Traders vs. Makers

My feed is full of Facebook IPO filing “news”, but the winning quote for the day seems to be this one, from Mark Zuckerberg’s letter to investors:

we don’t build services to make money; we make money to build better services

Like a lot of people, I love that quote for what it says about the motivations of great entrepreneurs: they do what they do to create value for users and make a difference in the world; if they happen to make money along the way they’re cool with that, but it’s a means to an end, not the end in itself.

This quote struck me more than usual today, because yesterday I wrote about how hard it is to create business value when SMBs are your target customer. A commenter (who reached me offline, not in the public comments) challenged my dim view of local by reminding me of the many founders and early investors who had made money in the sector.

Creating Wealth != Creating Value

The point of my post yesterday was that — given the level of human effort, capital and time required to build *any* business — local was a tougher-than-average place to create business value, defined as: “taking away [customer] pain for money, with accelerating [positive] margins at scale.” As examples I cited some of the “winners” in local, none of which had succeeded in building a business that actually generated more money than it cost to build and run.

The commenter’s counter-argument was that — because the founders and investors in some of these businesses had created significant wealth for themselves (despite the poor economics of the businesses they had built) — the businesses actually *were* successful, and I shouldn’t be so dismissive of the opportunity.

Zuck’s quote was timely, because it reminded me why that argument doesn’t work for me. It also brought home for about the millionth time since we started Founders Co-op why I love what I do, and why there’s never been a better time to do it.

Traders vs. Makers

I have a not-very-nice view of the financial services business that goes like this: the farther you progress up the capital markets stack — from seed investing at the bottom; through the various stages of venture and growth capital; to public market equities; and on up to quantitative trading and pure risk arbitrage — the more the emphasis of the principals shifts from a positive-sum game of value creation to the zero-sum game of value extraction.

In the simplest terms, makers focus on creating value; traders on creating wealth.

Not very many years ago, when it took more money to build a software business than it does today, the influence of “trader culture” on startups was very strong. Companies were formed by business founders and financed by venture capitalists who learned their trade at investment banks. Developers were low-level code monkeys hired to build what the business guys told them to build. And the public markets — a liquidity machine controlled by traders — were where the traders went to turn business ideas into money.

This was the golden era of “other people’s money” and “greater fool” investing.

In the last 10 years, the actual capital cost of building a software company has fallen precipitously — from millions of dollars to hundreds of thousands or (for very agile teams of makers) nothing at all. Open source tools and cloud infrastructure are the proximate cause, but these are just tools in the hands of the makers — small teams of digital creatives who know how to place the levers that can move the world.

The traders’ loss has been the makers’ gain.

As the power of money in software entrepreneurship wanes, an entirely new class of maker-founders and entrepreneur-investors has burst onto the scene. Makers no longer need the traders’ permission to get into business — they still (occasionally) need some money, but they prefer to take it from fellow-entrepreneurs who have walked in their shoes and can help them hone their craft.

The leaders in this new world aren’t admired for being aggregators of capital, but aggregators of talent: Y Combinator, TechStars, Foundry Group, First Round Capital — these are firms built by makers, for makers. And the most admired tech firms today — Facebook, Twitter, Google and Apple — were built by makers, not traders. (Jeff Bezos began life as a trader, but is clearly on the side of value creation).

Makers actually care about their customers.

There’s a strong, causal relationship between the rise of maker culture and the growing focus on user-centered design and agile software development.

When makers set out to build a business, they tend to design from the customer in. The core assumption of the Lean Startup movement is that frequent, high-velocity customer engagement is the only reliable path to business success. We’re also witnessing the rise of the designer-founder, reinforcing the idea that the experience layer of the business — the parts the customer actually touches — is as fundamental to long-term value creation as the underlying machinery.

When traders set out to build a business, the ends (creating wealth for founders and investors) justify the means (doing whatever it takes to drive price up and get out before the roof falls in). The business design is optimized for financial and capital markets outcomes, not company or customer gains. [Or as MC Solaar says in the video above, “La fin justifie les moyens”]

Wealth creation should flow from value creation

Back to Zuck and his investor letter, the Facebook IPO is likely to be one of the biggest tech wealth creation events ever (and Twitter’s not looking too shabby either). In fact, I can mentally list dozens of maker-led, user-centered software companies that are on track to produce billions of dollars of investor return.

As it turns out, making better services is a great way to make a ton of money.

The evolving transition from a trader-led culture of software entrepreneurship to a maker-led one doesn’t signal the kind of creeping socialism that kept Nixon up at night. I actually believe we’re witnessing the early ripples of a culture shift that will eventually make its way to Wall Street (though not without a little regulatory encouragement).

If this continues, we may actually see the day when pure trading behaviors are (gently) discouraged, while public and private capital investments that actually produce long-term value are supported and celebrated.

Our culture *should* reward and encourage entrepreneurs who work hard to grow the pie, not just cut a bigger slice for themselves. The maker community is leading the way, and I feel lucky to have a bit part in the action.