Silicon Valley is about scaling organizations, not software

Tyler Cowen asks whether tech companies should run everything. Trolling title aside, you should read his post, as he presents three competing worldviews that each try to explain silicon valley’s core value. I have a fourth contender: the core competency of silicon valley is avoiding organizational complacency.

The primary way organizations die is they coast after a few years of success. A company grows to tens of millions of dollars of annual profit and a handful of employees. There inevitably comes a moment when the owners are absolutely exhausted, take a step back, and discover they are worth eight figures. They buy racing cars, and drive off into the sunset.

Critics of silicon valley claim that its focus on exponential growth results in rapacious organizations that aren’t worth the cost. I won’t rehash their arguments, but they are aplenty. Peruse them at your leisure.

Silicon valley primarily avoids coasting by routinely burning ships. Each funding round essentially bakes in an expectation that the company will not exit for anything less than 10x the round’s valuation. It’s not just the VCs that enforce this, it’s the growing ranks of the organization’s employees as well. Every decade there are a handful of unicorns that scale, and the efficiency with which the rest of the valley’s talent gets absorbed and scaled is remarkable. Consider the employee count at Google: In 2002, they had around 200 employees. By 2004, this was about 2000 employees. 2006: 10,000. 2008: 20,000. 2012: 40,000. 2017: 80,000.

Here is an interesting fact about that kind of scaling. If you joined in 2002, within 2 years, you were in the 90th percentile by tenure. Hire date 2004, this was true by your 4th year. The four year mark is an important one since that’s the vest date of your initial stock grant. Given Google’s stock price growth, you’d see very little voluntary attrition until that mark. This is a 200 billion dollar market cap company where a 25-year old who joined straight of college would be in the 90th percentile by tenure. Yes, the 25-year old often quits to embrace a life of complacency, but more often than not, they return, drawn back in by a society that values new ideas more than old money. The culture that makes this unprecedented rate of scaling possible is truly special.

There are many other facets of society that have similar grow-or-die characteristics - cities are the first that come to my mind. Coming to America a decade ago, I was shocked by the complete lack of continuous development in its cities. To my developing world mind, a city is 25% active construction zone, otherwise it’s a museum. Once I was done being amazed by the skyscrapers of Manhattan - advances that were completed in the 1930s - I was baffled by how little activity there was at all. A few rebel market urbanist movements aside, most American cities are already dead, they just don’t know it yet. Cities have two equilibria: first, actively growing and thriving, where new migrants move in and participate in the productivity boom. The second equilibrium isn’t one of “moderate growth” and cultural preservation: it’s stasis with absolutely toxic politics. The incumbents are routinely priced out, and fight to the death to avoid it. I won’t rehash this either, please consult your local YIMBY talking points.

Peter Thiel argues that national GDP is another such grow-or-die problem, and its easy to see why. The basic framework of modern government isn’t really tenable under anything less than long term GDP growth rates of 2%. And it’s not just the economy: No redistribution of any kind of status is possible without fights-to-the-death, even ones that correct grievous historical injustices, as such gains can only come at the expense of incumbents.

Under this worldview, a group of people that have created a replicable model for scaling organizations is not just good, it’s the only thing that has any hope of turning the tide against stasis. So ultimately, I think silicon valley is the only thing that can make any headway at all. That said, I’m not sure a renaissance is possible. Silicon valley is a small if successful part of American society, and the greater complacency of the latter ultimately will dominate. And the vultures are already descending, starting by rewriting antitrust law to do their bidding. I expect them to prevail, notwithstanding Jeff Bezos’ last-minute attempts to purchase two more senators to stave them off.

I’m optimistic that silicon valley has successfully exported its core contributions to Shenzhen. Humanity will benefit from this invention. Domestically, I’m less optimistic that it ever will make it as far away as Sacramento.