The Chris Voss Show - The Chris Voss Show Podcast – Behind the Startup: How Venture Capital Shapes Work, Innovation, and Inequality by Benjamin Shestakofsky

Episode Date: March 20, 2024

Behind the Startup: How Venture Capital Shapes Work, Innovation, and Inequality by Benjamin Shestakofsky https://amzn.to/49QFVUB This systematic analysis of everyday life inside a tech startup dissects the logic of venture capital and its consequences for entrepreneurs, workers, and societies. In recent years, dreams about our technological future have soured as digital platforms have undermined privacy, eroded labor rights, and weakened democratic discourse. In light of the negative consequences of innovation, some blame harmful algorithms or greedy CEOs. Behind the Startup focuses instead on the role of capital and the influence of financiers. Drawing on nineteen months of participant-observation research inside a successful Silicon Valley startup, this book examines how the company was organized to meet the needs of the venture capital investors who funded it. Investors push startups to scale as quickly as possible to inflate the value of their asset. Benjamin Shestakofsky shows how these demands create organizational problems that managers solve by combining high-tech systems with low-wage human labor. With its focus on the financialization of innovation, Behind the Startup explains how the gains generated by these companies are funneled into the pockets of a small cadre of elite investors and entrepreneurs. To promote innovation that benefits the many rather than the few, Shestakofsky compellingly argues that we must focus less on fixing the technology and more on changing the financial infrastructure that supports it.About the author Benjamin Shestakofsky is an Assistant Professor of Sociology at the University of Pennsylvania, where he is affiliated with AI at Wharton and the Center on Digital Culture and Society. His research focuses on the relationship between work, technology, organizations, and political economy in the age of AI. He received his PhD in Sociology from the University of California, Berkeley.

You wanted the best. You've got the best podcast. The hottest podcast in the world. The Chris Voss Show. The preeminent podcast with guests so smart you may experience serious brain bleed. The CEOs, authors, thought leaders, visionaries, and motivators. Get ready. Get ready. Strap yourself in. Keep your hands, arms, and legs inside the vehicle at all times because you're about to go on a monster education roller coaster with your brain. Now, here's your host, Chris Voss. Hi, folks. It's Voss here from thechrisvossshow.com. There you go, ladies and gentlemen. Welcome to the big show. We certainly appreciate you guys coming by. Thanks for being here, as always.

We're bringing the smartest people on this darn show all the time. Two to three shows a weekday. What is that, 10 to 15 shows? Sometimes 20 a week. So make sure you refer the show to your family, friends, and relatives. Give us those great reviews on iTunes. Go to goodreads.com, 4chesschristmas, linkedin.com, 4chesschristmas, chrisfast1, the TikTokity, and chrisfastfacebook.com. Follow the great groups that we have over there. We have an amazing author on the show today.

We're going to be talking about really high-minded stuff, so put your intelligent thinking hat on if you have one. If you have a dunce hat, you can leave that on, but you'll probably be able to take it off once our current author leaves because you'll be so much smarter. That's what the Chris Voss Show does. We have Benjamin Shestakowski. Benjamin, give me that name if you will.

Shestakowski. Shestakowski. There we go. We have him on the show with us today. His newest book is coming out tomorrow, March 19, 2024. It's called Behind the Startup, How Venture Capital Shapes Work, Innovation, and Equality. We're going to be talking about his amazing insights here he is an assistant professor of sociology at the University of Pennsylvania where he's affiliated with AI at Wharton and the Center on digital

culture and society his research centers on these relationship between work technology organizations and political economy in the age of AI. His work has been featured in the Financial Times, Axios, and in a publication of the World Economic Forum. Welcome to the show, Benjamin. How are you? I'm good, Chris. Thanks for having me. Thank you for coming as well. Sorry for butchering your name there at the beginning.

Give us your dot coms. Where can we find you on the interwebs there? BenjaminShestakovsky.com, B. Shestakovsky on Twitter. That might be it. That might be it. There you go. It's all in one place there. So give us a 30,000 overview, new book, and what's inside. So the new book is sort of an inside look at a Silicon Valley-based tech startup.

It was a company that ran a digital platform for local services. So let's say connecting buyers and sellers of things like house cleaning, plumbing, tutoring, anything you might hire someone to do. And I, you know, sort of as an academic became embedded with this company as they were growing. So basically from their first VC fundraise through their second fundraise. And I was basically able to observe what happens when companies are facing this pressure to move fast and break things. What actually happens inside of the organization to make that happen? There you go. And was your role to observe and document or were you doing other

things and you just happened to kind of see the things as they went through the way? Yeah. So, the role that the term of art that's used in my field is called participant observation. So, basically, when you're doing research inside an organization like this, you actually go ahead and participate with the people who are in the organization. So I actually started as an unpaid intern who was just hanging out, collecting data, checking things out, and eventually moved into kind of a part-time marketing role and eventually ended up being a full-time director of customer support and operations manager. So you're embedded deep, as they would say. Yeah, they would say that.

Deep embedded, deep involvement, things like that. There you go. And so would you say your book addresses a lot of misnomers or misinformation or assumptions that people make about why startups fail, and you kind of give people the formula and drill it down a little bit deeper? You might be able to get some of that from the book. I think the way that I see the book standing out from others is that when it comes to the ways that people kind of talk about the tech economy and the startup economy, there's a lot of sensationalized exposes, right? Look at this crazy doofus founder or this like maniacal conniving founder and all the greedy, terrible

things they did, right. There's those ones. There's also a lot of talk these days about algorithms, AI, the good things they can do, but also the bad things that they can do, the harms that they can cause for people. What I try to do is sort of take a step back from all of that and say, okay, but what is the funding structure that sets this whole thing in motion? And I really focus on the venture capital funding model and how the particular ways that VCs make money from startups, how that shapes how these companies work. Wow. So the influence of the people with the money that goes into it, it's always interesting to me and you know like you mentioned there's a lot of theater that goes around like the we work ceo the original head of travis what's his face of uber and some of the things they were doing and and then i one of my other friends i i forget which

platform he worked for but he wrote a book talking about some of the craziness you know the drunken parties of unicorns in Silicon Valley and drugs and, you know, the madness and stuff like that. But I don't know, you might be, like you say, one of the first books to really delve into the influence of the investors and, you know, how they set that tone. Let's round back to the book, but let's give us a little bit of your history. What's your background and upbringing and what got you into being in college and professoring and writing books? Yeah, good question. Well, I couldn't really tell you how I ended up here except that I liked reading and learning and thinking about stuff.

And that's how I eventually ended up going to grad school to get a PhD in sociology. But before that, I ended up in a startup. Someone I knew from college had raised some money from someone and was starting a company and said, hey, will you come work for me? And I did. He was starting an online college guide. This was like back in the late aughts. And the idea was that students are going to tell you, the prospective student, what it's really like to go to this college. And we kind of built up a staff, we generated a lot of content. And then he gets this feature story that's going to be published in the New York Times Magazine. And it gets published, and the website launches, and immediately it crashes. And so for me, it was like this kind of really interesting window into the gap between the rhetoric and the reality of the startup world. And I think that experience

kind of piqued my interest, where once I started pursuing a PhD, I thought, well, this is something I'd like to really take a closer look at. And I think that's kind of how the trajectory was set. There you go. There you go. So now you've, is this the first book you've written? This is my first book. Yeah. There you go. And now you're in the startup field. So you got a way to see both sides of the business where you're seeing what venture capitals do and their fingers in the pie or whether they put their fingers in the pie. I suppose some are

placid. Give us some standouts or some teasers from the book that you think people like to entice them to buy it. Well, I think one of the things that I think really comes through in the book is that the way that technology development proceeds really in a lot of ways has to do with what VCs want. And it's not necessarily that VCs are, you know, standing there breathing down everyone's neck inside a startup. They actually might only get together like a few times a year. But the VC mindset, the mindset that our job in this company, we usually think of startups, what's their job? What do they do? Well, their job is to create some amazing product, right? Some new technology that's going to change everything. That's definitely what they're doing

kind of from a material standpoint. But their number one job is to inflate the value of this asset. The startup is an asset for investors, right? And they actually hold the whole portfolio of startups, and most of them are going to fail. Actually, maybe one or two of every 10 is going to actually manage to grow and become a more valuable asset for them that they can then sell for more than they originally paid. But really, for VCs, the game is invest in a lot of companies, push them all to innovate and experiment and change really fast. But in fact, they know that only a very small fraction of them are ever actually going to be able to succeed. And so, you know, one of the things that I write about in the book is, you know, an example of kind of a discussion between two software

engineers. One of them has this idea to make some changes with the platform that he thinks are going to kind of improve the user experience, right, which we think, of course, would be really important for a startup. But his colleague says, actually, no, that is not what we should be focused on. We need to be focused on anything that can help us make money at scale, right? And making tweaks to the user experience, overall, it's good, nothing to complain about. But it's not going to help us get the numbers up really fast. We can only work on projects that might get the numbers up really fast. We can only work on projects that might get the numbers up really fast. And of course, that ultimately means things can happen for users

that might leave them kind of upset. You know, we've done a lot of promotions, the Chris Foss show over the years, where we help launch apps and stuff and promote apps at South by Southwest and different things. And I can't tell you how many times we've gone there and we're promoting the we're doing a big promotion for it and the some idiot decides to accidentally upload something that was supposed to stay in the sandbox and he puts it on the public site and no one can sign up for it we've it happens like all the time in fact it happens so many times many times we finally put a thing in our contract that says, you pay us regardless of where that damn website's working. There you go.

We're just sick of it. They're like, well, we want this to be at the launch of South By. And I'm like, the whole thing doesn't work. It's a 404 at this point. Like, leave it alone. And when it was working, damn it. Yeah, but you can never leave it alone. There's always, you think someone else is coming up behind you faster.

And if you want to raise that next round, you got to get the numbers up. And so it's like this stuff happens and it happens by design. I mean, there are books, I'm looking at my shelf, this book by Reid Hoffman, who is a renowned venture capitalist. And the book is called Blitzscaling. And he talks about how dumpster fires are your friend. Chaos is your friend. If you are paying attention to your customers, you're doing it wrong because you can't achieve that kind of breakneck growth if you're paying attention to all these little details.

There you go. And I think he, wasn't he one of the original co-founders of LinkedIn? That's right. Yeah, he was. Yeah. I recognize that face. The, yeah, it's really hard because you've got to scale up. You've got to show you can make some money on your thing.

You know, they always make customer service the last thing they do. And, you know, there's a certain balance you have to have towards user, the ability of user, what is it, intuitiveness and ease of use and stuff. And so you've got to be able to have that, but you've also got to have, you know, the ability to make money, get your next round. Because, you know, if they're just looking at you on the next round going, well, you've got to, you know, this isn't going to make any money. This isn't getting ground. Then they're going to put the gun to your head, and you're going to have to fight for more value and stuff. So, yeah, it's a really weird sort of way that it goes through all those different ways. So do you find that the venture capitalists are the bad guys or the good guys,

or how do you make this out of the book? I really try to avoid sort of saying, well, these guys are the good guys? Or how do you make this out of the book? I really try to avoid, you know, sort of saying, well, these guys are the good guys. These guys are the villains. I think that that kind of thinking can distract us from maybe the more, what I think is the more relevant perspective, which is that everyone's playing a game. And the game has been set up in part through a lot of policy decisions that have allowed VC to boom. VC was not really a big part of the investment landscape until the 1970s. You had some things happening then, including sort of some deregulation that allowed pension fund managers to get into more risky investments. You had big cuts to the capital

gains tax rate. And, you know, sort of these incentives are there for investors to, you know, use startup companies to make a ton of money. They're playing the game that is in front of them. The, you know, the founders are playing the same game just from a different position. And I just don't think it's useful. Yes, we can call out certain people for their bad behavior. I'm totally supportive of that. But I think it's more useful to think about, okay, well, what is the system that incentivizes people to behave in these ways in the first place? And are there tweaks that we can make to the system that would help us ensure that all the benefits that come from innovation actually kind of get more broadly shared? So do you outline those in the book then? Yeah, I do. In the conclusion of the book, I talk

about a bunch of different models that really already, for the most part, already exist out there that, you know, we, I think like startups in the startup world, it's all about experimenting, right? And like trying new things. Of course, this is usually trying new things with the product, trying new things with their labor relations, with their business model. But I think as a society, we need to start experimenting more with actually how we fund innovation.

And there's lots of interesting examples out there. Everything from, you know, there are successful tech nonprofits out there that are, you know, sort of advancing a public mission, whether it's things like Wikipedia or some digital labor platforms like one called Amara. There's privately owned tech companies that haven't accepted VC that are a little more able to balance the profit motive with their own public service ethos. Craigslist is a great example of this. There's an excellent book by one of my colleagues here at Penn, Jessa Lingle, called An Internet for the People. That's about kind of the history of Craigslist and how, you know, you can see actually the fact that investors don't have their hands in that pot means that, yeah, it's a product that actually doesn't change a lot, makes a good amount of money.

But it's not all about, you know, harvesting data of all the money getting funneled back up to investors, the companies are actually owned by the workers themselves. And so most of the money gets reinvested back into the workforce. So there's a lot of models out there. None of them by themselves are going to sort of like slay Goliath and change the whole landscape. But I do think we can do more as a society to sort of promote different sorts of experiments in funding innovation. Yeah. It's always been interesting to me how some products win and some don't. Like an example was they're used to, you know, I'm a photographer, so I like great photography and good format. And I remember before Instagram came out, there was a website,

and there was like two competing websites. But the one would put stuff in 1080p format, or it was 1024 by 768, which I think is 1080p format. And that was kind of cutting edge at the time because no one was really doing 4K or 2K back then. This is before Instagram launched 10 plus years ago all right it's probably been longer than that now but i really liked uploading it to it because i would shoot in a in a 1024 768 format and it took more to upload probably took more space on their servers but you know the picture was really

good and i think one of the other services would only do 768. So it was half of the 1024. And I'm like, well, you know, that looks like crap when you upload it. So I like this service better. And a lot of people would use it. And so Instagram came along and it had that stupid new format that was formatted to portrait mode instead of landscape. And, you you know just made for what i would feel was awful pictures the resolution was low as well and somehow they came

out of nowhere and just skunked like these competitors that had higher quality higher resolution and everything else and they were very similar uh you know you could have the interaction you would have on instagram and so it was really surprising to me and i think they just they just tapped into stupid you know the george carlin you know think about dumb the average person is well 50 are dumber than them and they just tapped into all these people who aren't smart enough because you know we back then even then you'd yell at people quit doing portrait on your phone do landscape you idiot thanks for better pictures and then you know we back then even then you'd yell at people quit doing portrait on your phone do landscape you idiot it makes for better pictures and then you know they just tapped in the all the idiots who just like oh let's just do the portrait on my phone you know and so then

that became a thing so what do i know sounds like you are not the you are not the core market there market there i have an iq above five so it's 10 i think but yeah and so seeing that company lose that was like i was like this is dumb you know and i've watched a lot of other companies clubhouse i don't know if you played with clubhouse when it came out during covid i read about it but i didn't play with it yeah clubhouse was one of these things that suddenly captured the attention of all these people and it helped that they you know we were all locked down we called we called it a lockdown app but it you know it had at one point early on just overnight a four billion dollar valuation evidently zuckerberg might buy it and there was there was all this hype behind it and then the i don't i don't know if it was you know they

were funded through az16 yeah horse and anderson horowitz and uh they just started mucking it up like you could see that they were trying to put their thumb on the scale in different ways and i don't know if it came from anderson horowitz or if it came from the owners or it came from the ceo and stuff. But you could just tell they were making the dumbest decisions in the world. I remember telling an investor for them, I'm like, you need to get in there and get rid of those two kids that are running that shop and bring some managers in who know what they're doing because they're ruining it. They're going to destroy it. And they did. But I've seen a lot of startups like that

and just trying to figure out how do you keep that from happening? It sounds like you've kind of nailed down some of the formulas for that. Well, I think that, yeah, I think it's often from an academic standpoint, it can be very difficult to figure out, okay, this company succeeded. This company failed. Can we determine a causal relationship here? Can we determine exactly what contributed to the success or the failure? It's very difficult to do. But I do think it, you know, and I haven't studied the specifics of some of the cases that you're talking about, but I do know that there are many cases where when we're thinking about kind of the power and the influence of the VC

model, you know, it doesn't necessarily matter that you get there first. It doesn't necessarily matter, you know, that you're doing it better, you know, that you have a higher quality product than the rest of them. Like the big ride hail chase, you know, Uber and Lyft, where sidecar was actually in there too, at the very beginning, you know, but, you know, when you're playing this game, your ability to just vacuum up as much cash as possible, and then put that cash to use to bring users on board, right, which then creates this impression of exponential growth that then feeds more investment that then feeds more of this growth. You know, there's a really strong case to be made that, you know, that dynamic is, in many cases, what determines success, you know, more in many cases than

when you got there or how good your product is right the the you're right there's a there's a saying and i think it's in silicon valley it runs through my silicon valley friends the pioneer gets the arrows and so you see that action with apple where apple is yeah you guys go pioneer that have fun fun. You guys will get all the arrows, muck it up, and make all the mistakes. We're going to watch your mistakes, and then we're going to learn from them. And then two or three years after, we're going to wander into the pond maybe. And that really works for them if you see how they capture market share when they come in. And part of it is they have that power of their base.

But letting someone else work out the kinks first and then coming in with a better version, they come in and part of it is they have that power of their base but you know letting letting someone else work out the kinks first and then coming in with a better version i mean that's that's basically what instagram did i was really surprised i was like my god are we gonna start doing stupid ass portrait photos and well here we are this is the hell you're gonna die on yeah and then tiktok you know they came in with their own format. I'm just like, can we, you know, I'm just like, can we all just agree on one format, you know, like USB-C and just quit mucking about with all this crap? And, you know, you've got to cut everything for whatever, but, you know, it is what it is. So do you feel that there's, you suggested several models to people in the book of ways to possibly do it better. Do you feel the money is the biggest problem in Silicon Valley? I don't want to say greed, but there's a little bit of Ivan Biosky, greed is good in there.

Well, I think the fact that technology generates wealth is a wonderful thing. Not only does it generate innovations that a lot of us really want and we don't want to live without, but it also generates a lot of wealth. And so the wealth itself, I don't really have a problem with so much as the way that it's distributed. The way that the VC funding model is designed is basically to funnel as much of the wealth that's created as possible up to the folks at the very top, right? The lead investors, the entrepreneurs. And there are, I mean, part of what I talk about in the book, this is a company that when I was there had 20 full-time employees in an office in San Francisco, but actually 200 independent contractors working in the Philippines and 10 independent contractors working in Las Vegas. And that's,

you know, I forget what it is around 9% or less of the company was actually even full time employees that had stock options. And when you look at the distribution of stock options, obviously, it's also heavily weighted to the founders and the very earliest employees. And so there is a ton of wealth being generated in successful startups and by successful startups. But, you know, I think we could probably think about, again, what are the policy levers out there that can help to distribute this wealth more broadly? There you go. There you go. Any final teasers on the book before we go? You know, I guess I'll just say about the book is that, you know, ultimately, I think it's about how this financing model shapes startups and what that means for really all of us. I mean, and it says right there in the subtitle of the book, work,

innovation, inequality. I think VC is implicated in all these things. And I just think that, you know, I want readers to come away from the book with a sense that if we want tech to do better, we actually don't need to focus as much on the tech itself. We need to focus more on the financial infrastructure that's backing the technology. There you go. There you go. So give us your dot coms, Benjamin, as we go out. Yeah. So it's benjaminchestakovsky.com and on twitter at b shestakovsky there you go thank you very much for coming on the show we really appreciate it man thanks chris appreciate it thank you and thanks for us for tuning in order of the book wherever

fine books are sold behind the startup how venture capital shapes work innovation and equality it's Innovation and Equality. It's out tomorrow, March 19th, 2024. I almost said 2023 there. Wow. Benjamin Shestakowski has been on the show with us today. So thank you very much for coming on. And thanks to our audience for tuning in. Go to goodreads.com, Fortunes Chris Voss, linkedin.com, Fortunes Chris Voss, and all those crazy places around the internet. Thanks for being here, and we'll see you guys next time. And I should have a...