December 2008

For nearly all of history the success of a society was proportionate to its ability to assemble large and disciplined organizations.

Those who bet on economies of scale generally won, which meant the largest organizations were the most successful ones.

Things have already changed so much that this is hard for us to believe, but till just a few decades ago the largest organizations tended to be the most progressive.

An ambitious kid graduating from college in 1960 wanted to work in the huge, gleaming offices of Ford, or General Electric, or NASA.

Small meant small-time.

Small in 1960 didn't mean a cool little startup.

It meant uncle Sid's shoe store.

When I grew up in the 1970s, the idea of the "corporate ladder" was still very much alive.

The standard plan was to try to get into a good college, from which one would be drafted into some organization and then rise to positions of gradually increasing responsibility.

The more ambitious merely hoped to climb the same ladder faster. [1]

For nearly all of history a society's success was proportionate to its ability to assemble large and disciplined organizations. Those who bet on economies of scale won.

Till a few decades ago the largest organizations were also the most progressive. An ambitious kid in 1960 wanted the gleaming offices of Ford, GE, or NASA. Small meant small-time. It meant uncle Sid's shoe store.

For nearly all of history a society's success was proportionate to its ability to assemble large, disciplined organizations, so the biggest won. Even into the 1970s the plan was to climb the corporate ladder.

But in the late twentieth century something changed.

It turned out that economies of scale were not the only force at work.

Particularly in technology, the increase in speed one could get from smaller groups started to trump the advantages of size.

The future turned out to be different from the one we were expecting in 1970.

The domed cities and flying cars we expected have failed to materialize.

But fortunately so have the jumpsuits with badges indicating our specialty and rank.

Instead of being dominated by a few, giant tree-structured organizations, it's now looking like the economy of the future will be a fluid network of smaller, independent units.

Then something changed. Economies of scale were not the only force: particularly in technology, the speed of smaller groups started to trump the advantages of size.

The flying cars never materialized, but fortunately neither did the jumpsuits with badges indicating our rank. Instead of giant tree-structured organizations, the economy of the future looks like a fluid network of smaller, independent units.

In the late twentieth century, economies of scale stopped being the only force: in technology, the speed of smaller groups began to trump size. The future is a fluid network of smaller, independent units.

It's not so much that large organizations stopped working.

There's no evidence that famously successful organizations like the Roman army or the British East India Company were any less afflicted by protocol and politics than organizations of the same size today.

But they were competing against opponents who couldn't change the rules on the fly by discovering new technology.

Now it turns out the rule "large and disciplined organizations win" needs to have a qualification appended: "at games that change slowly."

No one knew till change reached a sufficient speed.

Large organizations will start to do worse now, though, because for the first time in history they're no longer getting the best people.

An ambitious kid graduating from college now doesn't want to work for a big company.

They want to work for the hot startup that's rapidly growing into one.

If they're really ambitious, they want to start it. [2]

This doesn't mean big companies will disappear.

To say that startups will succeed implies that big companies will exist, because startups that succeed either become big companies or are acquired by them. [3] But large organizations will probably never again play the leading role they did up till the last quarter of the twentieth century.

Large organizations didn't stop working. The Roman army and British East India Company were no less afflicted by protocol and politics than firms their size today, but their opponents couldn't change the rules by discovering new technology. The rule needs a qualification: large organizations win "at games that change slowly."

They will do worse now, because for the first time they're no longer getting the best people. An ambitious kid today doesn't want a big company; they want the hot startup growing into one, and if really ambitious, to start it.

This doesn't mean big companies disappear — successful startups become them or are acquired. But large organizations will never again play the leading role they did.

Large organizations didn't stop working; the rule "large and disciplined organizations win" just needed appending: "at games that change slowly." Now they're losing the best people, though startups imply big companies still exist.

It's kind of surprising that a trend that lasted so long would ever run out.

How often does it happen that a rule works for thousands of years, then switches polarity?

The millennia-long run of bigger-is-better left us with a lot of traditions [blocked] that are now obsolete, but extremely deeply rooted.

Which means the ambitious can now do arbitrage on them.

It will be very valuable to understand precisely which ideas to keep and which can now be discarded.

The place to look is where the spread of smallness began: in the world of startups.

How often does it happen that a rule works for thousands of years, then switches polarity?

That run of bigger-is-better left us traditions [blocked] now obsolete but deeply rooted, so the ambitious can do arbitrage on them.

The place to look is where the spread of smallness began: in the world of startups.

How often does a rule work for thousands of years, then switch polarity? Bigger-is-better left deeply rooted traditions now obsolete, ripe for arbitrage. To understand which to keep, look to startups.

There have always been occasional cases, particularly in the US, of ambitious people who grew the ladder under them instead of climbing it.

But till recently this was an anomalous route that tended to be followed only by outsiders.

It was no coincidence that the great industrialists of the nineteenth century had so little formal education.

As huge as their companies eventually became, they were all essentially mechanics and shopkeepers at first. That was a social step no one with a college education would take if they could avoid it.

Till the rise of technology startups, and in particular, Internet startups, it was very unusual for educated people to start their own businesses.

The eight men who left Shockley Semiconductor to found Fairchild Semiconductor, the original Silicon Valley startup, weren't even trying to start a company at first. They were just looking for a company willing to hire them as a group.

Then one of their parents introduced them to a small investment bank that offered to find funding for them to start their own, so they did.

But starting a company was an alien idea to them; it was something they backed into. [4]

Now I would guess that practically every Stanford or Berkeley undergrad who knows how to program has at least considered the idea of starting a startup.

East Coast universities are not far behind, and British universities only a little behind them.

This pattern suggests that attitudes at Stanford and Berkeley are not an anomaly, but a leading indicator.

This is the way the world is going.

Growing the ladder under you was once an anomalous route for outsiders. The nineteenth-century industrialists had little formal education — mechanics and shopkeepers, a step no educated person would take. Till technology startups, educated people rarely started their own businesses.

The eight men who left Shockley to found Fairchild, the original Silicon Valley startup, weren't even trying to start a company; they just wanted to be hired as a group, until a parent introduced them to a bank that offered funding. Starting one was alien; they backed into it.

Now practically every Stanford or Berkeley undergrad who can program has considered a startup, with East Coast and British universities not far behind. That's not an anomaly but a leading indicator.

Growing the ladder under you was once an anomalous route for outsiders — even Fairchild's founders backed into it. Now nearly every Stanford or Berkeley programmer has considered a startup: a leading indicator.

Of course, Internet startups are still only a fraction of the world's economy.

Could a trend based on them be that powerful?

I think so.

There's no reason to suppose there's any limit to the amount of work that could be done in this area.

Like science, wealth seems to expand fractally.

Steam power was a sliver of the British economy when Watt started working on it.

But his work led to more work till that sliver had expanded into something bigger than the whole economy of which it had initially been a part.

The same thing could happen with the Internet.

If Internet startups offer the best opportunity for ambitious people, then a lot of ambitious people will start them, and this bit of the economy will balloon in the usual fractal way.

Even if Internet-related applications only become a tenth of the world's economy, this component will set the tone for the rest. The most dynamic part of the economy always does, in everything from salaries to standards of dress.

Not just because of its prestige, but because the principles underlying the most dynamic part of the economy tend to be ones that work.

For the future, the trend to bet on seems to be networks of small, autonomous groups whose performance is measured individually.

And the societies that win will be the ones with the least impedance.

Could a trend based on Internet startups be that powerful? I think so. Like science, wealth expands fractally. Steam power was a sliver of the British economy when Watt started, but his work led to more work till that sliver grew bigger than the whole economy it began in.

The trend to bet on is networks of small, autonomous groups whose performance is measured individually. And the societies that win will be the ones with the least impedance.

Internet startups are a fraction of the economy, but like science, wealth expands fractally — as steam did from a sliver to bigger than the whole. The most dynamic part sets the tone, and the winning societies have the least impedance.

As with the original industrial revolution, some societies are going to be better at this than others.

Within a generation of its birth in England, the Industrial Revolution had spread to continental Europe and North America.

But it didn't spread everywhere.

This new way of doing things could only take root in places that were prepared for it.

It could only spread to places that already had a vigorous middle class.

There is a similar social component to the transformation that began in Silicon Valley in the 1960s.

Two new kinds of techniques were developed there: techniques for building integrated circuits, and techniques for building a new type of company designed to grow fast by creating new technology.

The techniques for building integrated circuits spread rapidly to other countries.

But the techniques for building startups didn't.

Fifty years later, startups are ubiquitous in Silicon Valley and common in a handful of other US cities, but they're still an anomaly in most of the world.

Part of the reason—possibly the main reason—that startups have not spread as broadly as the Industrial Revolution did is their social disruptiveness.

Though it brought many social changes, the Industrial Revolution was not fighting the principle that bigger is better.

Quite the opposite: the two dovetailed beautifully.

The new industrial companies adapted the customs of existing large organizations like the military and the civil service, and the resulting hybrid worked well.

"Captains of industry" issued orders to "armies of workers," and everyone knew what they were supposed to do.

Startups seem to go more against the grain, socially.

It's hard for them to flourish in societies that value hierarchy and stability, just as it was hard for industrialization to flourish in societies ruled by people who stole at will from the merchant class.

But there were already a handful of countries past that stage when the Industrial Revolution happened.

There do not seem to be that many ready this time.

As with the industrial revolution, some societies will be better at this. Within a generation it spread from England to Europe and North America, but only to places already prepared for it, with a vigorous middle class.

Silicon Valley developed two techniques: building integrated circuits, and building a company designed to grow fast by creating technology. The chip techniques spread rapidly abroad; the startup techniques didn't, and fifty years later startups are still an anomaly in most of the world.

The main reason is social disruptiveness. The Industrial Revolution wasn't fighting the principle that bigger is better — the two dovetailed: industrial companies adapted the customs of the military and civil service, and "captains of industry" issued orders to "armies of workers."

Startups go against the grain, hard to flourish where societies value hierarchy and stability, just as industrialization was hard where rulers stole from the merchant class. A handful of countries were past that stage by the Industrial Revolution. There do not seem to be that many ready this time.

Like the Industrial Revolution, this transformation only takes root in prepared places. Silicon Valley's chip-making techniques spread; its startup techniques didn't, because startups are socially disruptive — they fight the principle that bigger is better.

[1] One of the bizarre consequences of this model was that the usual way to make more money was to become a manager. This is one of the things startups fix.

[2] There are a lot of reasons American car companies have been doing so much worse than Japanese car companies, but at least one of them is a cause for optimism: American graduates have more options.

[3] It's possible that companies will one day be able to grow big in revenues without growing big in people, but we are not very far along that trend yet.

[4] Lecuyer, Christophe, Making Silicon Valley, MIT Press, 2006.

Thanks to Trevor Blackwell, Paul Buchheit, Jessica Livingston, and Robert Morris for reading drafts of this.

One bizarre consequence of the old model: the way to make more money was to become a manager — something startups fix. And one cause for optimism about American versus Japanese car companies is that American graduates now have more options.

Side notes: under the old model the way to make more money was to become a manager — something startups fix. American graduates now having more options is a cause for optimism about Detroit.