“A rising tide lifts all boats.”
I’ve got no idea how many times business people and venture capitalists have said that to me, but if I could, I would have personally, slowly, stabbed them in the heart for doing so.
Here’s why: it’s the worst and most transparently dishonest way to try to excuse inequality. There is another variant of the same saying, which is: “Which would you rather have, a big slice of a small pie, or a small slice of a huge pie?”
If you hope to ever actually get money or work with a person who says that to you, you are usually the one who is on the short end of the equality stick (or they wouldn’t be saying it) so you have to suck it up and knuckle your forehead and mutter, “yes your lordship.”
The correct answer, which you can only give if you really don’t care (i.e.: the pitch meeting is going horribly wrong) is: “I want your slice of the pie.”
Let’s look at some typical context: you and I, dear reader, are the founder team for a start-up. One of us is the CEO (“businessperson”) and the other is the CTO (“idea person”) and we have an idea that we think is going to be the next Facebook only not a disgusting time-wasting sewer of advertisement content. We’re trying to raise $5mn so we can build this business and we’re sitting in one of the many art-filled meeting rooms of Andreesen Horowitz’ $17mn office building on Sand Hill Rd in Palo Alto. [Marc Andreesen wrote a shitty browser, once, now he’s a billionaire; Andreesen Horowitz is his venture fund] Since $5mn is a tiny deal for a top-tier VC we’re meeting with an underling. We’re the 5th meeting already, for the underling. We’re on our 3rd meeting today. So the underling says some stock bullshit about how Andreesen Horowitz likes to “be in early in the cycle” when they really can be involved in shaping the company. That’s stock bullshit: what he’s really saying is that they want to invest in a controlling interest in any start-up, or forget it. They want to buy 51% for that $5mn. And you say, “sure, but we’re not interested in taking big money until this thing proves itself out.” That’s a polite way of saying “ha ha ha yeah I bet, but that would value us at $10m for the whole company and we’re going to be the next Facebook. We’re worth more than that.” Then the underling smiles and says “a rising tide floats all boats!” and you leap across the table drawing your katana with feral smoothness and…
No, not on the hand-rubbed hickory flooring. That would be wrong.
You’ve got the picture. What’s going on? “We are powerful and can set the price of your stock because we have all the money and you don’t” is the primary subtext in all of that. The secondary subtext is the idea of the rising tide: basically “sure you are giving up a huge chunk of equity, but if this thing really is the next Facebook, those shares are going to be worth billions and it’s silly to walk away from a deal over a measly $5mn right now. Of course the problem is that the billions are aspirational and the $5mn is very real. The slice of the pie argument is the same thing: if you stay small and lean and hungry and don’t have big money behind you, you may never amount to much; this this could be the next Facebook (huge pie) or it might be an also-ran (small pie, perhaps a cookie) and if you’ve got 50% of a multi-billion dollar pie that’s much more than 50% of a $30mn pie. That’s all true, except – again – all of this is aspirational. That’s why it’s a huge violation of the rules to not pretend to play along. It will end the meeting very, very quickly and on a bad note.
Venture capitalist assholes want to convince themselves that they offer something other than just access to money. That’s largely a lie, since the 90s, when the SEC started cracking down on some of the more obvious ways that VCs were dealing high cards into their own pockets. Nowadays VCs mostly want to buy low, sell high – buy a chunk of a start-up that’s the next Facebook for next to nothing, then sell it for hundreds of millions of dollars. “Rising tide!” What they’re really saying is “we want half of the functional space on your boat so we can have occasional deck-parties while you guys work the ship. And, yes, a rising tide will raise us all.” Another quip that has come to mind is “a rising tide also lifts the barnacles, you fucking venture capitalist parasite.” I don’t see any reason to be mean to the poor barnacles; they are just following the path nature laid out for them. The “rising tide” scenario means that – because they have money and you do not – they get to position themselves to grab an obscene amount of the final pie if it’s worth a lot. And, in the meantime, they don’t actually do a fucking thing to earn it; you and your crew will be doing the work.
In other words, it’s the same shit where your boss wants to not only put the boots to you economically, they want you to love them for it.
Which brings me to Bill Gates and Elizabeth Warren. [nyt] Gates said:
I do think if you tax too much you do risk the capital formation, innovation, U.S. as the desirable place to do innovative companies – I do think you risk that.
Considering that Gates’ billions come from his founding one of the most derivative, least innovative, software companies ever – one which (arguably) stole the design of its MS-DOS operating system from IBM, and its windowing system from Xerox PARC – it’s a bit ironic to see Gates worried about innovation. But I assume he’s talking as a venture capitalist would, now, not a technologist. So: you risk the ‘capital formation’ and ‘innovation’ – what he’s talking about, there, specifically, is that the stream of innovators and founders would stop crawling to venture capitalists’ palaces to kiss their rings, because of the threat of paying more taxes. See this guy Gates is held up as a business genius because he’s a billionaire, but my horse Otto is smarter than he is – Otto would say, “but Bill if you’re worried about innovation why don’t you just invest in tons more start-ups and settle for a slightly smaller scoop of the oats? After all, a small scoop of a healthy sized sack of oats is better than no scoop of oats at all, amirite?”
Why don’t any of the business press give Gates back Otto’s response? Could it be that they’re just ignorant corporate flacks? Or maybe they’ve got less sense than a horse who is not legendary for his intelligence, even among horses. That’s the simple, snappy response. There’s a better and more sophisticated one, which Elizabeth Warren (remember: she’s a “capitalist”) would not utter, namely: “But Bill, the entire system under which we finance innovation in this country amounts to a tax prior to earnings. Every VC who takes equity in a start-up is ‘taxing’ it if they ever succeed. Innovators and founders are perfectly willing to play the game under those circumstances; why ever do you think they’d walk away from the game en masse if there was one more hand in their pocket grabbing a little slice of their profits?”
Let’s do the fictional math: we raise our $5mn and our company takes off like a rocket. 5 years later, it’s worth $3bn and we’re bought for cash by Microsoft. Our VCs get their $1.5bn. The founders and staff divide up their $1.5bn. Let’s say each of the founders’ shares is worth $500mn. Since we’ve been holding the shares for 5 years it’s long-term capital gains and the tax-rate is fixed a maximum of 20%. So I owe $100mn and – oh, fuck, did you just see the razor blade in the scoop of oats? I’m not a billionaire! I write my tax check for $100mn and I’ve got $400mn left over and I’m not a billionaire so I totally do not give a fuck. I will, however, own 100% of the next company I start, since it will be self-funded, and the venture capitalists will never say “A rising tide…” to me, again. In this scenario, the only person who is “dissuaded” from anything is the venture capitalists, who are unhappy that they will have to pay an elevated tax on the $1.5bn that they got for doing exactly jack shit; i.e.: lending the founders of a start-up $5m. Gates is trying to say that him having to pay a bit more to help foster innovation means he’d rather take his marbles and go home. That’s fine, Billo – you just priced yourself out of that market, but there will be venture capitalists who would be perfectly happy to see things the way Otto does: some oats are better than no oats; we have a deal.
And Elizabeth Warren, capitalist tool, pretended to take Gates’ bogus argument seriously instead of saying, “well now that you mention it, if I am elected we will start a program that would replace the venture capital system as a way of fostering innovative start-ups, especially ones run by women and minorities. So you won’t have to worry about that; what you’ll have to worry about is hungry well-funded competitors. And I hope they eat your lunch.”
Re: self-dealing venture capitalists. In the 90s, VCs realized that they could manage the companies they owned stakes in as part of a “portfolio” of companies, and have them do business with eachother. That means, basically, that their sales get artificially inflated. I remember when Akamai started up; their entire network fabric was built atop gear from Juniper – instead of the usual choice for networking gear, which would be Cisco. Why? Their VCs also owned a chunk of Juniper. And they told Juniper to use Akamai. A guy I’ve known for a long time was one of the senior network engineers at Akamai and I remember him complaining that they had crates full of Juniper gear that they had bought and warehoused – millions of dollars worth – then they ran their production network on Cisco gear. The VCs didn’t care: both companies’ bottom lines had been artificially boosted by millions of dollars. This was back in a time when a couple multi-million-dollar deals were all you needed to go public and have a market valuation of $billions. Of course, the market(s) caught on to that, which had a fair bit to do with the tech stock crash; suddenly everyone realized they were overpaying hugely for companies that were basically shit – but the venture capitalists had already sold their shares and gotten out and were ready to move on to new markets.
In case some of you are thinking “wow, Marcus sounds bitter.” No, I’m angry, not bitter. I’ve done great. Many of my associates over the years are now fabulously wealthy; I actually know billionaires. Some of the start-ups I’ve been involved in went public or got bought and I’ve done well enough that I was able to step off the treadmill and not have to go around sniffing venture capitalists’ asses. If I wanted to try to make gigantic amounts of wealth, I have enough, now, that I could fund my own start-up, which would mean that I could die with more money that I could possibly do anything with, or lose it all. Instead, I chose to be a blacksmith. Who could be bitter about that?
Another answer to Gates would be, “Sod that, Billy. I’d cheat on my taxes just like you did.”