Paul Graham Doesn’t Know What He’s Talking About

According to Paul Graham, the investor who trades Top Ramen for equity stakes in feature-as-a-business startups launched by kids who can’t save $10,000, “Large organizations will start to do worse now.”

In a recent “essay,” Graham argues that:

…for the first time in history they’re no longer getting the best people. An ambitious kid graduating from college now doesn’t want to work for a big company. They want to work for the hot startup that’s rapidly growing into one. If they’re really ambitious, they want to start it.

Pure and utter bullshit.

Let’s approach his argument three ways: first by looking at economic reality, then by looking at social reality and then by looking at logic.

Economic Reality

If Graham’s thesis is correct and large companies are going to “start to do worse now” because the best and brightest would prefer to work at “hot” startups, one has to believe that there are enough jobs at startups to meet the demand that Graham says exists for employment at them.

In case he hasn’t looked around lately, “hot” startups are laying people off. The VCs that have backed many of them are encouraging them to do this because they know that cost cuts are necessary if these companies are to have a chance at surviving.

Total unemployment in the United States is 6.7% and it’s going to get worse. The unemployment figures also underestimate the extent of the employment problems in the United States (there are individuals who are employed but not making enough to pay their bills, there are individuals who have run out of unemployment benefits, there are those who are ineligible for unemployment, etc.).

The weakening of job markets is a trend that will continue in many countries around the world as a global recession (or depression?) looks increasingly inevitable.

Back to supply and demand.

United States universities have graduated over 40 million people, with over 10 million of them graduating between 1993 and 2003. Do “hot” startups employ that many people?

Since the hottest startups typically receive venture capital, let’s look at the total number of jobs created by venture-backed firms as a proxy for an analysis of Graham’s claim. According to a 2007 report entitled “Venture Impact: The Economic Importance of Venture Capital Backed Companies to the U.S. Economy” put out by the National Venture Capital Association and Global Insight, 10 million jobs in the United States are attributable to venture-backed firms - approximately 9% of private sector employment in the United States. Therefore 91% of private sector employment in the United States is not attributable to venture-backed firms.

With 1.5 million college graduates potentially entering the workforce each year, it’s quite obvious that the venture-backed companies (including those “hot” startups Graham talks about) do not come close to providing a job to every “ambitious kid graduating from college.” 10 million total jobs attributable to venture-capital backed companies does not do much for the 40 million people who have college degrees.

The challenges facing new entrants to the workforce is demonstrated by the fact that underemployment is a real issue for college graduates in the United States. Change Magazine, which is published by the Carnegie Foundation for the Advancement of Teaching, noted a story published by the Orlando Sentinel that reported that in Florida:

..a rise in college attendance coupled with downsizing, outsourcing, and a shortage of high-paying jobs is bolstering the ranks of the educated poor—people with college degrees who don’t earn above the national poverty line.

Many of the jobs that college graduates find themselves in don’t require a college education at all. Change Magazine reports that “four years after receiving a degree, 40 percent of those not enrolled in graduate education say they are employed in a job where a college education ‘is not required.’”

Finally, Change Magazine looks at the occupations that will grow the fastest through 2014, based on data from the US Bureau of Labor Statistics, and the results are not favorable to Graham’s thesis:

However, the story of the top 10 occupations with the largest (rather than fastest) growth in number of jobs is different. The BLS expects these occupations to grow by 4,600,000 jobs—23.4 percent of the total increase in jobs from 2004 to 2014—while the top 30 will increase by 8,833,000, or 47 percent of the total increase. Seventy percent of these occupations do not require college; 30 percent do.

Clearly, Graham’s perspective has been distorted by the small world he lives in.

Most young people are not going to work at companies that are trying to become the next Google; most are trying to find decent-paying jobs so they can pay down the debt they’ve accumulated acquiring an education. And while some of the most successful companies have been started by young entrepreneurs fresh out of college (or by college drop-outs), the reason their stories are so compelling is that their stories are not common.

Most newly minted college graduates simply aren’t pursuing their own entrepreneurial ventures. Over 600,000 new businesses are started in the United States each year. They’re “startups” regardless of whether or not they’re “hot” technology plays. Most studies I’ve seen indicate that the typical founder of a new business is in his 30s.

In recent years, the surge in new businesses started in the United States has not driven by the type of “hot” startups Graham envisions - new construction businesses and manufacturing businesses actually rose substantially while service businesses (including technology businesses) declined by 14%. While Graham demeans “uncle Sid’s shoe store,” the reality is that there are more uncle Sid’s shoe stores than there are Scribds.

And without the employment opportunities that exist thanks in large part to large organizations (both private and public), there simply wouldn’t be enough jobs to go around.

Social Reality

What do you want to do with your life?

It’s a question that all of us ask ourselves - probably multiple times.

Graham’s blanket statement that “an ambitious kid graduating from college now doesn’t want to work for a big company” is naive.

Not every young person is “entrepreneurial” and not every young person is looking for the same things in a job.

While most individuals probably wouldn’t answer yes to the question, “Do you want to work for a bureaucratic company?”, the utopian startup is largely a myth. Google has its own internal politics and “hot” startups like Facebook have seen their fair share of internal drama. Anyone who tells you that bureaucracy, back-stabbing and nepotism don’t exist at Internet startups hasn’t worked at one.

For many people, the fast-paced, competitive lifestyle of the technology startup world, coupled with the promise of stock options potentially worth millions, just isn’t their life’s calling.

There are plenty of young people who want to become lawyers, doctors, architects, teachers, nurses, interior designers, engineers, psychologists, mechanics and public servants. And that’s a good thing.

Strong national economies, and a vibrant global economy, couldn’t exist if everybody wanted to work at Google. After all, the basic products and services you depend on daily are only provided because there are individuals who work for the businesses that provide them.

Thank the employees at Proctor & Gamble for the consumer goods they manufacture for you. Thank the employees at GE for all those wonderful appliances they provide. Thank the employees at Wal-Mart for giving you access to affordable goods. Thank the employees at AT&T for your phone and Internet service. Thank the employees at Hewlett-Packard for your printer. Thank the employees at Exxon for providing you with the oil that powers your daily transportation needs. And thank the employees at State Farm for providing you with insurance.

In other words, thank all the people who work at large companies. Sometimes we love to hate these companies, but at the end of the day they’re an integral part of our daily lives and our economies.

In the United States in 2005, the 50 largest private sector companies employed 11 million people and the entire Fortune 500 employed 24 million - about 20% of the total workforce. Companies with 500 to 5,000 employees employed about 20% of the total workforce.

And don’t forget, of course, the public sector. The United States Federal Government, excluding the postal service, is the nation’s single largest employer with more than 2.7 million employees. Throw state and local government employees into the mix and approximately 20 million people in the United States can thank Uncle Sam for their jobs.

But according to Paul Graham, these people must not be the sharpest tools in the shed. If they were, they’d have all flocked to Silicon Valley to get a job at Facebook. Or better yet, they would have applied to YCombinator so that they could get $5,000 to build a cool web application. Right?

I wonder if Graham has spent any time talking to students at Ivy League graduate schools. Despite the nightmare on Wall Street, I think Graham would find that there are still more Harvard and Yale grad school students interested in various prestige jobs in the world’s financial centers than there are those interested in heading out to Silicon Valley. And there are plenty of international students who attend university in the United States and then go home to take advantage of better opportunities, not all of which are “entrepreneurial.” Entrepreneurship, Mr. Graham, is not valued as much in some countries as it is in the United States. Go figure.

The Logic

Clearly, economic and social reality makes it easy to dismiss Graham’s notion that “large organizations will start to do worse now” because all of the bright young minds want to build nifty web applications.

In fact, one might argue that the credit crunch and the ensuing financial clusterfuck has demonstrated just how important large companies are. Slowed consumer spending, investment losses, etc. have all cost economies around the world millions of jobs. The thaw in the commercial paper markets has placed many more at risk as companies find it difficult to access the money they need to make payroll.

To be sure, there are badly mismanaged companies and governments should allow the free market to deal with them. But if established companies with billions in revenue and tens of thousands of employees are finding it difficult to cope in this economy, just how does Graham think startups, many with no revenue and a dependence on vulnerable VCs (who themselves may find cash hard to come by), will fare?

A sinking tide lowers all ships.

The reality is that large companies are a product of corporate evolution. The business that begins as a startup and succeeds in its initial market has a natural tendency to want to grow larger (assuming that its initial market is of requisite size).

Graham at least recognizes this when he writes, “To say that startups will succeed implies that big companies will exist, because startups that succeed either become big companies or are acquired by them.”

As promising companies grow, they often have the ability to acquire a number of advantages that propel further growth. Common “positive feedback loops” include horizontal expansion, horizontal integration, vertical integration, economies of scale and economies of scope.

From Wal-Mart’s beginnings at a single store in Bentonville, Arkansas to Google’s beginnings on the campus of Stanford University, the path of the most successful companies is almost always similar in this respect: small becomes large.

Paul Graham’s notion that all of a sudden, because the best and brightest youngsters want to work at a get-rich-quick scheme masquerading as a startup, large organizations are going to start to “do worse” goes against not only against economic reality, social reality and logic but against history.

Of course, he recognizes this too. He writes:

It’s kind of surprising that a trend that lasted so long would ever run out. How often does it happen that a rule works for thousands of years, then switches polarity?

The answer: it doesn’t.

Every generation likes to believe that it exists in extraordinary times. A better world - and apocalypse - have always been right around the corner. “Paradigm shifts” are a dime a dozen.

In 1914, the US Bureau of Mines predicted that the world’s supply of oil would run out in ten years. In 1951 the US Interior Department predicted the wells would run dry in 13 years. In 1972, the Club of Rome predicted that the world would run out of oil in 1992 and natural gas in 1993. All the while the Saudis keep investing billions to keep finding more dinosaur cemeteries. Funny this is they’re doing a good job. A new field, Khurais, has 27 billion barrels and will take 50 years to deplete, unless of course you simply believe the Saudis are lying. And the Brazilians, too. There can’t be that much oil, right? I guess.

In the 1970s, there was public alarmism over climate change. Back then, the world was going to freeze. Now it’s going to burn. I suppose climate is kind of like a woman - one minute she’s hot, the next she’s cold.

In the late 1990s, the naive were sold on the “New Economy.” The most extreme “New Economy” ideas about information technology’s role in the world and the triumph of new economic principles over stodgy yet proven old ones were proven to be hogwash. Many only discovered this when they learned that stock in companies that produce no profits cannot go up in value perpetually. Yet today we still have people telling us that the world is being turned upside down and assholes like Malcolm Gladwell still write bestsellers filled with bullshit.

Much of the stupidity that results in stupid predictions comes from stupid assumptions made by people who have no perspective.

Which brings us back to Graham.

Graham argues that “even if Internet-related applications only become a tenth of the world’s economy, this component will set the tone for the rest.” In his estimation, “if Internet startups offer the best opportunity for ambitious people, then a lot of ambitious people will start them, and this bit of the economy will balloon in the usual fractal way.”

If, if, if. If only life was that simple.

GDP is probably the easiest way to measure the “world economy” and according to the World Bank, global GDP in 2007 was approximately $54 trillion. Graham suggests that Internet-related applications “only” need to become a tenth of this. That’s over $5 trillion/year. For comparison, the global energy industry (which includes oil, obviously) is generally estimated to be a $3-5 trillion/year industry depending on your sources. In other words, the global energy business accounts for something in the range of 10% of the world’s economic output. When will Internet-related applications reach that level? Perhaps when Graham’s latest YCombinator portfolio company, Shelld, finds a way to meet the world’s energy needs by tapping into Second Life’s bountiful yet still untapped reserves of light, sweet crude.

As for believing that Internet startups represent the best opportunity for ambitious people, Graham needs some perspective (especially in light of the aforementioned startup layoffs he apparently hasn’t noticed). I’m still young (under 28) but I’d take this bet: when I die, I’ll have met far more millionaires who made their fortunes from financial services, legal services, real estate, construction, heavy industry and criminal enterprise than I will have met millionaires who made their fortunes from Internet applications.

At the end of the day, there are plenty of entrepreneurial young people out there. Some will go to work for startups. Some will start their own businesses. Some will put their entrepreneurial skills to use in other ways. Some won’t do anything entrepreneurial at all.

A small number will go on to become their generation’s titans of business either by climbing the corporate ladder or by creating their own ladder. Like every generation, however, most will go on to lead normal lives working for normal companies. You know, the ones that are going “to do worse now.”

Inevitably, there comes a point in time in the average entrepreneur’s life when he realizes that he’s not going strike it rich overnight and while he may not give up his entrepreneurial pursuits entirely, entrepreneurial habits typically give way to a stable source of income that supports a more worthwhile investment: family.

In the end, tomorrow will be much like today and much like yesterday. As goes the large corporation so goes the global economy. And as goes naivety so goes Paul Graham’s asinine arguments.

In 10 years, Proctor & Gamble will still be selling toothpaste. Exxon will still be bringing oil to market. Wal-Mart will still have rollback pricing. The question for Paul Graham is not, “Will the large organizations be doing worse?” It’s, “Will YCombinator still be investing Top Ramen in feature-as-a-business startups?”

I think we all know the answer to that.