A colleague (and occasional TRP commenter), Dennis Schafroth, pointed me at a rather good article on Wil Shipley’s blog entitled Success, and Farming vs. Mining. You should read it for yourself, but in summary his point is that a software house — or anything else, really — has a choice to make, and will always make it whether consciously or unconsciously: it can set itself up either as a farmer (slow but continuous productivity) or a miner (explosive, exploitative profit). Specifically, “You can either see founding a company as something you’re doing because you want to produce good software, or you can see it as something you do so you can sell your stock and make a killing and move on.“
(Yes, there is a Danish pun in the traditional Irrelevant Sushi Photo.)
Shipley goes on to lament:
A big problem with our field is that mining is so glamorized: Not only are we inundated with tales of “Look, Bob Smith made a fortune selling his company after two years, and he’s a bazillionaire!” but if you seek outside investment you are usually required to be a miner: few investors are interested in partnering with someone who is going to retain ownership of his company and just make good products and sell them for a fair price. The very first thing an investor is usually going to ask is, “What’s your exit strategy?”
I’ve had this kind of bad feeling about the industry and about venture capital for some time. Back in March 1999, I was in Palo Alto for a few days — for a meeting of the Z39.50 Implementors Meeting, since you asked — and got to spend a few evenings sitting alone in restaurants. For me, this is one of the pleasant benefits of travelling: a bit of time alone makes a nice change from my usual lifestyle with three small and very noisy boys in the house. But I was staggered by the conversations I was overhearing in the heart of Silicon Valley, that hotbed of technology and innovation. No-one, I mean no-one, was talking about programming; everyone was talking about money. Hacking had become a means to an end; these people would have been just as happy making their fortunes in toothpaste as in programming. But at that time I hadn’t appreciated that this attitude was being forced onto people by the approach taken to investment.
It’s easy to be angry about Money People. (Of course in light of the Global Banking Crisis, it probably right to feel that way a lot of the time, but let’s be charitable and assume that the people responsible for that were edge-cases.) For most of my life, I was fundamentally unhappy about the whole financial system — investment, stocks and shares, loans, and all — because I couldn’t see that it actually produced anything — it seemed to be only about moving money from one place to another, with no actual creation. I guess this is a very common perception, especially among high-school seniors and college freshmen.
But about a year ago, another of my colleagues, Jason Skomorowski, changed my perspective by pointing out to me that the worldwide community of investors acts as a sort of distributed, privately financed granting body — an unorganised organisation to distribute money according to where it thinks it can achieve the most. And just as people tend to spend their own money more wisely than they spend other people’s, so VCs and other private investors will likely invest their own money more wisely than granting bodies invest their countries’ money. You can think of investors as providing an evolutionary selection pressure on businesses: they reward those that have good well-thought-through plans to achieve good things, and penalise those that are less fit. So I went away from that discussion a happier man.
But the problem is — and I say this as a qualified evolutionary biologist, remember — evolution doesn’t select on the basis of what we would consider desirable, but only on survival and success. Evolution is an optimisation machine, but it optimises on its own criteria, not ours.
In the case of the investment market, as the Farming vs. Mining article shows, it’s not selecting on productivity but on growth — a company that made a million dollars last year and two million this year is a better investment than one that makes three million dollars every year. And a company that will grow to ten million in two years, then fold six months after the investors sell their stocks is better investment still.
Rats. Now I am unhappy again.
And I think these reservations apply to free-market economies in general. While I am certainly not arguing for a Soviet-style centralised and managed economy, I do think that the all-too-common uncritical worship of free markets as the force that will save us all is horribly misplaced. Free markets optimise. But for what?
(The last two images taken from Sifu Renka’s Flickr collection.)