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Summary:

According to David E. Weekly, CEO Oha.na, Silicon Valley is stupid in three important ways — its startups are stupid, its government is stupid, and its investors are stupid. Companies are successful here because business intelligence is distributed, and the ultimate arbiter of correctness is the market.

Be Stupid_ Some rights reserved by Michiel020

In the past year, I have met with startup founders and government officials around the world. Everywhere I go, people are hungry to know how they can be clever like Silicon Valley. They assume that since I founded PBworks, a private wiki host and home to over two million groups, I must have insight into the smarts that make the Valley work, and they want to implement those good ideas in their regions.

But Silicon Valley works because it is stupid. The intelligence is distributed, and the ultimate arbiter of correctness is the market.

Let’s start with the startups. You might think that most successful startups begin with some genius’s brilliant idea. The genius shares this idea with a trusted investor who provides money to hire a team. They work really hard, have a big launch and become a success. But this is not how big companies begin. Companies that start this way tend to be good at spending a lot of money and producing useless products.

Successful startups often begin with no idea at all. They start with some friends who simply enjoy building things together, without any specific idea of what they are going to build or how they are going to make money at it. It sounds silly, but that’s exactly how Hewlett-Packard began. Two nerds in a garage. It took them a few years to find their first really good idea, which was to make cheap, high-quality oscilloscopes. Flickr began by working on something else altogether. Twitter came out of the train wreck of a podcasting startup. If a good team goes through enough ideas, they will eventually figure out how to make something that people want to use. Then, they raise money to bring that product to more people and scale it up.

Okay, so startups are dumb, but what about governments? It’s not that hard to believe that governments are dumb. What’s surprising is when that’s a good thing. The U.S. government is not smart enough to pick winners, so startups are treated like regular companies. When I first traveled to Mexico, I was asked whether the U.S. government paid for all or only part of our office space. The entrepreneurs were astonished to find out that my startup got no help whatsoever from the government. We were on our own. Terrifying. In theory, the Small Business Administration is there to help, but it is irrelevant to startups. It’s structured to help a dry cleaning shop purchase another piece of equipment, not help you hire another iOS developer so you can create Angrier Birds.

But what the U.S. government does do is get the heck out of our way. If you want to start a business, you can just go ahead and do it with no forms at all required. This is called a “sole proprietorship.” At the end of the year when you fill out your personal income taxes, you just attach an appendix that says, “Oh yeah, and I run a business and here’s how much money I made or lost.” If you want to incorporate your business, you can do it in about an hour. The form to create a tax ID takes a minute or two to fill out. Dozens of companies compete to offer cheap and easy payroll tax processing that electronically file everything you need with the state and federal governments for a few bucks a month. The government’s role is infrastructure and facilitation.

If government gave special aid to startups, it would need to ensure those startups were performing well, which would require startups to account for their progress or face punishment for wasting taxpayer money. This regular accounting smells like added paperwork. And overhead. Worst of all, it means bureaucrats are making the call about which startups stay and which go. And when bureaucrats have no incentive to pick longterm winners, they might be persuaded to be more lenient to startups that have friends in high places.

Startups funded by a government cannot, politically, afford to fail. But the real way to create new markets is to do the opposite — reduce the cost of failure by eliminating debtors’ prisons, make bankruptcy straightforward, and allow easy incorporation to shield founders’ personal finances somewhat from the failure of their companies. Even success takes too long for governments. Government programs are managed for the next election cycle, while startups usually take much longer than that to be proven out as a success.

So it’s actually much better if government is “stupid” and delegates the intelligence about which startups should thrive and which should die to others. The government should ensure clear and consistent corporate law and taxation, minimal red tape and overhead, fast and effective infrastructure, easy hiring and firing, and should expose itself as a customer of startup products.

The final dumb contingent of Silicon Valley is our awesome, dumb investors.

In many developing ecosystems, I see angels who describe themselves as “smart money.” They want to take 40 percent or more of the company in a seed round to ensure that the entrepreneur does the right thing, and that if the company is successful, the investor benefits richly. They think they will guide the company to success. They want to have a voice in the day-to-day operations of the company, and when they speak, they expect their entrepreneurs to listen.

But investors who take 40 percent of the company in seed rounds are setting themselves up for failure. If the company does well, it’ll need to raise more financing, and new investors will need substantial percentages of the company. With IPOs taking longer than ever, there may be many of these growth rounds. And if 40 percent of the company is in the hands of a seed investor, there’s not enough room for other investors. A Series A venture capitalist will realize this and simply not invest in a company with this kind of structure, meaning the company will not be able to find financing, even if it is very successful. The “smart” seed investor has effectively doomed the company.

Peter Thiel was the first investor in Facebook. He wrote a check for $500,000 and got a board seat and about 10 percent of the company (not 40 percent), but mostly he just told Zuckerberg to not f**k it up. When the company IPOed years later, poor Peter was left with a mere 2.5 percent stake of the company. But I don’t think he was too upset, because that stake was worth a billion dollars, which makes it the most successful seed investment in history. All for just believing in a smart kid and letting him do his thing. Peter was, brilliantly, not “smart money.”

So the best government defers smarts about which startups to invest in to the investors, the investors defer smarts about how to build the company to the startups, and startups defer the wisdom of what would be a good idea to build to the market. The intelligence is distributed, and it works.

David Weekly is the CEO of Oha.na, which helps users create visual newsletters. He is also a startup mentor and has helped found Hacker Dojo, PBworks, Mexican.VC and SuperHappyDevHouse.

Image courtesy of Flickr user Michiel020.  

  1. You start off by tooting your own horn, then insult the entire valley, then make outdated references, then ramble extensively about the government, and then reference outdated funding models.

    At least you make a good point at the end of the article, that distributed intelligence drives the valley, but man, you sure took a dumb route to get there.

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    1. Thanks for the feedback, and at least I ended up with something on which we could agree! This essay actually came from a talk I gave at Skolkovo Business School in Moscow, so it was intended for a non-SV audience – and I think you will find that outside SV there are still very many geographies in which angels seeking 40% is not an uncommon sight! It would be awesome if that was truly, globally, an outdated funding model. Then our work would be done. Likewise, the passion for seeing what the government does right here didn’t come until I saw how badly “smart” government internationally had botched things. It’s very easy to take for granted how smooth it can be to conduct business in the US!

      If you have some other ideas on how to make the point more clearly and concretely, I’m all ears.

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      1. This spring I was talking with an angel who wanted to take 80% of our company :) We are in Russia and not in European part :)

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      2. Really great point! Here in India, it is routine for Angels (or Demons?) and Series A investors take more than half the company! I have seen plenty of talent get frustrated with so called smart investors then try to micro-manage such companies, because they own so much of the company

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  2. Very good article! This works, because there is already a critical mass of smarts in SV. But how to build such a community somewhere else?

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    1. I think mainly it’s about letting smart and curious people do their thing and finding ways to get out of their way. Pretty much every place around the world has smart and curious people, but different regimes, cultures, and educational structures produce different outcomes in terms of their likelihood to constructively contribute to human knowledge.

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      1. So true!

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      2. Yep. “Get out of the way” is the key take-away. Great article.

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  3. Great article David. Thank you for writing it!

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  4. Jeffrey Alexander Saturday, September 22, 2012

    It’s amazing how tunnel vision can be mistaken for insight. Just because a few successful social media start-ups like Twitter and Facebook didn’t take government grants doesn’t mean that Silicon Valley doesn’t benefit from strategic technology investments by government. A number of Valley firms, particularly in biotech, benefited from Small Business Innovation Research grants–a program overseen by the Small Business Administration although operated through individual government agencies. A lot of Valley firms also take advantage of small business loans backed by SBA loan guarantees. And there is the famous, although often mis-used, story of how Google sprung out of the invention of the PageRank algorithm, which was funded by a National Science Foundation grant.

    Also, investors who take a big cut of equity and shut out the founders isn’t being ‘smart,’ just short-sighted. And a lot of investors take active board positions–they aren’t just passive moneybags.

    I see you’re trying to make an analogy to Dave Isenberg’s thesis on the “stupid network,” but distributed intelligence in a market economy is not the same as “dumb switches.” The Valley has a high density of connectors–research labs (usually gov’t-funded), investors, serial entrepreneurs–who are dynamically reconfiguring the network on the fly as they pursue new opportunities. But those connections aren’t dumb–quite the opposite. They just know their limitations.

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    1. I do think the government plays an excellent role in startup culture when it exposes itself as a customer. But moreover, in what you wrote there’s a great nugget that sums up much of what I was trying to say – truly smart people know their limitations and double down on the things they’re good at while delegating and empowering others to take care of the rest. Fake-smart people think they’re good at everything and try to take charge of everything and consequently screw things up.

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      1. Jeffrey Alexander Saturday, September 22, 2012

        OK, I’ll buy that…just don’t accuse people of being dumb terminals. ;)

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  5. I think AVB and Google was the most successful seed development in history. He made $1.7B from $100K.

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  6. David,great article. I have an interesting story about how “Startups funded by a government cannot, politically, afford to fail”.

    During the second year of my first startup, we got a 50k government grant to develop a 12 months investment plan.

    Five months later, with 15k already spent, rising costs and no traction, we decided it’s best to move on and look for other opportunities.

    Not only the government didn’t like, bother to understand nor help us in the situation, but they required us to give back the 15k of the grant we had already spent (even though we spent everything in their approved schedule and items).

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  7. Great Article! Especially what u said about the government is so true in U.S. Im from Germany, and to found a business there is much much more complicated not speaking of the Tax System !

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  8. Juanjo Bermudez Sunday, September 23, 2012

    I would add that maybe also customers in usa are stupid and so they try stupid products and help to improve them. And that thanks to stupid filmmakers in hollywood. But obviously there is anybody who is not stupid in this story and it’s in silicon valley and not in my town.

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  9. Great Article David !
    My name is Deny Cadorini and together with my partner Luca Zivelonghi and our great team we have created LeaveOn a new concept of Social network. We’re from Verona Italy and believe me here nobody is willing to help you so we’re doing everything on our own working days and nights but at least we’re having fun :)
    In Italy and Europe is going very well. 1000 users in the last 2 weeks so we’re happy that people likes our idea. We’re trying to have more users from US which is were I was born but it is very hard to get noticed because most of the blogs or news magazine are willing to write about you only if you’re famous or if you are willing to pay for review.

    So if you’d like to take a look of our job check here:

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    LeaveOn helps respecting our environment!
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    Follow LeaveOn on Facebook (News, Press Releases)
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    We have great ideas connected with LeaveOn that we’ve planned for the future.

    The way we see LeaveOn has not been invented yet.

    We hope we caught your attention

    Ciao!!

    Deny

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  10. By the way i Work directly on distributing the AD campaign BE STUPID made by Diesel and Renzo Rosso. The image your using is from that campaign. :)

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    1. Juan C. Estrada Monday, September 24, 2012

      PS: Delete my post and you’ll receive a Cease and Desist… LOL! :)

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