Entrepreneurs are the New Labor (part 1) [09/12]
Entrepreneurs Are The New Labor: Part I
Part I | Part II | Part III
For the last few months, I've been cautiously testing a radical-sounding hypothesis on smart people: entrepreneurs are the new labor. Or to put it in a more useful way, the balance of power between investors and entrepreneurs that marks the early, frontier days of a major technology wave (Moore's Law and the Internet in this case) has fallen apart. Investors have won, and their dealings with the entrepreneur class now look far more like the dealings between management and labor (with overtones of parent/child and teacher/student).  Those who are attracted to true entrepreneurship are figuring out new ways to work around the traditional investor class. The investor class in turn is struggling to deal with the unpleasant consequences of an outright victory.

In the small and incestuous technology world,  where I make my living shouting advice from the peanut gallery, standing behind politically charged statements like this can do a good deal of damage, so I've been wary about sharing my views more publicly.
To my surprise though, I found a lot of people agreeing with me. In fact, many confided that they'd been thinking the same thing themselves, and even offered more radical formulations than my own. By contrast, I found very few people seriously arguing for the obvious antithesis (a sort of gung-ho "everybody can be  a genuine entrepreneur" sentiment, which I find to be a vacuous rationalization of grim economic realities.)

The implications of this new state of play are extremely important, and extend far beyond the startup world to the economy at large. This is not just another quickie X-is-the-new-Y meme. Which is why it is going to take me some time to develop the arguments carefully. In this first of a three-part series, I will cover the history of this particular entrepreneurs-turning-into-labor pattern, which dates to the 19th century.  In Part II, I will apply the pattern to our times, mutatis mutandis. In Part III, I will try to look ahead at how the landscape might evolve.

The Politics of the Shift
I should note that none of this is news to anybody even marginally involved in technology entrepreneurship.  This entire three-part series is merely my attempt to assemble arguments made piecemeal by many others, into a coherent whole. But I suspect people far from the entrepreneurial world have no idea that all this is going on.

"Entrepreneurs as the new labor" is not necessarily a bad thing, unless you are among those who are attracted to the "masters of the universe" cachet rather than the substance of the "entrepreneur" label. There is dignity to labor just as there is romance to entrepreneurship.
There are many good things about the shift to a de facto management-labor game. Such a game is sorely needed as industrial models collapse and the work of defining an Internet-era corporate landscape, with new institutions capable of organizing work for a much larger population, begins.
There are still enlightened investors who use their new unchecked power wisely, and there are still entrepreneurs who are wily enough to stay inside the system and play the game on their own terms.
But for the most part, the collapse of the balance of power is not a good thing. Nor is a significant disconnect between nominal and actual narratives defining the lives of a significant and important population.
The good news is: this has happened before (in the late 19th century), and the last time around the system naturally self-corrected and defined a new labor class on its own terms, with the "entrepreneur" label being reclaimed by those it actually described. In the process, a new middle class was born. This was an external side-effect as far as entrepreneurs were concerned, but the main outcome of interest to everybody else.  That's the big hope on the horizon here: that the current travails of the entrepreneur class might eventually end with the formation of a new middle class to replace the one that is currently being gutted.
The transition was not without considerable pain, so we can and should learn from the previous episode and speed up the correction, this time around, hopefully with less pain and overcompensation. For those of you tempted to read this series as a blanket tarring-and-feathering of the investor class, keep in mind that they play an essential role, and that things aren't particularly pretty when entrepreneurs are dominating investors either.
Real entrepreneurship can return, and those playing the new management-and-labor game can learn to understand themselves more clearly, with a new management-labor narrative, instead of an overloaded investor-entrepreneur narrative.
But however you read what is going on, such a shift is politically charged. I like to kid myself that I am a political neutral on these matters, so I'll restrict myself to sketching out the contours of the new landscape, and leave you to form political opinions about it.
The Entrepreneur Class Today
Before I proceed, I should offer a very important qualification. By entrepreneurs I mean specifically the narrow class the term has come to define in the last decade: specifically technology entrepreneurs who start companies to build products or services with some sort of technological innovation at its core, with the Internet playing an important role in the venture.
This might seem to be a very narrow definition, but due to the dramatic ongoing impact of the Internet in every sector ("software eating everything"), and the collapse of traditional employment paths, this restricted class of entrepreneurs is quite significant in terms of both numbers and economic impact, and is growing rapidly.
My thesis specifically does not apply to other sorts of entrepreneur: the kind who start risky but non-innovative businesses of the coffee-shop variety, or the kind who steer a staid old family business onto an aggressive growth path. In recent years, the term entrepreneur has been glamorized, valorized and mapped to the technology-startup type entrepreneur, so I am using the unqualified term for simplicity.
And within this class I am specifically refering to the sub-category known as hustlers today. Technology startups typically have a hacker-and-hustler founding pair. Though the hustler can often do some hacking as well, the term has come to mean the person leading marketing, product management and fund-raising activities in the early stages.
So a more careful statement of my thesis would be: non-technical hustler founders of technology startups are the new labor.
What about the technical co-founders? Because of their very different risk exposures, compared to hustlers, they end up on a different path that effectively makes them mercenaries rather than entrepreneurs, a path that generally promises smaller jackpots, but better expected outcomes and survivability.
In brief, whereas hustlers have gradually been losing their information advantage with respect to investors (resulting in the balance of power collapsing), hackers have generally been gaining information advantage with respect to both, as Internet-era technology has gotten more complex and specialized. But their advantage does not lend itself well to being directly wielded. So the power of the technical community is organizing itself in other ways, which I covered in my earlier post on the rise of developeronomics.
Before we dive in,  here are two versions of the argument that make my views seem almost moderate by comparison. I want to call these out so you can calibrate various positions in these debates (all the way from "everybody is an entrepreneur" cheer-leading to "evil VCs pwn innocent founders" despair).

 A friend who works at a hedge fund and is starting to dabble in startups on the side wanted a quick primer from me on the popular Lean Startup model. After outlining the basic idea, I added some of my own cautious critical commentary. My friend immediately leaped to the conclusion that I'd been unconsciously resisting: "So you're basically saying that lean startups are great for investors, and not so great for entrepreneurs" (he also said "bwaahaahaa!")
 Another friend, a battle-scarred tech veteran, reacted to my views with a metaphor that made even me cringe: "So incubators like Y-Combinator are basically a cloud resource for investors, from which to source interchangeable hustlers, who are prized primarily for their youthful energy rather than any deep market knowledge." So much for the vaguely romantic notion of startup-founding as being somehow qualitatively different from interchangeable drones in a cubicle farm. Different farm, same metaphor.

I think these versions of the argument overstate the case, but viewed as rhetorical exaggeration, they do make valuable points. Lean startup models, applied with wisdom, can work for entrepreneurs. Applied naively, they become back-seat driving mechanisms with which investors can micromanage startups, to the detriment of both. But the model, being a product of our peculiar times, has the asymmetric balance of power between investors and entrepreneurs wired into its very DNA.
Startup incubators and angel investors can sometimes seem more like outsourced job-training for big companies, or even a substitute for college and graduate school respectively (in fact, many commentators proudly advertise that idea, and the "batch" and "graduating" language is a dead giveaway), but there are people graduating with genuine entrepreneurial skills.
So let's take a look at the entrepreneurs-are-labor model. It is useful to start with the nineteenth century steel industry where a similar emergence of a labor class from an entrepreneurial class happened, with different outcomes for the hustlers and hackers.
The Nineteenth Century Steel Game
In attempting to make sense of today's startup scene it is very useful to reflect on the evolution of the global steel industry in the nineteenth century, as it moved from its startup phase in England to its scaling and growth phase in America and Germany (similar things happened in mining, oil, railroads, telegraph and agriculture and machinery).
In the process, a two-tier reorganization occurred, reflecting the diverging paths of the hackers and hustlers of industrialization.
In the first tier, the artisan class of steelmakers (the hackers of their age), that had organized itself in intricate guild-like structures,  gave way to two sub-classes: a mercenary-minded scientifically trained engineer class that organized itself into professional associations, and a manual labor class that organized itself into the modern labor movement.
The finest example of the former was probably Alexander Holley, a sort of polymath-engineer Elon Musk of his time, but with more of a pure engineering mind. He was the greatest steel-plant designer of his time; the uber-10x-hacker of steel-making. When Andrew Carnegie turned his attention to steel, and raised $700,000 to build the pioneering Edgar Thompson plant, Holley stepped up immediately to handle the technical end. Charles Morris describes the event in The Tycoons:

 Holley was engaged almost immediately; he had made the first contact himself as soon as heard of the new plant. His offer -- $5000 for the drawings and $2500 a year for construction supervision -- was one that could not be refused.

It is critical to note two things about Holley's role. First, he negotiated a significant (for the time) but low-risk remuneration package (amounting to about 1% of the capital raised, but as cash rather than equity). Second, he made sure he wasn't tied to Carnegie via risk-capital, and offered his services as a highly paid mercenary, within a time-bound model. He was what we would call a rent-a-CTO today.
It is critical to note what he was up to on another front: he was a major figure in the founding of the ASME (the American Society of Mechanical Engineers and the model for later engineering associations in newer disciplines) in the 1880s. He had consciously decided to forgo the entrepreneurial path, and thrown his lot in with the emerging mercenary technologist class.
Holley's model came to define the engineering profession as it evolved: a community that organized itself along the lines of the scientific societies of the day, and arrogated to itself the authority to define, evolve and steward specialized knowledge of technology. Perhaps most importantly, engineers after Holley allied themselves with the owners of capital but maintained a suspicious arm's length relationship with them, using the instrument of professional associations, which cut across corporate boundaries and serve to liaise with academia. By organizing themselves in this manner, technologists took themselves out of the entrepreneurial equation for the most part, but retained an autonomous voice and a capacity to constrain the game through mechanisms like standardization and stewardship of commons knowledge.
Early engineers like Holley were mercenaries with no fixed loyalties to employers, businesses or markets, but a strong loyalty to a technical discipline and scientific methods of engineering. It wasn't until a few decades later that they turned into standing armies, as universities began churning out engineering graduates in larger numbers.
Their cousins on the shop floor suffered a different, less happy fate.
From Bankrupt Artisans to Modern Labor
The world of artisans was fundamentally at odds with the world of the large corporations. Artisans preferred to arrange their internal technical and economic affairs via what we would call internal markets today. This made each senior artisan something like a small business owner or tenured professor, managing a certain amount of risk, negotiating pay dynamically with bigger capitalists and the government, and contracting out work to other artisans. But these seasoned artisans had limited ambitions, they were not really entrepreneurial enough to want to scale to large operations.
Artisans were entrepreneurs within ecosystems around relatively small corporatized cores. Theirs was an intricate world of dozens of narrowly defined crafts, arranged in a production network. In the early years, larger business owners had no choice but to work within this model. It was a complex but relatively stable world defined by a network economy that was extremely rigid in some ways, and fluid in other ways.
But once science entered the picture, and engineers effectively took control of deep knowledge and forked off a community largely allied with owners of capital, the days of the residual artisan class were numbered. They had been intellectually bankrupted.
As Morris recounts the story, through the eyes of a British team surveying the American steel industry in the 1880s:

 The skills required in the modern factory were invented and controlled by the employer, and didn't take years of apprenticeship to acquire. The [British] visitors were struck by the short training periods required for raw hands in American mills; one Carnegie executive claimed he could make a farmboy into a melter, previously one of the more skilled positions, in just six to eight weeks. Integrated operations also eliminated the last vestiges of internal contracting.

I don't want to get ahead of myself, but in case you can't see where this is going, the analogy is to modern incubators promising to turn anybody into an entrepreneur in a weekend, week, or summer. More on that in a bit.
But the result of the new scientific models of manufacturing was modern labor. The residual artisan class could no longer rely on privileged access to an  illegible knowledge base and opaque organizational order to protect itself. That weapon had been taken over by the new class of engineers. They did the only thing they could: come together in solidarity in larger numbers to monopolize access to labor supply.  If the engineers withdrew from the poker game of business, the remaining artisans no longer had enough stakes to stay in the game as individuals.
They had been commoditized. The result was modern labor unions. Muscle farms. Or muscle clouds. The phrase collective bargaining emerged to describe their new role in the game. For the most part, they had been reduced to interchangeable parts. Autonomous control over supply, via aggregation in unions, became their only source of power.
What about the hustlers? Ironically, bankers managed to do them what they had done to the artisan class: split them into new mercenary and labor subclasses. This is the story of the second tier.
Hustlers versus Bankers
In the second tier, the hustler class of new-money industrialists produced a first generation of Robber Barons, and then an asymmetric balance of power between bankers and second-generation hustlers who aspired to Robber Baron level fortunes (egged on by Horatio Alger narratives), but ended up as the tame new middle class. How did this happen?
Carnegie was an old-school, large-scale hustler, like his contemporaries, Rockefeller, Jay Gould and Vanderbilt. Like them, he had some technical knowledge, but delegated most of the technological work to the new engineering class. Where he excelled was in his understanding of the murky emerging market structure and state of play. Like his contemporaries in the hustling game, he made something of a specialty of maneuvering around bankers in the world of finance, and found a certain vicious joy in doing it well (frontier hustlers swindling East Coast bankers before the rise of the telegraph was a common occurrence).
For approximately three decades following the Civil War, a tenuous balance of power situation prevailed, with canny real entrepreneurs like Vanderbilt, Rockefeller and Carnegie facing off against bankers like J. P. Morgan who were trying to do to the new mega-corporations what the Rothschilds had done to nation-states a century before: control them with money. Transitional figures like Jay Gould were starting to turn into hybrid financial operators and business managers: adept at both railroad Go-playing and stock-market manipulation.
But by around 1910, the balance of power had collapsed (as had the political balance of power in Europe, a not-unrelated development). The Robber Barons slowly withdrew from the scene to enjoy their great fortunes and redeem their tarnished images with good works.
In 1901, in an event charged with symbolism, J. P. Morgan managed to buy Carnegie out of the steel industry, to create US Steel. It was a feat Morgan and his crew would repeat across the industrial landscape, arranging new equilibrium conditions and regulatory mechanisms in one sector after the other, filling in for a non-existent central banking function (the Federal Reserve was created in 1913, marking the start of a whole new story).
How did the bankers win? In large part it was because in the balance of power, hustlers lost their main weapon: specialized and indispensable knowledge of murky emerging markets. On the other side, the bankers gained control of the new infrastructure, which were primarily financial beasts in their mature form. Since the newer hustlers needed the infrastructure (for example, hustlers taking advantage of oil, railroads, telegraph and electricity to build businesses in the new booming urban centers), they were at the mercy of the bankers.
The old-school hustlers were left with no leverage at the negotiating table with the owners of capital, while at the same time being at their mercy, instead of at the mercy of Wild West nature. In terms preferred by economists, a situation defined by a principal-agent problem (such as you hiring a doctor or car mechanic who gets to both define your problem and figure out what to charge you for fixing it) was replaced by a much simpler employment relationship: would-be hustlers found themselves being turned into professional, generalist managers.
Whereas in the 1870s, East Coast and European bankers had no option but to trust deeply knowledgeable experts on specific illegible emerging markets such as oil and steel, by the 1900s, bankers could do to wannabe-Carnegies what people like Carnegie themselves had done to the artisan class: extract the knowledge they brought to the party and neutralize its use at the negotiating table. The knowledge itself was turned over to the stewardship of yet another new mercenary class: marketers. Marketers were skilled at using the new emerging media (the mass-market newspapers that had been enabled by the development of cheap printing technologies in the 1890s) to sell, but not particularly interested in the full-spectrum risk-taking required of true entrepreneurs. The story of this mercenary class, which created the modern consumer economy on the foundations of 19th century technology infrastructure, is fascinating, but we won't get into it (the excellent 4-hour documentary mini-series, The Century of Self, does a great job of telling that story). Again, to peek ahead, we've seen a similar rise in new media models.
Instead of hustlers telling credulous investors what returns they could expect, investors told hustlers what returns they had to deliver, based on their own analysis of information made freely available by new media outlets working off the power of the telegraph. They knew enough to understand how hard they could push without breaking things (the rate of return they demanded would soon ossify into a ritualized expectation of stable growth rates, a big enabler of the rise of a middle class that could basically withdraw from the risk frontier).
The Gilded Age End Game
The game was over. Artisan hackers and old-school hustlers had been knocked out of the game, and transformed into engineers, laborers, marketers and professional managers in the process. The bankers had won (historically, this has always been the case; the only force capable of beating bankers in a technology-wave end-game is politics, backed by physical military force, a scenario that played out in Germany and Japan).
In information-theoretic terms, what happened was simple. Before, there was a chaotic and illegible new world of market and technical knowledge, owned by hustler and artisan (hacker) classes respectively. Each of those classes was able to use the illegibility of its domain to outsiders to create principal-agent situations to negotiate with investors on advantageous terms.
After, this knowledge became codified and institutionalized into a two level hierarchy, each with a specialist and generalist component.  Artisans turned into laborers (generalists) and engineers (specialists). Hustlers turned into marketers (specialists) and professional managers (generalists).
The defeated players who retained some individual leverage turned into the new professionalized and mobile middle class. Those who didn't, turned into either blue-collar or white-collar generalist labor.  The general principle was simply that money tamed silos of information in most-legible-first order so that it was no longer in play at the negotiating table. Once all information had been neutered via equilibrium arrangements, finance became, once more, the game of zero-information-advantage gambling it always wants to be.
The 1870s - 1930 story should sound very familiar to anyone over thirty. We've basically lived through a compressed and highly accelerated (by a factor of 2x to 3x) version of the same cyclic pattern, starting around 1979.
We will explore this story, which is now entering its end-game phase, in Part II.
Part I | Part II | Part III
This post is part of ongoing exploratory research for my next book, Game of Pickaxes.