Silicon Valley is defined by startups. While more than half a million new companies are started each year in the United States, only a tiny minority have the potential to get really big really fast - i.e are "startups" in the Silicon Valley sense of the term. As Paul Graham, founder of the legendary seed accelerator Y Combinator succinctly summarized, "Startup = Growth."
If you define growth based on revenue increase over four years (the way Inc keeps score), or based on achieving revenues of $100M within several decades of founding (the metric used in this recent Kauffman Foundation report by Paul Kedrosky), then most "high-growth" companies are admittedly not the venture-backed, Silicon Valley IT companies that probably come to mind. In fact, most of the $100M revenue companies founded since 1980 are not in IT, and are not in California - the Southeast actually leads the nation here.
But the growth Graham describes is different, and reflects a very specific, characteristic phase in a (tech) startup's development, after it's been through an initial phase of "slow or no growth while the startup tries to figure out what it's doing" (Graham's words), and before a successful startup begins to reach either internal or external limits, and growth starts to slow.
There's an amazing period in between - "as the startup figures out how to make something lots of people want and how to reach those people" - where growth can be explosive; at Y Combinator, Graham looks for weekly (!) growth of 5-7% a week - corresponding to yearly growth rates of 12.6x-33.7x, according to Graham's figures.
To be sure, this period of growth may not last very long, if it's achieved at all. Bruce Booth of Atlas Venture and Bijan Salehizadeh of NaviMed Capital calculate that in the 2000s, 75% of IT firms generated returns of 1x or less. More generally, Booth observes that as a whole, tech investments have underperformed life science investments, and have taken about as long or longer to achieve exits.
Yet what tech startups may uniquely offer is their potential to deliver at least a burst of exceptional growth, which (on rare occasions) can lead to exceptional (100x) returns. You don't see this in life-sciences, for example.
As serial entrepreneur Steve Blank has pointed out, the internet provides a historic opportunity to scale. "Facebook has adroitly capitalized on market forces on a scale never seen in the history of commerce," he writes. "For the first time, startups can today think about a Total Available Market in the billions of users (smart phones, tablets, PC's, etc.) and aim for hundreds of millions of customers."
It turns out that this phenomenon of ultra-fast growth may have an interesting biological correlate - in the field of addiction. In particular, the addictiveness of drugs of abuse such as cocaine and methamphetamine seems to be driven by the rate at which the neurotransmitter dopamine increases.
As George Koob of The Scripps Research Institute and Nora Volkow of the National Institute on Drug Abuse write, "fast dopamine changes are associated with the subjective perception of reward, whereas slow and stable dopamine increases do not induce these subjective responses." Elsewhere, Vokow and co-authors observe that "the reinforcing effects of drugs of abuse in human beings are contingent not just on dopamine increases per se...but on the rate of dopamine increases. The faster the increases, the more intense the reinforcing effects."
While the time scales of startup growth and dopamine accumulation are clearly different (weeks vs seconds), it's tempting to speculate that our fascination with tech startups is in some way connected to this same neural circuitry. Yes, some tech startups (like Tumblr) may enjoy widespread name recognition, and yes, some - a rare few - generate extraordinary returns. But you have to wonder if what really captures our attention, what hooks so many entrepreneurs, venture capitalists, journalists, and wannabes is the explosive rise in value, an exponential increase that, once you experience it, may leave you desperate for more, and lead to a frantic scramble to find another hit.
Pando Daily recently offered a cynical send-up of what so-called "startup junkies" are really drawn to -titles, conferences, free-wheeling culture. There's probably some truth to this. But I'd suggest that what really attracts people to tech startups just may be the chance to experience the exhilaration of explosive growth - and, of course, the dopamine surges that accompany it.