What Makes Silicon Valley Work

How infinite games breed positive sumness

The other week we discussed what Silicon Valley looks like in a virtual world. In this piece we’ll go deeper on what attributes make Silicon Valley—here used as a metaphor for tech culture more broadly—more positive sum than other cultures.

  1. Silicon Valley is a hits-driven industry.

  2. It’s hard to know which startup will be the next big hit.

  3. The valley runs on reputation, and thus people play infinite games.

  4. The valley celebrates failure, encouraging risk-taking.

  5. Status is doled to the builders and the funders — the people in the arena.

Silicon Valley is a hits-driven industry, which means that what matters most is how big the winners are. The biggest companies make the most money and often have the biggest impact. So when investors and founders decide what to spend their time on, they always focus on finding and funding big winners—or anything that could become a big winner.

Of course, it’s nearly impossible to predict who will become the next Jeff Bezos or Elon Musk. Mark Zuckerberg was a college drop out. So was Bill Gates. And Evan Spiegel and Steve Jobs too. The list goes on—not just of drop outs, but of founders whose successes were far from obvious.

This is why the golden rule of Silicon Valley is not just “Treat people how you’d want to be treated,” but instead, “Treat people as if they might become the next great founder” — because for all you know, they just might. If you’re good to them, they’ll remember you, let you invest, hire you, invest in your next project, etc. This is why you see 20 year olds able to quickly raise money or build their reputation in The Valley in ways you wouldn’t in other industries. In any comparable industry for talented people — Wall Street, medicine, law, Fortune 500 companies — there are few if any 25 year old billionaires. You have to “pay your dues” in other industries far more than you have to in Silicon Valley.

Silicon Valley runs on reputation: if you have a good one, everyone will want to work with you. Reputation is built on integrity and proof of work — What have you done? What have you built or funded? Who have you helped? Successful builders are more respected, but funders get plenty of respect too.

Silicon Valley is uniquely positive because, unlike Hollywood, there’s no natural limitation of startups that can be funded or become successful. Also, angel investing is so common, which aligns incentives at a much broader scale. 

What this means is that people play infinite games in Silicon Valley. Let me explain: There are two types of games you can play throughout your life — finite & infinite games. Finite games have an end. They’re full of willing participants who all agree on a set of rules, including the ending terms of the game. Infinite games, on the other hand, are also played with willing participants, but the game doesn't end. We play infinite games simply for the enjoyment of playing them. This is what makes them so magical.

Of course, it’s not all peace and love. As Alex Danco says in his great episode with Jim O'Shaughnessy in How Scenes Work

When you're surrounded by peers that are all competing for the same thing, on the one hand it creates this tremendous sense of camaraderie. Because you admire each other and you are grateful to each other and love each other for all validating each other's choices. You look around and you see other people who are striving and wanting and reaching for the same things you are and that makes you feel good, right? Because it validates this choice you've made to care about those things.

On the other hand, you hate them because they're your rivals, and they reveal your striving for what it is. They also want the same things and there's only one of it, there's not enough to go around. They are becoming your opponents by being the same as you; not only because they’re going after the same finite prize; but more importantly, because their wanting reveals your wanting.

So this creates this really big tension. It creates something that you would call a “double bind” psychologically, which is that simultaneously you are compelled to love and hate them. You are supposed to be grateful to them, but also envy them, right?

This irreducible tension is what creates the energy of a scene.

It’s not zero-sum, but money isn’t infinite, and some categories do have winner-take-most dynamics. What’s interesting is that there are finite games within infinite games. Learning is an infinite game, but school is a finite game. Culture is an infinite game, but scenes within our broader culture are finite games for the most part.

Infinite games characterize the Silicon Valley ethos, and this positive-sum competition fuels entrepreneurs to work hard and not only hustle, but be creative and try new things. In the abstract, everyone is rooting for each other. But when there’s not enough allocation in a fundraising round, everyone’s quick to trash talk the other. Of course, it’s just business, nothing personal. Grudges are inefficient in repeated-interaction environments, so people don’t keep them as much as they do in other industries.

One cultural quirk holding the infinite game together is the celebration of failure. Remember, all VC firms construct their portfolios knowing that their biggest exit will likely return more dollars than all the other companies combined. So each individual company doesn’t matter that much to them. And yet, since they can’t tell which one will have an outlier outcome, they have to treat everyone well. “Make your returns on your winners, but your reputation on your losers” - a popular saying goes.

Another quirk that’s celebrated is the pursuit of weird ideas. Since we don’t know who will be successful, it follows that we also don’t know what will be successful. So every startup is an experiment that the ecosystem benefits from. In a way, we actually want a ton of inefficiency — people trying new things in new ways without coordination — so we take as many shots on goal as possible to build something big.

So when any company fails, especially for trying something crazy, we defend it lest it become a referendum on Silicon Valley. Every Theranos or Juicero or Clinkle is a threat to the whole edifice: If those companies were shams, the logic goes, maybe lots of other ones are too? But a very important idea is that anyone and any idea can potentially be successful. If you as an ecosystem want the next Google or Facebook, you’re going to need thousands of shots on goals to get it. You need people unafraid to pursue crazy ideas and start companies. So it’s less that we celebrate individual instances of failure and more that the ecosystem needs all the shots on goals to keep itself going.

To ground this in a specific example: It’s an important narrative that the founders of Clinkle and Juicero can raise money again. That’s why founders are so eager to support other founders, even those that have blundered. Because if the music stops, everyone’s affected. Knowing that failure is de-risked keeps the magic going. If you notice, VCs aren’t as supportive of each other, in fact they’re quick to make fun of each other and even themselves. That’s because VCs compete head on for allocations. Founders don’t compete with each other as much, they compete against nobody giving a shit. In other words, they’re far less concerned about whether other founders succeed, and more concerned about a market environment where fewer employees want to take the leap or fewer angels want to take a risk on the next startup.

Related, founders and operators becoming angel investors also accelerates the flywheel. Equity alignment is not as much financial as it is social. If the advantage is being seen as a curator, a follower of the golden rule, and a magnet for capital or interesting ideas, then angel investing is where it’s at. High signal, low effort. Status is given to people who build and to people who fund builders. 

This is a positive feedback loop that encourages more people to build and more people to fund them. As Danco writes: “The social rewards of angel investing solve an important chicken-and-egg problem in early stage fundraising that financial rewards do not.” After all, many ideas are just ideas on a napkin. They require a suspension of belief, and your bank doesn’t let you do that — social status does. 

Not to mention that there’s special status for those who believe first, which further encourages people to invest “hilariously early”, which helps startups get off the ground. This only works in regions that care about this, which used to be centralized in SF but is now increasingly common elsewhere. These days, some people even make investments on Venmo.

Talking about status may seem trivial, but who society decides to lavish praise (& status) on is quite important. Status serves as a coordination mechanism — an ecosystem that praises something will get more of it, whatever it is.

And what separates Silicon Valley perhaps is that the most status is given to people who build. Not to the critics, the ideators, or the inheritors. It’s given to the people who’ve built the biggest companies, and to and to people who try to build those companies, even when they fail. Which encourages them to try again. And the flywheel continues.


Read and Cosign of the week: Eade Bengard on finding your people

Podcast of the week: Lyn Alden on Bankless

Song of the week: ODESZA

Until next week,

Erik