In the process, a new Middle Class was born. This was an external side-effect as far as entrepreneurs were concerned, but the main outcome of interest to everybody else. That’s the big hope on the horizon here: that the current travails of the entrepreneur class might eventually end with the formation of a new middle class to replace the one that is currently being gutted.

“So incubators like Y-Combinator are basically a cloud resource for investors, from which to source interchangeable hustlers, who are prized primarily for their youthful energy rather than any deep market knowledge.”

It is very useful to reflect on the evolution of the global steel industry in the nineteenth century, as it moved from its startup phase in England to its scaling and growth phase in America and Germany (similar things happened in mining, oil, railroads, telegraph and agriculture and machinery). In the process, a two-tier reorganization occurred, reflecting the diverging paths of the hackers and hustlers of industrialization. In the first tier, the artisan class of steelmakers (the hackers of their age), that had organized itself in intricate Trade Guild-like structures, gave way to two sub-classes: a mercenary-minded scientifically trained Engineer class that organized itself into Professional associations, and a manual labor class that organized itself into the modern labor movement.

What about the hustlers? Ironically, bankers managed to do them what they had done to the artisan class: split them into new mercenary and labor subclasses. This is the story of the second tier. In the second tier, the hustler class of new-money industrialists produced a first generation of Robber Barons, and then an asymmetric balance of power between bankers and second-generation hustlers who aspired to Robber Baron level fortunes (egged on by Horatio Alger narratives), but ended up as the tame new middle class... How did the bankers win? In large part it was because in the balance of power, hustlers lost their main weapon: specialized and indispensable knowledge of murky emerging markets. On the other side, the bankers gained control of the new Infrastructure, which were primarily financial beasts in their mature form. Since the newer hustlers needed the infrastructure (for example, hustlers taking advantage of oil, railroads, telegraph and electricity to build businesses in the new booming urban centers), they were at the mercy of the bankers... Hustlers turned into marketers (specialists) and professional managers (Generalists).

Part 2 continues...

As software eats the world, every sort of engineering (and indeed, every sort of profession organized along lines suggested by the physical sciences, including fields like medicine) is becoming effectively a branch of Computer Science... If you are in a traditional engineering discipline and are not programming computers to do what you were taught to do, your days are numbered... The residual traditional engineering types who eschew computers will increasingly find themselves in the position of 19th century artisans who failed to reinvent themselves as engineers.

When startups are founded by strongly technical types, they are often explicitly designed as vehicles for Acqui-Hiring (Buy-Out): startups that consciously develop products and services that make for exceptional acquisition properties for larger companies. Such companies are often accused of building features rather than products, but that is the whole point. The founders are looking for fast-track short-cuts to good jobs, and some mercenary freedoms, not a life of adventure.

In this environment, a world apart from the early frontier days of the Internet, hackers today universally exhibit a certain mercenary sensibility, cannily juggling multiple offers, playing judge in hustler beauty contests at hackathons, planning Acqui-Hire trajectories, and in general maximizing their value as the stewards of the new body of technical knowledge. And often hanging their hustler buddies out to dry.

Not to put too fine a point on it, true Hustlers are generally despised by those who work closely with them... People work with hustlers because they are forced to, with or without being consciously aware of it (hence the “hustle” in hustler) not because they want to... They are regarded as rapacious predators. Even by bankers.

You have to choose between two readings: either entrepreneurs have been such praiseworthy souls all along, and we’ve only just recognized their value, or the new entrepreneurs aren’t entrepreneurs at all, but wantapreneur-laborers being humored by a victorious investor class. Again, this is not new; post-RobberBaron era young people were fed similar self-perceptions via the Horatio Alger stories; it is notable that Alger had his breakthrough hit in 1868, by which time the major Robber Barons were already well into their later careers. Rather than create more entrepreneurs, the Horatio Alger stories mostly helped fuel the emergence of new labor and middle classes.

The saccharine rhetoric around entrepreneurship today hides an extraordinarily rapid behind-the-scenes actual devaluation of the hustler class in real terms. As the cost of starting new startups has crashed, so has the cost of hiring “CEOs” to run them. Silicon Valley even has cartoons doing the rounds, of homeless CEO-s holding up signs begging for CTO-s to join them... This situation is a perfectly natural one. The hustlers of today really don’t deserve the outsize compensation packages of hustlers from 10 years ago, because they typically bring no unique and indispensable knowledge of murky markets or technologies with them. They just bring resourcefulness, youthful passion and energy.

Entrepreneurship is three things: a set of business skills, a set of political skills, and a stash of hoarded unfair advantages, held in reserve for the right opportunity. When the latter two vanish, it becomes merely a teachable Generalist skill, rather than a cultivated talent for successful risk-taking.

Knowledge is captured and codified in ways that benefit a specific class. In the case of previously tacit entrepreneurial knowledge, the codification has been carried out to benefit investors. The biggest piece of such codified knowledge is the well -known Lean Startup model. While it functions roughly as advertised in a narrow sense, its real political significance is in the control structure it subtly encourages, which increases transparency to investors (and sundry outsiders)... Natural true-entrepreneur instincts towards guile and marketplace deception to outmaneuver the competition, and guarded relationships with investors, are suppressed in favor of allowing investors to easily scale their control authority across many cheap startups.

A second key element in the evolving landscape is the sharp decline in conflict between the investor class and the entrepreneur class... Even a few years ago, you could find people espousing fierce sentiments and deep reservations about OPM (other people’s money). Much of that depth of sentiment appears to have vanished. Today, BootStrapping vs. VC-funding has been subtly reframed as a Life Style Company vs. Growth Company debate... BootStrapping can create large businesses, and with the right kind of investor expectations (read: deliberately decoupled from Wall Street and its Wild West outposts), investor-funded businesses can remain small and lifestyle-sized too. In accepting venture funding as the de facto model for growth and scaling, entrepreneurs as a class have mostly handed control over how to create and manage growth to investors.

The third key element is perhaps the most curious. This is the fall of Serial Entrepreneur-s, which most people see as the rise of the angel investors (Angel Capital)... Until a few years ago, whether you succeeded or failed, serial entrepreneurship was the main pattern... (it) made sense because all the education required was acquired through ApprenticeShip rather than codified models. You needed multiple experiences before you could learn the business and political skills and accumulate enough of an unfair advantage... (Today) startup veterans, for the most part, move on to second careers as angel investors, from which new position they now compete with venture capitalists, often trying to engineer early-exit scenarios at lower multiples, and effectively allying themselves with the big acqui-hiring companies against the traditional VC class. You could say the smaller angel investors in particular, are effectively the new outsourced middle managers for big companies in the acqui-hiring market... Every new angel investor gained is one pure serial entrepreneur lost.

I don’t have time to go into other signs that clearly fit into the “entrepreneurs are the new labor” model. But they include: (5 things, including...): The rapid rise of “Lifestyle Design” as a quasi-entrepreneurial pattern of behavior on the part of those with modest ambitions (achieved via either BootStrapping or KickStarter-scale investments). This is best understood as a reaction by those who are inhabiting temporary mercenary roles in the economy, while attempting to recreate middle-class standards of living at lower costs (it is this class incidentally, that is the long-term target of the experience consumerism entrepreneurial sector: far from being at odds with each other, lifestyle designers are basically turning into customers of the domesticated labor-entrepreneur class, and forming the new middle class).

Part 3 aims for a more positive interpretation...

(Nice pair of diagrams showing changes in class-players through the 2 Economic Transition-s.)

(For the record, I suspect I have one foot in the obsolete class, and one foot in the lifestyle designer class. I lack the drive to join the labor entrepreneur class, and the skills to join the New Engineers class 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 class of new bankers (the J P Morgan type figures). What we can safely predict is that the Google-Facebook-Amazon-Apple (GAFA) 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.

Also note that in this second picture, the new (or rather, new-new) middle class today represents a tiny, fringe population, while what I have labeled the obsolete class 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... If the diagram above does not materialize in another 20 years, we are in much bigger trouble than we think.

This is the one-in-a-million redemption story (of an inexperienced entrepreneur having a huge success) sold as an expected outcome. Ironically to an audience that is prized for its statistical sophistication in other domains like A-B Test-ing of websites... 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 Class 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... 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 Entrepreneur-s... 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 massive amount of tactical self-delusion... 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.

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. Incubator-s increasingly act like alternative universities. The honest ones admit what they are. A tiny but culturally significant minority of young people is abandoning College Education for these alternatives, which are at least somewhat relevant, and far cheaper.

Though Facebook and Google may employ very few full-time employees for their financial size, they do induce EcoSystem-s that contain massive 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.” (DayJob)

After their first-blood experiences, our young heroes will live out careers shuttling in and out of different corporate ecosystems around financially massive, but HR-light platform corporations. (via Acqui-Hire processes)

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... Art History was never meant to be a major for the masses.

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 (City State-s) where nations and provinces have failed (US as future Failed State)... 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 Tech, 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... Mechanisms are already being talked about, for instance the Leap Zone (Legal, Economic, Administrative and Political jurisdiction) model (see Charter City) proposed by Mark Klugmann.

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 class and a new emerging middle class.