Folk Tales of the Dot-Com Bust
We are conditioned to reason about economic vulnerability in terms of individual merit, instead of as systemic failure.
When I first arrived to the San Francisco Bay Area in the summer of 2003, I had little context for the economic turmoil that lay beneath its technological idealism. From the working-class suburbs of Los Angeles, there was very little reason for me to take an interest in the liquidations of high-profile web properties. But soon after my arrival I was immersed in the oral tradition of the rise and fall of the paper empire.
Many people I talked to had experienced the very real consequences of the speculative bubble that collapsed in 2000. The more common stories were of offices whose operations stopped abruptly and emptied rapidly as venture funding dried up and revenues were unable to keep pace. For some, it meant massive layoffs and outsourcing as organizations tried desperately to operate in accordance with their costs. Others told stories of their employer closing up shop from underneath them, vacating the premises with little notice. Open headcounts were virtually eliminated, and many struggled to find new employment. Some left the field entirely, even waiting tables to pay the bills. Some left their homes with rents or mortgages they could no longer afford. Some left the Bay Area entirely. Neighborhoods that were terraformed to make room for the prosperity of the techno-utopia found themselves with far fewer tech workers to cater to, and remnants of communities displaced by gentrifiers were left to bear the weight of a failing regional economy whose wealth had never trickled down.
Photo CC-BY Patrick Nouhailler, filtered.
Embedded in this storytelling stands a collection of little fables: stories with moralities to guide us through the turmoil, and equip us to better survive it. Now, the Bay Area’s tech sector is in the midst of another bubble, and these fables continue to shape our perceptions and reactions to the bull tech market of this decade. These folk tales, their teachings, speak to the very real anxiety around the painful outcomes of the bust… but carry unintended consequences too.
The Engineer and the Imposter
Before arriving at college, I had prepared myself for a Computer Science education fraught with obstacles. A surge of interest in software meant capped major and classroom enrollments, and the possibility that I wouldn’t qualify at all. Much to my surprise, I found little difficulty with enrollment, and classes were not as full as I’d expected.
It wasn’t until my second year that I would hear explanations for this. “A lot of folks joined CS just to make money in the Dot Com boom,” I remember hearing a professor explain to a classroom. “Most of those folks are probably in business school classes now, which is probably where they should have been in the first place.”
I remember this line of reasoning extending out into the workplace. As the 2008 financial crisis hit, the constrained availability of venture funding left many feeling nervous about their employment, recalling a lived or second-hand experience with the not-too-distant dot-com bust. Colleagues calmed each other (or perhaps themselves) with reassurances that “any reasonably good engineer should be able to find work even in a down market. It was really only over-hyped web developers and mediocre workers who found their jobs cut or outsourced. There’s always a market for the talented.”
Photo CC-BY John Loo, filtered.
I have written at some length about the harmful effects of attempting to filter for innate ability, but the underlying morality of these stories also carries a policing of motivations which serves primarily to homogenize the culture. At one end we are asked to “Learn to Code” so that we can better contribute to society, provide for ourselves and our families, gain the respect of our peers, and (mostly) be better skilled and informed employees. At the other end, we are told that such motivations are far better suited to other, “softer” fields; the one true motivation for becoming a software engineer is an intrinsic love for all things computing.
In reality, any of these motivations can be valid starting points for a fulfilling career. But focusing on narrow-minded conceptions of inherent talent and appropriate motivation redirects the focus of our anxiety from our unsustainable economic environment onto colleagues that do not fit the morality described in these stories. Few people would admit to seeing themselves as such an impostor. Certainly some look among their classmates, colleagues, and coworkers for better candidates for culling than themselves. In the face of layoffs, this mentality establishes a cultural pecking order that can mean the difference between a paycheck and a job search.
The end result is a “meritocratic” reinforcement of our survival bias. Under this framework, those that managed to remain employed through the bust, or those who recovered quickly, were seen as able to do so exactly because of those innate qualities, rather than as accidents of structural advantage. Left unquestioned, these stories prime our industry for the lack of diversity we see today. Leaning on ineffable and innate qualities to describe successful individuals, they teach us to rely on stereotypes when deciding who to let in, who to keep, and who to grow. We end up seeking and clustering around those that already fit our notions of what a good engineer looks like (the “obsessive,” “antisocial” hackers, les enfants terribles, etc), or more readily, we seek those people most like ourselves.
Much more subtly, we are conditioned to reason about economic vulnerability in terms of individual merit, instead of as a systemic failure to which our society can be made resilient.
The Imprudent Entrepreneur
Photo CC-BY Pictures of Money, filtered.
Working in post-bubble San Francisco, the stories of the rapid liquidations of Pets.com, Webvan.com, and Kozmo.com were themselves synonymous with the Dot Com Bubble. In many ways the arcs of these defunct organizations are made to stand in for the arc of the dot com bubble itself: A company is founded without much of a business case, is able to raise funding despite serious flaws in its proposed business model, and goes on to spend significant amounts of money on advertising, exuberant launch parties, luxurious offices and excessive staff. Revenues inevitably fail to materialize, and the combination of high spending and trickling revenue vaporize the company instantaneously.
Though there is little to dispute about the general arc of these stories, the morality embedded within them centers around just one thing: the irresponsible spending decisions of entrepreneurs. We come to understand that responsibility for the collapse of the speculative bubble rests solely in the hands of foolish or unscrupulous individual entrepreneurs — obscuring the positive feedback loops that inflated startup valuations far beyond their intrinsic values. Favoring the simplistic story of entrepreneurial imprudence over a broader systemic analysis creates ripple effects that harm entrepreneurship and prevent the construction of systemic safeguards against another bubble.
What we did see in the post-bust world was an attitude that such outcomes could be avoided by filtering out untrustworthy individuals. And thus, we saw thoroughly articulated descriptions of investor bias, such as Paul Graham’s seeming obsession with young, white men and problematic dismissal of foreign-born entrepreneurs, or John Doerr of KPCB gleefully describing his preference for white male Stanford dropouts.
Many investors will tell you that they are in the role of managing risks, that they are looking for an early insight, the “tell” of a slightly less risky venture. As with the story of the impostor engineer, the lesson of the rash, extravagant entrepreneur allows investors to justify cheap decision-making on the basis of trust and familiarity, where people who look and act the part of an honest business person, or even a rule-breaking visionary, communicate reduced risk or higher potential for return. In such a context, it’s no wonder women, people of color, and other marginalized communities — often stereotyped as untrustworthy, inexperienced and undependable, and disconnected from venture capital’s traditional social circles — have not seen funding at the same rates as their “normative” white male counterparts. To investors, as with society at large, the marginalized just look like a bigger risk.
This mistrust occurs in spite of the fact that many of the highest profile failures of the dot-com era had white male founders, or were well-connected within venture capital’s affinity networks. If the demographics of venture funding distribution are supposed to reflect a retreat to safe, prudent, trustworthy choices, investors would seem to be barking up the wrong tree.
The Market as a Force of Nature
Carried within the individualized moralities and story arcs of these folk tales is a presupposition of the inevitability of bubbles. By focusing on individual defenses against volatile economic forces, the stories of the Impostor Engineer and the Imprudent Entrepreneur teach us that disaster is not a matter of *if* but *when*. Individual preparation and reaction are the only possible recourse we are offered, and the potential for collective, social influence over our economy goes unimagined.
This seeming inevitability of disaster is further supported by a pre-existing historical mythology of California, and the Bay Area in particular. The California Gold Rush has become a recurring comparative fixture in discussions among technologists, lending a historical weight to the notion that precarious economic expansion and contraction is in the DNA of the region.
Photo CC-BY milena mihaylova, cropped and filtered.
This backdrop of naturality has a much more uncomfortable companion, though: the idea that the busts themselves are not only inevitable, but beneficial, for burning off the excessive and unfit. With the Impostor Engineer, the dispassionate or the incapable are forced by their newfound economic insecurity to find employment to which they are better suited, re-balancing the labor market. In the case of the Imprudent Entrepreneur, we see the capital market adjust to reality, shedding the excesses which naturally accumulate. Investor Bill Gurley, leading the charge of the cash-burn analysis of the bubble, actually makes a literal appeal to Social Darwinism, comparing the startup ecosystem to Darwin’s own Galapagos Finches:
So I took my family down to the Galapagos this summer and read this book on the way down there called ‘The Beak of the Finch’ which is about this couple that has lived on Daphne Island for 40 years studying the finch. And, amazingly, when there are huge El Niño years and floods bring tons of food to this island, the finch population goes up like three or four times. Inevitably, when the rains are normal the next season there is massive death. Simply because once you get the food level back to a sustainable level. So, from a fitness perspective, excessive amounts of food lead to a lower average fitness and I think the same thing happens here [among startups].”
It is difficult for me not to hear the voice of The Godfather’s Peter Clemenza, who rationalizes a gruelling gang war because it “Helps to get rid of the bad blood.”
This is not to say that the startup ecosystem is made up of killer organized criminals. I draw the comparison primarily to highlight the impressive level of disconnect required to consider the consequences of an economic collapse desirable. It is also especially embittering coming from individuals who participate in, and benefit from such events. In the event of another tech-sector crash, investment firms and the investors for whom they act as fiduciaries can lean on diverse portfolios to smooth out risk, or use their considerable leverage to recuperate value from failing companies. The founders who were able to leverage their social networks and status into highly valued investments will be able to leverage those same networks to land safely in new ventures or other positions. Even engineers have the status of their profession to soften the blow. But there are entire ecosystems of human beings and communities that participate in, depend on, and share the same economy as the startup scene, and whose outlook in such an event is much more precarious.
Learning the Lessons
Photo CC-BY jenny downing, filtered.
An alternate view of the startup economy is as a system made up of people and the interactions among them. The collective behavior of individuals produce this system, and emergent systemic forces influence and constrain individual behavior. It need not have inevitable outcomes or inconceivable forces. But systemic stability requires systemic safeguards, implemented by the individuals participating therein. In his treatise How Complex Systems Fail, Dr. Richard Cook offers 18 theses on the properties of systemic failure. Within, he discusses how participants in a system actively and continuously create and enforce systemic safeguards and performance standards. Catastrophes require coordinating and compounding local failures, which increase in likelihood as local safeguards are systemically weakened or removed altogether.
It did not escape my notice how frequently the story of the bubble, with all its pithy morality, is told from the perspective of a wizened prophet. The teller explains what we have learned from these catastrophes: that we should be lean and scrappy, passionate and skillful, conjure viable businesses from the lessons of a previous decade’s faulty models. In other breaths, they tell us of our impending doom, that failure is imminent… the signs are telling us so, and have been for years.
But these simplistic narratives do not bring us to greater understanding of the hazards of our own actions, and of participants further from us in the system. Nor do they bring anyone nearer to the just consequences of their actions. Interdependence, accountability, and the goal of systemic resilience are lost in these narratives, instead leaving us to fend for ourselves as the startup world expands and contracts around us.
This piece was originally published in Model View Culture’s 2014 Quarterly Edition #4.