Matt Marshall has been better than most journalists at keeping tabs on the excess capital flowing into the private equity industry of late. So it's somewhat ironic that his site, Venture Beat, played host to one of the most "bubbly" articles I've seen in quite some time.
I encourage you all to read the article directly, but let me take each of author Auren Hoffman's points one-by-one:
- Auren Says: At a big company you’re stuck with corporate politics, paralysis decision making, and a lack of getting things done. At a small company you’re having fun, pursuing your dream, and actually getting things done.
My Reaction: For many employees at startups, they're no more pursuing their dream than they would be working for one of the juggernauts. Founders certainly would fit into what he's saying, but you can't convince me that Employee #20 is really pursuing his dream. As to having fewer politics to deal with...that can work both ways. Certainly smaller organizations aren't going to be as bogged down with bureaucracy. On the other hand, you're far more likely to have to be a jack-of-all-trades at a startup, and much of your work day will be spent putting out fires versus really focusing on your core competency. That's enticing to some, but plenty of "A" employees would prefer a more focused work environment.
- Auren Says: Job security is about a wash. While start-ups tend to go under, big companies are always doing lay-offs and good people are often getting fired due to corporate politics and purges.
My Reaction: Bollocks. Utter Rubbish. "A" employees, the indispensable ones, aren't going to be forced out in purges very often, or at least not often enough for Auren's contention to hold true. Chronicle the startup failure rate to the force attrition rate at large tech companies; it doesn't compare.
- Auren Says: Also let’s not forget the stock compensation which has no comparison.
My Reaction: Basic probability says otherwise. The expected value of stock options grants for established, publicly-traded technology companies is far greater than that of the EV of a startup. Hoffman's analysis forgets that for every YouTube there are a hundred failed startups. If one were to sum up the range of probable payoffs from a given series of options grants, it would take some of that "new math" for the startup grants to have a consistently higher EV. Startups are benefiting from the fact that many employees don't understand the concept of EV. They join a startup figuring their chances at real wealth are much greater than "working for the man." For founders and startup executives at well-funded startups, that may be close to the truth...but for the vast majority of other employees, it's most certainly not.
- Auren Says: Essentially, when the economy is good and massive amount of startup activity is happening, the big companies suffer. Just think about it…when you see the Google $1.65 billion acquisition of YouTube, does that make you want to work more for a Google or for a potential YouTube?
My Reaction: Sigh...I would rather be Sergey or Larry than the YouTube founders. And I would rather be the 10th employee at Google than the 10th employee at YouTube. But again the real failing here is in the word "potential." Auren is using YouTube as evidence yet a decision to go to a startup is made without the benefit of hindsight. Everyone HOPES they're at the "next YouTube" but the reality suggests there won't be another YouTube (from a payout perspective) in this generation; or at least very few.
- Auren Says: In fact, the only rational reason that I can think of to work for one of these large tech companies is if you want to work less (or eat free gourmet food). If you are content with working 35-40 hours a week and are not interested in growing your career at this point in your life, then working for a large company is a good short-term decision.
My Reaction: OK, so working for a big tech company means you get to kick your feet up and relax whereas working for a startup means working your ass off? Not only is that a delusional and self-serving viewpoint (Auren runs a startup), but it's a ridiculous assertion. Does he honestly think Cisco or Oracle or SAP is chock full of people who want to quietly wait out the remainder of their careers? At large companies it's easier for lazy people to hide out and find a niche, but well-run companies of any size do a good job of separating the wheat from the chaff. And again, "A" employees aren't working 35 hour weeks on a consistent basis.
As I read this article today, memories of the bubble were flooding back to me. I distinctly remember sharing a cab ride to the airport from an optical networking conference where the other passenger was pontificating about how she was "employee #12" of this hot startup; and that she had a boatload of stock options, the company would be up to 40 employees by month's end, and they planned an IPO within the next 12 months. A week later John Chambers signaled to the world that the networking boom was taking a turn for the worse, and this "company" (which was well funded by tier-1 VC firms incidentally) ceased to exist six months later. This was hardly a one off experience.
Leaving a big technology firm for a startup is nothing new, and certainly I don't mean to suggest that "A" players aren't making this move with more frequency. Friends like Jeff Nolan, Rod Boothby and Charlie Wood are perfect examples of guys who have (and would continue to) flourish at big firms but have made the entrepreneurial jump. However, it works both ways. Auren mentions Niall Kennedy's departure from Microsoft as evidence of this "trend"...yet I would point to Ray Ozzie's ARRIVAL at Microsoft as a pretty strong counterpoint. No disrespect to Niall, but if he's an "A" player then Ozzie is an "A++" player. Joining a startup as the founder or a CEO/CFO brought in early is one thing, in that case you're getting equity stakes that simply would be impossible to match at a large firm. Even then, mathematically the EV would work against you; although the emotional pull for the entrepreneur would likely supersede that. But for employees below the CxO level, even the early entrants, the economics, future value and job security are hardly strong enough to indicate that "A" players are flocking to the startup realm.
If, in fact, we're at the point where a mass exodus is happening (I don't think we are), it's the most damning sign yet that we're in a bubble.
Note: At the time of this writing I, and/or funds I maintain discretionary control over, maintained long equity positions in CSCO, MSFT and SAP. We did not maintain positions (long or short) in GOOG or ORCL. We also may, at times, carry derivative options on underlying positions as a hedge.
venturebeat bubble expected value flawed logic irregulars hiring tech startups enterprise2.0 woodrow
Morgan,
Thanks very much for the thoughtful reply.
You're right that segmentation of employee type would be a worthwhile extension of this conversation. Ultimately my reaction was to Auren's piece, which did not differentiate between engineers and others either.
We all tend to look at the world from our own lens, and not being an engineer, it's rarely my first instinct to put myself in their shoes. Thanks again for bringing that perspective to the conversation.
J
Posted by: Jason Wood | December 01, 2006 at 10:04 AM
Greetings,
While you make some good points, I'd like to note that you say:
'Everyone HOPES they're at the "next YouTube" but the reality suggests there won't be another YouTube (from a payout perspective) in this generation; or at least very few.'
But you neglect to note that the founders of YouTube were engineers who went through the previous $1.5 billion buyout of PayPal by eBay.
I'm not suggesting that there WILL be another YouTube, but it's not impossible. I've been through two extremely successful IPO's in my career, about a decade apart (McAfee and PayPal), and I know that it's possible to win multiple times.
The startup lottery is one of the only lotteries where you can actually gauge the likelihood of success, and make a difference in that chance, not to mention taking down a salary while you play. (I'm abusing the lottery analogy, because it's not *entirely* a game of chance, but it's what most people understand.)
In the end, though, if I were to argue the point about 'A players' leaving big companies, it would be based on a purely emotional argument. The best engineers, at least imnsho, have a passion for their work, and unless the company has a class of engineers that are free to pursue their own passions (like Sun and MSFT's Distinguished Engineers appear to be) they will go someplace where they can turn their passions into products.
The more established 'A' players have usually found a company that respects them and treats them well enough that the frisson of danger no longer excites them. Since most companies don't give out Distinguished status to younger, newer employees, it's the hungry, passionate, want-to-change-the-world types that are leaving for the startup world.
(I can't resist, 'And thus is the cycle of life continued...')
You might need to draw a distinction between types of 'A' players, because some kinds definitely are flocking to startups, and some kinds aren't.
Just some random thoughts, do with as you will...
-- Morgan
Posted by: Morgan Schweers | November 30, 2006 at 10:34 PM