The Silk Road, a story for entrepreneurs

Supported by Greenhaven Road Capital, finding value off the beaten path.

In American Kingpin, Nick Bilton delivers the story of The Pirate Bay, Dread Pirate Roberts, Ross Ulbricht and the law enforcement pack that ensnared him. Bilton’s chapters are crisp, with cliffhangers and for me, it was a “2AM” book – one you start to read and look up at the clock to realize it’s suddenly two in the morning.

Aside from the intrigue though is a lesson for entrepreneurs and investors. The future founders can read this to see how to start a company – though hopefully a law abiding one. The investors can read this to see how to solve a puzzle – through the eyes of the law enforcement officers.

Today is for founders. Ready?

Founders

Ulbricht fit the founder’s framework because he had intelligence, motivation, and curiosity but also wanted to see the world a different way. Facebook encouraged people to move fast and break things and to varying intensities, it’s what all entrepreneurs do.

“While he (Ross) couldn’t talk to them about what he did for work, he could discuss what inspired him to do it. After all, in San Francisco the mentality of using technology to try to disrupt a broken system wasn’t a strange way of thinking but rather the norm. In so many ways, the programmers and entrepreneurs Ross met were just like him.”

Ken Grossman was brewing beer in his closet, breaking the rules on underage consumption and home brewing. He wrote that these sorts of efforts could have led down the wrong path if it wasn’t for some neighbors who directed him in productive directions.

Or, as Yvon Chouinard put it: “One of my favorite quotes is ‘if you want to understand the entrepreneur study the juvenile delinquent’ cause they’re saying ‘this sucks I’m going to do it my own way.’”

While Chouinard and Grossman had prosocial avenues to head down, Ulbricht only saw dark alleys:

“But what choice did he have? It wasn’t like he could go out west to Silicon Valley and get a job at a start-up. After the bubble had popped a few years earlier, companies that had been built on a wing and a prayer had siphoned people’s retirements into thin air and collapsed, leaving San Francisco a metaphorical no-fly zone.”

That doesn’t excuse actions, but it points out that this mindset has certain consequences in certain conditions.

Ulbricht didn’t know what to do so he did what a lot of people do – he went to graduate school. After falling in love but falling out of his program he was back to trying things.

“After Penn State, Ross had tried to build a video game that would help demonstrate these theories. But it had gone nowhere. Just like all of Ross’s other ideas.”

Quantity is its own quality. Alice Waters succeeded with her first restaurant but not her first meal. She had a lot of failures, tweaks, adaptations, tests, and trials before she got it right. What Waters and Ulbricht both did was remix existing things into new ideas.

For Ross that meant combining his libertarian ideals, Craigslist use, drug participation, technology interest, and of course, a TV show. “The latest show they had become obsessed with was Breaking Bad.”

Combine these ingredients and out pops Amazon for drugs. But there was a missing piece. How do you pay for this stuff? “Ross had come across a technology that had recently emerged called Bitcoin.”

Angel investor Jason Calacanis likes to ask, what makes it different this time. Both he – and to some extent Rory Sutherland – believe that Uber succeeded because of the map app. Seeing the dots on a map connected the dots in people’s head. Bilton writes that Bitcoin, “was the missing piece Ross had been waiting for to build his experimental world with no rules.”

With the ideas and the tools, Ulbricht coded the site in a weekend. HA! A weekend! Bilton wrote:

“He spent innumerable hours writing front-end code, back-end code, and code that helped sew those digital dialects together. Ross was teaching himself all of these programming languages on the fly. He was technically doing the equivalent of building eBay and Amazon on his own, without any help and without any knowledge.”

The overnight success takes years of non-glamorous work. Marcus Lemonis, Ken Burns, and Brent Beshore all make it a point to point this out.

“Ross had to oversee customer-support tickets that seemed endless, with people complaining about drugs not arriving on time, the site being too slow, or harassment on the forums. There were more hackers to fend off with even larger ransoms, the Feds to hide from, and his employees to inspire. Fudge, this was hard work.”

Ulbricht muddled along.

“To help entice potential customers to feel comfortable acquiring drugs from these mysterious new dealers on the Internet, Ross built a ratings system on the Silk Road where sellers were given “karma” points, which acted like positive or negative reviews, just as on eBay or Amazon.”

Tweak, copy, patch. The site slowly came together (Ross got help from friends and message boards, the latter would be a clue for the officers). Ross thought he was protected because of the tools he used. When asked, “Ross would calmly reply, ‘I can’t get caught because I’m protected by Tor and Bitcoin.'” Every project requires assumptions but once firm footing can become sand and slip away.

‘Liquidity’ is a common financial assumption. In our post on five market crashes this was a thread in each tragic tapestry.

Another thing we see with startups is how much time they take. Founders don’t coach youth soccer. This was the point Malcolm Gladwell tried to make about ten-thousand hours:

For Ross it was about a girl:

“She loved Ross so much, but he appeared to love his Web site more.”

But was it worth it? Ulbricht had the right idea, creating a platform business model:

“The Silk Road, which he had started only a year earlier, had just crossed a line of $500,000 a month in drug sales, which would subsequently turn into hundreds of thousands of dollars in commissions that flowed right into Ross’s pocket.”

“The Silk Road, after all, was just the platform—no different from Facebook or Twitter or eBay—on which users communicated and exchanged ideas and currency.”

…

Damn, if only… I thought as I read this story. Unlike some failed startups, Ulbricht did so many things right. He understood his customers, he experimented, he was curious, and he was guided by a big idea (in addition to money). It was good work in the wrong direction.

There are lessons in this story for founders, but the biggest is to do something good.