Go big or go home

VCs don’t care if you’re a nice person. They want founders who take massive risks.

Of the billionaires on the 2023 Forbes 400 list — the 400 richest people in the United States — 70% are basically self-made. And 59% came from an upper-middle-class background or below. This phenomenon is even more true the farther you go along the tail of the wealth curve. All of the 10 richest people in America are classified as self-made. (Forbes treats the question as a sliding scale from 1 to 10; those with scores of 6 or higher were considered self-made).

This number is significantly higher than it once was. In 1982, only 40% of the Forbes 400 had started their own business; the majority were simply scions of inherited wealth. Old money is out, new money is in? Well, it’s essential to keep in mind that this is not an indication of overall social mobility in the United States. In fact, by most accounts, such as the extremely detailed work of the economist Raj Chetty, overall income and wealth mobility has decreased in the US from a generation ago. The Forbes 400, however, is the extreme right tail of the curve. To wind up there, it helps to have made some extremely risky bets that paid off — ones that you have less incentive to take if you’re already rich.

Let’s say you inherit a $25 million trust fund on your 18th birthday. Are you going to start a business with it? Maybe you should. But it’s much easier to withdraw $1 million a year to live off, travel the world and have some wild parties, and put the rest in S&P 500 index funds earning

7% a year. By the time you’re 65, your expected net worth is about $250 million — plus a whole lot of frequent flyer miles. Nice! You’re very, very rich. But you’re not sniffing the Forbes 400 list, where the bidding starts at about $3 billion.

Conversely, there are about 5 million new businesses founded in the US every year. That’s a slightly misleading statistic because it includes things like a self-employed writer/statistician/poker player setting up a personal S corp for tax purposes. Still, if even 1% of those startups have serious potential to scale up, that’s 50,000 lottery tickets every year. Some of them are going to hit big, and the payoff for hitting big is so large these days that the lucky few who do are going to leapfrog all the trust fund kids.

Now, this certainly doesn’t mean that you want to grow up in abject poverty if your goal is to launch a successful startup and get really rich; only a handful of the billionaires on the Forbes 400 list did. It helps to have a comfortable living environment. It also helps to be from one of the demographic classes that VCs like to invest in (e.g., a nerdy young man of European or Asian ancestry). But people who are born on third base tend to be pretty risk-averse.

“Why are second-generation kids never that successful?” asked Social Capital CEO Chamath Palihapitiya, who moved with his family from Sri Lanka to Canada and worked at a Burger King to help support them. Instead of the entrepreneurial mother or father, who had “only one curve that they were optimizing for, which is the what-have-I-got-to-lose curve,” the child starts “with the exact inverse curve working against them, which is the risk of embarrassment,” Palihapitiya said. “No matter what the parent says to that child, that person is operating from a perspective where the perception is that they have an enormous amount to lose.”

It can also help to have something else: a chip on your shoulder. Josh Wolfe, of Lux Capital, is fond of the phrase “chips on shoulders put chips in pockets.” Feeling left out, excluded, or estranged can make you extremely competitive. VCs want founders who are willing to commit to low-probability ideas — ideas they think the rest of the world is wrong about — for a decade or more. What motivates a person to do something like that? Wolfe, who grew up in a single-parent home in New York’s gritty Coney Island neighborhood, told me he thinks there’s a common answer: revenge.

“It could be because they were left for adoption. It could be a broken home,” he said. “It could be being the only minority in a mostly homogenous white neighborhood, or the obese kid in a Friday Night Lights football town. People that out of necessity grow a thick skin with not fitting in and being OK standing out. And feeling a sense of anger that is not leading them to despondence, but to motivated revenge.”

Let me make two things clear. First, you only want adversity up to a point. There is almost certainly a threshold beyond which there are too many disadvantages to overcome. Elon Musk had a difficult childhood and became estranged from his father; Thiel was gay and closeted; Jeff Bezos was adopted — but they were also privileged in other respects. They had chips on their shoulders, but they had enough social capital to be taken seriously by VCs, employees, and customers.

And second, this does not always turn out well. That competitive fire can be channeled in both constructive and self-destructive ways, and childhood trauma almost certainly has negative effects on the life course on average. But we’re not talking about the average: We’re talking about who winds up on the extreme right tail, the 0.0001%. It’s usually going to be people who are either irrationally risk-loving out of a sense of having nothing to lose, extraordinarily mission driven out of a sense of wanting to prove people wrong — or both, as in the case of Musk.

All of this is naturally going to lead to some difficult personalities. Some VCs even seem to think of it as an asset when a founder is poorly adjusted. “Who is my real customer? It’s a young, disenfranchised, disenchanted entrepreneur-to-be,” said Palihapitiya, referring to the sorts of people who might come to him for investment or mentorship. “And I use those words specifically, because if you’re comfortable, and you’re happy,” he continued, “you’re not the kind of person I want to work with anyway because you’re probably not gonna be successful.”

This feels like a dangerous game. Successful founders may be disagreeable on average, because disagreeability is correlated with competitiveness and independent-mindedness. But the disagreeability is still a bug, not a feature. If you start to select founders because they’re disagreeable, you may get the wrong ones — especially if founders deliberately play into stereotypes that they think VCs will like, as Sam Bankman-Fried did.

And yet, if all you care about is the right tail, the selection process gets weird. Let’s say you’re starting a small business like an ice-cream shop. You just want to sell ice cream at one or two stores and make a decent living — not disrupt the global ice-cream business. You have the money, and you’re looking for someone to run the operation. What characteristics should this person have? Words like reliable, trustworthy, hardworking, and agreeable come to mind. They’ll give you the highest probability of success.

But what if you want a business that could grow by 100x or 1,000x? That’s a lot harder to know. I don’t think VCs are deliberately picking founders they think are unreliable, although sometimes it seems like it.

In August 2022, Andreessen Horowitz (A16z) announced its newest investment: It would put $350 million into a company called Flow, which “aims to create a superior living environment that enhances the lives of our residents and communities” — in other words, rental real estate. The company was founded by a charismatic Israeli-American named Adam Neumann. If the name sounds familiar, it’s because Neumann was also the founder of WeWork — a company that was once worth an estimated $47 billion before imploding spectacularly amid accusations that Neumann had, among other things, taken a “sizable chunk” of weed across international borders on a private jet, fired a pregnant employee, and — most importantly — expanded far too quickly, leading to enormous annual losses. (Neumann, after directing me to a spokesperson, didn’t respond to an interview request.)

Would you want to go into business with someone like that? Well, I probably wouldn’t, though the plane rides sound like fun. But in Silicon Valley terms, the thinking may go something like this: You’d rather invest in someone who had built a $47 billion company and watched it catastrophically collapse than someone who had never done so at all.

And Andreessen Horowitz is proud of its investment in Flow. In February 2023, Marc Andreessen invited me to an A16z conference at the spectacularly beautiful Amangiri hotel in Canyon Point, Utah. I thought it would be worth going for the networking and the snowy desert landscapes even though I expected to be told that the event was off the record. Sure enough, at the first panel, Ben Horowitz said the proceedings were off the record. Fine. But since nothing had been agreed upon up to that point, I’m within my journalistic rights to report on the existence of the conference itself (which has also been reported on elsewhere) as well as the person who was onstage with Horowitz at the time he made the announcement. It was Neumann, as you’ve probably guessed. In a room full of Silicon Valley’s elites, A16z was showing him off — and sending a message.

“Why would they run out and give a bunch of money to Adam Neumann after everything they’ve seen? Like, what in the world? Was that all about?” said Benchmark’s Gurley. (Gurley brought up A16z’s investment in Flow independently in our conversation — we hadn’t been discussing the conference and I don’t know if he had attended it.) “If I were asked to analyze what they were doing, they wanted to send a signal to everyone.”

The signal was that they didn’t care about reliability — they wanted founders who gave them upside risk. They were embracing variance. “If they’re that type of person, they’re open for business, the door’s wide open, and we’re willing to talk to you, no matter what.”