Startups, Businesses, DAO’s, and Lock-In
Why is it easier for an individual to identify a valuable problem and solve it in a startup than it is in a business? Will be the same in most Decentralized Autonomous Organizations (DAO)? In this post, I’ll argue that information is a key enabler that makes it all the easier for an individual to identify and solve valuable problems. If we’re in the age of information, then why does information seem so scarce? The reasons for information scarcity are many and emergent, including status-quo preservation and self-identity protection. To understand the resistance to solving a valuable problem, it’s useful to think of Lock-In  and to mark the distinctions between startups, businesses and DAO’s.
A startup is not a business. A startup is an organization that is seeking to become a business. A startup is a hypothesis in search of validation. The entrepreneurs involved in founding a startup are to varying degrees neutral or opinionated about that hypothesis . Sorting problems into valuable and not valuable, and then solving them, is a major predictor of whether a startup grows up into a business.
A business is an organization that has discovered product-market-solution fit and exists to play a minimax game: to minimize cost and maximize profit. Sometimes businesses are in a growth phase, sometimes they are in decline, and it’s seldom understood when a peak is happening.
A DAO can take on multiple quality attributes. A DAO may blend properties is a non-profit with a not-for-profit. A DAO may be a for-profit co-operative entity. Anybody can set up an extractive DAO. There are very few limits on DAO institutional design, as the terms of what is decentralized and what is autonomous can be defined in many ways. What is the threshold for autonomy and how does the organization understand the term autonomous? Given the ambiguity, A DAO may erect very different, or very similar barriers to solving valuable problems as a startup or a business does.
They’re all subject to Lock-In, though, the kind of Lock-In may be different.
Look down at your fingers. Chances are that you have prints at the end of them. As an entrepreneur, your fingerprints create the maze that your future employees, partners, contractors, and customers will have to navigate. Lock-In begins with the fingerprints of the founding entrepreneurs. As Thelen (2004) argued often the founders of an institution have little idea that their initial decisions will have such a dramatic impact on the organization decades or centuries into the future. Entrepreneurs are rarely aware that they’re creating future walls with their fingerprints as they paw at a problem space.
One fundamental capability of a startup, a key predictor of its transformation into a business or into failure, is learning. How rapidly can the startup learn? How rapidly can it learn about which problems are valuable and which are not, which details are important and which are not, which people have important enough problems to solve and which do not? How well can it coordinate perspectives? The incentives in a small startup are usually aligned. The entrepreneurs (often) want to discover fit. Often, so does the team they lead. Discovering fit means success.
The incentives are far more difficult to align within a business. Learning is more likely to be inhibited by a few phenomenon related to status-quo preservation (preserving the current order – you can hear this in the refrain “that’s not the way things are done here”), self-protection (“but what will I do?”, “I’ve earned the right/privelege to treat people that way”), information entropy (“nobody knows what that means”), heterogenous incentives (“you get ahead by back-stabbing”, “you get a bonus by fixing the numbers”, “you get ahead through consensus”, and so on) and heterogenous incentive structures (“I get my commission upon signing, you get your bonus at the end of the year”). Functional stupidity is a major force . In part, functional stupidity is a certainty-status response to both curious inquiry, critical inquiry, and all shades in between. What’s most interesting about the effect of functional stupidity is that the amount of information reaching the centre of the hierarchy, already restricted by the physics of bandwidth, is further choked off by making contradictory information unwelcome. Functional stupidity causes a reduction in learning. Less talky talky, more tappy tappy.
It isn’t the only force that may be at play. Many businesses, in an effort to promote outward competition, incentivize inward competition. Why collaborate when you can compete? This doesn’t always have to generate negative conflict, but once unleashed, it can turn ritualized internecine conflict into stochastic internecine war. Isn’t it curious how rapidly fear and insecurity spread?
Often, insecurity, from within-within, within, and without, leads to information hiding. The worse part is that it can be difficult to discern functional stupidity induced disengagement from insecurity induced information hiding . In large institutions there is tremendous incentive to silo information – not just data, but also know-how, tradecraft, and ideas. Silo’d information reduces the rate of learning, which in turn degrades the dynamic capabilities  of the organization, which in turn creates a scarcity mindset, which in turn creates actual scarcity, which in turn increases the incentive to hide information . Once started, these dynamics can become the culture, and hard lock-in ensues. Spirals operate in two directions and it’s possible for them to be reversed. All one has to do is figure out how to reverse gravity.
Finally, the central component of a certainty-status response is perceived certainty. Many people experience certainty-status responses in places with less democracy, through the authoritarian government official that is certain that they know best and questions are unwelcome because they create doubt. In workplaces with less democracy, it’s almost as though people experience similar effects . Don’t rock the boat. Questioning the Goose that Lies The Golden Eggs threatens the Goose. Shortermism ensues. From this perspective, Lock-In is welcome because it generates certainty, and the promise of certain profits. It may also manufacture scapegoat narratives for when certain profits don’t manifest.
Solving a problem, no matter how valuable, disturbs the status quo.
These dynamics, contribute to a lack of information, which makes it all the harder for an individual to disturb the status quo – for better and for worse.
The emergence of premature lock-in, in startups, is likely to be fatal if the founding vision is even a little bit wrong. Leadership, in this context, matters a lot because speed matters. The heuristic of enabling smart, engaged individuals and teams to solve valuable problems, stay out of their way when necessary and participate when helpful, is likely to be a pretty good one. Provided that the startup stays small as it discovers product-solution-market fit, the smaller scale a startup can contribute to reduced information asymmetry, heterogenous incentives, and friction.
DAOs may be an opportunity for another way.
Will DAO’s be any better?
A very small number of DAO’s will likely be better. The vast majority will not.
There’s an idea that DAO’s will be designed to do what they are designed to do. If a DAO is designed to sort good ideas from bad ones, and execute them, then the likelihood of good ideas getting sorted from bad ones, and then executed, is greater than a DAO that is not designed to do. Intentional design can nudge an organization into effectiveness. It’s necessary, but not necessarily sufficient. The fact that there is a design is suggestive that there is thought and intent. Such a DAO might be designed to improve information flow for the purposes of increasing the rate of learning. Its collective intelligence and collective judgement could become better over time.
This idea should be familiar. It’s the story most scientific knowledge communities tell themselves. It’s just that communities of knowledge build paradigms for themselves , and paradigms themselves create a kind of lock-in. People tend to create prisons for themselves through the stories they tell.
If information is the key to reducing the friction in enabling individuals to solve valuable problems, and DAO’s offer better mechanisms to share information, then DAO’s may represent a new surface on which to play an ancient game. It might also provide the surface for a breakthrough. Democracies offer a compelling mechanism for transformation. Maybe DAO’s that put democracy at the centre offer a compelling platform?
Keeping the information flowing might be important to generating better experiences and outcomes.
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