The Dark Side Of Tech Startups

Are startups just for workaholic white male lumpen-preneurs?

A YEAR AGO Jody Sherman shot himself. His online shop, Ecomom, which sold eco-friendly and health products for children, was running out of cash. A few weeks later the business closed its virtual doors. A new owner relaunched it in June.

There is no evidence that entrepreneurs kill themselves more often than people in other high-pressure jobs, but the news of Sherman's death (which coincided with the suicide of Aaron Swartz, an internet activist) led to a rare moment of self-examination in the startup sphere. In a blog post Jason Calacanis, an outspoken serial entrepreneur, mused whether there was a need to examine if "the pressures of being a founder, the pressure of our community's relentless pursuit of greatness, in some way contributed to their deaths".

These pressures form part of the darker side of startups, along with concerns that startup communities, though very international, are made up largely of youngish white males who are not so much entrepreneurs as new kinds of workers. A further worry is that software--and hence startups--are eating not just the world but jobs, too.

Ask founders why they put up with the hardships, and they reply with predictable enthusiasm. "I want to change the world," says Daan Weddepohl, chief executive of Peerby, a service based in Amsterdam that could indeed make a difference if it takes off. It lets people borrow things they need (a drill, a lawnmower, an icemaker) from their neighbours within half an hour.

But beneath this fervour there is often a world of uncertainty. In essence, a founder's job is to create something out of nothing, which often means convincing people that there may be something in their idea. "Building a startup is all about building credibility--with investors, partners, customers, the media," explains Mr Weddepohl, a recent TechStars alumnus.

A big part of that is hype. "Everything is always awesome, but even startups considered successful tend to have huge issues," says Andreas Klinger, an Austrian who co-founded a (now defunct) London-based online shop for designer clothing.

What makes being a founder stressful is being on an emotional roller-coaster all the time. "In the morning you feel everything is on the right track and in the evening everything seems in the gutter," says Shawn Zvinis, the co-founder of Tab, a London startup which closed in December. "There are days you don't want to get out of bed. And you ask yourself: does changing the world feel like this?"

For most founders money is a constant worry. Investors often give them only relatively small sums at a time. To keep costs down and make sure that employees get paid, they draw little money for themselves and live as cheaply as they can. "If you haven't missed payroll at least once, you are not a real entrepreneur," goes a startup mantra.

Since many founders have no life outside their company, they consider it their family. That makes it traumatic when a long-standing employee or, worse, a co-founder leaves. "It's like getting divorced," says Mr Weddepohl, who has twice parted company with a co-founder.

Attitudes to failure vary by culture, though it is always a personal disaster when, after years of hard slog, a founder realises that the dream is over. But many still want to give it another try. "It's part of the game. You have to ask yourself what you have learned and move on," says Gaith Kawar, a Jordanian serial entrepreneur who is on his seventh startup.

Some experiment not only with new services but new work patterns too. At Jimdo, a firm based in Hamburg that makes it easy to build websites, employees came up with an internal set of rules to keep their to-do list manageable and ensure they are "well-rested". This does not seem to have hurt the firm: it has helped customers to set up 10m websites from offices in San Francisco, Tokyo and Shanghai and employs 170 people.

One-track minds

But on the whole the startup world, even more than other forms of business, leaves little room for life beyond work. That may be one reason why only about 10% of founders are women, according to Compass, a startup research outfit. It does not help that there are hardly any female role models, and that many schools do not encourage girls to take an interest in computing.

The financial side is similarly male-dominated. In 2013 less than 5% of IT investments were made in firms founded by women, according to PitchBook, a research firm (see chart 4). And it is not just women who are underrepresented. Founders may come from all over the world, but most of them are white or pale.

The lack of ethnic diversity is particularly noticeable in accelerators, but their managers say there is little they can do about it: the people who present themselves are "a bunch of white and Asian dudes", notes Mr Graham, the founder of Y Combinator. This seems likely to limit innovation. Still, a growing number of investors now at least recognise that there is a problem. Having found that only a handful of its applicants were female, Entrepreneur First, a London accelerator for individual founders, decided to launch CodeFirst:Girls, a series of free courses to teach female students how to code. Among the latest batch, four out of 31 founders are women, which is still not great.

A more diverse group of founders might develop a more mature self-image. For the moment many see themselves as the next Steve Jobs or Mark Zuckerberg, but last year Venkatesh Rao of Ribbonfarm, a consultancy, offered a different narrative. "Entrepreneurs are the new labour," he claimed in a series of well-argued blog posts with the same title. And it is true that many founders do indeed live on "rent and ramen [noodles]". But Mr Rao's analysis goes deeper. He sees a connection between today's entrepreneurs and the artisan steelmakers of the late 19th century. As the market matured, he explains, the Victorian steelworkers' knowledge became commoditised, making them the nucleus of the new working class. Something similar is now happening to founders, Mr Rao claims.

The lean startup methodology, the accelerators and the standardised term sheets for investments are all signs that the knowledge required to run a startup is becoming codified and commoditised. This has tilted the balance of power between investors and entrepreneurs, he writes. "Investors have won, and their dealings with the entrepreneur class now look far more like the dealings between management and labour."

Many founders will end up being "acqui-hired", with a large tech company buying a startup not for the technology but for the team, reckons Mr Rao. That may be no bad thing: a good engineer will quickly get a job that he would have taken twice as long to reach on a conventional career ladder, as well as a significant chunk of cash. But it puts a different light on startups and accelerators, suggesting that they are less about identifying the next Mr Zuckerberg or Mr Jobs than about providing a new system to train workers for the knowledge economy.

A trickle of jobs

Can founders not at least feel good about themselves as job creators? Between 1990 and 2011 information and communication technology (ICT) businesses in America aged between one and five years increased their workforce by 10% a year, according to a recent study by the Ewing Marion Kauffman Foundation. But since most of these businesses are small, so are the absolute numbers of jobs they generate. Although startups often "scale" quickly, they rarely become "massive", says Erik Brynjolfsson of MIT Sloan School of Management.

In a new book, "The Second Machine Age", co-written with a colleague, Andrew McAfee, Mr Brynjolfsson contrasts Eastman Kodak, founded in 1880, with Instagram, a photo-sharing app only 18 months old that was bought by Facebook for about $1 billion in 2012. In its heyday Kodak employed over 145,000 people and indirectly provided work for thousands more. It filed for bankruptcy a few months before Instagram was sold. At the time of the sale the photo-sharing firm had 130m customers but just 16 employees. Even Facebook, which now boasts more than 1.2 billion users, employs only about 5,800 people.

Yet it would be wrong to conclude that the entrepreneurial explosion will lead to more unemployment, argues Mr Brynjolfsson. Startups may disrupt existing industries, but they often create the foundation for many new jobs outside their own business. On Etsy, an online marketplace for homemade items, more than 1m people have opened stores to sell their wares. On eLance and oDesk, two freelancing sites, 2.3m and 4.5m members respectively are offering their services.

Most important, digital technology has created endless possibilities for new products. "The answer is not less entrepreneurship but more," says Mr Brynjolfsson. "We are in no danger of running out of combinations to try." That cornucopia is now extending from software to hardware.

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