Silicon Valley’s Information Asymmetry Problem
Sometimes when I see something that’s written about how startups should proceed written by the folks with a voice and brand – many times people with the capital to fund them – I chuckle.
The information asymmetry between what may be risky and unproven and what’s easy to tweet as fact is often large. For venture capital as an industry the time delay is roughly the time it takes to invalidate the previous way of doing things, or for a new trend to be so patently obvious that no one can ignore it.
While the concepts of remote and distributed teams are not new, they have certainly picked up steam—the reason for this is multi-fold, but the main takeaway is that ‘proof’ has arrived downstream to the VCs. None of this is new however.
Today, being able to leverage engineering talent outside of the Valley has become incredibly en vogue. But the irony for me on all this is that it was always valuable. It’s just that it’s now being vocalized by investors.
Let’s quickly look at the main ways to build an internationally distributed US-based team. Contrary to popular belief, the main reason that it’s hard to attain product market fit in the Valley (without running out of hope, money or both) is not insufficient housing for engineers.
Before I get to the issues in the Valley, for the sake of this post I’ll break down distributed companies into the three most common types:
- Foreign founders who move to the US / Valley, HQ there, stay there, and then leverage their ‘home country’ to build a distributed team abroad later
- Foreign founders who move to the US / Valley temporarily, then move back after setting up a company. Then keep a US presence (often some of the founding team) while building the product and team outside the US
- US-based founders who build and develop products / traction, fundraise & grow a business, then at some point during scaling call on distributed folks outside the Valley. This is what Stripe just announced (the Stripe founders are also a hybrid of #1)
There are of course other variations, as well as companies that disburse people within the US. It’s completely worth pointing out that if foreign geographies ‘market’ themselves well to US-based companies then the labor pool in that area (every country wants more people working in high tech because the wages are much higher) can piggy-back on this trend.
If you are building a product and team, you need people who are really on-board with you. This is incredibly hard to find in the Silicon Valley hype echo chamber where the employed pool in high tech constantly switch between what is momentarily ‘hot’.
It goes like this: in the Valley many employees ‘sold’ to join your company (often by investors!) tend to be absolutely mercenary… it’s well known that engineers routinely leave companies after just 6-12 months. The Valley is known to be the worst at this. Who wants to have a brilliant engineer join your team if they are going to move on to the next shiny object after a year? This has killed many ‘hot’ companies and the cycle here is getting worse not better.
Building a new product and company may seem glorious, but fact is you need to sweat and toil for years to be successful. And this is the differentiated investment required of founders. The post isn’t about starting vs joining companies, but founders can’t really wake up one day and say “I don’t want to do this anymore”. I am not arguing with free will, but the commitment is at least 10x vs someone joining your team.
When my co-founder Jakub told me he wanted to move back to Europe and build a significant team after YC, it was a hugely interesting vocalization to me at the time. To build a full-stack product company where he knew people, could hire and has many advantages around talent. It was obvious to me at that moment from my years in industry in the Valley that building a full stack hardware / software team in ‘frontier tech’ (sensor networks) would have easily required triple the projected funding. Or 1/3 the size of the team.
And this is exactly the way I immediately rationalized it: We could either hire 50 really brilliant folks in Europe, OR 15 in SF. Which would you choose? The thing lost on a lot of people and that’s implicit in ALL company building, is maximizing the output of every dollar raised. I covered this in depth calling out why Startup Capital Efficiency is so critical. At the end of the day you need to build a product, get traction, raise money, sell the product, and keep doing that—all while navigating luck, building a team and not going out of business. Doing this in SF / PA is just incredibly hard for the same dollar-on-dollar efficiency.
But this post is not supposed to be about the value of having a distributed team, how to create one, the workflow and tools to do so successfully, or capital efficiency.
My macro point which is critical to realize is that the Valley has a weird way of branding things when they are established and applying a ‘rule’. There exists a massive information asymmetry gap around what influential people in the Valley speak and give recommendations about, and where in the risk cycle that idea lies.
Ponder this irony: just five years ago, top Valley firms said to get a term sheet, you had to move there. Today they are tweeting (and strongly insinuating) that to get a term sheet, you have to move away… Serious question: how much of the success of distributed teams can be attested to YC in particular and select seed investors willing to bet on this trend years ago only now ‘proven’ to VCs? If you nodded, then you just explained that information asymmetry gap. It’s only now obvious to VCs in the funding cycle for one reason: it’s been ‘de-risked’.
All this is both very comical to me, as well as a constant reminder that ‘contrarian’ approaches are in fact usually so because information isn’t yet available to people in a way that allows a safe assumption.
And the ironic learning on information symmetry in the Silicon Valley is that it’s often the folks with capital who suggest that you should react to something they see happening. While startups react to that advice, the puck is moving somewhere else. It’s really on individuals to uncover the future arbitrage ahead of when information becomes accepted knowledge.
Perhaps the most fitting closure to end this is that your customers don’t care what investors think. Still to this day when I’m working with the world’s sophisticated platforms that are predominately on the west coast they often think we’re 100% headquartered there. But of course that conversation is incidental because they care more about how our products work, not where we are.
To the extent you are willing to accept that distributed international teams have cemented themselves as a potential killer weapon (hint: the smart money says they have) vs being 100% US-based, I’d encourage you to take this logic a step further and think about what else will later become ‘obvious’ to folks with capital. Fact is, that is exceedingly difficult to do which explains why it’s the real contrarian ideology to master.