The frothiness of today’s environment in Silicon Valley makes it easy to get sucked into a warped sense of reality. Valuations are high, capital is cheap, housing prices are skyrocketing, and RSUs are flowing like wine.
During the Tulip Mania of 1637, tulips reached an inflation-adjusted price of $61,710 each
Talk of another “bubble” is rebuffed, even by those who were scarred by the Dot-com collapse of 2000. Some argue we’ve exited the installation phase of technology—which was still sputtering along at the dawn of the new millennium—and have entered what Carlota Perez calls the ‘deployment phase’ of technology. In this phase, startups move “up the stack”, switching from building core infrastructure (i.e. interstate highways) to applications that go on top of it (i.e. Teslas).
Undoubtedly, changes in technology over the last 15 years have been breathtaking. The cost of bringing new products to market has dropped exponentially, and companies that hit product/market fit can build value incredibly fast through escape-velocity, engines of growth—going from worth nothing to worth billions, seemingly overnight. Unparalleled access to capital has led to an arms race for talent, with top tech companies stockpiling software engineers like ballistic missiles for the Tech Wars of the future.
Naval on exponentially increasing startup leverage
One risk of living in this Gilded Age of Tech is the temptation to view your own career and compensation through a disproportionately financial lens—much as a growing company would.
Companies are built on 5 to 10 year time horizons, so navigating the feast-or-famine fundraising environment and tracking jaw-dropping economic headlines across the globe are functions of survival. But when it comes to evaluating your own compensation and growth, focusing on the financial dimension is problematic because it’s too short-sighted.
Since the time horizon for your career is long, the most valuable startup compensation you can acquire isn’t a competitive salary, a chunk of stock or a Yoga-laiden benefits package. If you look at the expected rate-of-return for each of these and benchmark them against the market, they aren’t dramatically different from what you could get working at the stereotypical big company. In fact, they are worse on average—with one exception:
The most valuable compensation for working at a startup as opposed to a “normal job” is a dramatically higher rate-of-learning (ROL).
Your rate-of-learning is a better proxy for how successful you will be than your current salary or stock compensation because it’s a leading rather than lagging indicator. Abandoning the cubicle at your normal job to throw yourself head-first into a startup is a fiery accelerant for growth, changing your career trajectory by orders of magnitude through a substantially increased rate-of-learning. To explain why, let’s define ROL:
Definition: Rate-of-learning is the velocity at which you are aggregating new insights and deploying them in ways that build value.
In physics, velocity maps the relationship between speed and direction. In this case, the pace at which you are uncovering new insights (speed) has a direct relationship with the momentum you accumulate deploying these new insights (direction). Whether this process of aggregating and deploying insights is in the form of writing code or driving growth, scaling this steep learning curve is the forging process that turns you into a badass full-stack developer or full-stack marketer with a high market value—not getting paid a large salary to sit in meetings all day.
There are three reasons why I believe rate-of-learning is your most valuable personal asset class:
Compounding interest on learning. You may have noticed in the graph above that the line representing startup rate-of-learning is exponential while that of a normal job is linear. While this is more conceptual than anything else, it illustrates an important point: if you reach a fast enough rate-0f-learning you start generating compounding interest on those learnings.
Let’s use a real life example. Imagine you’re a growth marketer at a startup and uncover a new way to drive sign-ups by aggressively retargeting people who have visited your blog organically. You deploy the retargeting campaign and it works, so next, you find a way to generate more quality blog content by syndicating posts from experts in your space so you can attract even more eyeballs. Having successfully widened the top of your funnel, you switch gears and figure out how to dramatically increase conversion by personalizing sign-up page copy and background images based upon location data you’re pulling off a visitor’s IP address. This leads to another insight about a series of fields that can be moved out of the sign-up form and into the onboarding flow to reduce friction. The cumulative effect? You increase sign-ups by 20%.
In a startup, this series of experiments can happen over the course of a few days. In the alternative universe of a normal company you might be waiting a week for a small retargeting budget or approval from your manager. Therefore the valuable insights that should theoretically follow your initial insight may never come. If you extend this slower rate-of-learning over months or years, the opportunity cost of missed insights is massive.
Learning equals leverage. People think having “fuck you” money is leverage, but in reality, a high rate-of-learning gives you more leverage than money does. If I were to give you a choice between wiring $10,000 to your checking account or an opportunity to uncover 50 powerful insights that could land you an awesome job at Airbnb or Dropbox, which would you take?
Another way to think about rate-of-learning dividends: the present value of money is low, especially when interest rates are at 0%, because you can’t generate as much compounding interest on money as you can on your learnings. So if you have a choice between getting paid $50K at a startup or $100K at a dying company, your future self will thank you for taking half the pay in exchange for a 3-5X ROL. A high rate-of-learning is the most bankable asset you can have in the startup world because it’s the vehicle by which longterm value is created, both within yourself and for your startup.
Learning is an end to itself. The interesting thing about highly successful people is that most of them don’t stop working once they’ve “made it”. They continue climbing the learning curve long after the millions from big exits have been wired to their bank accounts. Why? After years in high rate-of-learning roles, they discover that learning was an end in itself.
Though it may seem like money is spilling all over the streets in Silicon Valley, don’t get distracted by shiny objects. Play the long game. Put yourself in a position to maximize your rate-of-learning, even—and especially—if it makes you a little uncomfortable. The long game is hard, but rewarding, because you’ll know you had the strength to make the steeper climb.
This weekend my wife and I had friends visiting from Merced, a small town in the Central Valley about two hours east of San Francisco. It was a perfect weekend that combined the best of everything the Bay Area has to offer— cloudless and spectacular 68° weather, a long hike off Skyline Boulevard down to Half Moon Bay and some amazing Greek food in Los Altos.
On Saturday night we decided to go out for drinks and a nice dinner in San Carlos and, naturally, my first thought was to fire up my Uber app and get the evening’s transportation dialed in (I’ve vowed to never take a traditional cab again, when possible). “Have you guys heard of Uber?” I asked as I was making Moscow mules for our guests. “What’s Uber?” they replied. I immediately shifted into VC-pitch mode, explaining how Uber may be the coolest thing to come out of Silicon Valley in a decade and how it will transform how people and things are moved on-demand, with just the push of a button. They immediately got it.
As I hit the “set pick up location” button for our trip, we marveled at the simultaneous simplicity and intricacy of the app, watching in real-time as our driver, Fadi, made a left turn in his black Chevy Suburban off the 101 freeway and hopped on the 92 towards our house. Then I said “you guys realize this is just the beginning for Uber, right?” I described the company’s crazy growth trajectory from having just one driver in San Francisco back in 2009 to now processing tens of thousands of rides per week in cities all over the United States and in countries all over the world, while growing at roughly 20 percent month-over-month. This statement sparked an entire conversation about all the pain points Uber could solve and how great it is that we get to “live in the future”.
We talked about a future where unreliable public transportation that gets shut down by strikes is disrupted by a more cost effective and human alternative (Uber’s fare splitting feature actually makes it cheaper to take Uber X than BART in many cases). We talked about a future where physical goods can be transported from point A to point B with just a few taps, as a network of drivers (or drones) bid in real-time to deliver your package in a matter of hours, making next-day delivery outmoded. We talked about a future where self-driving cars take the wheel, moving people and things with increased safety and efficiency, and your Uber driver transforms into an Uber concierge, focused on the critical human aspects of these transportation transactions. This was a future we all wanted to live in.
As we hopped in our blacked-out SUV for the night—feeling like the President walking off Air Force One, flanked by Fadi the Secret Service Agent—it really hit me why I’m so long on Uber:
- When I showed our friends the app, it felt like I was showing them a magic trick—and they reacted as if I had. I am struggling to think of another time where I’ve shown someone a product and got a similar response (maybe when I got my first iPhone in 2007?). Showing Uber for the first time is like traveling in a time machine and showing someone what the future looks like. It’s hard to overstate how big of a differentiator this is and it’s part of the magic that comes with nailing product/market fit.
- The fact that this couple only lives two hours from Uber’s headquarters in San Francisco and had never heard of the company before shows you that Uber is just at the tip of the iceberg in terms of growth. The size of the opportunity for being “everyone’s personal driver” is in-and-of-itself massive, notwithstanding all the other vertical markets that Uber will eventually capture.
- Uber has nailed the end-to-end experience in the real world the way the best software companies have in the digital one. Uber’s ability to fully bridge the online and offline and harness the power of pixels in the physical realm has allowed them to forge a space their brand can clearly own. It’s no small feat that every Uber driver I’ve ever had has been friendly, professional and excited to be part of this emerging ecosystem.
I recently finished Ben Horowitz’ book The Hard Thing About Hard Thingsand in it he talks about a very simple formula for determining whether a company should be subsumed by a larger organization or remain independent and go all the way. Ben posits that if A) the size of the market is massive and B) you have a good chance of taking the market, you shouldn’t sell. In Uber’s case, the market for moving people and things is so massive that it’s almost hard to fathom, and as long as they continue to field the best team in their space, they should never sell.
The best companies aren’t really companies at all—they’re movements. From fighting tooth-and-nail with entrenched taxi cab interests and local governments to sending teams across the globe to expand the product’s footprint, Uber is one of those special companies that comes along once in a generation. Movement-companies can become self-fulfilling prophecies of success and growth because they attract the type of people who believe in the mission and make winning even more inevitable. And unlike so many high-growth startups in Silicon Valley, Uber is a cash machine, paying out millions of dollars to drivers every week and generating tons of revenue.
Some things Uber could do to continue winning big:
- Uber could partner with Apple and have their app come default on every iOS device that ships, much like Google maps did originally. This will further establish Uber as the logistics and transportation platform of record, just as Google is the dominant player in the search market. I could also envision a deeper integration with Apple Maps that surfaces Uber “mass transit” pick up points and drop-off/delivery points for packages.
- Uber could take Apple or Google maps integration a step beyond surfacing nearby Uber Transit and Uber Delivery outposts. Imagine a prompt in the lower right corner that shows you how far away an Uber driver is from your current location at any given time. Apple users who don’t have the Uber app yet could even pay for their ride through iTunes—the trade-off of course being losing some control over the customer graph in exchange for access to 200M Apple customer’s credit cards.
- Uber could activate iBeacon within their app to create a mesh network of beacons across the platform, both within cars when drivers come online and amongst users. The network could be used to let customers know when rates are low or surging, cars are available nearby or packages are en route—even when the app is closed.
- Uber could create a “Give Uber” feature that allows a user to pay for a ride or delivery for someone else. Imagine paying for a ride for a homeless man to a job interview or creating a Kickstarter campaign that funds transportation for elderly home residents to the SF Moma. The kind of good that can be done with Uber is unlimited if the ability to give the gift of Uber becomes real.
As a Marketing Manager, I give props to whoever nailed the “moving people” positioning for Uber. These two words encompass so much of what the company’s future can be and the longterm value they can build. Creating a global transportation fleet powered by humans is such a monumental and worthwhile undertaking that it’s hard to even put a valuation on it. In the next five to ten years, I think we will see an Uber that becomes embedded in our lives, our cities and our communities and stands tall with companies like Google and Apple as one of the skyscrapers of the Internet Age.
And spawning Valley's all over the world
Last week, a late-night Twitter conversation with Marc Andreesen and Dave McClure got me thinking about the future of Silicon Valley in a different way.
The perennial “future-of-the-Valley” debate isn’t a new one. Nor is it surprising that a community preoccupied with building the future is curious about how the entrepreneurial world map will be redrawn in years to come. Will the Bay Area remain the mecca of modern tech entrepreneurship? Or will replica Silicon Valleys sprout up in cities like Singapore, Moscow and Tel Aviv that eventually reach parity? In short, will the future of the Valley be a story of continued consolidation or one of global diffusion?
I’ve always been in the camp that’s long on Silicon Valley—not just as a physical space for entrepreneurs but a mental one that values putting big dents in the universe. The ecosystem here is both complex and self-reinforcing, and each component—the Stanfords, Googles, Wilson Sonsinis, weather and natural beauty—would individually be so difficult to replicate that copying the entire package would be nearly impossible, akin to building a man-made Mount Everest in the desert and convincing the best climbers in the world to abandon the original and come scale Ever-esque.
I still believe this about the Valley. But Marc’s 140-character stream of thoughts has me thinking the entire premise of the debate may be wrong—and far too binary for what the future might actually look like. The Silicon-Valley-versus-the-world argument smacks of the mercantilist rhetoric of the 16th century that viewed global wealth as a zero-sum game—that Silicon Valley’s loss would be some other ecosystem’s gain and visa versa. Instead, Silicon Valley’s biggest export may be a model and culture of entrepreneurship routed across the globe, pollinating pockets of specialization that emerge and contribute new value to a much larger ecosystem. These geographic outposts would apply the Valley’s startup model to new domains where they are uniquely positioned to build a longterm, sustainable comparative advantage.
These “X” Valleys would become satellites of innovation even as Silicon Valley remains the center of gravity.
In the Wealth of Nations, Enlightenment economist Adam Smith introduced the concept of comparative advantage—a cornerstone of modern economic thought—which states that if a country can produce a product at a lower opportunity cost, even if another country is more efficient overall, they both benefit by trading with one another. Consider the Silicon-Valley-versus-the-world argument through the same framework: In an absolute sense, Silicon Valley is the most productive technology capital in the world, but if “X” Valley in another corner of the tech universe could produce wearable computers or self-driving cars at lower marginal costs and ship them worldwide with giant AmazonAir drones, the entire ecosystem prospers. It’s Adam Smith’s gains-from-trade model on crack.
Scottish economist Adam Smith
A bonus: new wealth being pumped into the system percolates to places beyond the golden triangle of San Francisco, Palo Alto and Atherton, while amplifying the mothership of Silicon Valley and benefiting consumers worldwide. The same engine of technology that has historically widened the gap between the haves and have-nots in the world may end up doing the exact opposite. The leverage that allowed twelve people to build the billion dollar Instagram can be exported, catapulting the world’s poor into the cloud and distributing tech power to the makers amongst the masses. Any bright-eyed kid with an Internet connection and some programming savvy can become an “X” Valley entrepreneur, no coercion required. And funding for his “X” Valley startup can be crowdsourced instantly by a global network of individual investors looking to bet on the next big thing (unless Dave McClure wires the money first☺).
Perhaps the greatest opportunity for poor countries in this space-race to spawn a hundred new “X” Valleys is to exploit a disadvantage rich countries have fallen prey to: overregulation. As large Western economies turn to government intervention to quell tumultuous markets, provide consumer safeguards, and protect politically influential incumbents, they suppress certain categories of innovation, inviting poorer countries to take the lead. Imagine “Robot” Valley, “Nano” Valley or “Biotech” Valley disrupting more affluent incumbent countries in the robotics, nanotech and biotech spaces—much in the way Singapore has become a biotechnology haven by lowering regulatory barriers. As Marc points out, one could envision a “Bitcoin” Valley springing up in a country without tight financial regulations and (as Naval Ravikant notes) a poor country could become wealthier by driving adoption of Bitcoin on a national level and displacing a weak currency. This is much less likely to happen in the United States or Germany because of strict financial controls, but could happen in a small country like Cyprus, engulfed by financial turmoil and needing to pivot. This would be the national equivalent of “moving fast and breaking stuff” to win.
Greater financial freedom across the globe creates broad ability for more people to vote with their feet and move to geographic outposts with shared values. It’s not hard to imagine the emergence of hundreds of new states, organized around “X” Valley capitals, that provide security and infrastructure for these golden egg-laying geese. As Dave McClurehypothesizes, in the future we will prototype entirely new countries, organizing small teams of people to search out national product-market fit. The freedom and efficacy synonymous with unparalleled access to the information, capital and computing power could also be a destabilizing force against dictators who control and coerce their people. And in waning areas where authoritarianism prevails, refugees will have more safe havens to flee to, with more “X” Valleys popping up on the map.
In a sense, this unbundling process is already happening. We can see the metamorphosis of a “GreenTech” Valley (Boulder, Colorado) or “Biotech” Valley (Singapore) already underway. It’s not inconceivable that North Dakota could become an “Energy” Valley or that some small country will grab the “Bitcoin” Valley mantle. We see top tier venture capital validating this unbundling process by flowing to startups in countries like Germany—bets now possible because the “Valley mentality” has been distilled to the point where it can exist outside the petri dish of Northern California. These proof points demonstrate that the mental space of Silicon Valley is far more premium real estate than the physical, with the ability to turn arid deserts into bustling metropolises and helpless people into entrepreneurs.
The unbundling of Silicon Valley and the spawning of new “X” Valleys across the planet could present a model for a more prosperous future. Like many of our forefathers who fled oppressive regimes and emigrated to a New World, and like those of us who came to Silicon Valley in search of a better life, the next wave of progress will be driven by a mass pilgrimage into the cloud. In this future, Silicon Valley doesn’t have to hoard the currency of innovation, monopolizing the ore of opportunity like mercantilist Kings of the past. Instead, we become the launch pad for sending satellites into orbit that will expand the tech universe and transform a regional phenomenon into a global one.