The San Francisco Fallacy, book review: Unconventional wisdom

Other cities are cheaper than San Francisco and have better infrastructure and more talented people who aren't already in good jobs. So why do the tech companies who like to think of themselves as disruptive outsiders flock together somewhere so inconvenient? Jonathan Siegel, who has founded, closed and sold a number of technology companies, wants to dissect that herd instinct and some other fallacies that are common to startups wherever they are, based on his own failures and assumptions -- and the times his startups did succeed.

The core lesson of The San Francisco Fallacy is there from the very first story: it's not all about the technology. That lesson is very true, but the conclusion Siegel draws from his own experience is still not wide enough. His story of setting up a BBS to redistribute adult images but not being able to make it profitable shows mainly that the marketing and payment systems are as important as understanding customer needs. A note about copyright and maybe asking your parents for permission before running a business out of your bedroom might be useful here, although that doesn't fit with the usual break-the-rules startup attitude typical of Uber, Facebook and any number of other Silicon Valley companies.

What Siegel calls the 'fallacy of democracy' is more like mistaking democracy for having no management and no HR team. There's probably a sweet spot somewhere between having the one true visionary founder and needing to have someone to break the deadlock when everyone disagrees.

As Uber has found out very publicly recently, and other startups have discovered over the years, investment is a double-edged sword because it gives investors so much say in what your business can do. By contrast, Snapchat's approach of non-voting shares give the company so much control that institutional investors are avoiding it. Siegel's startup doesn't reach those heights, but his investment fallacy -- that getting investment isn't always good news -- is the other side of the issues playing out at Uber about founders and control, as well as a lesson about not letting someone force you to pivot to do something you don't love.

If there's anything that really drives startups, it's passion. However, the lesson of The San Francisco Fallacy is Siegel's journey to understanding that passion isn't enough, and can get in the way of startups becoming businesses.

If it baffles you that Siegel would much rather spend hours writing the code to create an online posting service than print and post his own invoices, then you're not a startup founder. This particular fallacy is about it being OK to fail -- and you may indeed be expecting failure when Siegel reveals that he spent $500 on Google ads for every customer who signed up to pay $5 a month for the service.

This time there's no long drawn-out struggle, just the realization that next time he could run the ads to find out what people will pay before writing the code for the service they'll be paying for. That's a shortcut for the startup, but possibly a less appealing prospect for customers. On the other hand, customers very much want startups to learn the lesson of how to fail as early and with as little fallout as possible.

When Siegel pivots back to his original idea of just sending invoices, he thinks his fallacy is trusting experts. Instead, he discovers the innovator's dilemma all over again: the expert accountants look for the same high-margin service they offer instead of the simpler low-margin tool that he wanted to offer to the bigger market of people like him, just as software-as-a-service was emerging. The other lesson here is that actually your customer isn't that much like you and you'd better find out who they are and what they want.

If, like me, you were wondering how Siegel had been paying his bills with all these failures, when he recounts his first real success (which is all about execution rather than the idea) he reveals that he'd been a consultant all along (hence the invoices). It's more common for startups to mock consultants than learn from them, but consulting isn't just a good way to earn the money to live on while you work on your startup: it also gives you good experience with real-world problems and how to deliver solutions, as well as letting you spot some common mistakes that companies are making.

Take the money and run again

When Siegel stumbles onto the very beginning of cloud -- because Amazon CTO Werner Vogels turns down the shopping cart business he's ready to sell and tells him the e-commerce giant is pivoting to become a technology business -- it seems as though he's set for a big profit. The problem this time is his communications with the people he's working with, but the fallacy he picks out of this is about not overvaluing either your startup or your contribution to it. Again, his recommendation to take whatever exit you're offered for your startup and use the money to go and do another startup will confuse anyone who thinks that startups are only about passionate coders building products they love.

The chapter on the quality fallacy -- that your software should only be as good as it has to be and might not even have to exist when you start marketing it -- will be equally disturbing to many. As Siegel points out, building a technology company on a good idea is a hobby rather than a business; building a high-quality product without knowing people will pay for it doesn't make a business. The RightSignature team build a product to solve a business problem they have -- when you have to sign a business document the same day, the hotel fax machine is broken and you haven't already scanned your signature to drop into PDF files -- and advertise it only to prove that people are ready to buy it. They don't even keep the credit card companies of the people who sign up; instead, they're just evidence that it's interesting enough to get a large insurance company to licence it for their users.

And again, if that sounds like it's the wrong way round, that's because this is about succeeding at building technology companies rather than founders who care passionately about their ideas delivering them as great technology. 'Minimum viable product' in this sense means exactly what it says: the least you can deliver and still call it a product while you find out if there's a market for what you really want to build once you have the money to do it.

This is less autobiography and more 'scenes from a life in technology'. The stories Siegel tells are short and just interesting enough to leave you wanting more details, although the journey of his business education is rather jumpy as he leaps from startup to startup to make each specific point.

The book wraps up with Siegel becoming an investor and seeing founders making all his own mistakes. You also get a more detailed explanation of how to find out if there's a market for your product. Anyone considering creating or joining a startup will find this useful. For the rest of us, The San Francisco Fallacy is an excellent reminder that startups are about building businesses, which is why VCs invest in them, and that looking too deeply into how they are made can be slightly disturbing.

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