Startups are often thought of as a risky business. We imagine founders to be fierce visionaries who can see a better future and are willing to bet on their personal success to realize it. They tread the thin line between genius and delusion and their ventures are constantly on the verge of utter failure right up to the moment they cross an invisible threshold and achieve the fabled “hockey stick” growth — the supposed mark of a scalable technology business. Then, at long last, comes the vindication and adulation. The risky bet pays off.
Today, the picture has changed since the days of Jobs and Wozniak. Startups remain precarious in Silicon Valley, but for very different reasons. Today’s risk for founders and employees is not that the company runs out of money before it realizes its grand vision but that it has too much money to spend on pursuing trivial optimizations masquerading as long-term potential. If you want to figure out the right problems to dedicate your time to, there is too much noise and not enough signal in the market. The fear then is not of catastrophic failure but a gradual downward slide to obscurity. This is a much more insidious form of failure, because from the outside it very much looks like success in the short term
There was a time when a startup being able to raise multiple rounds of funding was a strong signal of real success. Those days are over. Today, there are a record number (138) of private companies in the world valued at more than $1 billion. Commonly known as “unicorns,” many of these large private companies, including familiar names like Evernote and Palantir, are seen as symbols of success and yet are nowhere close to delivering enough real value to go public. Murmurs of pending unicorn deaths can be heard across the valley.
At the lower end of the spectrum, it is now ridiculously easy for any idea decorated with the right pedigrees (Stanford CS students, ex-Googlers, industry insiders) to get million-dollar seed funding at multimillion-dollar valuations with zero market validation and traction. There is simply too much eager money in the system. For a new founder, receiving competing offers from multiple venture capital firms can be very dangerous because it creates the illusion of having already achieved success which leads to complacency and self-delusion. When I was a freshman at Stanford years ago, a professor from the computer science department told me an apocryphal story from the dotcom era when investors would go knocking on Stanford dorm room doors to ask students if they wanted to start a company. And now I wonder if we’re just watching history repeat itself.
It is a basic economic principle that when the real underlying signal of the market is lost, bad things happen. We call this moral hazard when we talk about Wall Street bankers and executives being financially rewarded even after running their own firms to the ground and wreaking havoc on the economy. Similarly, the success of democracy can be attributed to its ability to better respond to the true fundamental needs of the people. Citizens United and campaign finance reforms are important issues in this country precisely because the decisions of the American government are no longer correlated with the desires of the regular people.
When the signal of the market is lost in layers of misguided incentives, we are all worse off for it. In that sense, the amount of venture capital in startups today threatens to overshadow the market forces that should guide decision-making.
The idea of Silicon Valley and disruptive technology rests on the hypothesis that traditional companies cannot innovate and fail to respond to changing market demands. In other words, this is supposed to be a special place where the signal gets separated from the noise, elevated and amplified. Today, it often feels like we are part of the noise.
The Stanford computer science department is poised to once again set a record high for the number of newly declared majors this year. As we look to our peers and to external feedback to figure out which problems we want to spend our time working on, it is time to remind ourselves: Have we found the signal or are we blindly following the noise?
Contact Raven Jiang at jcx ‘at’ stanford.edu.