Slow Exits Are Fucking Up the Valley

February 15, 2017 holman

Something that’s been mentioned by a number of the investors and founders I’ve talked to the last few months is:

In terms of initial angel investors, I imagine GitHub would be a good source for you to tap.

It’s an understandable sentiment, given traditional thoughts of how the Valley operates. I saw GitHub’s valuation move from sub-$10M to more than $2B; beyond that, GitHub is turning a decade old this year. Traditionally, this would be a great point where lots of little companies get spun off from this created wealth, and employees and former employees would be able to help with that.

In reality, I can probably count on one hand the number of people from GitHub who are in a financial position to become true angels. This is far from a problem unique to GitHub; the entire industry is concentrating its cash in a select few.

And it’s fucking up one of the strengths of Silicon Valley: its fast-paced innovation.

No more PayPal mafias

Many of these fuckers who are repeat entrepreneurs or investor millionaires got theirs back when the market acted like a real market; now that they’re on top, they seem baffled that things might have changed. Successful current founders don’t necessarily see the problem, either, since cash-off-the-table is so commonplace as to insulate most from market realities.

The PayPal Mafia Wikipedia page is fairly amusing to read nowadays. They certainly were luckily to have nailed this during the irrational exuberance of the dotcom era, where you can start a company, flip it in a few years, and then cash out, but overall it’s just a weird, foreign circumstance that isn’t possible anymore. Almost all the companies mentioned in the lede of that article were founded in the first couple years post-eBay acquisition, within five of PayPal’s founding: Tesla Motors, LinkedIn, Palantir Technologies, SpaceX, YouTube, Yelp.

Exits are far away from most companies’ minds these days. Palantir is thirteen, Dropbox is turning ten, Airbnb and Uber are nine and eight years old. Even if they all IPO this year, it’s a hella long time compared to the early days of tech. Private stock buybacks are en vogue, but many times they involve onerous, one-sided — or possibly illegal — terms that either limit or restrict the windfall you can capitalize on.

The California benefit

One of the nice analogies here is to non-compete statutes in California. Silicon Valley has long since benefitted from California’s non-competes, generating a workforce that can more freely travel between innovative companies. It generates a huge benefit for Silicon Valley innovation as a whole. Along with free-flowing capital and the type of talent San Francisco attracts, this area has a strong continued claim as the center of tech innovation.

With slower exits, concentration of wealth, and legal stipulations like gnarly 90 day exercise windows, I worry a bit about the long-term position of Silicon Valley’s innovation. We all benefit when these huge, privately-backed unicorns suck up great talent, give them resources and problem space to teach them to forge ahead with new techniques, and then disperse to start companies, join nimbler competition, and invest in other lesser-known and younger talent (be it financially or otherwise).

It’s kind of a tragedy of the commons, thus fulfilling my seventh grade teacher’s request that I use tragedy of the commons in real-life conversation. If you assume that employees leaving companies is bad for the company — which I don’t necessarily; I think it’s an ethical question rather than a financial one, but that’s a longer conversation — then companies should try to retain everyone for themselves. That leads to a workforce that is less efficient than it could be. And it’s easy to see this; it seems like everyone I know who has been at a company past their four-year vest is pretty bored these days, working on problems that aren’t interesting and aren’t challenging them. It’s not ideal for anyone, long term.