Getting Access to the Old Boys’ Club

If you’re not winning, life will always seem horribly unfair. Women and minorities complain that the tech industry is an impenetrable animal house. Others complain about losing job opportunities to H-1B workers and diversity hires. But nothing seems more unjust than the venture capital industry, a circular institution that advertises meritocracy while celebrating a bunch of bros funding bros.

Silicon Valley is indeed insular and unfair. But hey, so is the whole rest of the world. The industry-disrupters of tomorrow should be the last ones demanding kid-glove treatment.

Here’s venture capitalist Mark Suster on getting access to the Old Boys’ club:

It may sound harsh but in reality I think it’s true. If you can’t get a warm introduction to a VC then how on Earth are you going to break down the doors to get to the VP of Sales, Biz Dev or Marketing in the organization that you’re looking to sell your products to to or develop partnerships with?

If you’re not assertive and creative enough to get through a VC’s doors then how are you going to get the most sought after journalists to write your stories or the most skeptical buyers to part with their hard-earned cash?

I might add: If you can’t tell an inappropriate investor to take a hike, how are you going to fire underperforming employees? If you can’t speak up about sexual harassment (until years later) for fear of retaliation, how are you going to defend your company against a media hatchet job?

There’s a saying in the industry, Outcomes are Binary. Either you’re building a billion-dollar company or you’re not. If you’re not building a billion-dollar company, you have the wrong business model for venture capital.

Raising money can be hard, but it’s the least-hard part of growing a startup. And if you can’t navigate the racist sexist VC circuit, you have a snowflake’s chance in hell of building a billion-dollar company.

Note: I don’t actually think Silicon Valley investors are sexist or racist. The ones in question mistreat male founders just as readily as they abuse women and minorities. That makes them assholes, not bigots.

The Business of Black Market Bribery

In 1937, a district attorney ordered an investigation of corruption in the SFPD. San Francisco was a pretty lawless place back then; houses of prostitution and gambling operated open and abundantly so long as they made monthly payoffs to the police force. There were so many brothels that in North Beach, tenants placed signs on their doors announcing they were private residences – to prevent the gentlemen callers from calling.

The typical tribute payment was $250 a month for a brothel, and $100 for a bookmaker. Adjusted for inflation, that’s about $4200 and $1700. That seems high! The nominal cost of ignoring an illegal establishment is zero, and I would expect police graft to be subject to competitive forces. Establishment operators who find themselves excessively shaken down could simply pack up and move to another officer’s beat.

Decentralized resource control is necessary but insufficient for a functioning economy. There also has to be some price system for communicating personal knowledge. Cops can’t walk around advertising their bribery rates (although I wish they would) so corruption is best handled collectively.

As a result, black markets tend to be monopolized markets. Ultimately, San Francisco’s vice industry was controlled by a couple of bail bondsmen who determined the price of payoff. The police department had to make regular arrests to keep their numbers up, and those who were up to date on their tribute payments would get a quick release while the holdouts were left in jail.

This all would have continued indefinitely, except that one prominent madam began listing police payoffs as a tax-deductible expense. This led the IRS to come after the SFPD for undeclared income, which prompted the whole investigation. See, even tribute collectors have to pay their tribute.

See Also:
1937 Police Graft Report by Edwin Atherton

Sexual Harassment in Silicon Valley

The venture capital industry continues its nonstop string of sexual harassment scandals. I was gonna write something sooner, but a New York Times article on gender discrimination made me roll my eyes so hard that they fell out of their sockets. It took several days to recover but I’m all better now thanks.

The Times draws on two dozen stories as evidence that sexual harassment in the startup ecosystem is “pervasive and ingrained”. Good grief. Aside from some brief detours, I’ve lived and worked in Silicon Valley since 1982. I promise it’s not that bad.

A typical early-stage founder will meet with over a hundred investors before closing a seed round with a handful of term sheets. Fundraising is a miserable experience only slightly less humiliating than public begging, and a startup CEO can expect to repeat this process every 18 months if her company doesn’t die before then.

Sand Hill Road: Will work for term sheets

When you have an industry that revolves around glorified panhandling, it’s inevitable that participants end up getting kicked and spat on. The Times describes some founders who put up with unwanted sexual advances because they were desperate to raise money for their startups. There’s an old-fashioned word for what these ladies are doing that I shan’t repeat here.

Male founders have to run this emasculating gauntlet too, except that they can’t blame gender discrimination for how dirty they feel at the end of the day.

There’s nothing unusual about the idea that the rich and powerful might abuse those who beg them for money. I imagine it’s one of the most attractive features of being rich. Some VCs are drafting a Code of Conduct that proposes to create a list of “bad actors” known to mistreat women or minorities. That’s a noble idea and all, but most of the bad actors recently harangued by the media were investing their own money. Call them out and paint a scarlet letter on their heads — Do you think the homeless people in Union Square check the Sex Offender Registry before accepting a dollar from a stranger?

The only thing more timeless than the abuse of power is the tolerance of abuse by those who most need the money. A common VC complaint is that there’s too much money chasing a few good companies. The flip side is that there’s a glut of unappreciated startups desperate for any funding at all. Silicon Valley is run by idealists, and I understand the desire to purify the industry — But to think that we can enforce a code of conduct is to completely misunderstand the nature of the supply and demand of capital.

Is a Subway Token a Security? and other non-legal advice.

In 2003, I had the best business idea ever. The MBTA had recently announced an upcoming increase in the price of Boston transit tokens, from a dollar to $1.25. The change would not be effective until the following January, which meant that any T tokens acquired before then would be guaranteed a 25% return. I had just over a month to hoard as many tokens as possible.

I wasn’t the only one with this strategy; many of my classmates did the same. But after a month-long buying spree, it became clear that realizing those profits would be a pain in the ass.

We could never use all those tokens ourselves, and there was no secondary market because all our friends had made the same brilliant investment. If only T tokens were tradeable on the blockchain!

How many potential buyers were discouraged by the lack of a convenient aftermarket? Without the liquidity limitation, the MBTA could have held a far bigger token sale. Maybe it could have paid for a new railway. Maybe another Big Dig. Maybe even a hyperloop!

Why don’t we finance all our infrastructure projects with token sales? Is Trump still looking for ways to pay for that wall? Issue a Wall Token and put it on the blockchain! Each Wall Token confers the right to one border crossing.

But it turns out such Tokens might constitute a security.

Here’s a 1977 paper about property developers who finance their facilities by selling usage licenses before construction. Two fun examples:

    In the case of Holloway v. Thompson, a landowner raised money for a cemetery by selling certificates entitling the holder to a future burial spot. After the cemetery was constructed, an elderly couple sued the developer because they were unable to resell their unused spots. They had purchased 31 spaces, hoping to flip ‘em for a quick profit. The court determined that the burial rights were unregistered securities, and buyers were refunded.

    In Forman v. Community Services, Inc, a property developer sold “shares” of a low-income housing project, which could be exchanged for a three-year lease on a future apartment. After construction, the lease agreements were less valuable than expected, and the shareholders sued. The Supreme Court determined that the housing shares, despite being explicitly sold as “shares”, were not securities. The case was dismissed. It helped that the defendant was a non-profit housing co-op trying to do a civic good.

There are many more cases, and every shade of grey in between. In the 1970s, a spate of country clubs raised money through initial membership offerings, at which point the SEC directed its staff to stop issuing no-action letters in this area and advised that past letters should not be relied upon: “The Commission is concerned that inferences may be drawn from the issuance of no-action letters in this rapidly-evolving area.”

That was 1976. Forty rapidly-evolving years later, the Commission is still fumbling to crank up its Gatling guns. Meanwhile, token offerings spring up every day, each one scammier than the last. It’s tough to be a regulator! The SEC is a massively underfunded agency that was established as part of a New Deal effort to create make-work jobs. For half a century its purpose was to hire people to push papers and write rules. In 1984, Congress expanded that role by giving them the authority to enforce their rules, but without the actual budget to do so. The SEC ought to consider an ICO.

Donald J. Regan. Securities Regulations: When is a Club Membership a Security, 10 Loyola of L.A. Law Review, 356 (1977).