Paul Graham’s Arguments for Startups

In my last post, I shared a few interesting ideas about programming from Paul Graham’s book Hackers & Painters. Another theme of the book is startups. In Chapter 6 of the book titled How to Make Wealth, Graham makes a strong case for building startups instead of working for existing companies. So what are his arguments?

Why startups?

Graham starts off by offering his definition of job:

“A job means doing something people want, averaged together with everyone else in that company.”

A job at a company is like rowing a boat. Your effort is averaged with everyone else’s. (Photo by Quino Al on Unsplash)

It’s the latter part of the definition that matters in the discussion of big companies vs. startups. Graham argues that large companies usually are unable to precisely assign value to each individual’s work, because many people’s work is often tangled together. For example, at a company that. makes an electronic gadget, multiple groups and many people from each group are involved in product development and the go-to-market process. They all, in theory, contribute to the sales of the gadget. In Graham’s words, the question is:

“How do you know how much of the gadget’s sales are due to each group’s efforts?”

As a result, it’s not straightforward to figure out how much each employee contributed to the success of the business and reward them accordingly. This could demotivate people who believe they play a pivotal role or who have the capacity to be much more productive. This leads to the central question Graham throws at people working at large companies:

“You can’t go to your boss and say, I’d like to start working ten times as hard, so will you please pay me ten times as much?”

Graham argues that startups avoid this problem (before it grows bigger) by allowing you to join a self-selected small group with whom you’re willing to average the value of your work with. Being in a small group also makes it easier to measure your contributions and see the effect of your actions on business outcomes.

“It’s a much better deal for them to average their work together with a small group of their peers than to average it with everyone.”

Are large companies hopeless for ambitious people?

As someone who works at a large company, I thought Graham made some astute observations from the angle of measuring individual contributions. Since those observations were made nearly 20 years ago, are they still relevant? I think large companies, especially in tech, have responded to the threat of losing talents to startups in several notable ways, though none probably would completely revert the fundamental arguments Graham made.

Better performance management

You might not expect that, but my first reaction to this chapter was, “Wow, all the time I spent on performance reviews and compensation planning as a manager is so worth it.” Really, the best defense of large companies against the arguments Graham put forth is to have a fair and robust performance review system that distinguishes the value of each person’s work as much as possible. On top of that, companies must stick to the principle of pay for performance.

Doing that is never easy for reasons Graham mentioned, but the practice of performance management did evolve, especially in tech, over the past two decades. For example, at more and more tech companies, job ladders for individual contributors can be as tall as the management ladders. Another HR innovation at some tech companies, including Google, is that you can nominate yourself for promotion without your manager’s approval, so long as you can convince a committee with evidence of performing at the next level and your peers’ support.

Clearly defined job ladders and a fair performance review & promotion process can serve as a reasonable answer to the question posed by Graham: how can I get paid X times more if I’m willing to work X times harder? But if your ambition is to get paid 10 times more, especially within the timeframe of a few years, you might still be out of luck at a large company.

Higher internal mobility

Another change in the last 20 years is the greater recognition and facilitation of internal mobility within large tech companies. This includes changing projects, teams, or types of roles. Internal mobility is real at Google. I’ve personally reviewed and approved job ladder transfers as a hiring committee member. I know many colleagues who successfully switched teams or between individual contributor and manager roles. When people have the flexibility to switch to different projects and roles, they get to choose the environment where they can do their best work and also the people they want their work to be averaged with.

Functioning in-house incubators

Last, some large companies established in-house startup incubators (e.g., Area 120 by Google). It’s another way to retain ambitious employees and provide them with an opportunity to choose how their work gets averaged and evaluated. This model seems to be working; I’ve seen some projects from Area 120 successfully “graduate” into a real product (e.g., Tables). When an internal startup gets “acquired” by a mature product group, the founders get rewarded substantially in addition to their normal salary, though it’s usually not as much as taking a startup to IPO or getting acquired by an external buyer.

Nonetheless, those in-house incubators are useful, because they address two “catches” of startups Graham acknowledged. The first catch is that you can’t choose how hard you’d like to work as a startup founder. It’s always as hard as you possibly can in order to survive:

“You can’t decide, for example, that you’d like to work just two or three times as hard, and get paid that much more.”

Another catch is that a startup can’t easily trade reward for less risk. In other words, it’s often an all or nothing game, and getting nothing after months, if not years, of hard work is unfortunately the norm:

“Most startups tank, and not just the dog food portals we all heard about during the Internet Bubble.”

So, are startups for you?

While there’s obviously no standard answer to this question, Graham’s arguments for startups offer a useful way to break down the high-stake question into a few more specific, and hopefully easier to think about ones:

  • Will the startup you’re founding or joining provide an environment where you can be more productive? This involves understanding what’s holding you back from creating more stuff other people want in your current environment.
  • Will the startup allow you to work with people whom you can learn from and are at least as good as you are? Joining a startup where nobody you really admire is probably not a great idea.
  • Will the startup provide a more straightforward way to measure the value of your work? In other words, are the effects of your actions on the business immediately clear instead of getting muddled together with many other people’s actions?

These questions are probably useful when considering where you want to be within a large company, too. Hackers & Painters is a thought-provoking book. If you’ve read it, I’d love to know your take.

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Tao Dong

Tao Dong

UX Lead at Google, transforming how developers build GUI with Flutter. Personal website: https://www.taodong.net/.