It seems to me that you become a billionaire by doing three things:
1) Make a great product.
2) Build an organization that can make the product cost-effectively.
3) Keep control of the organization as it scales up.Being a “bad person” isn’t useful for #1, but it is pretty useful for #s 2 and 3. Y-combinator mostly deals with early stage startups where the focus is still on #1.
My own thoughts.
The first challenge is to succeed at a sub-Dunbar level. As long as you have fewer than 150 people in the company, you can focus on product-market fit. The organization can be informal. You make decisions by talking to one another. You know if a co-worker is contributing too little or causing too much trouble just by being around them.
When you are in the process of growing past the Dunbar number, you need formal processes and the sort of well-understood and reinforced norms that we call “corporate culture.” The change from sub-Dunbar to super-Dunbar may leave some very important people behind, including the founder.
At the super-Dunbar level, there are many paths to organizational decay. Top positions in the firm become very attractive to guys who are more motivated by individual rewards than by the accomplishments of the company. You may have no choice but to hire some of those guys.
A mature firm becomes something like an investment portfolio. You are making bets, and you can make errors on either side. You can forego good bets-Xerox should have bet more on its personal computer innovations. Or you can make bad bets, like an acquisition that you have to write down.
It may be that more aggressive betting increases your chances of becoming a billionaire while also increasing the chance that your company flames out entirely.
In 1999, our company made a decision to sell out, which I don’t regret. To become a famous business mogul or to make orders of magnitude more money, I would have had to (a) keep our company independent, (b) continue to work my tail off, (c) make aggressive bets that might have left us with nothing, and (d) have the bets pay off. Taking that approach would have made me a different person, but not necessarily a bad one.
By “‘bad’ person” I meant someone who structures deals so that the benefits flow to them but the risks are borne by other people. Donald Trump is the quintessential example, but Mark Zuckerberg is a respectable second place. Bill Gates is another classic example, particularly his deal with IBM.
You might reasonably ask why people agree to these deals. Greed and FOMO are my two best guesses. Empirically, a good enough hustler can usually find enough marks.
By this definition, any rational person is a bad person. If someone is willing to assume risks on my behalf and undercharge me for the privilege, then I’ll gladly take it. And, are the counter-parties just naive to accept these terms? I mean, they are some of the smartest people in the room.
You could use the same logic for a crack dealer.
I dunno, do we have obligations to not exploit people we can exploit? It’s a complicated question but I’ve seen cases where I felt it was wrong to do so. The issue is that if you do so you are rewarded and often nobody really seems to care.
My crack dealer disagrees…limited time holiday bogo now available. Use coupon code: crack is whack
Trump vs. sophisticated bond holders
Gates vs. IBM
Zuckerberg vs. Accel/Greylock
The playing field seems pretty even to me. If anything, the upstarts were outmanned by the guys on the other side of the table. But, the other guys got PWND…such is life.
“Sophisticated Bond Holders” like some dudes retirement fund.
When I was in Trumps casinos, I found it a very depressing experience. I didn’t get the impression that any value was being added to existence. At least Gates could claim that licensing all those IBM clones broke open the PC market.
Trump University vs. unsophisticated middle class folks
Now, that is a total scam. Everything else that I mentioned seems fair game to me.
Maybe just my religious, conservative upbringing, but I’ve got no desire to visit Atlantic City or any of the other gambling destinations. Never visited Las Vegas. We go to Hawaii instead. But then again, there is quite a lot of wagering on the commercial real estate market over there as well.
Ex ante everyone expects to gain from all these dealings. Do people really sorry for IBM for not having agency in their dealings with microsoft? I’d guess that in the smokey rooms of IBM they thought they were going to get a great deal from Gates.
Also, all these deals are not zero sum. All parties can gain. Some deals might be zero sum. And the parties going into them might no this.
If people who deal with Gates or Trump don’t realize this, well…
Jay, bad people do this:
https://twitter.com/ggreenwald/status/1337763926155595776
There are many varieties of ‘bad’, and some are more conducive to entrepreneurship than others. And in some cases, the line between private enterprise and political power is blurry.
Arnold, you may want to read about Wenceslao Casares, the reluctant serial entrepreneur from Argentina’s Patagonia. His record of sales is impressive for a young person (he’s 46 and was 26 when he sold the first one), and I haven’t heard anybody saying he’s a bad person.
#3 is off a bit.
3) Ruthlessly fight to hold an unreasonable share of company ownership as the organization scales. To be fair, this almost always means a major deferral of financial gratification at several inflection points.
4) Or, just be married or related to an ownership that produces billions.
Insane wealth requires ownership, not accomplishment, at least directly. The accomplishment does have to come from somewhere, but only a sliver is you. The best you can say is that you contributed to the accomplishment and got to lead the effort. Obviously, if you are leading the accomplishment, then you are facilitating your own chance at ownership, and you get to decide just how and when to be ruthless.
For getting wealthy, ownership is more important than short-term control. And most un-owned based control is, or is at risk of being, short term.
https://www.joelonsoftware.com/2000/05/12/strategy-letter-i-ben-and-jerrys-vs-amazon/
Classic article by Joel Spolsky that deals with some of these issues.
Joel’s comparison makes no sense. You can raise a large amount of capital only after you have developed a company that others want to buy. Read about Wences Casares.
At certain times and places, there have been people who are willing to buy half-built companies with no proven business. “Venture capitalists” is as good a name for them as any.
Reading about how many colleges and universities seemed to work back in the day, it seems to me that it used to be a lot of mostly independent, sub-Dunbar research groups or scholarly master-apprentice mentor-student cliques, which were all put in close proximity for bundling convenience, but which mostly didn’t have much to do with each other, or operate much under volumes of common rules or bosses.
So, something similar to how an old newspaper has a classifieds section, a sports section, and a comics section, and these happen to be all bundled together, but the “newspaper corporate level” doesn’t care to exercise huge amounts of control over the content and practices of each section’s independent ‘division’ so long as the customers interested in that section seem to be happy with it.
But gradually, college and especially big university life has become like working for a corporation (or being in the government or military), for students and professors alike, with it’s (reasonably) obsessions with legal liability and PR, vast administrative bureaucracies with all kind of sub-specialty offices issuing regulations and dictats for everyone.
I think this has probably had a major impact on behaviors, beliefs, and attitudes, the tendency to “appeal to management”, and so forth. And it has probably also molded, prepared, and trained generations of students to work and manage similar corporate-type social organizations. Living under such large-org control and social technologies is definitely going to rub a lot of people the wrong way, and is probably annoying, unnatural, humiliating, and stressful enough to drive a lot of them a little nuts.
Having had the privilege of observing a bunch of very rich, successful Google higher-ups up close for many years, I have some thoughts on this with relevant case studies. In summary, my theory is:
— Successful founders are generally good people for the reasons Graham says.
— The bad people who nonetheless make a lot of money in business do so by exploiting super-Dunbar-organizational dynamics: they come into a company after it has gone super-Dunbar and rise by convincing other people at the company that they are good at making super-Dunbar organizations more profitable. This is so often a successful strategy because both convincing people like this *and* actually coordinating super-Dunbar organizations efficiently are different skills from actually serving customers well with great products, and because failure is far less painful once you get to a certain executive level.
— Super-Dunbar organizations also tempt more successful good people to do bad things because the social and institutional power they amass creates temptations for abuse.
Now to the juicy gossip, er, case studies:
Larry and Sergey were and are genuinely good people for Grahamian good-founder reasons. They are passionate about making great things that improve the world, and they often do make those great things. The early Google employees I knew (those in, say, the first 1000) were also like this, and many are now senior execs who have become extremely rich and successful through their contributions to the company and to the world. In the current kerfuffle about Timnit Gebru’s firing, for example, I am inclined to side with Jeff Dean not only because wokesterism has become so tiresome but because of what I know about Jeff. But I am not highly confident in that judgment because I’ve seen good people in his sort of position abuse their power. Amit Singhal, for example, did great things for the search organization for a long time but was ultimately forced out over sexual harassment allegations which I unfortunately find very credible.
Eric Schmidt and Sundar Pichai are interesting intermediate cases. Both are very technically savvy and are decent people as political types go. But both have a comparative advantage in playing large-organization games, and they know it, and so do Larry and Sergey, who elevated them both so that they wouldn’t have to specialize in those sorts of games, which they hate. Eric in particular plays the game with relish and panache, is a superb public speaker, and understands the commonalities between large corporations and governments deeply. I used to say that if his personal life weren’t so unorthodox I could see him running for President. Now after Trump I wonder if the personal life would still be a disqualifier.
Two genuinely bad people who succeeded at Google stand out in my memory: Andy Rubin and Vic Gundotra. Rubin is a formidable technical talent but probably would not have succeeded longer term if his Android startup hadn’t gotten acquired by Google, which suggests that as acquisition becomes a more common exit strategy for founders, more bad founders will succeed. The immense resources Google had amassed and the confidence L+S had in his technical acumen allowed him to indulge his assholery on a grand scale with impunity when building the Android organization, and most of us breathed a sigh of relief when he left, even before we found out that he too had gotten canned for sexual misconduct.
Vic is almost a parody of a smarmy, spin-doctoring, political game-playing corporate exec and of course came to Google from Microsoft which I hear has been infested with many such. He managed to convince L+S that he could beat Facebook with a second-mover social network if they gave him carte blanche, and they did so, and it was a mistake Google paid very dearly for. He finally had to retire when it was clear Google+ was a failure, but I am sure he walked away with an enormous golden parachute.
Good read!
Timnit Gebru seems to have all the instincts of a zealous political commissar, apart from being a modern ‘made man’ incredulous that her posturing about resignation was accepted. Surely a great hire for researching ethics in the first place.
Thanks! for great gossip – confirming what I had heard in just a couple of cases.
I think that you were wise to sell your business. I have held the theory for many years now that you should always sell the first time you get offered a fair valuation. This will give you usually the highest return to your investment in terms of IRR, unless you are able to scale the business successfully. This is very risky, as you describe in your post.
Even if you were able to scale the business, it will always be easier to you cash-out, reinvest part of the proceeds of the first sale and try to use the experience to prevent the initial errors you made on your first venture.
Lately this way of thinking has been perfected by the so-called serial entrepreneurs, so I feel vindicated.
I’m sure you’re very right about the trade-off:
It may be that more aggressive betting increases your chances of becoming a billionaire while also increasing the chance that your company flames out entirely.
I think more than “bad” people are the “better boot-licking” people. They understand the interpersonal issues of promotion in an org, and do CYA to avoid any blame while effectively finding the future successful projects to be leading or be associated with for credit. Especially early … while sliding out/ escaping before the project flames out. Virtually all successful executives I’ve met had some experience and expertise at licking boots – and I usually had the strong feeling they were testing my ability to do the same, with me usually not so good. I preferred merely doing a “good job”, which was often not good enough for the limited promotions.