In the closing session of Techonomy 2011, Sean Parker (of Napster and Facebook fame) talked about the surplus of early-stage funding in Silicon Valley. Parker said that one of the end results of so much early-stage capital is that too many talented people are starting their own companies instead of working at established players like Facebook, Google, Microsoft, etc. In his own words, “this results in a talent drain where the best talent gets diffused.” (The story was covered on TechCrunch, All Things Digital, and PCMagazine)

That statement seems to indicate that in terms of technological progress or societal impact, the best talent is better off working at the established players rather than at their own startups. To be fair, Parker was being intentionally contrarian instead of giving the “standard technocrat viewpoint”, but the implication behind that statement is one that is shared by many in the business community at large.

The theory is that at a large organization with access to resources and the ability to collaborate with one another, teams of people who would normally have little impact are able to make a large impact (either on technology, society, or both). Underlying that notion is a more basic one: that large institutions are the best way to organize people toward a common goal.

That’s not the case, at least not anymore. Institutions require a bureaucratic structure to keep the efforts of all the individual workers within it, who are not exposed to the same market forces as the institution, aligned with goals and efforts that will ultimately benefit the institution as a whole. This creates a lot of additional work for the institution (and meetings, and everything else dreadful about institutions) without creating additional value.

In a startup, the need for a bureaucratic structure disappears because everyone involved is so close to the market forces. Everyone’s effort in a startup is directed solely at the company’s survival, which, because of the proximity to the market, is equivalent to creating value for the company, and the company’s customers.

Not only does a startup remove extraneous work, but it also increase motivation. This makes sense if you consider that in a startup, the reward for success is enormous, and the effect that each worker has on the outcome is large. But even more telling is that according to social scientists, financial rewards aren’t the greatest motivator, especially in creative (i.e. innovative) work. Dan Pink at his TED talk in 2009 explains that for right-brained work, the kind of work that doesn’t have a clear set of rules or a single solution and requires creative thinking to solve, contingent rewards (if you do this task, you get this reward) don’t help, and actually hinder the work the being done. He quotes a study by the London School of Economics that found that “financial incentives can result in a negative impact on overall performance.”

Pink goes on to explain that the real motivators for creative work are autonomy, mastery, and purpose. A startup mirrors that model of motivation almost exactly. In a startup, the level of autonomy you are given is second only to actually working for yourself. Mastery, “the desire to get better at something that matters,” is ever-present in a startup, where you are constantly improving your skills in doing something that you have already decided matters a great deal. Purpose, “the yearning to do what we do in service of a higher purpose,” is nearly always present in a startup, where passion for solving a particular problem is just as important as the financial resources to do so.

In a startup, you have better motivation, and you have stripped away non-value creating work: how could this not be a better way to organize people toward a common goal? The common answer is the inability to collaborate on large projects. Startups are great for small (from a technical standpoint) projects like Twitter or Foursquare, but for large projects, you need a large group with the ability to collaborate.

But in today’s world, that collaboration exists without the need for the institution. It is almost a rule in startupland that your service must have a public API. This allows services to piggyback off of each other and “collaborate” without ever communicating, and, even better, without ever going to a meeting. And how many fantastic, value-creating services have we seen spring up as a result of public API’s? How many more will we see if this trend continues?

The startup model consists of taking a tiny piece of what could be a company and exposing it to market forces while it is manned by a self-selecting group of highly driven, highly capable individuals. In today’s world where collaboration doesn’t require institutions, it’s a better way to organize people to do work, and it results in more much innovation and societal impact. I don’t believe in the 20th century model of institutional management, and I think we are moving toward something better.

Inspiration for this post comes from Paul Graham’s essay, “How to Make Wealth.”