For me the greatest eye-opener in The Rainforest: The Secret to Building the Next Silicon Valley by Victor Hwang and Greg Horowitt was a realization that starting your own innovative company is a deeply irrational decision. Considering the amount of effort (and often your own money) that you are going to invest in it and the very low probability of success, it simply doesn’t make sense to start a company—as long as you measure success in dollars. As the authors write at one point, “the process of launching a startup company has many similarities to riding a roller-coaster. It is a highly irrational act.”
There is useful diagram on p. 224 of The Rainforest explaining the components that have to work in order for the venture to become success:
- Technology works
- Product works
- Customers buy
- Manufacturing works
- Business model works
- Enough capital
- Team can handle this whole thing
There are seven components of success in this scheme, and all of them must work in order for “this whole thing” to succeed. Even if we assign an unrealistically high chance of success—50%—to each step, the probability of all of the seven tosses coming heads up is less than 1%. A more realistic chance of success for each step, like 20%, yields an overall probability of around 0.001 percent. If you want to become a billionaire, there are much more certain routes to wealth—for example, working up the corporate ladder in a well-established large company or running a hedge fund. Or, as Thomas Piketty suggests, inheriting the wealth.
And I am not even talking about the “psychic costs” involved in starting a successful business. It can take many years before you find out whether you succeed, and all that time one must live with the very real possibility of failure, that all that hard work will be, in the end, wasted. At least, if you fail at becoming a CEO of a huge corporation, you will be still very handsomely remunerated along the way and can look forward to a very comfortable nest egg when you retire. Another huge psychic cost is having to ask people for money, and then almost always being turned down. As Hwang and Horowitt write, “successful innovation requires self-sacrifice.”
We have the examples of success in front of our eyes, the Bill Gateses and Steve Jobses, but for each of them there are thousands of entrepreneurs who ruined their lives by trying to launch a firm. Even the brilliant Nikola Tesla died in poverty, weighed down by debt (at the end of his life, he lived in a series of New York hotels, leaving behind unpaid bills).
Curiously enough, I have a great personal understanding of the costs of entrepreneurship, because launching Seshat: Global History Databank was in all respects, except one, an identical experience to an investor launching a successful business. The one difference, of course, is that the success of Seshat is measured not in dollars, but in the number of publications in top journals, the number of citations by other researchers, the theories that we either confirm or reject, and our increased understanding of how human societies evolve and function.
So, what does actually motivate entrepreneurs? Some of them are in it just for the money, and most of those fail. Successful ones are typically motivated by extrarational reasons: “thrill of competition, human altruism, a thirst for adventure, a joy of discovery and creativity, a concern for future generations, and a desire for meaning in one’s life.”
Even more eye-opening was the new understanding of venture capitalists that I gained after reading The Rainforest. I used to refer to them as “vulture capitalists”, but I now understand that it was unfair, especially when talking about successful VCs. Because successful VCs, as The Rainforest explains, also cannot be motivated by greed alone. The problem is, again, the high probability of failure. It is simply not rational to invest in a startup at the very early stage. Usually VCs will know that the first hurdle (“technology works”) has been successfully passed. But the remaining six hurdles still need to be surmounted. One way of increasing the payoff in case the venture succeeds is to force the entrepreneur to yield a large percentage of equity in the company. But that’s self-defeating, because that destroys the motivation of the entrepreneur to work hard.
At a later stage, once most of the hurdles have been cleared, it makes perfect sense to invest in a startup, but how do they get to that stage? It takes either investors behaving extrarationally, being motivated by the same values cited above, or collective action channeled by governments—in fact, it takes all of that.
Most venture funds that help entrepreneurs during the early stages are funded by governments who hire VCs to run them, or by VCs who venture their own money in parallel with a government fund. I had some experience of this recently, when one of the Seshat directors, Kevin Feeney, launched a new company, Data Chemist (read about it in The Irish Times).
I end my review of Hwang and Horowitt’s book with this quote “Rainforests depend on people not behaving like rational actors.” It requires extrarational motivations of all the key players, including the inventors and investors, and also governments. I am not saying that all business is like this. From what I read in the press, the world of financial organizations, large corporations, and corporate law seems to be driven largely, or entirely by greed. Branko Milanovic is right in that. But not all business is like that. Innovation is really the key to why we live better than people did one hundred, or one thousand years ago. And that business requires extrarational motivations, self-sacrifice, and cooperation.