The scientific reason startup ecosystems are full of jerks

How gossip, name-dropping, social punishment and Nash Equilibria maximize outcomes

I wrote this piece a while ago; but it’s come up in conversations three separate times recently, so I thought I’d share part of it here. Basically, this is an explanation of why behaviors that might get someone labelled a jerk—gossiping about others, and incessant name-dropping—actually lead to more efficient outcomes in tech hubs.

When it comes to Silicon Valley, I’m an outsider. A Montreal native, I spend time there and have dear friends in the Bay Area. But I’m still foreign. It’s taken me a while to realize that the valley has hidden rules that outsiders often don’t understand.

My friend Julien Smith is another displaced Montrealer. He’s an author and speaker, and incredibly well connected (and now the founder of shared-space rocketship Breather.) If I want to talk to Peter Thiel, I can spend a month trying to reach Peter myself — or I can ask Julien for an introduction, since he’s a mentor in the Thiel fellowship. It’ll take him five minutes to make the connection.

Similarly, if Julien wants to reach Tim O’Reilly, he can invest time in tracking him down, or ask me for an introduction. As an O’Reilly author and conference chair, I can make the link in five minutes, far more efficiently than Julien could. (Okay, Julien’s pretty connected, so maybe only slightly more quickly, but bear with me here.)

Silicon Valley thrives on the five-minute favor, as explained in this excellent post on reciprocal altruism from Startup Hoodlum. It turns out that this kind of mutual assistance is the easiest way to maximize the efficiency of the whole: Rather than taking two months for us to reach Peter and Tim, we take ten minutes.

Unfortunately, these kinds of mutual-assistance systems are subject to exploitation. If everyone does favors for everyone else, without any checks and balances, then people will start asking for favors without reciprocating. The system will crumble.

An equilibrium between reward and punishment to maximize outcomes is the kind of thing game theorists study. Remember what John Nash was scribbling on windows in A Beautiful Mind? That. It’s the Prisoner’s Dilemma and the Tragedy of the Commons:

Without gossip (punishment and consequences) the efficiency of the system drops significantly because everyone assumes the other person will not follow through with their side of the bargain.

To be efficient and sustainable, the system needs to have punishment for lack of reciprocity. If I do you a favor, and you then refuse to reciprocate, I should throw you under the bus. I should shout your treason from the rooftops. I should do everything I can to ostracize you from the system.

The Valley, explained

This explains three important things about the Valley that tend to mystify outsiders.

Some folks just seem lucky

Some people seem to have it easy, connected to a core network of, say, Paypal alumni or ex-Googlers. They have a lot to offer. It’s their “favor exchange rate” — a tech-startup equivalent of Cory Doctorow’s Whuffie.

Smart Valley investors have an innate sense of someone’s connectivity, and since attention is a scarce resource, they screen for it. Their background check is as much about who you know as what you’ve done, and like James Bond in a Facebook world, it’s hard to fake it. They discount your pitch if you don’t have credibility and favors to trade.

Startup accelerators like Ycombinator, 500Startups, and Techstars offer founders plenty of value, but they also offer connections.

  • At Year One Labs, an accelerator I helped run in Montreal, one of our advisors, Mike Montero, was a successful entrepreneur already. Yet he chose to join Techstars for his next startup largely for the connections and networking.

  • High Score House, one of the five companies Y1L backed, built its product in Montreal, but joined 500Startups afterwards, moving to San Francisco to hone its brand and build its network.

Universities provide a similar cachet, but these days, who you’ve worked with and who you know in your startup life matter as much or more. One of the reasons it can be smart to work at several startups early in your career is that it builds this network.

A side-effect of this is that, because of the huge potential loss of social capital, deals often happen on little more than a handshake. People agree to speak at a conference with just a phone call or an email — the details to be worked out later. Contracts are assumed. That doesn’t mean they’re unnecessary.

Importantly, worrying about formal guarantees too soon is a sign that you might not understand how the system works (and therefore be a candidate for ostracism.) For example, you can lose a lot of respect by trying to get a VC to sign a nondisclosure agreement early in a negotiation: You’ve just shown them you don’t know the rules of the TY game.

Name-dropping isn’t just Douchebaggery

One of the side effects of a five-minute-favor culture is that it looks like name-dropping. In my first two paragraphs, I dropped two big names (well, three, if you count Julien.) People in the Valley do this all the time. Cocktail party conversations turn into who-knows-the-richest-founder contests in five seconds flat.

It’s annoying, and easily mocked. I love the term “clusterfuckoisie,” (HT to Michael Hirschorn) which somehow describes the smug, self-congratulatory mock humility that tends to coat these kinds of events. And yet name-dropping competitions serve a purpose: everyone is advertising potential five-minute favors they can do, as well as those that won’t be of use because they know somebody already.

Contact advertisement is just routing

To explain this better, consider how traffic moves around the Internet:

The routers that connect everything to everything else on the Internet are constantly sharing routes and costs. One router might boast to the others, “I can get to google.com in just four connections.” Another nearby might counter with, “Big deal: I can get there in two.” All the other routers now know to send traffic destined to Google to the second router. This process is known as route advertisement.

There’s no shame in being the first router, or advertising a costly route — you probably have other destinations that you’re fastest for; and if the second router dies mysteriously, you may become the best route.

The five-minute favor requires contact advertisement.

When two entrepreneurs yell names at one another over an Indy band neither of them really likes at SXSW, they’re really just advertising route costs to one anothers’ contacts. Just as the Internet’s routing protocols figure out the most efficient way to get somewhere, so this insufferable name-dropping is a necessity.

Tools like LinkedIn are a proxy for genuine advertisement, since they try to map the social graph and connection strength of the people between you and your intended target. But they smack of trickery and salesmanship in part because they don’t have the innate filtering and personal judgements of the real thing.

This judgement is the fourth leg of the 5-minute-favor network. I’d be comfortable introducing Julien to Tim because I think they’d get along fabulously; but there are plenty of people on whom I wouldn’t waste Tim’s time. It’s precious, and if I waste too much of it, then I’ll lose the connection because Tim will ignore me.

Startup ecosystems are catty

To outsiders, this behaviour also looks really, really catty. One minute someone is in the group; the next, everyone is talking behind their back. It’s like high school, but with real money and huge mortgages at stake.

In fact, I’ve seen visitors from other cultures (particularly non-North-American ones), oblivious to how things work, finding themselves cut off entirely. I have another favorite term people use for this: grin-fucking. It’s the glad-handed, “we’ll call you.” Bright-eyed, somewhat naive, over-eager founders often mistake it for genuine interest. It’s not.

So how do you break in?

There’s no easy way to break into the network. If you don’t have favors to perform, you don’t have currency to trade. Fortunately, the valley is also driven by merit and risk-taking, so if you’re doing something interesting or tilting at deserving windmills, that can go a long way.

Valley denizens are also eager to help first-timers. The un-initiated aren’t tainted yet, and a first favor counts for a lot of karma down the road, so most Valley veterans will give someone an hour or do an initial favor if it’s framed the right way. It’s what you do with that favor that determines whether you’ll be able to grow your favor currency or be ostracized.

The valley shares much of its identity with Burning Man, an annual festival in the desert North of Reno that espouses radical self-reliance alongside mutual assistance. Burners get a lot of respect by rolling up their sleeves and pitching in. Aspiring entrepreneurs can learn a lot from it.

In the end, a thank-you, and a debt

Reciprocal altruism in social networks require:

  • A willingness to do favors when there is a big disparity in the efficiency between the person asking and the person delivering.

  • Reciprocity enforced by disproportionate retaliation for non-compliance.

  • Advertisement (in the form of name-dropping) to discover potential useful disparities.

  • Filtering based on a knowledge of both parties to ensure the introduction will reinforce the connection.

Epilogue: The system works against diversity

In the five years since I first wrote this post, we’re much more aware of the privilege that gender, income, and race play in the dynamic I’ve described.

Investors are searching for founders who can get the best returns on their investments, often with little real information. They use race, income, gender, and other factors as a proxy for likelihood of success — often subconsciously — in part because they know that within the rules of the game, these things mean something will take five minutes instead of two months.

To be clear, the explanation I’ve laid out here is not an excuse: We need to fix it. We need to back startups based on their chance of success, or their merit, rather than using bad proxies like the color of a founder’s skin or school name on their degree.

But we can’t fix it without addressing the underlying, systemic problems. Being aware of the role 5-minute favors play in success, flagging our cognitive biases, and changing how and for whom we do such favors, is a good start.

(Tasty bonus: James Alliban ran an experiment to show the prisoner’s dilemma in action. He pitted various co-operation “strategies” against one another to see which would do better and turned the results into a visualization. You can read about the experiment, too.)

If you want to read the original post, including a speculation on the other force that makes startup ecosystems tick—the informal network of back-channels—you can read it at solveforinteresting.com , where it’s lived since March 22, 2012.