The Outsider Paradox
Or why it's hard to be a two trick pony
Outsiders have social permission to build fantastical things beyond what is normally “allowed” in any given ecosystem, yet over time the most successful Outsiders become the Insiders and the cycle repeats
Cultivating an aggressively Outsider Mentality is often touted as a (if not the) core principle of the startup ecosystem. See Paul Graham’s Founder “Naughtiness”, Guy Raz’s “Finding the problem no one else is solving”, a16z’s “Moral Authority” perspectives and all the other essays that venerate bucking trends as being a key trait that forms the basis for innovation.
What’s it look like?
A bold, enterprising, young Outsider is called by her passion to upend the traditional status quo in a stagnant B2B/B2C/D2C/etc industry that she’s uniquely suited to disrupt with her vision (or so the story typically goes). People (Americans especially) love underdogs and what’s more underdog than a scrappy entrepreneur putting a middle finger up at the stodgy, old boardrooms?
I love it too. David & Goliath tales are motivating and showcase the power of the human will against all odds. They also leave a lot of stuff to think about out of the narrative.
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I’ve been thinking about the idea of Outsiders a lot lately as I try to figure out how to start something new in the burgeoning Crypto space. For the sake of brevity, I’m going to start with the framework for how I have come to think about the benefits and drawbacks of cultivating an Outsider Mentality first and then (for those who have a little extra time to read) I’ll go into my personal context with taking an Outsider Mentality in my career. Let’s do it.
The Outsider Mentality
Outsiders often (but not always) have an implicit social license to shake things up from both direct and indirect participants of an industry.
This social permission generally comes in the form of being “dismissed” by Insiders by operating in a way that they “know can’t work” as a startup (which you can actually cultivate by intentionally looking harmless or eccentric). No one cares about you therefor you can be heretical.
Sometimes Outsiders explicitly get the “benefit of the doubt” or even get major praise when they’re doing stuff that is typically against the norms or rules of said industry. This second class unfortunately mostly applies to what I’ll call Partial Outsiders, who are Outsiders in certain ways like career background or experience (like bringing a software mindset to a non-technical industry), but not Outsiders in other aspects of their life (ex. same race/class/educational background as the Investor you’re pitching or client to which you’re trying to sell)
As an Outsider you can more easily connect disparate fields, practices, and ideas to create something truly net new.
Different industries have different histories so they have different ways of approaching problems. Diverse experience creates value. There’s a balance to strike between bringing differentiated people & concepts together (feminist writer and professor Jo Freeman has a great write up on how a degree of homogeneity in teams is crucial for productivity), but a novel idea brought to an industry at the right time can absolutely change the world ← Malcolm McLean bringing containerization to the shipping industry shows how powerful an Outsider Mentality can be.
Outsiders don’t have to deal with Tradition aka peer pressure from dead people
Sometimes an Outsider actually just has no idea what the “traditional” way is. This leads them to continual come up with new approaches as they operate without the mental burden of fitting within an increasingly (over time) complex framework of how things “should” work.
Alternatively, an Outsider might understand the pre-existing structure of an ecosystem and see where they are have an advantage by being unburdened by historical constraints. This gives Outsiders an operational agility that Insiders can only dream of as Outsiders zoom past them.
You’ll always reinvent the wheel if you’re not careful.
The inverse of the final benefit above is that you might not have the benefit of the collective history and lessons learned of the industry you’re trying to disrupt. Matt Levine has a great running joke about how Crypto people are just rediscovering all of financial history and he’s mostly right. I can’t predict the future, but I can see some of the problems that are bubbling up with hierarchy within DAOs, a lack of realism in predicting software development times, and the countless hacks of improperly audited smart contract code in Web3 are reteaching some lessons on how people should work together that could have been avoiding with a little less of a reflexive “burn it all down” approach
To be clear, this is a wasteful approach if you’re trying to build something good and build it fast. Rebuild the important things, keep the good ideas from history and adopt them as your own.
Trust is hard to build with key Insiders as an Outsider
If I knock on your door and tell you I think everything you do is stupid and you’re an idiot and then ask nicely to come inside to sell you something what would you do? Obviously this is how Elon Musk operates, but for the rest of us who can’t afford (yet) to alienate whoever we feel like that day and need to convince clients and customers of things (like giving you money) on a regular basis, you’ll probably need to win over some Insiders eventually (and honestly the sooner the better)
If you can avoid the enthusiastically mindless wheel reinventing mentioned above and communicate that “hey there are some good ideas and traditions of yours” with Insiders you’re courting, you can probably avoid the worst of this issue. If you don’t want to do that to start attracting some Insiders in specific roles, then expect to have to teach your hires a lot of industry context before they can be truly useful as, say, a Head of BD. Customers want to buy things that solve their problems and you can’t solve their problems without knowing them and communicating credibly that you know them.
The Outsider eventually becomes the Insider as you win
This is admittedly a good problem to have. However, at some point you turn into the incumbent which sets the conditions to fall into exactly what you successfully disrupted when you entered an industry.
You can mitigate some parts of the intellectual challenges here. Read weird papers about butterfly wings. Talk to people that like REALLY disagree with you. Hire people that tell you when your ideas suck to your face. Stay vigilant to new Outsiders coming up with better approaches. Do all the things your previous competitor should have done, but didn’t.
You CAN’T mitigate your context. Pretending to be something you’re not can work for a little while, but acting like you’re the underdog when you’re clearly not isn’t a sympathetic long term position. You’ve built up a history of commitments to your team and investors over time that you should probably acknowledge as well as gathered a set of resources to allocate in ways that Outsiders don’t have access. Competitive Privilege is real and no amount of publicly smoking your meats will change the fact that you have an inherently different set of strategic choices to make due to your successful positioning.
So onto the Inward Look.
For the past few months, I’ve been in research mode to find interesting problems that emerging Web3 principles and concepts might be able to solve better than currently handled by Web2’s infrastructure. I’ve found some exciting stuff already so I’ve been mentally running through what a roadmap might look like for building a company around said ideas. This has naturally led me to reflect on the classic “why me” question that founders should ask themselves (especially before trying to raise from VCs who will ask that question").
What makes the metaphorical “you” the best and most appropriate person to build and do this really really hard thing?
More on that in a second.
My current thesis is that the winners (now Insiders) in Crypto right now are (on average) more early movers than good operators which means we’re about to see a wave of fast followers that will compete on many vectors other than “does this thing exist or not” with the current guard of protocols/companies. The Outsiders will have to contend with the very really challenge of establishing legitimacy in the space, but by definition the coming wave of quality/utility driven projects won’t just be a fork of a previous project with a new coat of paint. The forks will die (or become memes). I think predicting memes is tough so I’ll leave that one for those danker than I.
So if I think this fast follower wave is coming and that many will win on operating skill, I see an interesting confluence of factors where I bring value.
I’ve felt and acted like an Outsider for most of my life (which is a bit eyeroll-y to write out tbh) and it’s important for me to acknowledge that as I reflect on my own context. In high school, I was an angry Athiest hooligan internet kid with a pierced ear in my nice, conservative Christian neighborhood in suburban Georgia. I left to go to a military college and join the Army (Infantry hooah) where I was considered by some of my Leaders to very much be an “Athenian” rather the “Spartan” they imagined they wanted because I read more books than they thought was appropriate. This continued over time in spite of my performance reviews reflecting the high quality of my work. I eventually went to a business school where less than 5% had military experience (and probably an equivalently small percentage had ever interacted with military personnel) where it was gently (but firmly) suggested that I pursue Consulting as it was a way for me to “prove my value” to future employers in a way they could understand.
I decided I could build things without checking another box for 2 years so I spent my time learning finance and tech. It’s worked out pretty well for me, but in the process of all of this, I’ve lived every piece of the framework above as I’ve tried to connect my hard won lessons learned on people, teams, and organizational management to the new contexts I’ve entered.
I’ve experienced where the Outsider Mentality is unbelievably helpful like when intentionally empowering my geographically distributed Soldiers to solve their own problems using Mission Command Principles that my Army Leadership was espousing, but not actually implementing. I’ve also experienced where the Outsider Mentality is absolutely the wrong call like when I was interning at Amazon Go and I made the decision to reach out to Whole Foods (which Amazon had purchased) for their reporting metrics, structure, and approach to integrate into Go’s internal reporting. Amazon was (and is) aggressively trying to reinvent physical retail with a new mindset, but at the time they were doing it at the cost of ignoring crucial metrics (and industry benchmarks) like inventory spoilage and sales per square foot. In their pursuit of Outsider novelty at all costs, they failed to acknowledge that high quality stores already exist and can be used as a free learning so they could focus on extending the retail experience past the “good” status quo.
So knowing a few things about how Outsider Mentalities work, I can see some examples of tension in Crypto already. Many protocols are thriving by letting the operations scale, but are critically failing to scale others (like team sizes) for often ideological reasons. Growing orgs need more structure, more processes, and more (shudder) administrative bureaucracy to manage the internal workings because they get more complicated as they grow. Teams need some sort of (even weak) hierarchy to scale effectively. Crypto people often reflexively hate even a whiff of structure or (dare I say it) centralization of decision making, but you just can’t rely on your DAO to decide on which type of pencil to buy every day. Fortunately, many protocols’ inherent tech simplicity helps suppress the impending operational problems here for a while, but this will get much more critical as bigger, more interconnected things get built and man the numbers I’m seeing are already buckwild to be completely honest.
Take the Automated Market Maker Uniswap. About $12B was transacted through their platform last week which brings them to about $700B in cumulative value transacted. At their rough average 0.3% fee level that’s about $2.1B in fees accumulated. As far as I can tell, this is managed by a team of 40ish people. That’s a revenue per employee of about $52M. Dude. like WHAT.
That’s insane. Hire some engineers! There is absolutely no chance that 40 people are detecting and solving and monitoring all of the issues that $12B worth of transactions flowing through that platform create in a week. Also, it really fails to build compounding advantages that a steady influx of fresh blood solving emergent problems will create. Like, I don’t think they should hire people to just hire people, but man this smells like an opportunity.
So I’m excited. I think thoughtful organizational design is critical for the industry (especially one now looking for DAOs to be get individuals to come together and build). There’s clearly a ton of work left to be done in solving the problems these new organizations face and I think a thoughtful Outsider Mentality that acknowledges the inherent weaknesses Outsiders have to deal with will really be a game changer for the next wave of Crypto startups. I believe I can bring that and hope this helps you do it too.
I hope this added value to your day.
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TIMESTAMP END 1140 EST ← Really blew past the clock on this one, but felt good about it.
EDIT END 1147 EST ← Not so much polishing here because I think I did it as I went? I’ll adjust tomorrow and put a countdown clock to see if I can keep myself more focused on the core task at hand