What Startups Should Learn from “The Big Short”
Updated: Feb 4, 2019
“What are the odds that people will make smart decisions about money if they don’t need to make smart decisions―if they can get rich making dumb decisions?”
― Michael Lewis, The Big Short: Inside the Doomsday Machine
I joined my first startup in 2008. As you know, the U.S. housing market collapsed and our economy tanked shortly thereafter. The forces at play on Wall Street that caused the Great Recession drive the plot of the movie The Big Short, which is an adaptation of Michael Lewis’ book, The Big Short: Inside the Doomsday Machine.
The book and movie make one point really clearly. In the words of Michael Lewis himself, “Any business where you can sell a product and make money without having to worry how the product performs is going to attract sleazy people.”
Watching the movie, it’s striking just how sleazy the world of finance was (is?). Sleazy. Mostly white. And mostly male. It’s insane that Michael Lewis wrote a book back in 1991 that chronicled the exact same arrogance and folly that led to the 2008 collapse. Apparently, despite the calamity it causes, the stagnant, non-diverse culture of Wall Street will continue to make the same mistakes over and over again with impunity.
Silicon Valley is also mostly white and mostly male, but I don’t think we’re sleazy — yet. And I think there are three big lessons for us in The Big Short if we pay attention:
1. Index high on the “give a damn” axis.
Former Google exec Kim Scott talks about her “give a damn” axis when she speaks on radical candor as a framework for giving feedback. My former boss and White House deputy CTO DJ Patil talks about the importance of passion and intellectual honesty in problem solving. I think both concepts are linked to something we must maintain in the Valley: genuine interest in the problems we’re solving.
I often hear people talking about how the “hot” industry post-MBA was once finance; now it’s tech. They go on to tell me that if business school students want to get into our industry, it’s a sign we are in a bubble. The weird thing is, it’s usually MBA students who tell me this, chuckling and pleased with themselves. But the subtext is that business school students are constantly chasing cash. Is it really flattering to be part of a group that will rush in a hive-like manner toward the quickest way to make a buck?
We need to hire and invest in people who actually give a damn about what we’re trying to do. If that means passing on a pricey developer with questionable commitment, so be it. If it means taking a chance on a really dedicated nights-and-weekends programmer who needs her first shot at the big time, all the better. Honestly giving a damn needs to be a non-negotiable criteria.
2. Be long character and short greed.
Our community is already flooded with the folks who are here to make that quick buck (post-MBA and otherwise). They think of tech as a new gold rush, not a long-term investment. As a result, they aren’t here to inspire, innovate, be great bosses, or form meaningful relationships. They are the type who network like it’s a competitive sport and talk about opportunities with phrases like, “I really like what they are doing, but I NEED to make a big exit on my next startup.” Oh, do you? A lot of people NEEDED to win the Powerball, too.
Also, I have news for you: it’s unlikely you are going to get rich working in startups unless you are a partner in a venture capital firm.
In finance, mortgage-backed securities were smart and innovative in the 1970s, when they provided more capital for housing at a time when it was needed. Then, through a series of lapses in moral judgment and common sense, mortgage-backed securities were perverted over time into something sinister enough to threaten our whole economy. Something similar may be happening in our equity pools. We used to have a smart and fairly simple way of distributing equity to employees. Startups were risky, so early employees were rewarded for their gumption with equity packages that would be valuable if the startup made it to exit.
Today, it’s more like IPO or bust. Liquidation preferences and other provisions tucked away in our filings make it so that VC investors are guaranteed to be paid out before anyone else. Few founders are going to sacrifice their own profitability to help their staff, so if your startup is sold instead of debuting on the stock exchange, you’re probably NOT going to afford that yacht you have your eye on. Your sweat equity is actually building real equity on Sand Hill.
Further, let’s not forget what Michael Burry (Valley resident and key player in The Big Short) says about spotting a bubble:
“It is ludicrous to believe that asset bubbles can only be recognized in hindsight. There are specific identifiers that are entirely recognizable during the bubble’s inflation. One hallmark of mania is the rapid rise in the incidence and complexity of fraud.”
VC financings and equity allocations are complicated and opaque to most startup employees. Sometimes the terms are intentionally incomprehensible, which is how employees can end up with completely worthless stock plans.
In addition, think about how valuations and exits play out. Insiders (investors, board members, founders) determine a valuation for the company that is largely made up. The company shares this valuation because it helps them hire talent, build clout, and get PR mentions. Employees hear they are worth a boatload, and with dollar signs in their eyes, they double-down on their efforts. But those insiders get protected downside, and it’s ultimately them who can decide to sell for much, much less than the advertised valuation. Rank-and-file employees who joined the company at the publicized valuation (sometimes dropping out of grad school, moving their families across the country, doing whatever else people do for a good opportunity) have zero say. And they are often the ones left holding the bag.
This whole situation isn’t fraud as far as I know, but it definitely doesn’t sound like it’s all above board, does it?
Let’s stop disguising greed as ambition. Let’s try at least to curb the gold rush mentality. Instead, we can hire and invest in people who have good character and want to be in tech for the joy of it. The noble, the humble, the honest, the dedicated — these are the people who will stand guard against sleaze and help us all follow the better angels of our nature.
3. Invest in diversity.
We know the Wall Street of The Big Short is far from diverse. (Note: The movie rather heartbreakingly omits a key woman from the story, but that’s a post for another day.) Silicon Valley is also mostly white and mostly male. We need to wake up and realize that diversity is really good for business. If we invest in it, diversity will be foundational in keeping us from sleaze and stagnation.
First, consider the business case for diversity. Racial diversity at work has been associated with increased sales revenue and greater relative profits. Female leaders are associated with higher profits, increased honesty, and a reduction of sleazy behavior, like tax evasion. And if you’re worried that including more women in your startup will limit the fun, the opposite is actually true: workplaces with an equal mix of men and women tend to be happier.
Here’s how it works: Diverse teams have access to a wider range of problem-solving approaches, skill sets, and ideas. Moreover, because teammates work regularly with people who are different from them, they come to meetings more prepared and with more thorough plans.
Diversity is great for business. Ot behooves all of us to create workplace environments that enable trust, social cohesion, and tolerance (immediately, if not sooner).
We can do better.
I joined my first startup in 2008, and the world melted down shortly thereafter. But I was at a startup that was diverse, packed with women and people of a wide range of ethnicities. It was teeming with people who cared more about our product and our customers than anything. As a testament to the genuine character of my colleagues, one of our core values was “Look forward to Mondays” — and we did.
We went through the entire recession without layoffs, and actually continued to grow wildly until we were acquired in 2010. And the kicker is that we sold stationery! Without having lived through it, I never would have guessed that Tiny Prints would be recession-proof, but we were — thanks in large part to the lessons above.
As Michael Lewis writes in his book, “To succeed in a spectacular fashion you had to be spectacularly unusual.” Tiny Prints was, and I think more companies should be contemplating how to follow in its footsteps.