Posts

How I Learned To Understand Silicon Valley

If, like me, you are new to the world of tech startups, and are also a fan of the HBO show Silicon Valley, odds are pretty good you spend a part of your Sunday nights very confused.

If you haven’t been watching Silicon Valley, it’s a hilarious parody of life in the tech startup world, which follows the trials and tribulations of an incubator team turned startup (Pied Piper) as they navigate the highs and lows of the business.

Sometimes this show is so accurate, it isn’t even parody; it’s just real life.

The problem with Silicon Valley (and seriously, if you haven’t been watching it, just go now and watch it; I’ll wait) is that it’s so chock full of inside knowledge about the way tech startups work that from the outsider’s perspective, it can be a bit confusing. As one friend put it, sometimes this show is so accurate, it isn’t even parody; it’s just real life.

So for a long time I watched the show in the dark (the metaphorical dark; the one where no knowledge goes) and wondered what the heck half the dialogue even meant. Weirdly (or luckily), it was while writing for One Month’s Learning Library (and researching Valuations, Exits, Seed Fundraising, and why on earth people keep flocking to Delaware to incorporate their companies) that I was turned on to the subtle hilarity and tension at work in the show. So with that in mind, assuming you are watching (do it! There’s a reason creative procrastination is healthy!), let’s answer a few questions about the show using the learning library.

Luckily, it was while writing for One Month’s Learning Library that I was turned on to the subtle hilarity and tension at work in the show.

Why Does Anyone Fund Pied Piper When They Don’t Have a Company Yet? (Ep 1.1)

A lot of season one is devoted to Richard Hendricks, Pied Piper’s CEO, trying to figure out what exactly their company does. Pied Piper starts out as a music app for creatives, effectively a way to find out if you’re accidentally ripping off another artist (or “sampling” as Vanilla Ice would have it), but in the first episode Richard suddenly finds himself at the end of a bidding war with one person offering him seed money and another offering him money money.

But why on earth would anyone offer him money for a product that doesn’t exist yet?

You don’t need a big, flashy product to launch your startup. In fact, it’s fine if you’re even a little embarrassed by your product at first. What you need is a minimum viable product.

Basically, it all comes down to the concept of the MVP: the minimum viable product. If you remember from the “How to Launch an MVP in One Minute” post, you don’t need a big, flashy product to launch your startup. In fact, it’s fine if you’re even a little embarrassed by your product at first. What you need is a minimum viable product: something tiny that people will want to invest in.

In Pied Piper’s case, the MVP is a baller compression algorithm with an excellent Weissman Score that he pushed to GitHub (yay, Github!). That’s enough to entice a VC into funding.

I’m Sorry, Did He Say SCRUM? (Ep 1.5)

As the team at Pied Piper start building the platform of their web app, they run into an early problem with workflow: there is none. The problem is that they still think like individual programmers, so each member of the team is waiting for every other member to finish their work before they feel like they can start it.

Their business manager, Jared suggests turning to a SCRUM system.

It’s really not important to understand the ins and outs of a SCRUM system (which is fortunate because I understand neither the ins nor the outs, and the acronym is vaguely vulgar), what’s important is to understand how an agile workflow system works.

What is SCRUM? It’s really not important to understand the ins and outs of a SCRUM system (which is fortunate because I understand neither the ins nor the outs, and the acronym is vaguely vulgar), what’s important is to understand how an agile workflow system works.

Agile Workflow effectively means that rather than having each member of the company complete a task and then pass it on to the next person and next person and so on, now all of the company is working on tiny, iterative bits of the process. One person can be conceiving of a framework for information architecture while another is testing a part of the process. It works incrementally and iteratively toward a polished product.

How Do They Make Money? What Drives This Company? Why Didn’t They Just Take the Darn Buyout? What the Heck?! (Ep 1.1, 2.1, 2.3, 2.7)

The second season starts out with the Pied Piper team searching for funding yet again, which confused me more than maybe any episode. Why would Pied Piper need to secure funding again when they had so much interest at the end of last season? Couldn’t they write their own check?

Well, no. It’s good to think of it like this: season one is all about getting seed money and creating a strong MVP. Season two is about getting series A funding and about growth hacking the company.

It’s good to think of it like this: season one is all about getting seed money and creating a strong MVP. Season two is about getting series A funding and about growth hacking the company.

What helped me understand this was watching the video on the stages of startup funding. It’s helpful to remember that startups don’t get funded all in one go. They have to go through stages of funding and growth before seeking an exit strategy. The first stage is really just a way of generating the company’s MVP with no revenue stream. But that’s not enough money to get through.

So at the start of season two, Richard needs to find his series A funding, and this is where things get both weird and interesting. VC firms enter into a bidding war for shares in Pied Piper, each valuing the company differently. In this process of valuation, they’re essentially saying, “We offer you X amount of money for Y percentage of your company.” So as the percentages being taken go down, the value of the company goes up based on its equity.

It would make sense for Richard to take the most money he can and then run with it, right? But he doesn’t, and that baffled me, until I understood the principle of growth. We have heard time and time again that the most important thing to a startup is consistent growth.

From that perspective, it would make sense for Richard to take the most money he can and then run with it, right? But he doesn’t, and that baffled me, until I understood the principle of growth.

We have heard time and time again that the most important thing to a startup is consistent growth. When a VC invests in your company, they count on getting upwards of ten times that back later. So from Pied Piper’s perspective as a young company too early on in its years to think about exiting, they need to think realistically about their prospects for growth. If they can’t grow past their series A valuation, they’ll never make it to a series B, and that’ll be that for them (they probably know that 90% of all businesses end in bankruptcy).

This raises the question of why they don’t just sell the company while they’re up. That’s certainly an option for them. Twice, they’re offered a buyout. Aside from the fact that we need them to exist or there’s no show, it also makes sense for them to keep control of their company as long as possible to make sure its valuation grows as much as possible.

Eventually, they’ll need to sell their company or go public. Hopefully, that’s not for a few seasons.