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to be treated as a threat to a company's survival. They just think they need a little more information to make up their minds. They don't get that there are 10 other investors who also want a little more information, and that the process of talking to them all can bring a startup to a standstill for months. Because investors don't understand the cost of dealing with them, they don't realize how much room there is for a potential competitor to undercut them. I know from my own experience how much faster investors could decide, because we've brought our own time down to 20 minutes (5 minutes of reading an application plus a 10 minute interview plus 5 minutes of discussion). If you were investing more money you'd want to take longer, of course. But if we can decide in 20 minutes, should it take anyone longer than a couple days? Opportunities like this don't sit unexploited forever, even in an industry as conservative as venture capital. So either existing investors will start to make up their minds faster, or new investors will emerge who do. In the meantime founders have to treat raising money as a dangerous process. Fortunately, I can fix the biggest danger right here. The biggest danger is surprise. It's that startups will underestimate the difficulty of raising money—that they'll cruise through all the initial steps, but when they turn to raising money they'll find it surprisingly hard, get demoralized, and give up. So I'm telling you in advance: raising money is hard. ** |
| December 2008 _(I originally wrote this at the request of a company producing a report about entrepreneurship. Unfortunately after reading it they decided it was too controversial to include.)_ VC funding will probably dry up somewhat during the present recession, like it usually does in bad times. But this time the result may be different. This time the number of new startups may not decrease. And that could be dangerous for VCs. When VC funding dried up after the Internet Bubble, startups dried up too. There were not a lot of new startups being founded in 2003\. But startups aren't tied to VC the way they were 10 years ago. It's now possible for VCs and startups to diverge. And if they do, they may not reconverge once the economy gets better. The reason startups no longer depend so much on VCs is one that everyone in the startup business knows by now: it has gotten much cheaper to start a startup. There are four main reasons: Moore's law has made hardware cheap; open source has made software free; the web has made marketing and distribution free; and more powerful programming languages mean development teams can be smaller. These changes have pushed the cost of starting a startup down into the noise. In a lot of startups—probaby most startups funded by Y Combinator—the biggest expense is simply the founders' living expenses. We've had startups that were profitable on revenues of $3000 a month. $3000 is insignificant as revenues go. Why should anyone care about a startup making $3000 a month? Because, although insignificant as _revenue_ , this amount of money can change a startup's _funding_ situation completely. Someone running a startup is always calculating in the back of their mind how much "runway" they have—how long they have till the money in the bank runs out and they either have to be profitable, raise more money, or go out of business. Once you cross the threshold of profitability, however low, your runway becomes infinite. It's a qualitative change, like the stars turning into lines and disappearing when the Enterprise accelerates to warp speed. Once you're profitable you don't need investors' money. And because Internet startups have become so cheap to run, the threshold of profitability can be trivially low. Which means many Internet startups don't need VC-scale investments anymore. For many startups, VC funding has, in the language of VCs, gone from a must-have to a nice-to-have. This change happened while no one was looking, and its effects have been largely masked so far. It was during the trough after the Internet Bubble that it became trivially cheap to start a startup, but few realized it because startups were so out of fashion. When startups came back into fashion, around 2005, investors were starting to write checks again. And while founders may not have needed VC money the way they used to, they were willing to take it if offered—partly because there was a tradition of startups taking VC money, and partly because startups, |
dogs, tend to eat when given the opportunity. As long as VCs were writing checks, founders were never forced to explore the limits of how little they needed them. There were a few startups who hit these limits accidentally because of their unusual circumstances—most famously 37signals, which hit the limit because they crossed into startup land from the other direction: they started as a consulting firm, so they had revenue before they had a product. VCs and founders are like two components that used to be bolted together. Around 2000 the bolt was removed. Because the components have so far been subjected to the same forces, they still seem to be joined together, but really one is just resting on the other. A sharp impact would make them fly apart. And the present recession could be that impact. Because of Y Combinator's position at the extreme end of the spectrum, we'd be the first to see signs of a separation between founders and investors, and we are in fact seeing it. For example, though the stock market crash does seem to have made investors more cautious, it doesn't seem to have had any effect on the number of people who want to start startups. We take applications for funding every 6 months. Applications for the current funding cycle closed on October 17, well after the markets tanked, and even so we got a record number, up 40% from the same cycle a year before. Maybe things will be different a year from now, if the economy continues to get worse, but so far there is zero slackening of interest among potential founders. That's different from the way things felt in 2001. Then there was a widespread feeling among potential founders that startups were over, and that one should just go to grad school. That isn't happening this time, and part of the reason is that even in a bad economy it's not that hard to build something that makes $3000 a month. If investors stop writing checks, who cares? We also see signs of a divergence between founders and investors in the attitudes of existing startups we've funded. I was talking to one recently that had a round fall through at the last minute over the sort of trifle that breaks deals when investors feel they have the upper hand—over an uncertainty about whether the founders had correctly filed their 83(b) forms, if you can believe that. And yet this startup is obviously going to succeed: their traffic and revenue graphs look like a jet taking off. So I asked them if they wanted me to introduce them to more investors. To my surprise, they said no—that they'd just spent four months dealing with investors, and they were actually a lot happier now that they didn't have to. There was a friend they wanted to hire with the investor money, and now they'd have to postpone that. But otherwise they felt they had enough in the bank to make it to profitability. To make sure, they were moving to a cheaper apartment. And in this economy I bet they got a good deal on it. I've detected this "investors aren't worth the trouble" |
from several YC founders I've talked to recently. At least one startup from the most recent (summer) cycle may not even raise angel money, let alone VC. Ticketstumbler made it to profitability on Y Combinator's $15,000 investment and they hope not to need more. This surprised even us. Although YC is based on the idea of it being cheap to start a startup, we never anticipated that founders would grow successful startups on nothing more than YC funding. If founders decide VCs aren't worth the trouble, that could be bad for VCs. When the economy bounces back in a few years and they're ready to write checks again, they may find that founders have moved on. There is a founder community just as there's a VC community. They all know one another, and techniques spread rapidly between them. If one tries a new programming language or a new hosting provider and gets good results, 6 months later half of them are using it. And the same is true for funding. The current generation of founders want to raise money from VCs, and Sequoia specifically, because Larry and Sergey took money from VCs, and Sequoia specifically. Imagine what it would do to the VC business if the next hot company didn't take VC at all. VCs think they're playing a zero sum game. In fact, it's not even that. If you lose a deal to Benchmark, you lose that deal, but VC as an industry still wins. If you lose a deal to None, all VCs lose. This recession may be different from the one after the Internet Bubble. This time founders may keep starting startups. And if they do, VCs will have to keep writing checks, or they could become irrelevant. **Thanks** to Sam Altman, Trevor Blackwell, David Hornik, Jessica Livingston, Robert Morris, and Fred Wilson for reading drafts of this. --- --- Russian Translation * * * --- |
| March 2008, rev May 2013 _(This essay grew out of something I wrote for myself to figure out what we do. Even though Y Combinator is now 3 years old, we're still trying to understand its implications.)_ I was annoyed recently to read a description of Y Combinator that said "Y Combinator does seed funding for startups." What was especially annoying about it was that I wrote it. This doesn't really convey what we do. And the reason it's inaccurate is that, paradoxically, funding very early stage startups is not mainly about funding. Saying YC does seed funding for startups is a description in terms of earlier models. It's like calling a car a horseless carriage. When you scale animals you can't just keep everything in proportion. For example, volume grows as the cube of linear dimension, but surface area only as the square. So as animals get bigger they have trouble radiating heat. That's why mice and rabbits are furry and elephants and hippos aren't. You can't make a mouse by scaling down an elephant. YC represents a new, smaller kind of animal—so much smaller that all the rules are different. Before us, most companies in the startup funding business were venture capital funds. VCs generally fund later stage companies than we do. And they supply so much money that, even though the other things they do may be very valuable, it's not that inaccurate to regard VCs as sources of money. Good VCs are "smart money," but they're still money. All good investors supply a combination of money and help. But these scale differently, just as volume and surface area do. Late stage investors supply huge amounts of money and comparatively little help: when a company about to go public gets a mezzanine round of $50 million, the deal tends to be almost entirely about money. As you move earlier in the venture funding process, the ratio of help to money increases, because earlier stage companies have different needs. Early stage companies need less money because they're smaller and cheaper to run, but they need more help because life is so precarious for them. So when VCs do a series A round for, say, $2 million, they generally expect to offer a significant amount of help along with the money. Y Combinator occupies the earliest end of the spectrum. We're at least one and generally two steps before VC funding. (Though some startups go straight from YC to VC, the most common trajectory is to do an angel round first.) And what happens at Y Combinator is as different from what happens in a series A round as a series A round is from a mezzanine financing. At our end, money is almost a negligible factor. The startup usually consists of just the founders. Their living expenses are the company's main expense, and since most founders are under 30, their living expenses are low. But at this early stage companies need a lot of help. Practically every question is still unanswered. Some companies we've funded have been working on their software for a year or more, but others haven't |
what to work on, or even who the founders should be. When PR people and journalists recount the histories of startups after they've become big, they always underestimate how uncertain things were at first. They're not being deliberately misleading. When you look at a company like Google, it's hard to imagine they could once have been small and helpless. Sure, at one point they were a just a couple guys in a garage—but even then their greatness was assured, and all they had to do was roll forward along the railroad tracks of destiny. Far from it. A lot of startups with just as promising beginnings end up failing. Google has such momentum now that it would be hard for anyone to stop them. But all it would have taken in the beginning would have been for two Google employees to focus on the wrong things for six months, and the company could have died. We know, because we've been there, just how vulnerable startups are in the earliest phases. Curiously enough, that's why founders tend to get so rich from them. Reward is always proportionate to risk, and very early stage startups are insanely risky. What we really do at Y Combinator is get startups launched straight. One of many metaphors you could use for YC is a steam catapult on an aircraft carrier. We get startups airborne. Barely airborne, but enough that they can accelerate fast. When you're launching planes they have to be set up properly or you're just launching projectiles. They have to be pointed straight down the deck; the wings have to be trimmed properly; the engines have to be at full power; the pilot has to be ready. These are the kind of problems we deal with. After we fund startups we work closely with them for three months—so closely in fact that we insist they move to where we are. And what we do in those three months is make sure everything is set up for launch. If there are tensions between cofounders we help sort them out. We get all the paperwork set up properly so there are no nasty surprises later. If the founders aren't sure what to focus on first, we try to figure that out. If there is some obstacle right in front of them, we either try to remove it, or shift the startup sideways. The goal is to get every distraction out of the way so the founders can use that time to build (or finish building) something impressive. And then near the end of the three months we push the button on the steam catapult in the form of Demo Day, where the current group of startups present to pretty much every investor in Silicon Valley. Launching companies isn't identical with launching products. Though we do spend a lot of time on launch strategies for products, there are some things that take too long to build for a startup to launch them before raising their next round of funding. Several of the most promising startups we've funded haven't launched their products yet, but are definitely launched as companies. In the earliest stage, startups not only have more questions to answer, but they tend to |
different kinds of questions. In later stage startups the questions are about deals, or hiring, or organization. In the earliest phase they tend to be about technology and design. What do you make? That's the first problem to solve. That's why our motto is "Make something people want." This is always a good thing for companies to do, but it's even more important early on, because it sets the bounds for every other question. Who you hire, how much money you raise, how you market yourself—they all depend on what you're making. Because the early problems are so much about technology and design, you probably need to be hackers to do what we do. While some VCs have technical backgrounds, I don't know any who still write code. Their expertise is mostly in business—as it should be, because that's the kind of expertise you need in the phase between series A and (if you're lucky) IPO. We're so different from VCs that we're really a different kind of animal. Can we claim founders are better off as a result of this new type of venture firm? I'm pretty sure the answer is yes, because YC is an improved version of what happened to our startup, and our case was not atypical. We started Viaweb with $10,000 in seed money from our friend Julian. He was a lawyer and arranged all our paperwork, so we could just code. We spent three months building a version 1, which we then presented to investors to raise more money. Sounds familiar, doesn't it? But YC improves on that significantly. Julian knew a lot about law and business, but his advice ended there; he was not a startup guy. So we made some basic mistakes early on. And when we presented to investors, we presented to only 2, because that was all we knew. If we'd had our later selves to encourage and advise us, and Demo Day to present at, we would have been in much better shape. We probably could have raised money at 3 to 5 times the valuation we did. If we take 7% of a company we fund, the founders only have to do 7.5% better in their next round of funding to end up net ahead. We certainly manage that. So who is our 7% coming out of? If the founders end up net ahead it's not coming out of them. So is it coming out of later stage investors? Well, they do end up paying more. But I think they pay more because the company is actually more valuable. And later stage investors have no problem with that. The returns of a VC fund depend on the quality of the companies they invest in, not how cheaply they can buy stock in them. If what we do is useful, why wasn't anyone doing it before? There are two answers to that. One is that people were doing it before, just haphazardly on a smaller scale. Before us, seed funding came primarily from individual angel investors. Larry and Sergey, for example, got their seed funding from Andy Bechtolsheim, one of the founders of Sun. And because he was a startup guy he probably gave them useful advice. But raising money from angel investors is a hit or miss thing. It's a sideline for most |
them, so they only do a handful of deals a year and they don't spend a lot of time on the startups they invest in. And they're hard to reach, because they don't want random startups pestering them with business plans. The Google guys were lucky because they knew someone who knew Bechtolsheim. It generally takes a personal introduction with angels. The other reason no one was doing quite what we do is that till recently it was a lot more expensive to start a startup. You'll notice we haven't funded any biotech startups. That's still expensive. But advancing technology has made web startups so cheap that you really can get a company airborne for $15,000. If you understand how to operate a steam catapult, at least. So in effect what's happened is that a new ecological niche has opened up, and Y Combinator is the new kind of animal that has moved into it. We're not a replacement for venture capital funds. We occupy a new, adjacent niche. And conditions in our niche are really quite different. It's not just that the problems we face are different; the whole structure of the business is different. VCs are playing a zero-sum game. They're all competing for a slice of a fixed amount of "deal flow," and that explains a lot of their behavior. Whereas our m.o. is to create new deal flow, by encouraging hackers who would have gotten jobs to start their own startups instead. We compete more with employers than VCs. It's not surprising something like this would happen. Most fields become more specialized—more articulated—as they develop, and startups are certainly an area in which there has been a lot of development over the past couple decades. The venture business in its present form is only about forty years old. It stands to reason it would evolve. And it's natural that the new niche would at first be described, even by its inhabitants, in terms of the old one. But really Y Combinator is not in the startup funding business. Really we're more of a small, furry steam catapult. **Thanks** to Trevor Blackwell, Jessica Livingston, and Robert Morris for reading drafts of this. Comment on this essay. --- * * * --- |
| | **Want to start a startup?** Get funded by Y Combinator. --- March 2012 One of the more surprising things I've noticed while working on Y Combinator is how frightening the most ambitious startup ideas are. In this essay I'm going to demonstrate this phenomenon by describing some. Any one of them could make you a billionaire. That might sound like an attractive prospect, and yet when I describe these ideas you may notice you find yourself shrinking away from them. Don't worry, it's not a sign of weakness. Arguably it's a sign of sanity. The biggest startup ideas are terrifying. And not just because they'd be a lot of work. The biggest ideas seem to threaten your identity: you wonder if you'd have enough ambition to carry them through. There's a scene in _Being John Malkovich_ where the nerdy hero encounters a very attractive, sophisticated woman. She says to him: > Here's the thing: If you ever got me, you wouldn't have a clue what to do > with me. That's what these ideas say to us. This phenomenon is one of the most important things you can understand about startups. You'd expect big startup ideas to be attractive, but actually they tend to repel you. And that has a bunch of consequences. It means these ideas are invisible to most people who try to think of startup ideas, because their subconscious filters them out. Even the most ambitious people are probably best off approaching them obliquely. **1\. A New Search Engine** The best ideas are just on the right side of impossible. I don't know if this one is possible, but there are signs it might be. Making a new search engine means competing with Google, and recently I've noticed some cracks in their fortress. The point when it became clear to me that Microsoft had lost their way was when they decided to get into the search business. That was not a natural move for Microsoft. They did it because they were afraid of Google, and Google was in the search business. But this meant (a) Google was now setting Microsoft's agenda, and (b) Microsoft's agenda consisted of stuff they weren't good at. Microsoft : Google :: Google : Facebook. That does not by itself mean there's room for a new search engine, but lately when using Google search I've found myself nostalgic for the old days, when Google was true to its own slightly aspy self. Google used to give me a page of the right answers, fast, with no clutter. Now the results seem inspired by the Scientologist principle that what's true is what's true for you. And the pages don't have the clean, sparse feel they used to. Google search results used to look like the output of a Unix utility. Now if I accidentally put the cursor in the wrong place, anything might happen. The way to win here is to build the search engine all the hackers use. A search engine whose users consisted of the top 10,000 hackers and no one else would be in a very powerful position despite its small size, just as Google was when it was that search engine. And for the first time in over |
decade the idea of switching seems thinkable to me. Since anyone capable of starting this company is one of those 10,000 hackers, the route is at least straightforward: make the search engine you yourself want. Feel free to make it excessively hackerish. Make it really good for code search, for example. Would you like search queries to be Turing complete? Anything that gets you those 10,000 users is ipso facto good. Don't worry if something you want to do will constrain you in the long term, because if you don't get that initial core of users, there won't be a long term. If you can just build something that you and your friends genuinely prefer to Google, you're already about 10% of the way to an IPO, just as Facebook was (though they probably didn't realize it) when they got all the Harvard undergrads. **2\. Replace Email** Email was not designed to be used the way we use it now. Email is not a messaging protocol. It's a todo list. Or rather, my inbox is a todo list, and email is the way things get onto it. But it is a disastrously bad todo list. I'm open to different types of solutions to this problem, but I suspect that tweaking the inbox is not enough, and that email has to be replaced with a new protocol. This new protocol should be a todo list protocol, not a messaging protocol, although there is a degenerate case where what someone wants you to do is: read the following text. As a todo list protocol, the new protocol should give more power to the recipient than email does. I want there to be more restrictions on what someone can put on my todo list. And when someone can put something on my todo list, I want them to tell me more about what they want from me. Do they want me to do something beyond just reading some text? How important is it? (There obviously has to be some mechanism to prevent people from saying everything is important.) When does it have to be done? This is one of those ideas that's like an irresistible force meeting an immovable object. On one hand, entrenched protocols are impossible to replace. On the other, it seems unlikely that people in 100 years will still be living in the same email hell we do now. And if email is going to get replaced eventually, why not now? If you do it right, you may be able to avoid the usual chicken and egg problem new protocols face, because some of the most powerful people in the world will be among the first to switch to it. They're all at the mercy of email too. Whatever you build, make it fast. GMail has become painfully slow. If you made something no better than GMail, but fast, that alone would let you start to pull users away from GMail. GMail is slow because Google can't afford to spend a lot on it. But people will pay for this. I'd have no problem paying $50 a month. Considering how much time I spend in email, it's kind of scary to think how much I'd be justified in paying. At least $1000 a month. If I spend several hours a day reading and writing email, that would be a cheap way to |
my life better. **3\. Replace Universities** People are all over this idea lately, and I think they're onto something. I'm reluctant to suggest that an institution that's been around for a millennium is finished just because of some mistakes they made in the last few decades, but certainly in the last few decades US universities seem to have been headed down the wrong path. One could do a lot better for a lot less money. I don't think universities will disappear. They won't be replaced wholesale. They'll just lose the de facto monopoly on certain types of learning that they once had. There will be many different ways to learn different things, and some may look quite different from universities. Y Combinator itself is arguably one of them. Learning is such a big problem that changing the way people do it will have a wave of secondary effects. For example, the name of the university one went to is treated by a lot of people (correctly or not) as a credential in its own right. If learning breaks up into many little pieces, credentialling may separate from it. There may even need to be replacements for campus social life (and oddly enough, YC even has aspects of that). You could replace high schools too, but there you face bureaucratic obstacles that would slow down a startup. Universities seem the place to start. **4\. Internet Drama** Hollywood has been slow to embrace the Internet. That was a mistake, because I think we can now call a winner in the race between delivery mechanisms, and it is the Internet, not cable. A lot of the reason is the horribleness of cable clients, also known as TVs. Our family didn't wait for Apple TV. We hated our last TV so much that a few months ago we replaced it with an iMac bolted to the wall. It's a little inconvenient to control it with a wireless mouse, but the overall experience is much better than the nightmare UI we had to deal with before. Some of the attention people currently devote to watching movies and TV can be stolen by things that seem completely unrelated, like social networking apps. More can be stolen by things that are a little more closely related, like games. But there will probably always remain some residual demand for conventional drama, where you sit passively and watch as a plot happens. So how do you deliver drama via the Internet? Whatever you make will have to be on a larger scale than Youtube clips. When people sit down to watch a show, they want to know what they're going to get: either part of a series with familiar characters, or a single longer "movie" whose basic premise they know in advance. There are two ways delivery and payment could play out. Either some company like Netflix or Apple will be the app store for entertainment, and you'll reach audiences through them. Or the would-be app stores will be too overreaching, or too technically inflexible, and companies will arise to supply payment and streaming a la carte to the producers of drama. If that's the way things play out, there |
also be a need for such infrastructure companies. **5\. The Next Steve Jobs** I was talking recently to someone who knew Apple well, and I asked him if the people now running the company would be able to keep creating new things the way Apple had under Steve Jobs. His answer was simply "no." I already feared that would be the answer. I asked more to see how he'd qualify it. But he didn't qualify it at all. No, there will be no more great new stuff beyond whatever's currently in the pipeline. Apple's revenues may continue to rise for a long time, but as Microsoft shows, revenue is a lagging indicator in the technology business. So if Apple's not going to make the next iPad, who is? None of the existing players. None of them are run by product visionaries, and empirically you can't seem to get those by hiring them. Empirically the way you get a product visionary as CEO is for him to found the company and not get fired. So the company that creates the next wave of hardware is probably going to have to be a startup. I realize it sounds preposterously ambitious for a startup to try to become as big as Apple. But no more ambitious than it was for Apple to become as big as Apple, and they did it. Plus a startup taking on this problem now has an advantage the original Apple didn't: the example of Apple. Steve Jobs has shown us what's possible. That helps would-be successors both directly, as Roger Bannister did, by showing how much better you can do than people did before, and indirectly, as Augustus did, by lodging the idea in users' minds that a single person could unroll the future for them. Now Steve is gone there's a vacuum we can all feel. If a new company led boldly into the future of hardware, users would follow. The CEO of that company, the "next Steve Jobs," might not measure up to Steve Jobs. But he wouldn't have to. He'd just have to do a better job than Samsung and HP and Nokia, and that seems pretty doable. **6\. Bring Back Moore's Law** The last 10 years have reminded us what Moore's Law actually says. Till about 2002 you could safely misinterpret it as promising that clock speeds would double every 18 months. Actually what it says is that circuit densities will double every 18 months. It used to seem pedantic to point that out. Not any more. Intel can no longer give us faster CPUs, just more of them. This Moore's Law is not as good as the old one. Moore's Law used to mean that if your software was slow, all you had to do was wait, and the inexorable progress of hardware would solve your problems. Now if your software is slow you have to rewrite it to do more things in parallel, which is a lot more work than waiting. It would be great if a startup could give us something of the old Moore's Law back, by writing software that could make a large number of CPUs look to the developer like one very fast CPU. There are several ways to approach this problem. The most ambitious is to try to do it automatically: to write a compiler that will parallelize |
code for us. There's a name for this compiler, _the sufficiently smart compiler,_ and it is a byword for impossibility. But is it really impossible? Is there no configuration of the bits in memory of a present day computer that is this compiler? If you really think so, you should try to prove it, because that would be an interesting result. And if it's not impossible but simply very hard, it might be worth trying to write it. The expected value would be high even if the chance of succeeding was low. The reason the expected value is so high is web services. If you could write software that gave programmers the convenience of the way things were in the old days, you could offer it to them as a web service. And that would in turn mean that you got practically all the users. Imagine there was another processor manufacturer that could still translate increased circuit densities into increased clock speeds. They'd take most of Intel's business. And since web services mean that no one sees their processors anymore, by writing the sufficiently smart compiler you could create a situation indistinguishable from you being that manufacturer, at least for the server market. The least ambitious way of approaching the problem is to start from the other end, and offer programmers more parallelizable Lego blocks to build programs out of, like Hadoop and MapReduce. Then the programmer still does much of the work of optimization. There's an intriguing middle ground where you build a semi-automatic weapon—where there's a human in the loop. You make something that looks to the user like the sufficiently smart compiler, but inside has people, using highly developed optimization tools to find and eliminate bottlenecks in users' programs. These people might be your employees, or you might create a marketplace for optimization. An optimization marketplace would be a way to generate the sufficiently smart compiler piecemeal, because participants would immediately start writing bots. It would be a curious state of affairs if you could get to the point where everything could be done by bots, because then you'd have made the sufficiently smart compiler, but no one person would have a complete copy of it. I realize how crazy all this sounds. In fact, what I like about this idea is all the different ways in which it's wrong. The whole idea of focusing on optimization is counter to the general trend in software development for the last several decades. Trying to write the sufficiently smart compiler is by definition a mistake. And even if it weren't, compilers are the sort of software that's supposed to be created by open source projects, not companies. Plus if this works it will deprive all the programmers who take pleasure in making multithreaded apps of so much amusing complexity. The forum troll I have by now internalized doesn't even know where to begin in raising objections to this project. Now that's what I call a startup idea. **7\. Ongoing Diagnosis** But wait, here's |
that could face even greater resistance: ongoing, automatic medical diagnosis. One of my tricks for generating startup ideas is to imagine the ways in which we'll seem backward to future generations. And I'm pretty sure that to people 50 or 100 years in the future, it will seem barbaric that people in our era waited till they had symptoms to be diagnosed with conditions like heart disease and cancer. For example, in 2004 Bill Clinton found he was feeling short of breath. Doctors discovered that several of his arteries were over 90% blocked and 3 days later he had a quadruple bypass. It seems reasonable to assume Bill Clinton has the best medical care available. And yet even he had to wait till his arteries were over 90% blocked to learn that the number was over 90%. Surely at some point in the future we'll know these numbers the way we now know something like our weight. Ditto for cancer. It will seem preposterous to future generations that we wait till patients have physical symptoms to be diagnosed with cancer. Cancer will show up on some sort of radar screen immediately. (Of course, what shows up on the radar screen may be different from what we think of now as cancer. I wouldn't be surprised if at any given time we have ten or even hundreds of microcancers going at once, none of which normally amount to anything.) A lot of the obstacles to ongoing diagnosis will come from the fact that it's going against the grain of the medical profession. The way medicine has always worked is that patients come to doctors with problems, and the doctors figure out what's wrong. A lot of doctors don't like the idea of going on the medical equivalent of what lawyers call a "fishing expedition," where you go looking for problems without knowing what you're looking for. They call the things that get discovered this way "incidentalomas," and they are something of a nuisance. For example, a friend of mine once had her brain scanned as part of a study. She was horrified when the doctors running the study discovered what appeared to be a large tumor. After further testing, it turned out to be a harmless cyst. But it cost her a few days of terror. A lot of doctors worry that if you start scanning people with no symptoms, you'll get this on a giant scale: a huge number of false alarms that make patients panic and require expensive and perhaps even dangerous tests to resolve. But I think that's just an artifact of current limitations. If people were scanned all the time and we got better at deciding what was a real problem, my friend would have known about this cyst her whole life and known it was harmless, just as we do a birthmark. There is room for a lot of startups here. In addition to the technical obstacles all startups face, and the bureaucratic obstacles all medical startups face, they'll be going against thousands of years of medical tradition. But it will happen, and it will be a great thing—so great that people in the future will feel as sorry for us as we do |
the generations that lived before anaesthesia and antibiotics. **Tactics** Let me conclude with some tactical advice. If you want to take on a problem as big as the ones I've discussed, don't make a direct frontal attack on it. Don't say, for example, that you're going to replace email. If you do that you raise too many expectations. Your employees and investors will constantly be asking "are we there yet?" and you'll have an army of haters waiting to see you fail. Just say you're building todo-list software. That sounds harmless. People can notice you've replaced email when it's a _fait accompli_. Empirically, the way to do really big things seems to be to start with deceptively small things. Want to dominate microcomputer software? Start by writing a Basic interpreter for a machine with a few thousand users. Want to make the universal web site? Start by building a site for Harvard undergrads to stalk one another. Empirically, it's not just for other people that you need to start small. You need to for your own sake. Neither Bill Gates nor Mark Zuckerberg knew at first how big their companies were going to get. All they knew was that they were onto something. Maybe it's a bad idea to have really big ambitions initially, because the bigger your ambition, the longer it's going to take, and the further you project into the future, the more likely you'll get it wrong. I think the way to use these big ideas is not to try to identify a precise point in the future and then ask yourself how to get from here to there, like the popular image of a visionary. You'll be better off if you operate like Columbus and just head in a general westerly direction. Don't try to construct the future like a building, because your current blueprint is almost certainly mistaken. Start with something you know works, and when you expand, expand westward. The popular image of the visionary is someone with a clear view of the future, but empirically it may be better to have a blurry one. ** |
| | **Want to start a startup?** Get funded by Y Combinator. --- August 2010 Two years ago I wrote about what I called "a huge, unexploited opportunity in startup funding:" the growing disconnect between VCs, whose current business model requires them to invest large amounts, and a large class of startups that need less than they used to. Increasingly, startups want a couple hundred thousand dollars, not a couple million. The opportunity is a lot less unexploited now. Investors have poured into this territory from both directions. VCs are much more likely to make angel-sized investments than they were a year ago. And meanwhile the past year has seen a dramatic increase in a new type of investor: the super-angel, who operates like an angel, but using other people's money, like a VC. Though a lot of investors are entering this territory, there is still room for more. The distribution of investors should mirror the distribution of startups, which has the usual power law dropoff. So there should be a lot more people investing tens or hundreds of thousands than millions. In fact, it may be good for angels that there are more people doing angel- sized deals, because if angel rounds become more legitimate, then startups may start to opt for angel rounds even when they could, if they wanted, raise series A rounds from VCs. One reason startups prefer series A rounds is that they're more prestigious. But if angel investors become more active and better known, they'll increasingly be able to compete with VCs in brand. Of course, prestige isn't the main reason to prefer a series A round. A startup will probably get more attention from investors in a series A round than an angel round. So if a startup is choosing between an angel round and an A round from a good VC fund, I usually advise them to take the A round. But while series A rounds aren't going away, I think VCs should be more worried about super-angels than vice versa. Despite their name, the super- angels are really mini VC funds, and they clearly have existing VCs in their sights. They would seem to have history on their side. The pattern here seems the same one we see when startups and established companies enter a new market. Online video becomes possible, and YouTube plunges right in, while existing media companies embrace it only half-willingly, driven more by fear than hope, and aiming more to protect their turf than to do great things for users. Ditto for PayPal. This pattern is repeated over and over, and it's usually the invaders who win. In this case the super-angels are the invaders. Angel rounds are their whole business, as online video was for YouTube. Whereas VCs who make angel investments mostly do it as a way to generate deal flow for series A rounds. On the other hand, startup investing is a very strange business. Nearly all the returns are concentrated in a few big winners. If the super-angels merely fail to invest in (and to some extent produce) the big winners, they'll be out of business, |
if they invest in all the others. **VCs** Why don't VCs start doing smaller series A rounds? The sticking point is board seats. In a traditional series A round, the partner whose deal it is takes a seat on the startup's board. If we assume the average startup runs for 6 years and a partner can bear to be on 12 boards at once, then a VC fund can do 2 series A deals per partner per year. It has always seemed to me the solution is to take fewer board seats. You don't have to be on the board to help a startup. Maybe VCs feel they need the power that comes with board membership to ensure their money isn't wasted. But have they tested that theory? Unless they've tried not taking board seats and found their returns are lower, they're not bracketing the problem. I'm not saying VCs don't help startups. The good ones help them a lot. What I'm saying is that the kind of help that matters, you may not have to be a board member to give. How will this all play out? Some VCs will probably adapt, by doing more, smaller deals. I wouldn't be surprised if by streamlining their selection process and taking fewer board seats, VC funds could do 2 to 3 times as many series A rounds with no loss of quality. But other VCs will make no more than superficial changes. VCs are conservative, and the threat to them isn't mortal. The VC funds that don't adapt won't be violently displaced. They'll edge gradually into a different business without realizing it. They'll still do what they will call series A rounds, but these will increasingly be de facto series B rounds. In such rounds they won't get the 25 to 40% of the company they do now. You don't give up as much of the company in later rounds unless something is seriously wrong. Since the VCs who don't adapt will be investing later, their returns from winners may be smaller. But investing later should also mean they have fewer losers. So their ratio of risk to return may be the same or even better. They'll just have become a different, more conservative, type of investment. **Angels** In the big angel rounds that increasingly compete with series A rounds, the investors won't take as much equity as VCs do now. And VCs who try to compete with angels by doing more, smaller deals will probably find they have to take less equity to do it. Which is good news for founders: they'll get to keep more of the company. The deal terms of angel rounds will become less restrictive too—not just less restrictive than series A terms, but less restrictive than angel terms have traditionally been. In the future, angel rounds will less often be for specific amounts or have a lead investor. In the old days, the standard m.o. for startups was to find one angel to act as the lead investor. You'd negotiate a round size and valuation with the lead, who'd supply some but not all of the money. Then the startup and the lead would cooperate to find the rest. The future of angel rounds looks more like this: instead of a fixed round size, startups will do a rolling |
where they take money from investors one at a time till they feel they have enough. And though there's going to be one investor who gives them the first check, and his or her help in recruiting other investors will certainly be welcome, this initial investor will no longer be the lead in the old sense of managing the round. The startup will now do that themselves. There will continue to be lead investors in the sense of investors who take the lead in _advising_ a startup. They may also make the biggest investment. But they won't always have to be the one terms are negotiated with, or be the first money in, as they have in the past. Standardized paperwork will do away with the need to negotiate anything except the valuation, and that will get easier too. If multiple investors have to share a valuation, it will be whatever the startup can get from the first one to write a check, limited by their guess at whether this will make later investors balk. But there may not have to be just one valuation. Startups are increasingly raising money on convertible notes, and convertible notes have not valuations but at most valuation _caps_ : caps on what the effective valuation will be when the debt converts to equity (in a later round, or upon acquisition if that happens first). That's an important difference because it means a startup could do multiple notes at once with different caps. This is now starting to happen, and I predict it will become more common. **Sheep** The reason things are moving this way is that the old way sucked for startups. Leads could (and did) use a fixed size round as a legitimate-seeming way of saying what all founders hate to hear: I'll invest if other people will. Most investors, unable to judge startups for themselves, rely instead on the opinions of other investors. If everyone wants in, they want in too; if not, not. Founders hate this because it's a recipe for deadlock, and delay is the thing a startup can least afford. Most investors know this m.o. is lame, and few say openly that they're doing it. But the craftier ones achieve the same result by offering to lead rounds of fixed size and supplying only part of the money. If the startup can't raise the rest, the lead is out too. How could they go ahead with the deal? The startup would be underfunded! In the future, investors will increasingly be unable to offer investment subject to contingencies like other people investing. Or rather, investors who do that will get last place in line. Startups will go to them only to fill up rounds that are mostly subscribed. And since hot startups tend to have rounds that are oversubscribed, being last in line means they'll probably miss the hot deals. Hot deals and successful startups are not identical, but there is a significant correlation. So investors who won't invest unilaterally will have lower returns. Investors will probably find they do better when deprived of this crutch anyway. Chasing hot deals doesn't make investors choose better; |
just makes them feel better about their choices. I've seen feeding frenzies both form and fall apart many times, and as far as I can tell they're mostly random. If investors can no longer rely on their herd instincts, they'll have to think more about each startup before investing. They may be surprised how well this works. Deadlock wasn't the only disadvantage of letting a lead investor manage an angel round. The investors would not infrequently collude to push down the valuation. And rounds took too long to close, because however motivated the lead was to get the round closed, he was not a tenth as motivated as the startup. Increasingly, startups are taking charge of their own angel rounds. Only a few do so far, but I think we can already declare the old way dead, because those few are the best startups. They're the ones in a position to tell investors how the round is going to work. And if the startups you want to invest in do things a certain way, what difference does it make what the others do? **Traction** In fact, it may be slightly misleading to say that angel rounds will increasingly take the place of series A rounds. What's really happening is that startup-controlled rounds are taking the place of investor-controlled rounds. This is an instance of a very important meta-trend, one that Y Combinator itself has been based on from the beginning: founders are becoming increasingly powerful relative to investors. So if you want to predict what the future of venture funding will be like, just ask: how would founders like it to be? One by one, all the things founders dislike about raising money are going to get eliminated. Using that heuristic, I'll predict a couple more things. One is that investors will increasingly be unable to wait for startups to have "traction" before they put in significant money. It's hard to predict in advance which startups will succeed. So most investors prefer, if they can, to wait till the startup is already succeeding, then jump in quickly with an offer. Startups hate this as well, partly because it tends to create deadlock, and partly because it seems kind of slimy. If you're a promising startup but don't yet have significant growth, all the investors are your friends in words, but few are in actions. They all say they love you, but they all wait to invest. Then when you start to see growth, they claim they were your friend all along, and are aghast at the thought you'd be so disloyal as to leave them out of your round. If founders become more powerful, they'll be able to make investors give them more money upfront. (The worst variant of this behavior is the tranched deal, where the investor makes a small initial investment, with more to follow if the startup does well. In effect, this structure gives the investor a free option on the next round, which they'll only take if it's worse for the startup than they could get in the open market. Tranched deals are an abuse. They're increasingly rare, and they're going to |
rarer.) Investors don't like trying to predict which startups will succeed, but increasingly they'll have to. Though the way that happens won't necessarily be that the behavior of existing investors will change; it may instead be that they'll be replaced by other investors with different behavior—that investors who understand startups well enough to take on the hard problem of predicting their trajectory will tend to displace suits whose skills lie more in raising money from LPs. **Speed** The other thing founders hate most about fundraising is how long it takes. So as founders become more powerful, rounds should start to close faster. Fundraising is still terribly distracting for startups. If you're a founder in the middle of raising a round, the round is the top idea in your mind, which means working on the company isn't. If a round takes 2 months to close, which is reasonably fast by present standards, that means 2 months during which the company is basically treading water. That's the worst thing a startup could do. So if investors want to get the best deals, the way to do it will be to close faster. Investors don't need weeks to make up their minds anyway. We decide based on about 10 minutes of reading an application plus 10 minutes of in person interview, and we only regret about 10% of our decisions. If we can decide in 20 minutes, surely the next round of investors can decide in a couple days. There are a lot of institutionalized delays in startup funding: the multi-week mating dance with investors; the distinction between termsheets and deals; the fact that each series A has enormously elaborate, custom paperwork. Both founders and investors tend to take these for granted. It's the way things have always been. But ultimately the reason these delays exist is that they're to the advantage of investors. More time gives investors more information about a startup's trajectory, and it also tends to make startups more pliable in negotiations, since they're usually short of money. These conventions weren't designed to drag out the funding process, but that's why they're allowed to persist. Slowness is to the advantage of investors, who have in the past been the ones with the most power. But there is no need for rounds to take months or even weeks to close, and once founders realize that, it's going to stop. Not just in angel rounds, but in series A rounds too. The future is simple deals with standard terms, done quickly. One minor abuse that will get corrected in the process is option pools. In a traditional series A round, before the VCs invest they make the company set aside a block of stock for future hires—usually between 10 and 30% of the company. The point is to ensure this dilution is borne by the existing shareholders. The practice isn't dishonest; founders know what's going on. But it makes deals unnecessarily complicated. In effect the valuation is 2 numbers. There's no need to keep doing this. The final thing founders want is to be able |
sell some of their own stock in later rounds. This won't be a change, because the practice is now quite common. A lot of investors hated the idea, but the world hasn't exploded as a result, so it will happen more, and more openly. **Surprise** I've talked here about a bunch of changes that will be forced on investors as founders become more powerful. Now the good news: investors may actually make more money as a result. A couple days ago an interviewer asked me if founders having more power would be better or worse for the world. I was surprised, because I'd never considered that question. Better or worse, it's happening. But after a second's reflection, the answer seemed obvious. Founders understand their companies better than investors, and it has to be better if the people with more knowledge have more power. One of the mistakes novice pilots make is overcontrolling the aircraft: applying corrections too vigorously, so the aircraft oscillates about the desired configuration instead of approaching it asymptotically. It seems probable that investors have till now on average been overcontrolling their portfolio companies. In a lot of startups, the biggest source of stress for the founders is not competitors but investors. Certainly it was for us at Viaweb. And this is not a new phenomenon: investors were James Watt's biggest problem too. If having less power prevents investors from overcontrolling startups, it should be better not just for founders but for investors too. Investors may end up with less stock per startup, but startups will probably do better with founders more in control, and there will almost certainly be more of them. Investors all compete with one another for deals, but they aren't one another's main competitor. Our main competitor is employers. And so far that competitor is crushing us. Only a tiny fraction of people who could start a startup do. Nearly all customers choose the competing product, a job. Why? Well, let's look at the product we're offering. An unbiased review would go something like this: > Starting a startup gives you more freedom and the opportunity to make a lot > more money than a job, but it's also hard work and at times very stressful. Much of the stress comes from dealing with investors. If reforming the investment process removed that stress, we'd make our product much more attractive. The kind of people who make good startup founders don't mind dealing with technical problems—they enjoy technical problems—but they hate the type of problems investors cause. Investors have no idea that when they maltreat one startup, they're preventing 10 others from happening, but they are. Indirectly, but they are. So when investors stop trying to squeeze a little more out of their existing deals, they'll find they're net ahead, because so many more new deals appear. One of our axioms at Y Combinator is not to think of deal flow as a zero-sum game. Our main focus is to encourage more startups to happen, not to win a larger |
of the existing stream. We've found this principle very useful, and we think as it spreads outward it will help later stage investors as well. "Make something people want" applies to us too. ** |
| | **Want to start a startup?** Get funded by Y Combinator. --- September 2013 Most startups that raise money do it more than once. A typical trajectory might be (1) to get started with a few tens of thousands from something like Y Combinator or individual angels, then (2) raise a few hundred thousand to a few million to build the company, and then (3) once the company is clearly succeeding, raise one or more later rounds to accelerate growth. Reality can be messier. Some companies raise money twice in phase 2\. Others skip phase 1 and go straight to phase 2. And at Y Combinator we get an increasing number of companies that have already raised amounts in the hundreds of thousands. But the three phase path is at least the one about which individual startups' paths oscillate. This essay focuses on phase 2 fundraising. That's the type the startups we fund are doing on Demo Day, and this essay is the advice we give them. **Forces** Fundraising is hard in both senses: hard like lifting a heavy weight, and hard like solving a puzzle. It's hard like lifting a weight because it's intrinsically hard to convince people to part with large sums of money. That problem is irreducible; it should be hard. But much of the other kind of difficulty can be eliminated. Fundraising only seems a puzzle because it's an alien world to most founders, and I hope to fix that by supplying a map through it. To founders, the behavior of investors is often opaque — partly because their motivations are obscure, but partly because they deliberately mislead you. And the misleading ways of investors combine horribly with the wishful thinking of inexperienced founders. At YC we're always warning founders about this danger, and investors are probably more circumspect with YC startups than with other companies they talk to, and even so we witness a constant series of explosions as these two volatile components combine. If you're an inexperienced founder, the only way to survive is by imposing external constraints on yourself. You can't trust your intuitions. I'm going to give you a set of rules here that will get you through this process if anything will. At certain moments you'll be tempted to ignore them. So rule number zero is: these rules exist for a reason. You wouldn't need a rule to keep you going in one direction if there weren't powerful forces pushing you in another. The ultimate source of the forces acting on you are the forces acting on investors. Investors are pinched between two kinds of fear: fear of investing in startups that fizzle, and fear of missing out on startups that take off. The cause of all this fear is the very thing that makes startups such attractive investments: the successful ones grow very fast. But that fast growth means investors can't wait around. If you wait till a startup is obviously a success, it's too late. To get the really high returns, you have to invest in startups when it's still unclear how they'll do. But that in turn makes investors nervous |
about to invest in a flop. As indeed they often are. What investors would like to do, if they could, is wait. When a startup is only a few months old, every week that passes gives you significantly more information about them. But if you wait too long, other investors might take the deal away from you. And of course the other investors are all subject to the same forces. So what tends to happen is that they all wait as long as they can, then when some act the rest have to. **Don't raise money unless you want it and it wants you.** Such a high proportion of successful startups raise money that it might seem fundraising is one of the defining qualities of a startup. Actually it isn't. Rapid growth is what makes a company a startup. Most companies in a position to grow rapidly find that (a) taking outside money helps them grow faster, and (b) their growth potential makes it easy to attract such money. It's so common for both (a) and (b) to be true of a successful startup that practically all do raise outside money. But there may be cases where a startup either wouldn't want to grow faster, or outside money wouldn't help them to, and if you're one of them, don't raise money. The other time not to raise money is when you won't be able to. If you try to raise money before you can convince investors, you'll not only waste your time, but also burn your reputation with those investors. **Be in fundraising mode or not.** One of the things that surprises founders most about fundraising is how distracting it is. When you start fundraising, everything else grinds to a halt. The problem is not the time fundraising consumes but that it becomes the top idea in your mind. A startup can't endure that level of distraction for long. An early stage startup grows mostly because the founders make it grow, and if the founders look away, growth usually drops sharply. Because fundraising is so distracting, a startup should either be in fundraising mode or not. And when you do decide to raise money, you should focus your whole attention on it so you can get it done quickly and get back to work. You can take money from investors when you're not in fundraising mode. You just can't expend any attention on it. There are two things that take attention: convincing investors, and negotiating with them. So when you're not in fundraising mode, you should take money from investors only if they require no convincing, and are willing to invest on terms you'll take without negotiation. For example, if a reputable investor is willing to invest on a convertible note, using standard paperwork, that is either uncapped or capped at a good valuation, you can take that without having to think. The terms will be whatever they turn out to be in your next equity round. And "no convincing" means just that: zero time spent meeting with investors or preparing materials for them. If an investor says they're ready to invest, but they need you to come in for one meeting to meet some of the partners, tell |
no, if you're not in fundraising mode, because that's fundraising. Tell them politely; tell them you're focusing on the company right now, and that you'll get back to them when you're fundraising; but do not get sucked down the slippery slope. Investors will try to lure you into fundraising when you're not. It's great for them if they can, because they can thereby get a shot at you before everyone else. They'll send you emails saying they want to meet to learn more about you. If you get cold-emailed by an associate at a VC firm, you shouldn't meet even if you are in fundraising mode. Deals don't happen that way. But even if you get an email from a partner you should try to delay meeting till you're in fundraising mode. They may say they just want to meet and chat, but investors never just want to meet and chat. What if they like you? What if they start to talk about giving you money? Will you be able to resist having that conversation? Unless you're experienced enough at fundraising to have a casual conversation with investors that stays casual, it's safer to tell them that you'd be happy to later, when you're fundraising, but that right now you need to focus on the company. Companies that are successful at raising money in phase 2 sometimes tack on a few investors after leaving fundraising mode. This is fine; if fundraising went well, you'll be able to do it without spending time convincing them or negotiating about terms. **Get introductions to investors.** Before you can talk to investors, you have to be introduced to them. If you're presenting at a Demo Day, you'll be introduced to a whole bunch simultaneously. But even if you are, you should supplement these with intros you collect yourself. Do you have to be introduced? In phase 2, yes. Some investors will let you email them a business plan, but you can tell from the way their sites are organized that they don't really want startups to approach them directly. Intros vary greatly in effectiveness. The best type of intro is from a well- known investor who has just invested in you. So when you get an investor to commit, ask them to introduce you to other investors they respect. The next best type of intro is from a founder of a company they've funded. You can also get intros from other people in the startup community, like lawyers and reporters. There are now sites like AngelList, FundersClub, and WeFunder that can introduce you to investors. We recommend startups treat them as auxiliary sources of money. Raise money first from leads you get yourself. Those will on average be better investors. Plus you'll have an easier time raising money on these sites once you can say you've already raised some from well-known investors. **Hear no till you hear yes.** Treat investors as saying no till they unequivocally say yes, in the form of a definite offer with no contingencies. I mentioned earlier that investors prefer to wait if they can. What's particularly dangerous for founders is the way they wait. |
they lead you on. They seem like they're about to invest right up till the moment they say no. If they even say no. Some of the worse ones never actually do say no; they just stop replying to your emails. They hope that way to get a free option on investing. If they decide later that they want to invest — usually because they've heard you're a hot deal — they can pretend they just got distracted and then restart the conversation as if they'd been about to. That's not the worst thing investors will do. Some will use language that makes it sound as if they're committing, but which doesn't actually commit them. And wishful thinking founders are happy to meet them half way. Fortunately, the next rule is a tactic for neutralizing this behavior. But to work it depends on you not being tricked by the no that sounds like yes. It's so common for founders to be misled/mistaken about this that we designed a protocol to fix the problem. If you believe an investor has committed, get them to confirm it. If you and they have different views of reality, whether the source of the discrepancy is their sketchiness or your wishful thinking, the prospect of confirming a commitment in writing will flush it out. And till they confirm, regard them as saying no. **Do breadth-first search weighted by expected value.** When you talk to investors your m.o. should be breadth-first search, weighted by expected value. You should always talk to investors in parallel rather than serially. You can't afford the time it takes to talk to investors serially, plus if you only talk to one investor at a time, they don't have the pressure of other investors to make them act. But you shouldn't pay the same attention to every investor, because some are more promising prospects than others. The optimal solution is to talk to all potential investors in parallel, but give higher priority to the more promising ones. Expected value = how likely an investor is to say yes, multiplied by how good it would be if they did. So for example, an eminent investor who would invest a lot, but will be hard to convince, might have the same expected value as an obscure angel who won't invest much, but will be easy to convince. Whereas an obscure angel who will only invest a small amount, and yet needs to meet multiple times before making up his mind, has very low expected value. Meet such investors last, if at all. Doing breadth-first search weighted by expected value will save you from investors who never explicitly say no but merely drift away, because you'll drift away from them at the same rate. It protects you from investors who flake in much the same way that a distributed algorithm protects you from processors that fail. If some investor isn't returning your emails, or wants to have lots of meetings but isn't progressing toward making you an offer, you automatically focus less on them. But you have to be disciplined about assigning probabilities. You can't let how much you want an investor influence your |
of how much they want you. **Know where you stand.** How do you judge how well you're doing with an investor, when investors habitually seem more positive than they are? By looking at their actions rather than their words. Every investor has some track they need to move along from the first conversation to wiring the money, and you should always know what that track consists of, where you are on it, and how fast you're moving forward. Never leave a meeting with an investor without asking what happens next. What more do they need in order to decide? Do they need another meeting with you? To talk about what? And how soon? Do they need to do something internally, like talk to their partners, or investigate some issue? How long do they expect it to take? Don't be too pushy, but know where you stand. If investors are vague or resist answering such questions, assume the worst; investors who are seriously interested in you will usually be happy to talk about what has to happen between now and wiring the money, because they're already running through that in their heads. If you're experienced at negotiations, you already know how to ask such questions. If you're not, there's a trick you can use in this situation. Investors know you're inexperienced at raising money. Inexperience there doesn't make you unattractive. Being a noob at technology would, if you're starting a technology startup, but not being a noob at fundraising. Larry and Sergey were noobs at fundraising. So you can just confess that you're inexperienced at this and ask how their process works and where you are in it. **Get the first commitment.** The biggest factor in most investors' opinions of you is the opinion of other investors. Once you start getting investors to commit, it becomes increasingly easy to get more to. But the other side of this coin is that it's often hard to get the first commitment. Getting the first substantial offer can be half the total difficulty of fundraising. What counts as a substantial offer depends on who it's from and how much it is. Money from friends and family doesn't usually count, no matter how much. But if you get $50k from a well known VC firm or angel investor, that will usually be enough to set things rolling. **Close committed money.** It's not a deal till the money's in the bank. I often hear inexperienced founders say things like "We've raised $800,000," only to discover that zero of it is in the bank so far. Remember the twin fears that torment investors? The fear of missing out that makes them jump early, and the fear of jumping onto a turd that results? This is a market where people are exceptionally prone to buyer's remorse. And it's also one that furnishes them plenty of excuses to gratify it. The public markets snap startup investing around like a whip. If the Chinese economy blows up tomorrow, all bets are off. But there are lots of surprises for individual startups too, and they tend to be concentrated around fundraising. Tomorrow a big competitor |
appear, or you could get C&Ded, or your cofounder could quit. Even a day's delay can bring news that causes an investor to change their mind. So when someone commits, get the money. Knowing where you stand doesn't end when they say they'll invest. After they say yes, know what the timetable is for getting the money, and then babysit that process till it happens. Institutional investors have people in charge of wiring money, but you may have to hunt angels down in person to collect a check. Inexperienced investors are the ones most likely to get buyer's remorse. Established ones have learned to treat saying yes as like diving off a diving board, and they also have more brand to preserve. But I've heard of cases of even top-tier VC firms welching on deals. **Avoid investors who don't "lead."** Since getting the first offer is most of the difficulty of fundraising, that should be part of your calculation of expected value when you start. You have to estimate not just the probability that an investor will say yes, but the probability that they'd be the _first_ to say yes, and the latter is not simply a constant fraction of the former. Some investors are known for deciding quickly, and those are extra valuable early on. Conversely, an investor who will only invest once other investors have is worthless initially. And while most investors are influenced by how interested other investors are in you, there are some who have an explicit policy of only investing after other investors have. You can recognize this contemptible subspecies of investor because they often talk about "leads." They say that they don't lead, or that they'll invest once you have a lead. Sometimes they even claim to be willing to lead themselves, by which they mean they won't invest till you get $x from other investors. (It's great if by "lead" they mean they'll invest unilaterally, and in addition will help you raise more. What's lame is when they use the term to mean they won't invest unless you can raise more elsewhere.) Where does this term "lead" come from? Up till a few years ago, startups raising money in phase 2 would usually raise equity rounds in which several investors invested at the same time using the same paperwork. You'd negotiate the terms with one "lead" investor, and then all the others would sign the same documents and all the money change hands at the closing. Series A rounds still work that way, but things now work differently for most fundraising prior to the series A. Now there are rarely actual rounds before the A round, or leads for them. Now startups simply raise money from investors one at a time till they feel they have enough. Since there are no longer leads, why do investors use that term? Because it's a more legitimate-sounding way of saying what they really mean. All they really mean is that their interest in you is a function of other investors' interest in you. I.e. the spectral signature of all mediocre investors. But when phrased in terms of leads, |
sounds like there is something structural and therefore legitimate about their behavior. When an investor tells you "I want to invest in you, but I don't lead," translate that in your mind to "No, except yes if you turn out to be a hot deal." And since that's the default opinion of any investor about any startup, they've essentially just told you nothing. When you first start fundraising, the expected value of an investor who won't "lead" is zero, so talk to such investors last if at all. **Have multiple plans.** Many investors will ask how much you're planning to raise. This question makes founders feel they should be planning to raise a specific amount. But in fact you shouldn't. It's a mistake to have fixed plans in an undertaking as unpredictable as fundraising. So why do investors ask how much you plan to raise? For much the same reasons a salesperson in a store will ask "How much were you planning to spend?" if you walk in looking for a gift for a friend. You probably didn't have a precise amount in mind; you just want to find something good, and if it's inexpensive, so much the better. The salesperson asks you this not because you're supposed to have a plan to spend a specific amount, but so they can show you only things that cost the most you'll pay. Similarly, when investors ask how much you plan to raise, it's not because you're supposed to have a plan. It's to see whether you'd be a suitable recipient for the size of investment they like to make, and also to judge your ambition, reasonableness, and how far you are along with fundraising. If you're a wizard at fundraising, you can say "We plan to raise a $7 million series A round, and we'll be accepting termsheets next tuesday." I've known a handful of founders who could pull that off without having VCs laugh in their faces. But if you're in the inexperienced but earnest majority, the solution is analogous to the solution I recommend for pitching your startup: do the right thing and then just tell investors what you're doing. And the right strategy, in fundraising, is to have multiple plans depending on how much you can raise. Ideally you should be able to tell investors something like: we can make it to profitability without raising any more money, but if we raise a few hundred thousand we can hire one or two smart friends, and if we raise a couple million, we can hire a whole engineering team, etc. Different plans match different investors. If you're talking to a VC firm that only does series A rounds (though there are few of those left), it would be a waste of time talking about any but your most expensive plan. Whereas if you're talking to an angel who invests $20k at a time and you haven't raised any money yet, you probably want to focus on your least expensive plan. If you're so fortunate as to have to think about the upper limit on what you should raise, a good rule of thumb is to multiply the number of people you want to hire times $15k times 18 months. In most startups, nearly |
the costs are a function of the number of people, and $15k per month is the conventional total cost (including benefits and even office space) per person. $15k per month is high, so don't actually spend that much. But it's ok to use a high estimate when fundraising to add a margin for error. If you have additional expenses, like manufacturing, add in those at the end. Assuming you have none and you think you might hire 20 people, the most you'd want to raise is 20 x $15k x 18 = $5.4 million. **Underestimate how much you want.** Though you can focus on different plans when talking to different types of investors, you should on the whole err on the side of underestimating the amount you hope to raise. For example, if you'd like to raise $500k, it's better to say initially that you're trying to raise $250k. Then when you reach $150k you're more than half done. That sends two useful signals to investors: that you're doing well, and that they have to decide quickly because you're running out of room. Whereas if you'd said you were raising $500k, you'd be less than a third done at $150k. If fundraising stalled there for an appreciable time, you'd start to read as a failure. Saying initially that you're raising $250k doesn't limit you to raising that much. When you reach your initial target and you still have investor interest, you can just decide to raise more. Startups do that all the time. In fact, most startups that are very successful at fundraising end up raising more than they originally intended. I'm not saying you should lie, but that you should lower your expectations initially. There is almost no downside in starting with a low number. It not only won't cap the amount you raise, but will on the whole tend to increase it. A good metaphor here is angle of attack. If you try to fly at too steep an angle of attack, you just stall. If you say right out of the gate that you want to raise a $5 million series A round, unless you're in a very strong position, you not only won't get that but won't get anything. Better to start at a low angle of attack, build up speed, and then gradually increase the angle if you want. **Be profitable if you can.** You will be in a much stronger position if your collection of plans includes one for raising zero dollars — i.e. if you can make it to profitability without raising any additional money. Ideally you want to be able to say to investors "We'll succeed no matter what, but raising money will help us do it faster." There are many analogies between fundraising and dating, and this is one of the strongest. No one wants you if you seem desperate. And the best way not to seem desperate is not to _be_ desperate. That's one reason we urge startups during YC to keep expenses low and to try to make it to ramen profitability before Demo Day. Though it sounds slightly paradoxical, if you want to raise money, the best thing you can do is get yourself to the point where you don't need to. There are almost two distinct modes of |
one in which founders who need money knock on doors seeking it, knowing that otherwise the company will die or at the very least people will have to be fired, and one in which founders who don't need money take some to grow faster than they could merely on their own revenues. To emphasize the distinction I'm going to name them: type A fundraising is when you don't need money, and type B fundraising is when you do. Inexperienced founders read about famous startups doing what was type A fundraising, and decide they should raise money too, since that seems to be how startups work. Except when they raise money they don't have a clear path to profitability and are thus doing type B fundraising. And they are then surprised how difficult and unpleasant it is. Of course not all startups can make it to ramen profitability in a few months. And some that don't still manage to have the upper hand over investors, if they have some other advantage like extraordinary growth numbers or exceptionally formidable founders. But as time passes it gets increasingly difficult to fundraise from a position of strength without being profitable. **Don't optimize for valuation.** When you raise money, what should your valuation be? The most important thing to understand about valuation is that it's not that important. Founders who raise money at high valuations tend to be unduly proud of it. Founders are often competitive people, and since valuation is usually the only visible number attached to a startup, they end up competing to raise money at the highest valuation. This is stupid, because fundraising is not the test that matters. The real test is revenue. Fundraising is just a means to that end. Being proud of how well you did at fundraising is like being proud of your college grades. Not only is fundraising not the test that matters, valuation is not even the thing to optimize about fundraising. The number one thing you want from phase 2 fundraising is to get the money you need, so you can get back to focusing on the real test, the success of your company. Number two is good investors. Valuation is at best third. The empirical evidence shows just how unimportant it is. Dropbox and Airbnb are the most successful companies we've funded so far, and they raised money after Y Combinator at premoney valuations of $4 million and $2.6 million respectively. Prices are so much higher now that if you can raise money at all you'll probably raise it at higher valuations than Dropbox and Airbnb. So let that satisfy your competitiveness. You're doing better than Dropbox and Airbnb! At a test that doesn't matter. When you start fundraising, your initial valuation (or valuation cap) will be set by the deal you make with the first investor who commits. You can increase the price for later investors, if you get a lot of interest, but by default the valuation you got from the first investor becomes your asking price. So if you're raising money from multiple investors, as most companies do |
phase 2, you have to be careful to avoid raising the first from an over-eager investor at a price you won't be able to sustain. You can of course lower your price if you need to (in which case you should give the same terms to investors who invested earlier at a higher price), but you may lose a bunch of leads in the process of realizing you need to do this. What you can do if you have eager first investors is raise money from them on an uncapped convertible note with an MFN clause. This is essentially a way of saying that the valuation cap of the note will be determined by the next investors you raise money from. It will be easier to raise money at a lower valuation. It shouldn't be, but it is. Since phase 2 prices vary at most 10x and the big successes generate returns of at least 100x, investors should pick startups entirely based on their estimate of the probability that the company will be a big success and hardly at all on price. But although it's a mistake for investors to care about price, a significant number do. A startup that investors seem to like but won't invest in at a cap of $x will have an easier time at $x/2. **Yes/no before valuation.** Some investors want to know what your valuation is before they even talk to you about investing. If your valuation has already been set by a prior investment at a specific valuation or cap, you can tell them that number. But if it isn't set because you haven't closed anyone yet, and they try to push you to name a price, resist doing so. If this would be the first investor you've closed, then this could be the tipping point of fundraising. That means closing this investor is the first priority, and you need to get the conversation onto that instead of being dragged sideways into a discussion of price. Fortunately there is a way to avoid naming a price in this situation. And it is not just a negotiating trick; it's how you (both) should be operating. Tell them that valuation is not the most important thing to you and that you haven't thought much about it, that you are looking for investors you want to partner with and who want to partner with you, and that you should talk first about whether they want to invest at all. Then if they decide they do want to invest, you can figure out a price. But first things first. Since valuation isn't that important and getting fundraising rolling is, we usually tell founders to give the first investor who commits as low a price as they need to. This is a safe technique so long as you combine it with the next one. **Beware "valuation sensitive" investors.** Occasionally you'll encounter investors who describe themselves as "valuation sensitive." What this means in practice is that they are compulsive negotiators who will suck up a lot of your time trying to push your price down. You should therefore never approach such investors first. While you shouldn't chase high valuations, you also don't want your valuation to be set artificially low because the first investor |
committed happened to be a compulsive negotiator. Some such investors have value, but the time to approach them is near the end of fundraising, when you're in a position to say "this is the price everyone else has paid; take it or leave it" and not mind if they leave it. This way, you'll not only get market price, but it will also take less time. Ideally you know which investors have a reputation for being "valuation sensitive" and can postpone dealing with them till last, but occasionally one you didn't know about will pop up early on. The rule of doing breadth first search weighted by expected value already tells you what to do in this case: slow down your interactions with them. There are a handful of investors who will try to invest at a lower valuation even when your price has already been set. Lowering your price is a backup plan you resort to when you discover you've let the price get set too high to close all the money you need. So you'd only want to talk to this sort of investor if you were about to do that anyway. But since investor meetings have to be arranged at least a few days in advance and you can't predict when you'll need to resort to lowering your price, this means in practice that you should approach this type of investor last if at all. If you're surprised by a lowball offer, treat it as a backup offer and delay responding to it. When someone makes an offer in good faith, you have a moral obligation to respond in a reasonable time. But lowballing you is a dick move that should be met with the corresponding countermove. **Accept offers greedily.** I'm a little leery of using the term "greedily" when writing about fundraising lest non-programmers misunderstand me, but a greedy algorithm is simply one that doesn't try to look into the future. A greedy algorithm takes the best of the options in front of it right now. And that is how startups should approach fundraising in phases 2 and later. Don't try to look into the future because (a) the future is unpredictable, and indeed in this business you're often being deliberately misled about it and (b) your first priority in fundraising should be to get it finished and get back to work anyway. If someone makes you an acceptable offer, take it. If you have multiple incompatible offers, take the best. Don't reject an acceptable offer in the hope of getting a better one in the future. These simple rules cover a wide variety of cases. If you're raising money from many investors, roll them up as they say yes. As you start to feel you've raised enough, the threshold for acceptable will start to get higher. In practice offers exist for stretches of time, not points. So when you get an acceptable offer that would be incompatible with others (e.g. an offer to invest most of the money you need), you can tell the other investors you're talking to that you have an offer good enough to accept, and give them a few days to make their own. This could lose you some that might have made an offer if they |
more time. But by definition you don't care; the initial offer was acceptable. Some investors will try to prevent others from having time to decide by giving you an "exploding" offer, meaning one that's only valid for a few days. Offers from the very best investors explode less frequently and less rapidly — Fred Wilson never gives exploding offers, for example — because they're confident you'll pick them. But lower-tier investors sometimes give offers with very short fuses, because they believe no one who had other options would choose them. A deadline of three working days is acceptable. You shouldn't need more than that if you've been talking to investors in parallel. But a deadline any shorter is a sign you're dealing with a sketchy investor. You can usually call their bluff, and you may need to. It might seem that instead of accepting offers greedily, your goal should be to get the best investors as partners. That is certainly a good goal, but in phase 2 "get the best investors" only rarely conflicts with "accept offers greedily," because the best investors don't usually take any longer to decide than the others. The only case where the two strategies give conflicting advice is when you have to forgo an offer from an acceptable investor to see if you'll get an offer from a better one. If you talk to investors in parallel and push back on exploding offers with excessively short deadlines, that will almost never happen. But if it does, "get the best investors" is in the average case bad advice. The best investors are also the most selective, because they get their pick of all the startups. They reject nearly everyone they talk to, which means in the average case it's a bad trade to exchange a definite offer from an acceptable investor for a potential offer from a better one. (The situation is different in phase 1. You can't apply to all the incubators in parallel, because some offset their schedules to prevent this. In phase 1, "accept offers greedily" and "get the best investors" do conflict, so if you want to apply to multiple incubators, you should do it in such a way that the ones you want most decide first.) Sometimes when you're raising money from multiple investors, a series A will emerge out of those conversations, and these rules even cover what to do in that case. When an investor starts to talk to you about a series A, keep taking smaller investments till they actually give you a termsheet. There's no practical difficulty. If the smaller investments are on convertible notes, they'll just convert into the series A round. The series A investor won't like having all these other random investors as bedfellows, but if it bothers them so much they should get on with giving you a termsheet. Till they do, you don't know for sure they will, and the greedy algorithm tells you what to do. **Don't sell more than 25% in phase 2.** If you do well, you will probably raise a series A round eventually. I say probably because things are changing with |
A rounds. Startups may start to skip them. But only one company we've funded has so far, so tentatively assume the path to huge passes through an A round. Which means you should avoid doing things in earlier rounds that will mess up raising an A round. For example, if you've sold more than about 40% of your company total, it starts to get harder to raise an A round, because VCs worry there will not be enough stock left to keep the founders motivated. Our rule of thumb is not to sell more than 25% in phase 2, on top of whatever you sold in phase 1, which should be less than 15%. If you're raising money on uncapped notes, you'll have to guess what the eventual equity round valuation might be. Guess conservatively. (Since the goal of this rule is to avoid messing up the series A, there's obviously an exception if you end up raising a series A in phase 2, as a handful of startups do.) **Have one person handle fundraising.** If you have multiple founders, pick one to handle fundraising so the other(s) can keep working on the company. And since the danger of fundraising is not the time taken up by the actual meetings but that it becomes the top idea in your mind, the founder who handles fundraising should make a conscious effort to insulate the other founder(s) from the details of the process. (If the founders mistrust one another, this could cause some friction. But if the founders mistrust one another, you have worse problems to worry about than how to organize fundraising.) The founder who handles fundraising should be the CEO, who should in turn be the most formidable of the founders. Even if the CEO is a programmer and another founder is a salesperson? Yes. If you happen to be that type of founding team, you're effectively a single founder when it comes to fundraising. It's ok to bring all the founders to meet an investor who will invest a lot, and who needs this meeting as the final step before deciding. But wait till that point. Introducing an investor to your cofounder(s) should be like introducing a girl/boyfriend to your parents — something you do only when things reach a certain stage of seriousness. Even if there are still one or more founders focusing on the company during fundraising, growth will slow. But try to get as much growth as you can, because fundraising is a segment of time, not a point, and what happens to the company during that time affects the outcome. If your numbers grow significantly between two investor meetings, investors will be hot to close, and if your numbers are flat or down they'll start to get cold feet. **You'll need an executive summary and (maybe) a deck.** Traditionally phase 2 fundraising consists of presenting a slide deck in person to investors. Sequoia describes what such a deck should contain, and since they're the customer you can take their word for it. I say "traditionally" because I'm ambivalent about decks, and (though perhaps this is wishful thinking) they seem to be on the way out. A lot of the most |
startups we fund never make decks in phase 2. They just talk to investors and explain what they plan to do. Fundraising usually takes off fast for the startups that are most successful at it, and they're thus able to excuse themselves by saying that they haven't had time to make a deck. You'll also want an executive summary, which should be no more than a page long and describe in the most matter of fact language what you plan to do, why it's a good idea, and what progress you've made so far. The point of the summary is to remind the investor (who may have met many startups that day) what you talked about. Assume that if you give someone a copy of your deck or executive summary, it will be passed on to whoever you'd least like to have it. But don't refuse on that account to give copies to investors you meet. You just have to treat such leaks as a cost of doing business. In practice it's not that high a cost. Though founders are rightly indignant when their plans get leaked to competitors, I can't think of a startup whose outcome has been affected by it. Sometimes an investor will ask you to send them your deck and/or executive summary before they decide whether to meet with you. I wouldn't do that. It's a sign they're not really interested. **Stop fundraising when it stops working.** When do you stop fundraising? Ideally when you've raised enough. But what if you haven't raised as much as you'd like? When do you give up? It's hard to give general advice about this, because there have been cases of startups that kept trying to raise money even when it seemed hopeless, and miraculously succeeded. But what I usually tell founders is to stop fundraising when you start to get a lot of air in the straw. When you're drinking through a straw, you can tell when you get to the end of the liquid because you start to get a lot of air in the straw. When your fundraising options run out, they usually run out in the same way. Don't keep sucking on the straw if you're just getting air. It's not going to get better. **Don't get addicted to fundraising.** Fundraising is a chore for most founders, but some find it more interesting than working on their startup. The work at an early stage startup often consists of unglamorous schleps. Whereas fundraising, when it's going well, can be quite the opposite. Instead of sitting in your grubby apartment listening to users complain about bugs in your software, you're being offered millions of dollars by famous investors over lunch at a nice restaurant. The danger of fundraising is particularly acute for people who are good at it. It's always fun to work on something you're good at. If you're one of these people, beware. Fundraising is not what will make your company successful. Listening to users complain about bugs in your software is what will make you successful. And the big danger of getting addicted to fundraising is not merely that you'll spend too long on it or raise too much money. It's that you'll start to think of |
as being already successful, and lose your taste for the schleps you need to undertake to actually be successful. Startups can be destroyed by this. When I see a startup with young founders that is fabulously successful at fundraising, I mentally decrease my estimate of the probability that they'll succeed. The press may be writing about them as if they'd been anointed as the next Google, but I'm thinking "this is going to end badly." **Don't raise too much.** Though only a handful of startups have to worry about this, it is possible to raise too much. The dangers of raising too much are subtle but insidious. One is that it will set impossibly high expectations. If you raise an excessive amount of money, it will be at a high valuation, and the danger of raising money at too high a valuation is that you won't be able to increase it sufficiently the next time you raise money. A company's valuation is expected to rise each time it raises money. If not it's a sign of a company in trouble, which makes you unattractive to investors. So if you raise money in phase 2 at a post-money valuation of $30 million, the pre-money valuation of your next round, if you want to raise one, is going to have to be at least $50 million. And you have to be doing really, really well to raise money at $50 million. It's very dangerous to let the competitiveness of your current round set the performance threshold you have to meet to raise your next one, because the two are only loosely coupled. But the money itself may be more dangerous than the valuation. The more you raise, the more you spend, and spending a lot of money can be disastrous for an early stage startup. Spending a lot makes it harder to become profitable, and perhaps even worse, it makes you more rigid, because the main way to spend money is people, and the more people you have, the harder it is to change directions. So if you do raise a huge amount of money, don't spend it. (You will find that advice almost impossible to follow, so hot will be the money burning a hole in your pocket, but I feel obliged at least to try.) **Be nice.** Startups raising money occasionally alienate investors by seeming arrogant. Sometimes because they are arrogant, and sometimes because they're noobs clumsily attempting to mimic the toughness they've observed in experienced founders. It's a mistake to behave arrogantly to investors. While there are certain situations in which certain investors like certain kinds of arrogance, investors vary greatly in this respect, and a flick of the whip that will bring one to heel will make another roar with indignation. The only safe strategy is never to seem arrogant at all. That will require some diplomacy if you follow the advice I've given here, because the advice I've given is essentially how to play hardball back. When you refuse to meet an investor because you're not in fundraising mode, or slow down your interactions with an investor who moves too slow, or treat a contingent offer as the |
it actually is and then, by accepting offers greedily, end up leaving that investor out, you're going to be doing things investors don't like. So you must cushion the blow with soft words. At YC we tell startups they can blame us. And now that I've written this, everyone else can blame me if they want. That plus the inexperience card should work in most situations: sorry, we think you're great, but PG said startups shouldn't ___, and since we're new to fundraising, we feel like we have to play it safe. The danger of behaving arrogantly is greatest when you're doing well. When everyone wants you, it's hard not to let it go to your head. Especially if till recently no one wanted you. But restrain yourself. The startup world is a small place, and startups have lots of ups and downs. This is a domain where it's more true than usual that pride goeth before a fall. Be nice when investors reject you as well. The best investors are not wedded to their initial opinion of you. If they reject you in phase 2 and you end up doing well, they'll often invest in phase 3\. In fact investors who reject you are some of your warmest leads for future fundraising. Any investor who spent significant time deciding probably came close to saying yes. Often you have some internal champion who only needs a little more evidence to convince the skeptics. So it's wise not merely to be nice to investors who reject you, but (unless they behaved badly) to treat it as the beginning of a relationship. **The bar will be higher next time.** Assume the money you raise in phase 2 will be the last you ever raise. You must make it to profitability on this money if you can. Over the past several years, the investment community has evolved from a strategy of anointing a small number of winners early and then supporting them for years to a strategy of spraying money at early stage startups and then ruthlessly culling them at the next stage. This is probably the optimal strategy for investors. It's too hard to pick winners early on. Better to let the market do it for you. But it often comes as a surprise to startups how much harder it is to raise money in phase 3. When your company is only a couple months old, all it has to be is a promising experiment that's worth funding to see how it turns out. The next time you raise money, the experiment has to have worked. You have to be on a trajectory that leads to going public. And while there are some ideas where the proof that the experiment worked might consist of e.g. query response times, usually the proof is profitability. Usually phase 3 fundraising has to be type A fundraising. In practice there are two ways startups hose themselves between phases 2 and 3. Some are just too slow to become profitable. They raise enough money to last for two years. There doesn't seem any particular urgency to be profitable. So they don't make any effort to make money for a year. But by that time, not making money has become habitual. When they finally decide to |
they find they can't. The other way companies hose themselves is by letting their expenses grow too fast. Which almost always means hiring too many people. You usually shouldn't go out and hire 8 people as soon as you raise money at phase 2. Usually you want to wait till you have growth (and thus usually revenues) to justify them. A lot of VCs will encourage you to hire aggressively. VCs generally tell you to spend too much, partly because as money people they err on the side of solving problems by spending money, and partly because they want you to sell them more of your company in subsequent rounds. Don't listen to them. **Don't make things complicated.** I realize it may seem odd to sum up this huge treatise by saying that my overall advice is not to make fundraising too complicated, but if you go back and look at this list you'll see it's basically a simple recipe with a lot of implications and edge cases. Avoid investors till you decide to raise money, and then when you do, talk to them all in parallel, prioritized by expected value, and accept offers greedily. That's fundraising in one sentence. Don't introduce complicated optimizations, and don't let investors introduce complications either. Fundraising is not what will make you successful. It's just a means to an end. Your primary goal should be to get it over with and get back to what will make you successful — making things and talking to users — and the path I've described will for most startups be the surest way to that destination. Be good, take care of yourselves, and _don't leave the path_. ** |
| December 2019 I've seen the same pattern in many different fields: even though lots of people have worked hard in the field, only a small fraction of the space of possibilities has been explored, because they've all worked on similar things. Even the smartest, most imaginative people are surprisingly conservative when deciding what to work on. People who would never dream of being fashionable in any other way get sucked into working on fashionable problems. If you want to try working on unfashionable problems, one of the best places to look is in fields that people think have already been fully explored: essays, Lisp, venture funding you may notice a pattern here. If you can find a new approach into a big but apparently played out field, the value of whatever you discover will be _multiplied_ by its enormous surface area. The best protection against getting drawn into working on the same things as everyone else may be to _genuinely love_ what you're doing. Then you'll continue to work on it even if you make the same mistake as other people and think that it's too marginal to matter. --- --- Japanese Translation | | Arabic Translation French Translation * * * --- |
| October 2015 Here's a simple trick for getting more people to read what you write: write in spoken language. Something comes over most people when they start writing. They write in a different language than they'd use if they were talking to a friend. The sentence structure and even the words are different. No one uses "pen" as a verb in spoken English. You'd feel like an idiot using "pen" instead of "write" in a conversation with a friend. The last straw for me was a sentence I read a couple days ago: > The mercurial Spaniard himself declared: "After Altamira, all is decadence." It's from Neil Oliver's _A History of Ancient Britain_. I feel bad making an example of this book, because it's no worse than lots of others. But just imagine calling Picasso "the mercurial Spaniard" when talking to a friend. Even one sentence of this would raise eyebrows in conversation. And yet people write whole books of it. Ok, so written and spoken language are different. Does that make written language worse? If you want people to read and understand what you write, yes. Written language is more complex, which makes it more work to read. It's also more formal and distant, which gives the reader's attention permission to drift. But perhaps worst of all, the complex sentences and fancy words give you, the writer, the false impression that you're saying more than you actually are. You don't need complex sentences to express complex ideas. When specialists in some abstruse topic talk to one another about ideas in their field, they don't use sentences any more complex than they do when talking about what to have for lunch. They use different words, certainly. But even those they use no more than necessary. And in my experience, the harder the subject, the more informally experts speak. Partly, I think, because they have less to prove, and partly because the harder the ideas you're talking about, the less you can afford to let language get in the way. Informal language is the athletic clothing of ideas. I'm not saying spoken language always works best. Poetry is as much music as text, so you can say things you wouldn't say in conversation. And there are a handful of writers who can get away with using fancy language in prose. And then of course there are cases where writers don't want to make it easy to understand what they're saying—in corporate announcements of bad news, for example, or at the more _bogus_ end of the humanities. But for nearly everyone else, spoken language is better. It seems to be hard for most people to write in spoken language. So perhaps the best solution is to write your first draft the way you usually would, then afterward look at each sentence and ask "Is this the way I'd say this if I were talking to a friend?" If it isn't, imagine what you would say, and use that instead. After a while this filter will start to operate as you write. When you write something you wouldn't say, you'll hear the clank as it hits the page. Before I publish a new |
I read it out loud and fix everything that doesn't sound like conversation. I even fix bits that are phonetically awkward; I don't know if that's necessary, but it doesn't cost much. This trick may not always be enough. I've seen writing so far removed from spoken language that it couldn't be fixed sentence by sentence. For cases like that there's a more drastic solution. After writing the first draft, try explaining to a friend what you just wrote. Then replace the draft with what you said to your friend. People often tell me how much my essays sound like me talking. The fact that this seems worthy of comment shows how rarely people manage to write in spoken language. Otherwise everyone's writing would sound like them talking. If you simply manage to write in spoken language, you'll be ahead of 95% of writers. And it's so easy to do: just don't let a sentence through unless it's the way you'd say it to a friend. **Thanks** to Patrick Collison and Jessica Livingston for reading drafts of this. --- --- Japanese Translation | | Arabic Translation * * * --- |
| October 2015 This will come as a surprise to a lot of people, but in some cases it's possible to detect bias in a selection process without knowing anything about the applicant pool. Which is exciting because among other things it means third parties can use this technique to detect bias whether those doing the selecting want them to or not. You can use this technique whenever (a) you have at least a random sample of the applicants that were selected, (b) their subsequent performance is measured, and (c) the groups of applicants you're comparing have roughly equal distribution of ability. How does it work? Think about what it means to be biased. What it means for a selection process to be biased against applicants of type x is that it's harder for them to make it through. Which means applicants of type x have to be better to get selected than applicants not of type x. Which means applicants of type x who do make it through the selection process will outperform other successful applicants. And if the performance of all the successful applicants is measured, you'll know if they do. Of course, the test you use to measure performance must be a valid one. And in particular it must not be invalidated by the bias you're trying to measure. But there are some domains where performance can be measured, and in those detecting bias is straightforward. Want to know if the selection process was biased against some type of applicant? Check whether they outperform the others. This is not just a heuristic for detecting bias. It's what bias means. For example, many suspect that venture capital firms are biased against female founders. This would be easy to detect: among their portfolio companies, do startups with female founders outperform those without? A couple months ago, one VC firm (almost certainly unintentionally) published a study showing bias of this type. First Round Capital found that among its portfolio companies, startups with female founders _outperformed_ those without by 63%. The reason I began by saying that this technique would come as a surprise to many people is that we so rarely see analyses of this type. I'm sure it will come as a surprise to First Round that they performed one. I doubt anyone there realized that by limiting their sample to their own portfolio, they were producing a study not of startup trends but of their own biases when selecting companies. I predict we'll see this technique used more in the future. The information needed to conduct such studies is increasingly available. Data about who applies for things is usually closely guarded by the organizations selecting them, but nowadays data about who gets selected is often publicly available to anyone who takes the trouble to aggregate it. ** |
| December 2019 There are two distinct ways to be politically moderate: on purpose and by accident. Intentional moderates are trimmers, deliberately choosing a position mid-way between the extremes of right and left. Accidental moderates end up in the middle, on average, because they make up their own minds about each question, and the far right and far left are roughly equally wrong. You can distinguish intentional from accidental moderates by the distribution of their opinions. If the far left opinion on some matter is 0 and the far right opinion 100, an intentional moderate's opinion on every question will be near 50. Whereas an accidental moderate's opinions will be scattered over a broad range, but will, like those of the intentional moderate, average to about 50. Intentional moderates are similar to those on the far left and the far right in that their opinions are, in a sense, not their own. The defining quality of an ideologue, whether on the left or the right, is to acquire one's opinions in bulk. You don't get to pick and choose. Your opinions about taxation can be predicted from your opinions about sex. And although intentional moderates might seem to be the opposite of ideologues, their beliefs (though in their case the word "positions" might be more accurate) are also acquired in bulk. If the median opinion shifts to the right or left, the intentional moderate must shift with it. Otherwise they stop being moderate. Accidental moderates, on the other hand, not only choose their own answers, but choose their own questions. They may not care at all about questions that the left and right both think are terribly important. So you can only even measure the politics of an accidental moderate from the intersection of the questions they care about and those the left and right care about, and this can sometimes be vanishingly small. It is not merely a manipulative rhetorical trick to say "if you're not with us, you're against us," but often simply false. Moderates are sometimes derided as cowards, particularly by the extreme left. But while it may be accurate to call intentional moderates cowards, openly being an accidental moderate requires the most courage of all, because you get attacked from both right and left, and you don't have the comfort of being an orthodox member of a large group to sustain you. Nearly all the most impressive people I know are accidental moderates. If I knew a lot of professional athletes, or people in the entertainment business, that might be different. Being on the far left or far right doesn't affect how fast you run or how well you sing. But someone who works with ideas has to be independent-minded to do it well. Or more precisely, you have to be independent-minded about the ideas you work with. You could be mindlessly doctrinaire in your politics and still be a good mathematician. In the 20th century, a lot of very smart people were Marxists just no one who was smart about the subjects Marxism involves. But |
the ideas you use in your work intersect with the politics of your time, you have two choices: be an accidental moderate, or be mediocre. ** |
| | **Want to start a startup?** Get funded by Y Combinator. --- October 2014 _(This essay is derived from a guest lecture in Sam Altman'sstartup class at Stanford. It's intended for college students, but much of it is applicable to potential founders at other ages.)_ One of the advantages of having kids is that when you have to give advice, you can ask yourself "what would I tell my own kids?" My kids are little, but I can imagine what I'd tell them about startups if they were in college, and that's what I'm going to tell you. Startups are very counterintuitive. I'm not sure why. Maybe it's just because knowledge about them hasn't permeated our culture yet. But whatever the reason, starting a startup is a task where you can't always trust your instincts. It's like skiing in that way. When you first try skiing and you want to slow down, your instinct is to lean back. But if you lean back on skis you fly down the hill out of control. So part of learning to ski is learning to suppress that impulse. Eventually you get new habits, but at first it takes a conscious effort. At first there's a list of things you're trying to remember as you start down the hill. Startups are as unnatural as skiing, so there's a similar list for startups. Here I'm going to give you the first part of it — the things to remember if you want to prepare yourself to start a startup. **Counterintuitive** The first item on it is the fact I already mentioned: that startups are so weird that if you trust your instincts, you'll make a lot of mistakes. If you know nothing more than this, you may at least pause before making them. When I was running Y Combinator I used to joke that our function was to tell founders things they would ignore. It's really true. Batch after batch, the YC partners warn founders about mistakes they're about to make, and the founders ignore them, and then come back a year later and say "I wish we'd listened." Why do the founders ignore the partners' advice? Well, that's the thing about counterintuitive ideas: they contradict your intuitions. They seem wrong. So of course your first impulse is to disregard them. And in fact my joking description is not merely the curse of Y Combinator but part of its raison d'etre. If founders' instincts already gave them the right answers, they wouldn't need us. You only need other people to give you advice that surprises you. That's why there are a lot of ski instructors and not many running instructors. You can, however, trust your instincts about people. And in fact one of the most common mistakes young founders make is not to do that enough. They get involved with people who seem impressive, but about whom they feel some misgivings personally. Later when things blow up they say "I knew there was something off about him, but I ignored it because he seemed so impressive." If you're thinking about getting involved with someone — as a cofounder, an employee, an investor, or an acquirer — and you have misgivings about them, |
your gut. If someone seems slippery, or bogus, or a jerk, don't ignore it. This is one case where it pays to be self-indulgent. Work with people you genuinely like, and you've known long enough to be sure. **Expertise** The second counterintuitive point is that it's not that important to know a lot about startups. The way to succeed in a startup is not to be an expert on startups, but to be an expert on your users and the problem you're solving for them. Mark Zuckerberg didn't succeed because he was an expert on startups. He succeeded despite being a complete noob at startups, because he understood his users really well. If you don't know anything about, say, how to raise an angel round, don't feel bad on that account. That sort of thing you can learn when you need to, and forget after you've done it. In fact, I worry it's not merely unnecessary to learn in great detail about the mechanics of startups, but possibly somewhat dangerous. If I met an undergrad who knew all about convertible notes and employee agreements and (God forbid) class FF stock, I wouldn't think "here is someone who is way ahead of their peers." It would set off alarms. Because another of the characteristic mistakes of young founders is to go through the motions of starting a startup. They make up some plausible-sounding idea, raise money at a good valuation, rent a cool office, hire a bunch of people. From the outside that seems like what startups do. But the next step after rent a cool office and hire a bunch of people is: gradually realize how completely fucked they are, because while imitating all the outward forms of a startup they have neglected the one thing that's actually essential: making something people want. **Game** We saw this happen so often that we made up a name for it: playing house. Eventually I realized why it was happening. The reason young founders go through the motions of starting a startup is because that's what they've been trained to do for their whole lives up to that point. Think about what you have to do to get into college, for example. Extracurricular activities, check. Even in college classes most of the work is as artificial as running laps. I'm not attacking the educational system for being this way. There will always be a certain amount of fakeness in the work you do when you're being taught something, and if you measure their performance it's inevitable that people will exploit the difference to the point where much of what you're measuring is artifacts of the fakeness. I confess I did it myself in college. I found that in a lot of classes there might only be 20 or 30 ideas that were the right shape to make good exam questions. The way I studied for exams in these classes was not (except incidentally) to master the material taught in the class, but to make a list of potential exam questions and work out the answers in advance. When I walked into the final, the main thing I'd be feeling was curiosity about which of my questions would turn up |
the exam. It was like a game. It's not surprising that after being trained for their whole lives to play such games, young founders' first impulse on starting a startup is to try to figure out the tricks for winning at this new game. Since fundraising appears to be the measure of success for startups (another classic noob mistake), they always want to know what the tricks are for convincing investors. We tell them the best way to convince investors is to make a startup that's actually doing well, meaning growing fast, and then simply tell investors so. Then they want to know what the tricks are for growing fast. And we have to tell them the best way to do that is simply to make something people want. So many of the conversations YC partners have with young founders begin with the founder asking "How do we..." and the partner replying "Just..." Why do the founders always make things so complicated? The reason, I realized, is that they're looking for the trick. So this is the third counterintuitive thing to remember about startups: starting a startup is where gaming the system stops working. Gaming the system may continue to work if you go to work for a big company. Depending on how broken the company is, you can succeed by sucking up to the right people, giving the impression of productivity, and so on. But that doesn't work with startups. There is no boss to trick, only users, and all users care about is whether your product does what they want. Startups are as impersonal as physics. You have to make something people want, and you prosper only to the extent you do. The dangerous thing is, faking does work to some degree on investors. If you're super good at sounding like you know what you're talking about, you can fool investors for at least one and perhaps even two rounds of funding. But it's not in your interest to. The company is ultimately doomed. All you're doing is wasting your own time riding it down. So stop looking for the trick. There are tricks in startups, as there are in any domain, but they are an order of magnitude less important than solving the real problem. A founder who knows nothing about fundraising but has made something users love will have an easier time raising money than one who knows every trick in the book but has a flat usage graph. And more importantly, the founder who has made something users love is the one who will go on to succeed after raising the money. Though in a sense it's bad news in that you're deprived of one of your most powerful weapons, I think it's exciting that gaming the system stops working when you start a startup. It's exciting that there even exist parts of the world where you win by doing good work. Imagine how depressing the world would be if it were all like school and big companies, where you either have to spend a lot of time on bullshit things or lose to people who do. I would have been delighted if I'd realized in college that there were parts of the real world where gaming the system mattered |
than others, and a few where it hardly mattered at all. But there are, and this variation is one of the most important things to consider when you're thinking about your future. How do you win in each type of work, and what would you like to win by doing? **All-Consuming** That brings us to our fourth counterintuitive point: startups are all- consuming. If you start a startup, it will take over your life to a degree you cannot imagine. And if your startup succeeds, it will take over your life for a long time: for several years at the very least, maybe for a decade, maybe for the rest of your working life. So there is a real opportunity cost here. Larry Page may seem to have an enviable life, but there are aspects of it that are unenviable. Basically at 25 he started running as fast as he could and it must seem to him that he hasn't stopped to catch his breath since. Every day new shit happens in the Google empire that only the CEO can deal with, and he, as CEO, has to deal with it. If he goes on vacation for even a week, a whole week's backlog of shit accumulates. And he has to bear this uncomplainingly, partly because as the company's daddy he can never show fear or weakness, and partly because billionaires get less than zero sympathy if they talk about having difficult lives. Which has the strange side effect that the difficulty of being a successful startup founder is concealed from almost everyone except those who've done it. Y Combinator has now funded several companies that can be called big successes, and in every single case the founders say the same thing. It never gets any easier. The nature of the problems change. You're worrying about construction delays at your London office instead of the broken air conditioner in your studio apartment. But the total volume of worry never decreases; if anything it increases. Starting a successful startup is similar to having kids in that it's like a button you push that changes your life irrevocably. And while it's truly wonderful having kids, there are a lot of things that are easier to do before you have them than after. Many of which will make you a better parent when you do have kids. And since you can delay pushing the button for a while, most people in rich countries do. Yet when it comes to startups, a lot of people seem to think they're supposed to start them while they're still in college. Are you crazy? And what are the universities thinking? They go out of their way to ensure their students are well supplied with contraceptives, and yet they're setting up entrepreneurship programs and startup incubators left and right. To be fair, the universities have their hand forced here. A lot of incoming students are interested in startups. Universities are, at least de facto, expected to prepare them for their careers. So students who want to start startups hope universities can teach them about startups. And whether universities can do this or not, there's some pressure to claim they can, lest they |
applicants to other universities that do. Can universities teach students about startups? Yes and no. They can teach students about startups, but as I explained before, this is not what you need to know. What you need to learn about are the needs of your own users, and you can't do that until you actually start the company. So starting a startup is intrinsically something you can only really learn by doing it. And it's impossible to do that in college, for the reason I just explained: startups take over your life. You can't start a startup for real as a student, because if you start a startup for real you're not a student anymore. You may be nominally a student for a bit, but you won't even be that for long. Given this dichotomy, which of the two paths should you take? Be a real student and not start a startup, or start a real startup and not be a student? I can answer that one for you. Do not start a startup in college. How to start a startup is just a subset of a bigger problem you're trying to solve: how to have a good life. And though starting a startup can be part of a good life for a lot of ambitious people, age 20 is not the optimal time to do it. Starting a startup is like a brutally fast depth-first search. Most people should still be searching breadth-first at 20. You can do things in your early 20s that you can't do as well before or after, like plunge deeply into projects on a whim and travel super cheaply with no sense of a deadline. For unambitious people, this sort of thing is the dreaded "failure to launch," but for the ambitious ones it can be an incomparably valuable sort of exploration. If you start a startup at 20 and you're sufficiently successful, you'll never get to do it. Mark Zuckerberg will never get to bum around a foreign country. He can do other things most people can't, like charter jets to fly him to foreign countries. But success has taken a lot of the serendipity out of his life. Facebook is running him as much as he's running Facebook. And while it can be very cool to be in the grip of a project you consider your life's work, there are advantages to serendipity too, especially early in life. Among other things it gives you more options to choose your life's work from. There's not even a tradeoff here. You're not sacrificing anything if you forgo starting a startup at 20, because you're more likely to succeed if you wait. In the unlikely case that you're 20 and one of your side projects takes off like Facebook did, you'll face a choice of running with it or not, and it may be reasonable to run with it. But the usual way startups take off is for the founders to make them take off, and it's gratuitously stupid to do that at 20. **Try** Should you do it at any age? I realize I've made startups sound pretty hard. If I haven't, let me try again: starting a startup is really hard. What if it's too hard? How can you tell if you're up to this challenge? The answer is the fifth counterintuitive point: you can't tell. Your |
so far may have given you some idea what your prospects might be if you tried to become a mathematician, or a professional football player. But unless you've had a very strange life you haven't done much that was like being a startup founder. Starting a startup will change you a lot. So what you're trying to estimate is not just what you are, but what you could grow into, and who can do that? For the past 9 years it was my job to predict whether people would have what it took to start successful startups. It was easy to tell how smart they were, and most people reading this will be over that threshold. The hard part was predicting how tough and ambitious they would become. There may be no one who has more experience at trying to predict that, so I can tell you how much an expert can know about it, and the answer is: not much. I learned to keep a completely open mind about which of the startups in each batch would turn out to be the stars. The founders sometimes think they know. Some arrive feeling sure they will ace Y Combinator just as they've aced every one of the (few, artificial, easy) tests they've faced in life so far. Others arrive wondering how they got in, and hoping YC doesn't discover whatever mistake caused it to accept them. But there is little correlation between founders' initial attitudes and how well their companies do. I've read that the same is true in the military — that the swaggering recruits are no more likely to turn out to be really tough than the quiet ones. And probably for the same reason: that the tests involved are so different from the ones in their previous lives. If you're absolutely terrified of starting a startup, you probably shouldn't do it. But if you're merely unsure whether you're up to it, the only way to find out is to try. Just not now. **Ideas** So if you want to start a startup one day, what should you do in college? There are only two things you need initially: an idea and cofounders. And the m.o. for getting both is the same. Which leads to our sixth and last counterintuitive point: that the way to get startup ideas is not to try to think of startup ideas. I've written a whole essay on this, so I won't repeat it all here. But the short version is that if you make a conscious effort to think of startup ideas, the ideas you come up with will not merely be bad, but bad and plausible-sounding, meaning you'll waste a lot of time on them before realizing they're bad. The way to come up with good startup ideas is to take a step back. Instead of making a conscious effort to think of startup ideas, turn your mind into the type that startup ideas form in without any conscious effort. In fact, so unconsciously that you don't even realize at first that they're startup ideas. This is not only possible, it's how Apple, Yahoo, Google, and Facebook all got started. None of these companies were even meant to be companies at first. They were all just side projects. The best startups almost have to start as side projects, |
great ideas tend to be such outliers that your conscious mind would reject them as ideas for companies. Ok, so how do you turn your mind into the type that startup ideas form in unconsciously? (1) Learn a lot about things that matter, then (2) work on problems that interest you (3) with people you like and respect. The third part, incidentally, is how you get cofounders at the same time as the idea. The first time I wrote that paragraph, instead of "learn a lot about things that matter," I wrote "become good at some technology." But that prescription, though sufficient, is too narrow. What was special about Brian Chesky and Joe Gebbia was not that they were experts in technology. They were good at design, and perhaps even more importantly, they were good at organizing groups and making projects happen. So you don't have to work on technology per se, so long as you work on problems demanding enough to stretch you. What kind of problems are those? That is very hard to answer in the general case. History is full of examples of young people who were working on important problems that no one else at the time thought were important, and in particular that their parents didn't think were important. On the other hand, history is even fuller of examples of parents who thought their kids were wasting their time and who were right. So how do you know when you're working on real stuff? I know how _I_ know. Real problems are interesting, and I am self-indulgent in the sense that I always want to work on interesting things, even if no one else cares about them (in fact, especially if no one else cares about them), and find it very hard to make myself work on boring things, even if they're supposed to be important. My life is full of case after case where I worked on something just because it seemed interesting, and it turned out later to be useful in some worldly way. Y Combinator itself was something I only did because it seemed interesting. So I seem to have some sort of internal compass that helps me out. But I don't know what other people have in their heads. Maybe if I think more about this I can come up with heuristics for recognizing genuinely interesting problems, but for the moment the best I can offer is the hopelessly question-begging advice that if you have a taste for genuinely interesting problems, indulging it energetically is the best way to prepare yourself for a startup. And indeed, probably also the best way to live. But although I can't explain in the general case what counts as an interesting problem, I can tell you about a large subset of them. If you think of technology as something that's spreading like a sort of fractal stain, every moving point on the edge represents an interesting problem. So one guaranteed way to turn your mind into the type that has good startup ideas is to get yourself to the leading edge of some technology — to cause yourself, as Paul Buchheit put it, to "live in the future." When you reach that point, ideas that |
seem to other people uncannily prescient will seem obvious to you. You may not realize they're startup ideas, but you'll know they're something that ought to exist. For example, back at Harvard in the mid 90s a fellow grad student of my friends Robert and Trevor wrote his own voice over IP software. He didn't mean it to be a startup, and he never tried to turn it into one. He just wanted to talk to his girlfriend in Taiwan without paying for long distance calls, and since he was an expert on networks it seemed obvious to him that the way to do it was turn the sound into packets and ship it over the Internet. He never did any more with his software than talk to his girlfriend, but this is exactly the way the best startups get started. So strangely enough the optimal thing to do in college if you want to be a successful startup founder is not some sort of new, vocational version of college focused on "entrepreneurship." It's the classic version of college as education for its own sake. If you want to start a startup after college, what you should do in college is learn powerful things. And if you have genuine intellectual curiosity, that's what you'll naturally tend to do if you just follow your own inclinations. The component of entrepreneurship that really matters is domain expertise. The way to become Larry Page was to become an expert on search. And the way to become an expert on search was to be driven by genuine curiosity, not some ulterior motive. At its best, starting a startup is merely an ulterior motive for curiosity. And you'll do it best if you introduce the ulterior motive toward the end of the process. So here is the ultimate advice for young would-be startup founders, boiled down to two words: just learn. ** |
| July 2010 What hard liquor, cigarettes, heroin, and crack have in common is that they're all more concentrated forms of less addictive predecessors. Most if not all the things we describe as addictive are. And the scary thing is, the process that created them is accelerating. We wouldn't want to stop it. It's the same process that cures diseases: technological progress. Technological progress means making things do more of what we want. When the thing we want is something we want to want, we consider technological progress good. If some new technique makes solar cells x% more efficient, that seems strictly better. When progress concentrates something we don't want to want — when it transforms opium into heroin — it seems bad. But it's the same process at work. No one doubts this process is accelerating, which means increasing numbers of things we like will be transformed into things we like too much. As far as I know there's no word for something we like too much. The closest is the colloquial sense of "addictive." That usage has become increasingly common during my lifetime. And it's clear why: there are an increasing number of things we need it for. At the extreme end of the spectrum are crack and meth. Food has been transformed by a combination of factory farming and innovations in food processing into something with way more immediate bang for the buck, and you can see the results in any town in America. Checkers and solitaire have been replaced by World of Warcraft and FarmVille. TV has become much more engaging, and even so it can't compete with Facebook. The world is more addictive than it was 40 years ago. And unless the forms of technological progress that produced these things are subject to different laws than technological progress in general, the world will get more addictive in the next 40 years than it did in the last 40. The next 40 years will bring us some wonderful things. I don't mean to imply they're all to be avoided. Alcohol is a dangerous drug, but I'd rather live in a world with wine than one without. Most people can coexist with alcohol; but you have to be careful. More things we like will mean more things we have to be careful about. Most people won't, unfortunately. Which means that as the world becomes more addictive, the two senses in which one can live a normal life will be driven ever further apart. One sense of "normal" is statistically normal: what everyone else does. The other is the sense we mean when we talk about the normal operating range of a piece of machinery: what works best. These two senses are already quite far apart. Already someone trying to live well would seem eccentrically abstemious in most of the US. That phenomenon is only going to become more pronounced. You can probably take it as a rule of thumb from now on that if people don't think you're weird, you're living badly. Societies eventually develop antibodies to addictive new things. I've seen that happen with cigarettes. When cigarettes first |
they spread the way an infectious disease spreads through a previously isolated population. Smoking rapidly became a (statistically) normal thing. There were ashtrays everywhere. We had ashtrays in our house when I was a kid, even though neither of my parents smoked. You had to for guests. As knowledge spread about the dangers of smoking, customs changed. In the last 20 years, smoking has been transformed from something that seemed totally normal into a rather seedy habit: from something movie stars did in publicity shots to something small huddles of addicts do outside the doors of office buildings. A lot of the change was due to legislation, of course, but the legislation couldn't have happened if customs hadn't already changed. It took a while though—on the order of 100 years. And unless the rate at which social antibodies evolve can increase to match the accelerating rate at which technological progress throws off new addictions, we'll be increasingly unable to rely on customs to protect us. Unless we want to be canaries in the coal mine of each new addiction—the people whose sad example becomes a lesson to future generations—we'll have to figure out for ourselves what to avoid and how. It will actually become a reasonable strategy (or a more reasonable strategy) to suspect everything new. In fact, even that won't be enough. We'll have to worry not just about new things, but also about existing things becoming more addictive. That's what bit me. I've avoided most addictions, but the Internet got me because it became addictive while I was using it. Most people I know have problems with Internet addiction. We're all trying to figure out our own customs for getting free of it. That's why I don't have an iPhone, for example; the last thing I want is for the Internet to follow me out into the world. My latest trick is taking long hikes. I used to think running was a better form of exercise than hiking because it took less time. Now the slowness of hiking seems an advantage, because the longer I spend on the trail, the longer I have to think without interruption. Sounds pretty eccentric, doesn't it? It always will when you're trying to solve problems where there are no customs yet to guide you. Maybe I can't plead Occam's razor; maybe I'm simply eccentric. But if I'm right about the acceleration of addictiveness, then this kind of lonely squirming to avoid it will increasingly be the fate of anyone who wants to get things done. We'll increasingly be defined by what we say no to. ** |
| | **Want to start a startup?** Get funded by Y Combinator. --- January 2012 A year ago I noticed a pattern in the least successful startups we'd funded: they all seemed hard to talk to. It felt as if there was some kind of wall between us. I could never quite tell if they understood what I was saying. This caught my attention because earlier we'd noticed a pattern among the most successful startups, and it seemed to hinge on a different quality. We found the startups that did best were the ones with the sort of founders about whom we'd say "they can take care of themselves." The startups that do best are fire-and-forget in the sense that all you have to do is give them a lead, and they'll close it, whatever type of lead it is. When they're raising money, for example, you can do the initial intros knowing that if you wanted to you could stop thinking about it at that point. You won't have to babysit the round to make sure it happens. That type of founder is going to come back with the money; the only question is how much on what terms. It seemed odd that the outliers at the two ends of the spectrum could be detected by what appeared to be unrelated tests. You'd expect that if the founders at one end were distinguished by the presence of quality x, at the other end they'd be distinguished by lack of x. Was there some kind of inverse relation between resourcefulness and being hard to talk to? It turns out there is, and the key to the mystery is the old adage "a word to the wise is sufficient." Because this phrase is not only overused, but overused in an indirect way (by prepending the subject to some advice), most people who've heard it don't know what it means. What it means is that if someone is wise, all you have to do is say one word to them, and they'll understand immediately. You don't have to explain in detail; they'll chase down all the implications. In much the same way that all you have to do is give the right sort of founder a one line intro to a VC, and he'll chase down the money. That's the connection. Understanding all the implications — even the inconvenient implications — of what someone tells you is a subset of resourcefulness. It's conversational resourcefulness. Like real world resourcefulness, conversational resourcefulness often means doing things you don't want to. Chasing down all the implications of what's said to you can sometimes lead to uncomfortable conclusions. The best word to describe the failure to do so is probably "denial," though that seems a bit too narrow. A better way to describe the situation would be to say that the unsuccessful founders had the sort of conservatism that comes from weakness. They traversed idea space as gingerly as a very old person traverses the physical world. The unsuccessful founders weren't stupid. Intellectually they were as capable as the successful founders of following all the implications of what one said to them. They just weren't eager to. So being hard to talk to was not what was |
the unsuccessful startups. It was a sign of an underlying lack of resourcefulness. That's what was killing them. As well as failing to chase down the implications of what was said to them, the unsuccessful founders would also fail to chase down funding, and users, and sources of new ideas. But the most immediate evidence I had that something was amiss was that I couldn't talk to them. ** |
| February 2008 A user on Hacker News recently posted a comment that set me thinking: > Something about hacker culture that never really set well with me was this > the nastiness. ... I just don't understand why people troll like they do. I've thought a lot over the last couple years about the problem of trolls. It's an old one, as old as forums, but we're still just learning what the causes are and how to address them. There are two senses of the word "troll." In the original sense it meant someone, usually an outsider, who deliberately stirred up fights in a forum by saying controversial things. For example, someone who didn't use a certain programming language might go to a forum for users of that language and make disparaging remarks about it, then sit back and watch as people rose to the bait. This sort of trolling was in the nature of a practical joke, like letting a bat loose in a room full of people. The definition then spread to people who behaved like assholes in forums, whether intentionally or not. Now when people talk about trolls they usually mean this broader sense of the word. Though in a sense this is historically inaccurate, it is in other ways more accurate, because when someone is being an asshole it's usually uncertain even in their own mind how much is deliberate. That is arguably one of the defining qualities of an asshole. I think trolling in the broader sense has four causes. The most important is distance. People will say things in anonymous forums that they'd never dare say to someone's face, just as they'll do things in cars that they'd never do as pedestrians like tailgate people, or honk at them, or cut them off. Trolling tends to be particularly bad in forums related to computers, and I think that's due to the kind of people you find there. Most of them (myself included) are more comfortable dealing with abstract ideas than with people. Hackers can be abrupt even in person. Put them on an anonymous forum, and the problem gets worse. The third cause of trolling is incompetence. If you disagree with something, it's easier to say "you suck" than to figure out and explain exactly what you disagree with. You're also safe that way from refutation. In this respect trolling is a lot like graffiti. Graffiti happens at the intersection of ambition and incompetence: people want to make their mark on the world, but have no other way to do it than literally making a mark on the world. The final contributing factor is the culture of the forum. Trolls are like children (many _are_ children) in that they're capable of a wide range of behavior depending on what they think will be tolerated. In a place where rudeness isn't tolerated, most can be polite. But vice versa as well. There's a sort of Gresham's Law of trolls: trolls are willing to use a forum with a lot of thoughtful people in it, but thoughtful people aren't willing to use a forum with a lot of trolls in it. Which means that once trolling takes hold, it tends to become |
dominant culture. That had already happened to Slashdot and Digg by the time I paid attention to comment threads there, but I watched it happen to Reddit. News.YC is, among other things, an experiment to see if this fate can be avoided. The sites's guidelines explicitly ask people not to say things they wouldn't say face to face. If someone starts being rude, other users will step in and tell them to stop. And when people seem to be deliberately trolling, we ban them ruthlessly. Technical tweaks may also help. On Reddit, votes on your comments don't affect your karma score, but they do on News.YC. And it does seem to influence people when they can see their reputation in the eyes of their peers drain away after making an asshole remark. Often users have second thoughts and delete such comments. One might worry this would prevent people from expressing controversial ideas, but empirically that doesn't seem to be what happens. When people say something substantial that gets modded down, they stubbornly leave it up. What people delete are wisecracks, because they have less invested in them. So far the experiment seems to be working. The level of conversation on News.YC is as high as on any forum I've seen. But we still only have about 8,000 uniques a day. The conversations on Reddit were good when it was that small. The challenge is whether we can keep things this way. I'm optimistic we will. We're not depending just on technical tricks. The core users of News.YC are mostly refugees from other sites that were overrun by trolls. They feel about trolls roughly the way refugees from Cuba or Eastern Europe feel about dictatorships. So there are a lot of people working to keep this from happening again. ** |
| December 2008 For nearly all of history the success of a society was proportionate to its ability to assemble large and disciplined organizations. Those who bet on economies of scale generally won, which meant the largest organizations were the most successful ones. Things have already changed so much that this is hard for us to believe, but till just a few decades ago the largest organizations tended to be the most progressive. An ambitious kid graduating from college in 1960 wanted to work in the huge, gleaming offices of Ford, or General Electric, or NASA. Small meant small-time. Small in 1960 didn't mean a cool little startup. It meant uncle Sid's shoe store. When I grew up in the 1970s, the idea of the "corporate ladder" was still very much alive. The standard plan was to try to get into a good college, from which one would be drafted into some organization and then rise to positions of gradually increasing responsibility. The more ambitious merely hoped to climb the same ladder faster. But in the late twentieth century something changed. It turned out that economies of scale were not the only force at work. Particularly in technology, the increase in speed one could get from smaller groups started to trump the advantages of size. The future turned out to be different from the one we were expecting in 1970. The domed cities and flying cars we expected have failed to materialize. But fortunately so have the jumpsuits with badges indicating our specialty and rank. Instead of being dominated by a few, giant tree-structured organizations, it's now looking like the economy of the future will be a fluid network of smaller, independent units. It's not so much that large organizations stopped working. There's no evidence that famously successful organizations like the Roman army or the British East India Company were any less afflicted by protocol and politics than organizations of the same size today. But they were competing against opponents who couldn't change the rules on the fly by discovering new technology. Now it turns out the rule "large and disciplined organizations win" needs to have a qualification appended: "at games that change slowly." No one knew till change reached a sufficient speed. Large organizations _will_ start to do worse now, though, because for the first time in history they're no longer getting the best people. An ambitious kid graduating from college now doesn't want to work for a big company. They want to work for the hot startup that's rapidly growing into one. If they're really ambitious, they want to start it. This doesn't mean big companies will disappear. To say that startups will succeed implies that big companies will exist, because startups that succeed either become big companies or are acquired by them. But large organizations will probably never again play the leading role they did up till the last quarter of the twentieth century. It's kind of surprising that a trend that lasted so long would ever run out. |
often does it happen that a rule works for thousands of years, then switches polarity? The millennia-long run of bigger-is-better left us with a lot of traditions that are now obsolete, but extremely deeply rooted. Which means the ambitious can now do arbitrage on them. It will be very valuable to understand precisely which ideas to keep and which can now be discarded. The place to look is where the spread of smallness began: in the world of startups. There have always been occasional cases, particularly in the US, of ambitious people who grew the ladder under them instead of climbing it. But till recently this was an anomalous route that tended to be followed only by outsiders. It was no coincidence that the great industrialists of the nineteenth century had so little formal education. As huge as their companies eventually became, they were all essentially mechanics and shopkeepers at first. That was a social step no one with a college education would take if they could avoid it. Till the rise of technology startups, and in particular, Internet startups, it was very unusual for educated people to start their own businesses. The eight men who left Shockley Semiconductor to found Fairchild Semiconductor, the original Silicon Valley startup, weren't even trying to start a company at first. They were just looking for a company willing to hire them as a group. Then one of their parents introduced them to a small investment bank that offered to find funding for them to start their own, so they did. But starting a company was an alien idea to them; it was something they backed into. Now I would guess that practically every Stanford or Berkeley undergrad who knows how to program has at least considered the idea of starting a startup. East Coast universities are not far behind, and British universities only a little behind them. This pattern suggests that attitudes at Stanford and Berkeley are not an anomaly, but a leading indicator. This is the way the world is going. Of course, Internet startups are still only a fraction of the world's economy. Could a trend based on them be that powerful? I think so. There's no reason to suppose there's any limit to the amount of work that could be done in this area. Like science, wealth seems to expand fractally. Steam power was a sliver of the British economy when Watt started working on it. But his work led to more work till that sliver had expanded into something bigger than the whole economy of which it had initially been a part. The same thing could happen with the Internet. If Internet startups offer the best opportunity for ambitious people, then a lot of ambitious people will start them, and this bit of the economy will balloon in the usual fractal way. Even if Internet-related applications only become a tenth of the world's economy, this component will set the tone for the rest. The most dynamic part of the economy always does, in everything from salaries to standards of dress. Not just because of its prestige, |
because the principles underlying the most dynamic part of the economy tend to be ones that work. For the future, the trend to bet on seems to be networks of small, autonomous groups whose performance is measured individually. And the societies that win will be the ones with the least impedance. As with the original industrial revolution, some societies are going to be better at this than others. Within a generation of its birth in England, the Industrial Revolution had spread to continental Europe and North America. But it didn't spread everywhere. This new way of doing things could only take root in places that were prepared for it. It could only spread to places that already had a vigorous middle class. There is a similar social component to the transformation that began in Silicon Valley in the 1960s. Two new kinds of techniques were developed there: techniques for building integrated circuits, and techniques for building a new type of company designed to grow fast by creating new technology. The techniques for building integrated circuits spread rapidly to other countries. But the techniques for building startups didn't. Fifty years later, startups are ubiquitous in Silicon Valley and common in a handful of other US cities, but they're still an anomaly in most of the world. Part of the reason—possibly the main reason—that startups have not spread as broadly as the Industrial Revolution did is their social disruptiveness. Though it brought many social changes, the Industrial Revolution was not fighting the principle that bigger is better. Quite the opposite: the two dovetailed beautifully. The new industrial companies adapted the customs of existing large organizations like the military and the civil service, and the resulting hybrid worked well. "Captains of industry" issued orders to "armies of workers," and everyone knew what they were supposed to do. Startups seem to go more against the grain, socially. It's hard for them to flourish in societies that value hierarchy and stability, just as it was hard for industrialization to flourish in societies ruled by people who stole at will from the merchant class. But there were already a handful of countries past that stage when the Industrial Revolution happened. There do not seem to be that many ready this time. ** |
| | **Want to start a startup?** Get funded by Y Combinator. --- March 2008, rev. June 2008 Technology tends to separate normal from natural. Our bodies weren't designed to eat the foods that people in rich countries eat, or to get so little exercise. There may be a similar problem with the way we work: a normal job may be as bad for us intellectually as white flour or sugar is for us physically. I began to suspect this after spending several years working with startup founders. I've now worked with over 200 of them, and I've noticed a definite difference between programmers working on their own startups and those working for large organizations. I wouldn't say founders seem happier, necessarily; starting a startup can be very stressful. Maybe the best way to put it is to say that they're happier in the sense that your body is happier during a long run than sitting on a sofa eating doughnuts. Though they're statistically abnormal, startup founders seem to be working in a way that's more natural for humans. I was in Africa last year and saw a lot of animals in the wild that I'd only seen in zoos before. It was remarkable how different they seemed. Particularly lions. Lions in the wild seem about ten times more alive. They're like different animals. I suspect that working for oneself feels better to humans in much the same way that living in the wild must feel better to a wide- ranging predator like a lion. Life in a zoo is easier, but it isn't the life they were designed for. **Trees** What's so unnatural about working for a big company? The root of the problem is that humans weren't meant to work in such large groups. Another thing you notice when you see animals in the wild is that each species thrives in groups of a certain size. A herd of impalas might have 100 adults; baboons maybe 20; lions rarely 10. Humans also seem designed to work in groups, and what I've read about hunter-gatherers accords with research on organizations and my own experience to suggest roughly what the ideal size is: groups of 8 work well; by 20 they're getting hard to manage; and a group of 50 is really unwieldy. Whatever the upper limit is, we are clearly not meant to work in groups of several hundred. And yet—for reasons having more to do with technology than human nature—a great many people work for companies with hundreds or thousands of employees. Companies know groups that large wouldn't work, so they divide themselves into units small enough to work together. But to coordinate these they have to introduce something new: bosses. These smaller groups are always arranged in a tree structure. Your boss is the point where your group attaches to the tree. But when you use this trick for dividing a large group into smaller ones, something strange happens that I've never heard anyone mention explicitly. In the group one level up from yours, your boss represents your entire group. A group of 10 managers is not merely a group of 10 people working together in the usual way. |
really a group of groups. Which means for a group of 10 managers to work together as if they were simply a group of 10 individuals, the group working for each manager would have to work as if they were a single person—the workers and manager would each share only one person's worth of freedom between them. In practice a group of people are never able to act as if they were one person. But in a large organization divided into groups in this way, the pressure is always in that direction. Each group tries its best to work as if it were the small group of individuals that humans were designed to work in. That was the point of creating it. And when you propagate that constraint, the result is that each person gets freedom of action in inverse proportion to the size of the entire tree. Anyone who's worked for a large organization has felt this. You can feel the difference between working for a company with 100 employees and one with 10,000, even if your group has only 10 people. **Corn Syrup** A group of 10 people within a large organization is a kind of fake tribe. The number of people you interact with is about right. But something is missing: individual initiative. Tribes of hunter-gatherers have much more freedom. The leaders have a little more power than other members of the tribe, but they don't generally tell them what to do and when the way a boss can. It's not your boss's fault. The real problem is that in the group above you in the hierarchy, your entire group is one virtual person. Your boss is just the way that constraint is imparted to you. So working in a group of 10 people within a large organization feels both right and wrong at the same time. On the surface it feels like the kind of group you're meant to work in, but something major is missing. A job at a big company is like high fructose corn syrup: it has some of the qualities of things you're meant to like, but is disastrously lacking in others. Indeed, food is an excellent metaphor to explain what's wrong with the usual sort of job. For example, working for a big company is the default thing to do, at least for programmers. How bad could it be? Well, food shows that pretty clearly. If you were dropped at a random point in America today, nearly all the food around you would be bad for you. Humans were not designed to eat white flour, refined sugar, high fructose corn syrup, and hydrogenated vegetable oil. And yet if you analyzed the contents of the average grocery store you'd probably find these four ingredients accounted for most of the calories. "Normal" food is terribly bad for you. The only people who eat what humans were actually designed to eat are a few Birkenstock-wearing weirdos in Berkeley. If "normal" food is so bad for us, why is it so common? There are two main reasons. One is that it has more immediate appeal. You may feel lousy an hour after eating that pizza, but eating the first couple bites feels great. The other is economies of scale. Producing junk food scales; producing |
vegetables doesn't. Which means (a) junk food can be very cheap, and (b) it's worth spending a lot to market it. If people have to choose between something that's cheap, heavily marketed, and appealing in the short term, and something that's expensive, obscure, and appealing in the long term, which do you think most will choose? It's the same with work. The average MIT graduate wants to work at Google or Microsoft, because it's a recognized brand, it's safe, and they'll get paid a good salary right away. It's the job equivalent of the pizza they had for lunch. The drawbacks will only become apparent later, and then only in a vague sense of malaise. And founders and early employees of startups, meanwhile, are like the Birkenstock-wearing weirdos of Berkeley: though a tiny minority of the population, they're the ones living as humans are meant to. In an artificial world, only extremists live naturally. **Programmers** The restrictiveness of big company jobs is particularly hard on programmers, because the essence of programming is to build new things. Sales people make much the same pitches every day; support people answer much the same questions; but once you've written a piece of code you don't need to write it again. So a programmer working as programmers are meant to is always making new things. And when you're part of an organization whose structure gives each person freedom in inverse proportion to the size of the tree, you're going to face resistance when you do something new. This seems an inevitable consequence of bigness. It's true even in the smartest companies. I was talking recently to a founder who considered starting a startup right out of college, but went to work for Google instead because he thought he'd learn more there. He didn't learn as much as he expected. Programmers learn by doing, and most of the things he wanted to do, he couldn't—sometimes because the company wouldn't let him, but often because the company's code wouldn't let him. Between the drag of legacy code, the overhead of doing development in such a large organization, and the restrictions imposed by interfaces owned by other groups, he could only try a fraction of the things he would have liked to. He said he has learned much more in his own startup, despite the fact that he has to do all the company's errands as well as programming, because at least when he's programming he can do whatever he wants. An obstacle downstream propagates upstream. If you're not allowed to implement new ideas, you stop having them. And vice versa: when you can do whatever you want, you have more ideas about what to do. So working for yourself makes your brain more powerful in the same way a low-restriction exhaust system makes an engine more powerful. Working for yourself doesn't have to mean starting a startup, of course. But a programmer deciding between a regular job at a big company and their own startup is probably going to learn more doing the startup. You can adjust the amount |
freedom you get by scaling the size of company you work for. If you start the company, you'll have the most freedom. If you become one of the first 10 employees you'll have almost as much freedom as the founders. Even a company with 100 people will feel different from one with 1000. Working for a small company doesn't ensure freedom. The tree structure of large organizations sets an upper bound on freedom, not a lower bound. The head of a small company may still choose to be a tyrant. The point is that a large organization is compelled by its structure to be one. **Consequences** That has real consequences for both organizations and individuals. One is that companies will inevitably slow down as they grow larger, no matter how hard they try to keep their startup mojo. It's a consequence of the tree structure that every large organization is forced to adopt. Or rather, a large organization could only avoid slowing down if they avoided tree structure. And since human nature limits the size of group that can work together, the only way I can imagine for larger groups to avoid tree structure would be to have no structure: to have each group actually be independent, and to work together the way components of a market economy do. That might be worth exploring. I suspect there are already some highly partitionable businesses that lean this way. But I don't know any technology companies that have done it. There is one thing companies can do short of structuring themselves as sponges: they can stay small. If I'm right, then it really pays to keep a company as small as it can be at every stage. Particularly a technology company. Which means it's doubly important to hire the best people. Mediocre hires hurt you twice: they get less done, but they also make you big, because you need more of them to solve a given problem. For individuals the upshot is the same: aim small. It will always suck to work for large organizations, and the larger the organization, the more it will suck. In an essay I wrote a couple years ago I advised graduating seniors to work for a couple years for another company before starting their own. I'd modify that now. Work for another company if you want to, but only for a small one, and if you want to start your own startup, go ahead. The reason I suggested college graduates not start startups immediately was that I felt most would fail. And they will. But ambitious programmers are better off doing their own thing and failing than going to work at a big company. Certainly they'll learn more. They might even be better off financially. A lot of people in their early twenties get into debt, because their expenses grow even faster than the salary that seemed so high when they left school. At least if you start a startup and fail your net worth will be zero rather than negative. We've now funded so many different types of founders that we have enough data to see patterns, and there seems to be no benefit from working for a big company. The people |
worked for a few years do seem better than the ones straight out of college, but only because they're that much older. The people who come to us from big companies often seem kind of conservative. It's hard to say how much is because big companies made them that way, and how much is the natural conservatism that made them work for the big companies in the first place. But certainly a large part of it is learned. I know because I've seen it burn off. Having seen that happen so many times is one of the things that convinces me that working for oneself, or at least for a small group, is the natural way for programmers to live. Founders arriving at Y Combinator often have the downtrodden air of refugees. Three months later they're transformed: they have so much more confidence that they seem as if they've grown several inches taller. Strange as this sounds, they seem both more worried and happier at the same time. Which is exactly how I'd describe the way lions seem in the wild. Watching employees get transformed into founders makes it clear that the difference between the two is due mostly to environment—and in particular that the environment in big companies is toxic to programmers. In the first couple weeks of working on their own startup they seem to come to life, because finally they're working the way people are meant to. ** |
| December 2008 A few months ago I read a _New York Times_ article on South Korean cram schools that said > Admission to the right university can make or break an ambitious young South > Korean. A parent added: > "In our country, college entrance exams determine 70 to 80 percent of a > person's future." It was striking how old fashioned this sounded. And yet when I was in high school it wouldn't have seemed too far off as a description of the US. Which means things must have been changing here. The course of people's lives in the US now seems to be determined less by credentials and more by performance than it was 25 years ago. Where you go to college still matters, but not like it used to. What happened? _____ Judging people by their academic credentials was in its time an advance. The practice seems to have begun in China, where starting in 587 candidates for the imperial civil service had to take an exam on classical literature. It was also a test of wealth, because the knowledge it tested was so specialized that passing required years of expensive training. But though wealth was a necessary condition for passing, it was not a sufficient one. By the standards of the rest of the world in 587, the Chinese system was very enlightened. Europeans didn't introduce formal civil service exams till the nineteenth century, and even then they seem to have been influenced by the Chinese example. Before credentials, government positions were obtained mainly by family influence, if not outright bribery. It was a great step forward to judge people by their performance on a test. But by no means a perfect solution. When you judge people that way, you tend to get cram schools—which they did in Ming China and nineteenth century England just as much as in present day South Korea. What cram schools are, in effect, is leaks in a seal. The use of credentials was an attempt to seal off the direct transmission of power between generations, and cram schools represent that power finding holes in the seal. Cram schools turn wealth in one generation into credentials in the next. It's hard to beat this phenomenon, because the schools adjust to suit whatever the tests measure. When the tests are narrow and predictable, you get cram schools on the classic model, like those that prepared candidates for Sandhurst (the British West Point) or the classes American students take now to improve their SAT scores. But as the tests get broader, the schools do too. Preparing a candidate for the Chinese imperial civil service exams took years, as prep school does today. But the raison d'etre of all these institutions has been the same: to beat the system. _____ History suggests that, all other things being equal, a society prospers in proportion to its ability to prevent parents from influencing their children's success directly. It's a fine thing for parents to help their children indirectly—for example, by helping them to become smarter or more disciplined, which then makes them more |
The problem comes when parents use direct methods: when they are able to use their own wealth or power as a substitute for their children's qualities. Parents will tend to do this when they can. Parents will die for their kids, so it's not surprising to find they'll also push their scruples to the limits for them. Especially if other parents are doing it. Sealing off this force has a double advantage. Not only does a society get "the best man for the job," but parents' ambitions are diverted from direct methods to indirect ones—to actually trying to raise their kids well. But we should expect it to be very hard to contain parents' efforts to obtain an unfair advantage for their kids. We're dealing with one of the most powerful forces in human nature. We shouldn't expect naive solutions to work, any more than we'd expect naive solutions for keeping heroin out of a prison to work. _____ The obvious way to solve the problem is to make credentials better. If the tests a society uses are currently hackable, we can study the way people beat them and try to plug the holes. You can use the cram schools to show you where most of the holes are. They also tell you when you're succeeding in fixing them: when cram schools become less popular. A more general solution would be to push for increased transparency, especially at critical social bottlenecks like college admissions. In the US this process still shows many outward signs of corruption. For example, legacy admissions. The official story is that legacy status doesn't carry much weight, because all it does is break ties: applicants are bucketed by ability, and legacy status is only used to decide between the applicants in the bucket that straddles the cutoff. But what this means is that a university can make legacy status have as much or as little weight as they want, by adjusting the size of the bucket that straddles the cutoff. By gradually chipping away at the abuse of credentials, you could probably make them more airtight. But what a long fight it would be. Especially when the institutions administering the tests don't really want them to be airtight. _____ Fortunately there's a better way to prevent the direct transmission of power between generations. Instead of trying to make credentials harder to hack, we can also make them matter less. Let's think about what credentials are for. What they are, functionally, is a way of predicting performance. If you could measure actual performance, you wouldn't need them. So why did they even evolve? Why haven't we just been measuring actual performance? Think about where credentialism first appeared: in selecting candidates for large organizations. Individual performance is hard to measure in large organizations, and the harder performance is to measure, the more important it is to predict it. If an organization could immediately and cheaply measure the performance of recruits, they wouldn't need to examine their credentials. They could take everyone and keep |
the good ones. Large organizations can't do this. But a bunch of small organizations in a market can come close. A market takes every organization and keeps just the good ones. As organizations get smaller, this approaches taking every person and keeping just the good ones. So all other things being equal, a society consisting of more, smaller organizations will care less about credentials. _____ That's what's been happening in the US. That's why those quotes from Korea sound so old fashioned. They're talking about an economy like America's a few decades ago, dominated by a few big companies. The route for the ambitious in that sort of environment is to join one and climb to the top. Credentials matter a lot then. In the culture of a large organization, an elite pedigree becomes a self-fulfilling prophecy. This doesn't work in small companies. Even if your colleagues were impressed by your credentials, they'd soon be parted from you if your performance didn't match, because the company would go out of business and the people would be dispersed. In a world of small companies, performance is all anyone cares about. People hiring for a startup don't care whether you've even graduated from college, let alone which one. All they care about is what you can do. Which is in fact all that should matter, even in a large organization. The reason credentials have such prestige is that for so long the large organizations in a society tended to be the most powerful. But in the US at least they don't have the monopoly on power they once did, precisely because they can't measure (and thus reward) individual performance. Why spend twenty years climbing the corporate ladder when you can get rewarded directly by the market? I realize I see a more exaggerated version of the change than most other people. As a partner at an early stage venture funding firm, I'm like a jumpmaster shoving people out of the old world of credentials and into the new one of performance. I'm an agent of the change I'm seeing. But I don't think I'm imagining it. It was not so easy 25 years ago for an ambitious person to choose to be judged directly by the market. You had to go through bosses, and they were influenced by where you'd been to college. _____ What made it possible for small organizations to succeed in America? I'm still not entirely sure. Startups are certainly a large part of it. Small organizations can develop new ideas faster than large ones, and new ideas are increasingly valuable. But I don't think startups account for all the shift from credentials to measurement. My friend Julian Weber told me that when he went to work for a New York law firm in the 1950s they paid associates far less than firms do today. Law firms then made no pretense of paying people according to the value of the work they'd done. Pay was based on seniority. The younger employees were paying their dues. They'd be rewarded later. The same principle prevailed at industrial companies. When my father was working |
Westinghouse in the 1970s, he had people working for him who made more than he did, because they'd been there longer. Now companies increasingly have to pay employees market price for the work they do. One reason is that employees no longer trust companies to deliver deferred rewards: why work to accumulate deferred rewards at a company that might go bankrupt, or be taken over and have all its implicit obligations wiped out? The other is that some companies broke ranks and started to pay young employees large amounts. This was particularly true in consulting, law, and finance, where it led to the phenomenon of yuppies. The word is rarely used today because it's no longer surprising to see a 25 year old with money, but in 1985 the sight of a 25 year old _professional_ able to afford a new BMW was so novel that it called forth a new word. The classic yuppie worked for a small organization. He didn't work for General Widget, but for the law firm that handled General Widget's acquisitions or the investment bank that floated their bond issues. Startups and yuppies entered the American conceptual vocabulary roughly simultaneously in the late 1970s and early 1980s. I don't think there was a causal connection. Startups happened because technology started to change so fast that big companies could no longer keep a lid on the smaller ones. I don't think the rise of yuppies was inspired by it; it seems more as if there was a change in the social conventions (and perhaps the laws) governing the way big companies worked. But the two phenomena rapidly fused to produce a principle that now seems obvious: paying energetic young people market rates, and getting correspondingly high performance from them. At about the same time the US economy rocketed out of the doldrums that had afflicted it for most of the 1970s. Was there a connection? I don't know enough to say, but it felt like it at the time. There was a lot of energy released. _____ Countries worried about their competitiveness are right to be concerned about the number of startups started within them. But they would do even better to examine the underlying principle. Do they let energetic young people get paid market rate for the work they do? The young are the test, because when people aren't rewarded according to performance, they're invariably rewarded according to seniority instead. All it takes is a few beachheads in your economy that pay for performance. Measurement spreads like heat. If one part of a society is better at measurement than others, it tends to push the others to do better. If people who are young but smart and driven can make more by starting their own companies than by working for existing ones, the existing companies are forced to pay more to keep them. So market rates gradually permeate every organization, even the government. The measurement of performance will tend to push even the organizations issuing credentials into line. When we were kids I used to annoy my sister by ordering |
to do things I knew she was about to do anyway. As credentials are superseded by performance, a similar role is the best former gatekeepers can hope for. Once credential granting institutions are no longer in the self- fullfilling prophecy business, they'll have to work harder to predict the future. _____ Credentials are a step beyond bribery and influence. But they're not the final step. There's an even better way to block the transmission of power between generations: to encourage the trend toward an economy made of more, smaller units. Then you can measure what credentials merely predict. No one likes the transmission of power between generations—not the left or the right. But the market forces favored by the right turn out to be a better way of preventing it than the credentials the left are forced to fall back on. The era of credentials began to end when the power of large organizations peaked in the late twentieth century. Now we seem to be entering a new era based on measurement. The reason the new model has advanced so rapidly is that it works so much better. It shows no sign of slowing. ** |
| | **Want to start a startup?** Get funded by Y Combinator. --- July 2009 Now that the term "ramen profitable" has become widespread, I ought to explain precisely what the idea entails. Ramen profitable means a startup makes just enough to pay the founders' living expenses. This is a different form of profitability than startups have traditionally aimed for. Traditional profitability means a big bet is finally paying off, whereas the main importance of ramen profitability is that it buys you time. In the past, a startup would usually become profitable only after raising and spending quite a lot of money. A company making computer hardware might not become profitable for 5 years, during which they spent $50 million. But when they did they might have revenues of $50 million a year. This kind of profitability means the startup has succeeded. Ramen profitability is the other extreme: a startup that becomes profitable after 2 months, even though its revenues are only $3000 a month, because the only employees are a couple 25 year old founders who can live on practically nothing. Revenues of $3000 a month do not mean the company has succeeded. But it does share something with the one that's profitable in the traditional way: they don't need to raise money to survive. Ramen profitability is an unfamiliar idea to most people because it only recently became feasible. It's still not feasible for a lot of startups; it would not be for most biotech startups, for example; but it is for many software startups because they're now so cheap. For many, the only real cost is the founders' living expenses. The main significance of this type of profitability is that you're no longer at the mercy of investors. If you're still losing money, then eventually you'll either have to raise more or shut down. Once you're ramen profitable this painful choice goes away. You can still raise money, but you don't have to do it now. * * * The most obvious advantage of not needing money is that you can get better terms. If investors know you need money, they'll sometimes take advantage of you. Some may even deliberately stall, because they know that as you run out of money you'll become increasingly pliable. But there are also three less obvious advantages of ramen profitability. One is that it makes you more attractive to investors. If you're already profitable, on however small a scale, it shows that (a) you can get at least someone to pay you, (b) you're serious about building things people want, and (c) you're disciplined enough to keep expenses low. This is reassuring to investors, because you've addressed three of their biggest worries. It's common for them to fund companies that have smart founders and a big market, and yet still fail. When these companies fail, it's usually because (a) people wouldn't pay for what they made, e.g. because it was too hard to sell to them, or the market wasn't ready yet, (b) the founders solved the wrong problem, instead of paying attention to |
users needed, or (c) the company spent too much and burned through their funding before they started to make money. If you're ramen profitable, you're already avoiding these mistakes. Another advantage of ramen profitability is that it's good for morale. A company tends to feel rather theoretical when you first start it. It's legally a company, but you feel like you're lying when you call it one. When people start to pay you significant amounts, the company starts to feel real. And your own living expenses are the milestone you feel most, because at that point the future flips state. Now survival is the default, instead of dying. A morale boost on that scale is very valuable in a startup, because the moral weight of running a startup is what makes it hard. Startups are still very rare. Why don't more people do it? The financial risk? Plenty of 25 year olds save nothing anyway. The long hours? Plenty of people work just as long hours in regular jobs. What keeps people from starting startups is the fear of having so much responsibility. And this is not an irrational fear: it really is hard to bear. Anything that takes some of that weight off you will greatly increase your chances of surviving. A startup that reaches ramen profitability may be more likely to succeed than not. Which is pretty exciting, considering the bimodal distribution of outcomes in startups: you either fail or make a lot of money. The fourth advantage of ramen profitability is the least obvious but may be the most important. If you don't need to raise money, you don't have to interrupt working on the company to do it. Raising money is terribly distracting. You're lucky if your productivity is a third of what it was before. And it can last for months. I didn't understand (or rather, remember) precisely why raising money was so distracting till earlier this year. I'd noticed that startups we funded would usually grind to a halt when they switched to raising money, but I didn't remember exactly why till YC raised money itself. We had a comparatively easy time of it; the first people I asked said yes; but it took months to work out the details, and during that time I got hardly any real work done. Why? Because I thought about it all the time. At any given time there tends to be one problem that's the most urgent for a startup. This is what you think about as you fall asleep at night and when you take a shower in the morning. And when you start raising money, that becomes the problem you think about. You only take one shower in the morning, and if you're thinking about investors during it, then you're not thinking about the product. Whereas if you can choose when you raise money, you can pick a time when you're not in the middle of something else, and you can probably also insist that the round close fast. You may even be able to avoid having the round occupy your thoughts, if you don't care whether it closes. * * * Ramen profitable means no more than the definition implies. It does |
for example, imply that you're "bootstrapping" the startup—that you're never going to take money from investors. Empirically that doesn't seem to work very well. Few startups succeed without taking investment. Maybe as startups get cheaper it will become more common. On the other hand, the money is there, waiting to be invested. If startups need it less, they'll be able to get it on better terms, which will make them more inclined to take it. That will tend to produce an equilibrium. Another thing ramen profitability doesn't imply is Joe Kraus's idea that you should put your business model in beta when you put your product in beta. He believes you should get people to pay you from the beginning. I think that's too constraining. Facebook didn't, and they've done better than most startups. Making money right away was not only unnecessary for them, but probably would have been harmful. I do think Joe's rule could be useful for many startups, though. When founders seem unfocused, I sometimes suggest they try to get customers to pay them for something, in the hope that this constraint will prod them into action. The difference between Joe's idea and ramen profitability is that a ramen profitable company doesn't have to be making money the way it ultimately will. It just has to be making money. The most famous example is Google, which initially made money by licensing search to sites like Yahoo. Is there a downside to ramen profitability? Probably the biggest danger is that it might turn you into a consulting firm. Startups have to be product companies, in the sense of making a single thing that everyone uses. The defining quality of startups is that they grow fast, and consulting just can't scale the way a product can. But it's pretty easy to make $3000 a month consulting; in fact, that would be a low rate for contract programming. So there could be a temptation to slide into consulting, and telling yourselves you're a ramen profitable startup, when in fact you're not a startup at all. It's ok to do a little consulting-type work at first. Startups usually have to do something weird at first. But remember that ramen profitability is not the destination. A startup's destination is to grow really big; ramen profitability is a trick for not dying en route. ** |
| | **Want to start a startup?** Get funded by Y Combinator. --- August 2010 When I went to work for Yahoo after they bought our startup in 1998, it felt like the center of the world. It was supposed to be the next big thing. It was supposed to be what Google turned out to be. What went wrong? The problems that hosed Yahoo go back a long time, practically to the beginning of the company. They were already very visible when I got there in 1998. Yahoo had two problems Google didn't: easy money, and ambivalence about being a technology company. **Money** The first time I met Jerry Yang, we thought we were meeting for different reasons. He thought we were meeting so he could check us out in person before buying us. I thought we were meeting so we could show him our new technology, Revenue Loop. It was a way of sorting shopping search results. Merchants bid a percentage of sales for traffic, but the results were sorted not by the bid but by the bid times the average amount a user would buy. It was like the algorithm Google uses now to sort ads, but this was in the spring of 1998, before Google was founded. Revenue Loop was the optimal sort for shopping search, in the sense that it sorted in order of how much money Yahoo would make from each link. But it wasn't just optimal in that sense. Ranking search results by user behavior also makes search better. Users train the search: you can start out finding matches based on mere textual similarity, and as users buy more stuff the search results get better and better. Jerry didn't seem to care. I was confused. I was showing him technology that extracted the maximum value from search traffic, and he didn't care? I couldn't tell whether I was explaining it badly, or he was just very poker faced. I didn't realize the answer till later, after I went to work at Yahoo. It was neither of my guesses. The reason Yahoo didn't care about a technique that extracted the full value of traffic was that advertisers were already overpaying for it. If Yahoo merely extracted the actual value, they'd have made less. Hard as it is to believe now, the big money then was in banner ads. Advertisers were willing to pay ridiculous amounts for banner ads. So Yahoo's sales force had evolved to exploit this source of revenue. Led by a large and terrifyingly formidable man called Anil Singh, Yahoo's sales guys would fly out to Procter & Gamble and come back with million dollar orders for banner ad impressions. The prices seemed cheap compared to print, which was what advertisers, for lack of any other reference, compared them to. But they were expensive compared to what they were worth. So these big, dumb companies were a dangerous source of revenue to depend on. But there was another source even more dangerous: other Internet startups. By 1998, Yahoo was the beneficiary of a de facto Ponzi scheme. Investors were excited about the Internet. One reason they were excited was Yahoo's revenue growth. So they invested in new Internet startups. |
startups then used the money to buy ads on Yahoo to get traffic. Which caused yet more revenue growth for Yahoo, and further convinced investors the Internet was worth investing in. When I realized this one day, sitting in my cubicle, I jumped up like Archimedes in his bathtub, except instead of "Eureka!" I was shouting "Sell!" Both the Internet startups and the Procter & Gambles were doing brand advertising. They didn't care about targeting. They just wanted lots of people to see their ads. So traffic became the thing to get at Yahoo. It didn't matter what type. It wasn't just Yahoo. All the search engines were doing it. This was why they were trying to get people to start calling them "portals" instead of "search engines." Despite the actual meaning of the word portal, what they meant by it was a site where users would find what they wanted on the site itself, instead of just passing through on their way to other destinations, as they did at a search engine. I remember telling David Filo in late 1998 or early 1999 that Yahoo should buy Google, because I and most of the other programmers in the company were using it instead of Yahoo for search. He told me that it wasn't worth worrying about. Search was only 6% of our traffic, and we were growing at 10% a month. It wasn't worth doing better. I didn't say "But search traffic is worth more than other traffic!" I said "Oh, ok." Because I didn't realize either how much search traffic was worth. I'm not sure even Larry and Sergey did then. If they had, Google presumably wouldn't have expended any effort on enterprise search. If circumstances had been different, the people running Yahoo might have realized sooner how important search was. But they had the most opaque obstacle in the world between them and the truth: money. As long as customers were writing big checks for banner ads, it was hard to take search seriously. Google didn't have that to distract them. **Hackers** But Yahoo also had another problem that made it hard to change directions. They'd been thrown off balance from the start by their ambivalence about being a technology company. One of the weirdest things about Yahoo when I went to work there was the way they insisted on calling themselves a "media company." If you walked around their offices, it seemed like a software company. The cubicles were full of programmers writing code, product managers thinking about feature lists and ship dates, support people (yes, there were actually support people) telling users to restart their browsers, and so on, just like a software company. So why did they call themselves a media company? One reason was the way they made money: by selling ads. In 1995 it was hard to imagine a technology company making money that way. Technology companies made money by selling their software to users. Media companies sold ads. So they must be a media company. Another big factor was the fear of Microsoft. If anyone at Yahoo considered the idea that they should be a technology |
the next thought would have been that Microsoft would crush them. It's hard for anyone much younger than me to understand the fear Microsoft still inspired in 1995. Imagine a company with several times the power Google has now, but way meaner. It was perfectly reasonable to be afraid of them. Yahoo watched them crush the first hot Internet company, Netscape. It was reasonable to worry that if they tried to be the next Netscape, they'd suffer the same fate. How were they to know that Netscape would turn out to be Microsoft's last victim? It would have been a clever move to pretend to be a media company to throw Microsoft off their scent. But unfortunately Yahoo actually tried to be one, sort of. Project managers at Yahoo were called "producers," for example, and the different parts of the company were called "properties." But what Yahoo really needed to be was a technology company, and by trying to be something else, they ended up being something that was neither here nor there. That's why Yahoo as a company has never had a sharply defined identity. The worst consequence of trying to be a media company was that they didn't take programming seriously enough. Microsoft (back in the day), Google, and Facebook have all had hacker-centric cultures. But Yahoo treated programming as a commodity. At Yahoo, user-facing software was controlled by product managers and designers. The job of programmers was just to take the work of the product managers and designers the final step, by translating it into code. One obvious result of this practice was that when Yahoo built things, they often weren't very good. But that wasn't the worst problem. The worst problem was that they hired bad programmers. Microsoft (back in the day), Google, and Facebook have all been obsessed with hiring the best programmers. Yahoo wasn't. They preferred good programmers to bad ones, but they didn't have the kind of single-minded, almost obnoxiously elitist focus on hiring the smartest people that the big winners have had. And when you consider how much competition there was for programmers when they were hiring, during the Bubble, it's not surprising that the quality of their programmers was uneven. In technology, once you have bad programmers, you're doomed. I can't think of an instance where a company has sunk into technical mediocrity and recovered. Good programmers want to work with other good programmers. So once the quality of programmers at your company starts to drop, you enter a death spiral from which there is no recovery. At Yahoo this death spiral started early. If there was ever a time when Yahoo was a Google-style talent magnet, it was over by the time I got there in 1998. The company felt prematurely old. Most technology companies eventually get taken over by suits and middle managers. At Yahoo it felt as if they'd deliberately accelerated this process. They didn't want to be a bunch of hackers. They wanted to be suits. A media company should be run by suits. The first |
I visited Google, they had about 500 people, the same number Yahoo had when I went to work there. But boy did things seem different. It was still very much a hacker-centric culture. I remember talking to some programmers in the cafeteria about the problem of gaming search results (now known as SEO), and they asked "what should we do?" Programmers at Yahoo wouldn't have asked that. Theirs was not to reason why; theirs was to build what product managers spec'd. I remember coming away from Google thinking "Wow, it's still a startup." There's not much we can learn from Yahoo's first fatal flaw. It's probably too much to hope any company could avoid being damaged by depending on a bogus source of revenue. But startups can learn an important lesson from the second one. In the software business, you can't afford not to have a hacker-centric culture. Probably the most impressive commitment I've heard to having a hacker-centric culture came from Mark Zuckerberg, when he spoke at Startup School in 2007. He said that in the early days Facebook made a point of hiring programmers even for jobs that would not ordinarily consist of programming, like HR and marketing. So which companies need to have a hacker-centric culture? Which companies are "in the software business" in this respect? As Yahoo discovered, the area covered by this rule is bigger than most people realize. The answer is: any company that needs to have good software. Why would great programmers want to work for a company that didn't have a hacker-centric culture, as long as there were others that did? I can imagine two reasons: if they were paid a huge amount, or if the domain was interesting and none of the companies in it were hacker-centric. Otherwise you can't attract good programmers to work in a suit-centric culture. And without good programmers you won't get good software, no matter how many people you put on a task, or how many procedures you establish to ensure "quality." Hacker culture often seems kind of irresponsible. That's why people proposing to destroy it use phrases like "adult supervision." That was the phrase they used at Yahoo. But there are worse things than seeming irresponsible. Losing, for example. ** |
| March 2012 As a child I read a book of stories about a famous judge in eighteenth century Japan called Ooka Tadasuke. One of the cases he decided was brought by the owner of a food shop. A poor student who could afford only rice was eating his rice while enjoying the delicious cooking smells coming from the food shop. The owner wanted the student to pay for the smells he was enjoying. The student was stealing his smells! This story often comes to mind when I hear the RIAA and MPAA accusing people of stealing music and movies. It sounds ridiculous to us to treat smells as property. But I can imagine scenarios in which one could charge for smells. Imagine we were living on a moon base where we had to buy air by the liter. I could imagine air suppliers adding scents at an extra charge. The reason it seems ridiculous to us to treat smells as property is that it wouldn't work to. It would work on a moon base, though. What counts as property depends on what works to treat as property. And that not only can change, but has changed. Humans may always (for some definition of human and always) have treated small items carried on one's person as property. But hunter gatherers didn't treat land, for example, as property in the way we do. The reason so many people think of property as having a single unchanging definition is that its definition changes very slowly. But we are in the midst of such a change now. The record labels and movie studios used to distribute what they made like air shipped through tubes on a moon base. But with the arrival of networks, it's as if we've moved to a planet with a breathable atmosphere. Data moves like smells now. And through a combination of wishful thinking and short-term greed, the labels and studios have put themselves in the position of the food shop owner, accusing us all of stealing their smells. (The reason I say short-term greed is that the underlying problem with the labels and studios is that the people who run them are driven by bonuses rather than equity. If they were driven by equity they'd be looking for ways to take advantage of technological change instead of fighting it. But building new things takes too long. Their bonuses depend on this year's revenues, and the best way to increase those is to extract more money from stuff they do already.) So what does this mean? Should people not be able to charge for content? There's not a single yes or no answer to that question. People should be able to charge for content when it works to charge for content. But by "works" I mean something more subtle than "when they can get away with it." I mean when people can charge for content without warping society in order to do it. After all, the companies selling smells on the moon base could continue to sell them on the Earth, if they lobbied successfully for laws requiring us all to continue to breathe through tubes down here too, even though we no longer needed to. The crazy legal measures that the labels and studios have |
taking have a lot of that flavor. Newspapers and magazines are just as screwed, but they are at least declining gracefully. The RIAA and MPAA would make us breathe through tubes if they could. Ultimately it comes down to common sense. When you're abusing the legal system by trying to use mass lawsuits against randomly chosen people as a form of exemplary punishment, or lobbying for laws that would break the Internet if they passed, that's ipso facto evidence you're using a definition of property that doesn't work. This is where it's helpful to have working democracies and multiple sovereign countries. If the world had a single, autocratic government, the labels and studios could buy laws making the definition of property be whatever they wanted. But fortunately there are still some countries that are not copyright colonies of the US, and even in the US, politicians still seem to be afraid of actual voters, in sufficient numbers. The people running the US may not like it when voters or other countries refuse to bend to their will, but ultimately it's in all our interest that there's not a single point of attack for people trying to warp the law to serve their own purposes. Private property is an extremely useful idea — arguably one of our greatest inventions. So far, each new definition of it has brought us increasing material wealth. It seems reasonable to suppose the newest one will too. It would be a disaster if we all had to keep running an obsolete version just because a few powerful people were too lazy to upgrade. ** |
| October 2015 When I talk to a startup that's been operating for more than 8 or 9 months, the first thing I want to know is almost always the same. Assuming their expenses remain constant and their revenue growth is what it has been over the last several months, do they make it to profitability on the money they have left? Or to put it more dramatically, by default do they live or die? The startling thing is how often the founders themselves don't know. Half the founders I talk to don't know whether they're default alive or default dead. If you're among that number, Trevor Blackwell has made a handy _calculator_ you can use to find out. The reason I want to know first whether a startup is default alive or default dead is that the rest of the conversation depends on the answer. If the company is default alive, we can talk about ambitious new things they could do. If it's default dead, we probably need to talk about how to save it. We know the current trajectory ends badly. How can they get off that trajectory? Why do so few founders know whether they're default alive or default dead? Mainly, I think, because they're not used to asking that. It's not a question that makes sense to ask early on, any more than it makes sense to ask a 3 year old how he plans to support himself. But as the company grows older, the question switches from meaningless to critical. That kind of switch often takes people by surprise. I propose the following solution: instead of starting to ask too late whether you're default alive or default dead, start asking too early. It's hard to say precisely when the question switches polarity. But it's probably not that dangerous to start worrying too early that you're default dead, whereas it's very dangerous to start worrying too late. The reason is a phenomenon I wrote about earlier: the fatal pinch. The fatal pinch is default dead + slow growth + not enough time to fix it. And the way founders end up in it is by not realizing that's where they're headed. There is another reason founders don't ask themselves whether they're default alive or default dead: they assume it will be easy to raise more money. But that assumption is often false, and worse still, the more you depend on it, the falser it becomes. Maybe it will help to separate facts from hopes. Instead of thinking of the future with vague optimism, explicitly separate the components. Say "We're default dead, but we're counting on investors to save us." Maybe as you say that, it will set off the same alarms in your head that it does in mine. And if you set off the alarms sufficiently early, you may be able to avoid the fatal pinch. It would be safe to be default dead if you could count on investors saving you. As a rule their interest is a function of growth. If you have steep revenue growth, say over 5x a year, you can start to count on investors being interested even if you're not profitable. But investors are so fickle that you can never do more than start to count on them. |
something about your business will spook investors even if your growth is great. So no matter how good your growth is, you can never safely treat fundraising as more than a plan A. You should always have a plan B as well: you should know (as in write down) precisely what you'll need to do to survive if you can't raise more money, and precisely when you'll have to switch to plan B if plan A isn't working. In any case, growing fast versus operating cheaply is far from the sharp dichotomy many founders assume it to be. In practice there is surprisingly little connection between how much a startup spends and how fast it grows. When a startup grows fast, it's usually because the product hits a nerve, in the sense of hitting some big need straight on. When a startup spends a lot, it's usually because the product is expensive to develop or sell, or simply because they're wasteful. If you're paying attention, you'll be asking at this point not just how to avoid the fatal pinch, but how to avoid being default dead. That one is easy: don't hire too fast. Hiring too fast is by far the biggest killer of startups that raise money. Founders tell themselves they need to hire in order to grow. But most err on the side of overestimating this need rather than underestimating it. Why? Partly because there's so much work to do. Naive founders think that if they can just hire enough people, it will all get done. Partly because successful startups have lots of employees, so it seems like that's what one does in order to be successful. In fact the large staffs of successful startups are probably more the effect of growth than the cause. And partly because when founders have slow growth they don't want to face what is usually the real reason: the product is not appealing enough. Plus founders who've just raised money are often encouraged to overhire by the VCs who funded them. Kill-or-cure strategies are optimal for VCs because they're protected by the portfolio effect. VCs want to blow you up, in one sense of the phrase or the other. But as a founder your incentives are different. You want above all to survive. Here's a common way startups die. They make something moderately appealing and have decent initial growth. They raise their first round fairly easily, because the founders seem smart and the idea sounds plausible. But because the product is only moderately appealing, growth is ok but not great. The founders convince themselves that hiring a bunch of people is the way to boost growth. Their investors agree. But (because the product is only moderately appealing) the growth never comes. Now they're rapidly running out of runway. They hope further investment will save them. But because they have high expenses and slow growth, they're now unappealing to investors. They're unable to raise more, and the company dies. What the company should have done is address the fundamental problem: that the product is only moderately appealing. Hiring people is rarely the way to fix |
More often than not it makes it harder. At this early stage, the product needs to evolve more than to be "built out," and that's usually easier with fewer people. Asking whether you're default alive or default dead may save you from this. Maybe the alarm bells it sets off will counteract the forces that push you to overhire. Instead you'll be compelled to seek growth in other ways. For example, by _doing things that don't scale_, or by redesigning the product in the way only founders can. And for many if not most startups, these paths to growth will be the ones that actually work. Airbnb waited 4 months after raising money at the end of Y Combinator before they hired their first employee. In the meantime the founders were terribly overworked. But they were overworked evolving Airbnb into the astonishingly successful organism it is now. ** |
| December 2019 Before I had kids, I was afraid of having kids. Up to that point I felt about kids the way the young Augustine felt about living virtuously. I'd have been sad to think I'd never have children. But did I want them now? No. If I had kids, I'd become a parent, and parents, as I'd known since I was a kid, were uncool. They were dull and responsible and had no fun. And while it's not surprising that kids would believe that, to be honest I hadn't seen much as an adult to change my mind. Whenever I'd noticed parents with kids, the kids seemed to be terrors, and the parents pathetic harried creatures, even when they prevailed. When people had babies, I congratulated them enthusiastically, because that seemed to be what one did. But I didn't feel it at all. "Better you than me," I was thinking. Now when people have babies I congratulate them enthusiastically and I mean it. Especially the first one. I feel like they just got the best gift in the world. What changed, of course, is that I had kids. Something I dreaded turned out to be wonderful. Partly, and I won't deny it, this is because of serious chemical changes that happened almost instantly when our first child was born. It was like someone flipped a switch. I suddenly felt protective not just toward our child, but toward all children. As I was driving my wife and new son home from the hospital, I approached a crosswalk full of pedestrians, and I found myself thinking "I have to be really careful of all these people. Every one of them is someone's child!" So to some extent you can't trust me when I say having kids is great. To some extent I'm like a religious cultist telling you that you'll be happy if you join the cult too but only because joining the cult will alter your mind in a way that will make you happy to be a cult member. But not entirely. There were some things about having kids that I clearly got wrong before I had them. For example, there was a huge amount of selection bias in my observations of parents and children. Some parents may have noticed that I wrote "Whenever I'd noticed parents with kids." Of course the times I noticed kids were when things were going wrong. I only noticed them when they made noise. And where was I when I noticed them? Ordinarily I never went to places with kids, so the only times I encountered them were in shared bottlenecks like airplanes. Which is not exactly a representative sample. Flying with a toddler is something very few parents enjoy. What I didn't notice, because they tend to be much quieter, were all the great moments parents had with kids. People don't talk about these much the magic is hard to put into words, and all other parents know about them anyway but one of the great things about having kids is that there are so many times when you feel there is nowhere else you'd rather be, and nothing else you'd rather be doing. You don't have to be doing anything special. You could just be going somewhere together, or putting them to |
or pushing them on the swings at the park. But you wouldn't trade these moments for anything. One doesn't tend to associate kids with peace, but that's what you feel. You don't need to look any further than where you are right now. Before I had kids, I had moments of this kind of peace, but they were rarer. With kids it can happen several times a day. My other source of data about kids was my own childhood, and that was similarly misleading. I was pretty bad, and was always in trouble for something or other. So it seemed to me that parenthood was essentially law enforcement. I didn't realize there were good times too. I remember my mother telling me once when I was about 30 that she'd really enjoyed having me and my sister. My god, I thought, this woman is a saint. She not only endured all the pain we subjected her to, but actually enjoyed it? Now I realize she was simply telling the truth. She said that one reason she liked having us was that we'd been interesting to talk to. That took me by surprise when I had kids. You don't just love them. They become your friends too. They're really interesting. And while I admit small children are disastrously fond of repetition (anything worth doing once is worth doing fifty times) it's often genuinely fun to play with them. That surprised me too. Playing with a 2 year old was fun when I was 2 and definitely not fun when I was 6. Why would it become fun again later? But it does. There are of course times that are pure drudgery. Or worse still, terror. Having kids is one of those intense types of experience that are hard to imagine unless you've had them. But it is not, as I implicitly believed before having kids, simply your DNA heading for the lifeboats. Some of my worries about having kids were right, though. They definitely make you less productive. I know having kids makes some people get their act together, but if your act was already together, you're going to have less time to do it in. In particular, you're going to have to work to a schedule. Kids have schedules. I'm not sure if it's because that's how kids are, or because it's the only way to integrate their lives with adults', but once you have kids, you tend to have to work on their schedule. You will have chunks of time to work. But you can't let work spill promiscuously through your whole life, like I used to before I had kids. You're going to have to work at the same time every day, whether inspiration is flowing or not, and there are going to be times when you have to stop, even if it is. I've been able to adapt to working this way. Work, like love, finds a way. If there are only certain times it can happen, it happens at those times. So while I don't get as much done as before I had kids, I get enough done. I hate to say this, because being ambitious has always been a part of my identity, but having kids may make one less ambitious. It hurts to see that sentence written down. I squirm to avoid it. But if there weren't something real there, |
would I squirm? The fact is, once you have kids, you're probably going to care more about them than you do about yourself. And attention is a zero-sum game. Only one idea at a time can be the _top idea in your mind_. Once you have kids, it will often be your kids, and that means it will less often be some project you're working on. I have some hacks for sailing close to this wind. For example, when I write essays, I think about what I'd want my kids to know. That drives me to get things right. And when I was writing _Bel_, I told my kids that once I finished it I'd take them to Africa. When you say that sort of thing to a little kid, they treat it as a promise. Which meant I had to finish or I'd be taking away their trip to Africa. Maybe if I'm really lucky such tricks could put me net ahead. But the wind is there, no question. On the other hand, what kind of wimpy ambition do you have if it won't survive having kids? Do you have so little to spare? And while having kids may be warping my present judgement, it hasn't overwritten my memory. I remember perfectly well what life was like before. Well enough to miss some things a lot, like the ability to take off for some other country at a moment's notice. That was so great. Why did I never do that? See what I did there? The fact is, most of the freedom I had before kids, I never used. I paid for it in loneliness, but I never used it. I had plenty of happy times before I had kids. But if I count up happy moments, not just potential happiness but actual happy moments, there are more after kids than before. Now I practically have it on tap, almost any bedtime. People's experiences as parents vary a lot, and I know I've been lucky. But I think the worries I had before having kids must be pretty common, and judging by other parents' faces when they see their kids, so must the happiness that kids bring. **Note** Adults are sophisticated enough to see 2 year olds for the fascinatingly complex characters they are, whereas to most 6 year olds, 2 year olds are just defective 6 year olds. **Thanks** to Trevor Blackwell, Jessica Livingston, and Robert Morris for reading drafts of this. --- --- Arabic Translation | | Slovak Translation * * * --- |
| December 2019 The most damaging thing you learned in school wasn't something you learned in any specific class. It was learning to get good grades. When I was in college, a particularly earnest philosophy grad student once told me that he never cared what grade he got in a class, only what he learned in it. This stuck in my mind because it was the only time I ever heard anyone say such a thing. For me, as for most students, the measurement of what I was learning completely dominated actual learning in college. I was fairly earnest; I was genuinely interested in most of the classes I took, and I worked hard. And yet I worked by far the hardest when I was studying for a test. In theory, tests are merely what their name implies: tests of what you've learned in the class. In theory you shouldn't have to prepare for a test in a class any more than you have to prepare for a blood test. In theory you learn from taking the class, from going to the lectures and doing the reading and/or assignments, and the test that comes afterward merely measures how well you learned. In practice, as almost everyone reading this will know, things are so different that hearing this explanation of how classes and tests are meant to work is like hearing the etymology of a word whose meaning has changed completely. In practice, the phrase "studying for a test" was almost redundant, because that was when one really studied. The difference between diligent and slack students was that the former studied hard for tests and the latter didn't. No one was pulling all-nighters two weeks into the semester. Even though I was a diligent student, almost all the work I did in school was aimed at getting a good grade on something. To many people, it would seem strange that the preceding sentence has a "though" in it. Aren't I merely stating a tautology? Isn't that what a diligent student is, a straight-A student? That's how deeply the conflation of learning with grades has infused our culture. Is it so bad if learning is conflated with grades? Yes, it is bad. And it wasn't till decades after college, when I was running Y Combinator, that I realized how bad it is. I knew of course when I was a student that studying for a test is far from identical with actual learning. At the very least, you don't retain knowledge you cram into your head the night before an exam. But the problem is worse than that. The real problem is that most tests don't come close to measuring what they're supposed to. If tests truly were tests of learning, things wouldn't be so bad. Getting good grades and learning would converge, just a little late. The problem is that nearly all tests given to students are terribly hackable. Most people who've gotten good grades know this, and know it so well they've ceased even to question it. You'll see when you realize how naive it sounds to act otherwise. Suppose you're taking a class on medieval history and the final exam is coming up. The final exam is supposed to be a test of |
knowledge of medieval history, right? So if you have a couple days between now and the exam, surely the best way to spend the time, if you want to do well on the exam, is to read the best books you can find about medieval history. Then you'll know a lot about it, and do well on the exam. No, no, no, experienced students are saying to themselves. If you merely read good books on medieval history, most of the stuff you learned wouldn't be on the test. It's not good books you want to read, but the lecture notes and assigned reading in this class. And even most of that you can ignore, because you only have to worry about the sort of thing that could turn up as a test question. You're looking for sharply-defined chunks of information. If one of the assigned readings has an interesting digression on some subtle point, you can safely ignore that, because it's not the sort of thing that could be turned into a test question. But if the professor tells you that there were three underlying causes of the Schism of 1378, or three main consequences of the Black Death, you'd better know them. And whether they were in fact the causes or consequences is beside the point. For the purposes of this class they are. At a university there are often copies of old exams floating around, and these narrow still further what you have to learn. As well as learning what kind of questions this professor asks, you'll often get actual exam questions. Many professors re-use them. After teaching a class for 10 years, it would be hard not to, at least inadvertently. In some classes, your professor will have had some sort of political axe to grind, and if so you'll have to grind it too. The need for this varies. In classes in math or the hard sciences or engineering it's rarely necessary, but at the other end of the spectrum there are classes where you couldn't get a good grade without it. Getting a good grade in a class on x is so different from learning a lot about x that you have to choose one or the other, and you can't blame students if they choose grades. Everyone judges them by their grades graduate programs, employers, scholarships, even their own parents. I liked learning, and I really enjoyed some of the papers and programs I wrote in college. But did I ever, after turning in a paper in some class, sit down and write another just for fun? Of course not. I had things due in other classes. If it ever came to a choice of learning or grades, I chose grades. I hadn't come to college to do badly. Anyone who cares about getting good grades has to play this game, or they'll be surpassed by those who do. And at elite universities, that means nearly everyone, since someone who didn't care about getting good grades probably wouldn't be there in the first place. The result is that students compete to maximize the difference between learning and getting good grades. Why are tests so bad? More precisely, why are they so hackable? Any experienced programmer could answer that. How hackable |
software whose author hasn't paid any attention to preventing it from being hacked? Usually it's as porous as a colander. Hackable is the default for any test imposed by an authority. The reason the tests you're given are so consistently bad so consistently far from measuring what they're supposed to measure is simply that the people creating them haven't made much effort to prevent them from being hacked. But you can't blame teachers if their tests are hackable. Their job is to teach, not to create unhackable tests. The real problem is grades, or more precisely, that grades have been overloaded. If grades were merely a way for teachers to tell students what they were doing right and wrong, like a coach giving advice to an athlete, students wouldn't be tempted to hack tests. But unfortunately after a certain age grades become more than advice. After a certain age, whenever you're being taught, you're usually also being judged. I've used college tests as an example, but those are actually the least hackable. All the tests most students take their whole lives are at least as bad, including, most spectacularly of all, the test that gets them into college. If getting into college were merely a matter of having the quality of one's mind measured by admissions officers the way scientists measure the mass of an object, we could tell teenage kids "learn a lot" and leave it at that. You can tell how bad college admissions are, as a test, from how unlike high school that sounds. In practice, the freakishly specific nature of the stuff ambitious kids have to do in high school is directly proportionate to the hackability of college admissions. The classes you don't care about that are mostly memorization, the random "extracurricular activities" you have to participate in to show you're "well-rounded," the standardized tests as artificial as chess, the "essay" you have to write that's presumably meant to hit some very specific target, but you're not told what. As well as being bad in what it does to kids, this test is also bad in the sense of being very hackable. So hackable that whole industries have grown up to hack it. This is the explicit purpose of test-prep companies and admissions counsellors, but it's also a significant part of the function of private schools. Why is this particular test so hackable? I think because of what it's measuring. Although the popular story is that the way to get into a good college is to be really smart, admissions officers at elite colleges neither are, nor claim to be, looking only for that. What are they looking for? They're looking for people who are not simply smart, but admirable in some more general sense. And how is this more general admirableness measured? The admissions officers feel it. In other words, they accept who they like. So what college admissions is a test of is whether you suit the taste of some group of people. Well, of course a test like that is going to be hackable. And because it's both very hackable |
there's (thought to be) a lot at stake, it's hacked like nothing else. That's why it distorts your life so much for so long. It's no wonder high school students often feel alienated. The shape of their lives is completely artificial. But wasting your time is not the worst thing the educational system does to you. The worst thing it does is to train you that the way to win is by hacking bad tests. This is a much subtler problem that I didn't recognize until I saw it happening to other people. When I started advising startup founders at Y Combinator, especially young ones, I was puzzled by the way they always seemed to make things overcomplicated. How, they would ask, do you raise money? What's the trick for making venture capitalists want to invest in you? The best way to make VCs want to invest in you, I would explain, is to actually be a good investment. Even if you could trick VCs into investing in a bad startup, you'd be tricking yourselves too. You're investing time in the same company you're asking them to invest money in. If it's not a good investment, why are you even doing it? Oh, they'd say, and then after a pause to digest this revelation, they'd ask: What makes a startup a good investment? So I would explain that what makes a startup promising, not just in the eyes of investors but in fact, is _growth_. Ideally in revenue, but failing that in usage. What they needed to do was get lots of users. How does one get lots of users? They had all kinds of ideas about that. They needed to do a big launch that would get them "exposure." They needed influential people to talk about them. They even knew they needed to launch on a tuesday, because that's when one gets the most attention. No, I would explain, that is not how to get lots of users. The way you get lots of users is to make the product really great. Then people will not only use it but recommend it to their friends, so your growth will be exponential once you _get it started_. At this point I've told the founders something you'd think would be completely obvious: that they should make a good company by making a good product. And yet their reaction would be something like the reaction many physicists must have had when they first heard about the theory of relativity: a mixture of astonishment at its apparent genius, combined with a suspicion that anything so weird couldn't possibly be right. Ok, they would say, dutifully. And could you introduce us to such-and-such influential person? And remember, we want to launch on Tuesday. It would sometimes take founders years to grasp these simple lessons. And not because they were lazy or stupid. They just seemed blind to what was right in front of them. Why, I would ask myself, do they always make things so complicated? And then one day I realized this was not a rhetorical question. Why did founders tie themselves in knots doing the wrong things when the answer was right in front of them? Because that was what they'd been trained to do. Their education |
taught them that the way to win was to hack the test. And without even telling them they were being trained to do this. The younger ones, the recent graduates, had never faced a non-artificial test. They thought this was just how the world worked: that the first thing you did, when facing any kind of challenge, was to figure out what the trick was for hacking the test. That's why the conversation would always start with how to raise money, because that read as the test. It came at the end of YC. It had numbers attached to it, and higher numbers seemed to be better. It must be the test. There are certainly big chunks of the world where the way to win is to hack the test. This phenomenon isn't limited to schools. And some people, either due to ideology or ignorance, claim that this is true of startups too. But it isn't. In fact, one of the most striking things about startups is the degree to which you win by simply doing good work. There are edge cases, as there are in anything, but in general you win by getting users, and what users care about is whether the product does what they want. Why did it take me so long to understand why founders made startups overcomplicated? Because I hadn't realized explicitly that schools train us to win by hacking bad tests. And not just them, but me! I'd been trained to hack bad tests too, and hadn't realized it till decades later. I had lived as if I realized it, but without knowing why. For example, I had avoided working for big companies. But if you'd asked why, I'd have said it was because they were bogus, or bureaucratic. Or just yuck. I never understood how much of my dislike of big companies was due to the fact that you win by hacking bad tests. Similarly, the fact that the tests were unhackable was a lot of what attracted me to startups. But again, I hadn't realized that explicitly. I had in effect achieved by successive approximations something that may have a closed-form solution. I had gradually undone my training in hacking bad tests without knowing I was doing it. Could someone coming out of school banish this demon just by knowing its name, and saying begone? It seems worth trying. Merely talking explicitly about this phenomenon is likely to make things better, because much of its power comes from the fact that we take it for granted. After you've noticed it, it seems the elephant in the room, but it's a pretty well camouflaged elephant. The phenomenon is so old, and so pervasive. And it's simply the result of neglect. No one meant things to be this way. This is just what happens when you combine learning with grades, competition, and the naive assumption of unhackability. It was mind-blowing to realize that two of the things I'd puzzled about the most the bogusness of high school, and the difficulty of getting founders to see the obvious both had the same cause. It's rare for such a big block to slide into place so late. Usually when that happens it has implications in a lot of different areas, and |
case seems no exception. For example, it suggests both that education could be done better, and how you might fix it. But it also suggests a potential answer to the question all big companies seem to have: how can we be more like a startup? I'm not going to chase down all the implications now. What I want to focus on here is what it means for individuals. To start with, it means that most ambitious kids graduating from college have something they may want to unlearn. But it also changes how you look at the world. Instead of looking at all the different kinds of work people do and thinking of them vaguely as more or less appealing, you can now ask a very specific question that will sort them in an interesting way: to what extent do you win at this kind of work by hacking bad tests? It would help if there was a way to recognize bad tests quickly. Is there a pattern here? It turns out there is. Tests can be divided into two kinds: those that are imposed by authorities, and those that aren't. Tests that aren't imposed by authorities are inherently unhackable, in the sense that no one is claiming they're tests of anything more than they actually test. A football match, for example, is simply a test of who wins, not which team is better. You can tell that from the fact that commentators sometimes say afterward that the better team won. Whereas tests imposed by authorities are usually proxies for something else. A test in a class is supposed to measure not just how well you did on that particular test, but how much you learned in the class. While tests that aren't imposed by authorities are inherently unhackable, those imposed by authorities have to be made unhackable. Usually they aren't. So as a first approximation, bad tests are roughly equivalent to tests imposed by authorities. You might actually like to win by hacking bad tests. Presumably some people do. But I bet most people who find themselves doing this kind of work don't like it. They just take it for granted that this is how the world works, unless you want to drop out and be some kind of hippie artisan. I suspect many people implicitly assume that working in a field with bad tests is the price of making lots of money. But that, I can tell you, is false. It used to be true. In the mid-twentieth century, when the economy was _composed of oligopolies_, the only way to the top was by playing their game. But it's not true now. There are now ways to get rich by doing good work, and that's part of the reason people are so much more excited about getting rich than they used to be. When I was a kid, you could either become an engineer and make cool things, or make lots of money by becoming an "executive." Now you can make lots of money by making cool things. Hacking bad tests is becoming less important as the link between work and authority erodes. The erosion of that link is one of the most important trends happening now, and we see its effects in almost every kind of work people do. Startups are one |
the most visible examples, but we see much the same thing in writing. Writers no longer have to submit to publishers and editors to reach readers; now they can go direct. The more I think about this question, the more optimistic I get. This seems one of those situations where we don't realize how much something was holding us back until it's eliminated. And I can foresee the whole bogus edifice crumbling. Imagine what happens as more and more people start to ask themselves if they want to win by hacking bad tests, and decide that they don't. The kinds of work where you win by hacking bad tests will be starved of talent, and the kinds where you win by doing good work will see an influx of the most ambitious people. And as hacking bad tests shrinks in importance, education will evolve to stop training us to do it. Imagine what the world could look like if that happened. This is not just a lesson for individuals to unlearn, but one for society to unlearn, and we'll be amazed at the energy that's liberated when we do. ** |
| August 2015 I recently got an email from a founder that helped me understand something important: why it's safe for startup founders to be nice people. I grew up with a cartoon idea of a very successful businessman (in the cartoon it was always a man): a rapacious, cigar-smoking, table-thumping guy in his fifties who wins by exercising power, and isn't too fussy about how. As I've written before, one of the things that has surprised me most about startups is how few of the most successful founders are like that. Maybe successful people in other industries are; I don't know; but not startup founders. I knew this empirically, but I never saw the math of why till I got this founder's email. In it he said he worried that he was fundamentally soft- hearted and tended to give away too much for free. He thought perhaps he needed "a little dose of sociopath-ness." I told him not to worry about it, because so long as he built something good enough to spread by word of mouth, he'd have a superlinear growth curve. If he was bad at extracting money from people, at worst this curve would be some constant multiple less than 1 of what it might have been. But a constant multiple of any curve is exactly the same shape. The numbers on the Y axis are smaller, but the curve is just as steep, and when anything grows at the rate of a successful startup, the Y axis will take care of itself. Some examples will make this clear. Suppose your company is making $1000 a month now, and you've made something so great that it's growing at 5% a week. Two years from now, you'll be making about $160k a month. Now suppose you're so un-rapacious that you only extract half as much from your users as you could. That means two years later you'll be making $80k a month instead of $160k. How far behind are you? How long will it take to catch up with where you'd have been if you were extracting every penny? A mere 15 weeks. After two years, the un-rapacious founder is only 3.5 months behind the rapacious one. If you're going to optimize a number, the one to choose is your growth rate. Suppose as before that you only extract half as much from users as you could, but that you're able to grow 6% a week instead of 5%. Now how are you doing compared to the rapacious founder after two years? You're already ahead—$214k a month versus $160k—and pulling away fast. In another year you'll be making $4.4 million a month to the rapacious founder's $2 million. Obviously one case where it would help to be rapacious is when growth depends on that. What makes startups different is that usually it doesn't. Startups usually win by making something so great that people recommend it to their friends. And being rapacious not only doesn't help you do that, but probably hurts. The reason startup founders can safely be nice is that making great things is compounded, and rapacity isn't. So if you're a founder, here's a deal you can make with yourself that will both make you happy and make your company successful. |
yourself you can be as nice as you want, so long as you work hard on your growth rate to compensate. Most successful startups make that tradeoff unconsciously. Maybe if you do it consciously you'll do it even better. ** |
| March 2012 Y Combinator's 7th birthday was March 11. As usual we were so busy we didn't notice till a few days after. I don't think we've ever managed to remember our birthday on our birthday. On March 11 2005, Jessica and I were walking home from dinner in Harvard Square. Jessica was working at an investment bank at the time, but she didn't like it much, so she had interviewed for a job as director of marketing at a Boston VC fund. The VC fund was doing what now seems a comically familiar thing for a VC fund to do: taking a long time to make up their mind. Meanwhile I had been telling Jessica all the things they should change about the VC business essentially the ideas now underlying Y Combinator: investors should be making more, smaller investments, they should be funding hackers instead of suits, they should be willing to fund younger founders, etc. At the time I had been thinking about doing some angel investing. I had just given a talk to the undergraduate computer club at Harvard about how to start a startup, and it hit me afterward that although I had always meant to do angel investing, 7 years had now passed since I got enough money to do it, and I still hadn't started. I had also been thinking about ways to work with Robert Morris and Trevor Blackwell again. A few hours before I had sent them an email trying to figure out what we could do together. Between Harvard Square and my house the idea gelled. We'd start our own investment firm and Jessica could work for that instead. As we turned onto Walker Street we decided to do it. I agreed to put $100k into the new fund and Jessica agreed to quit her job to work for it. Over the next couple days I recruited Robert and Trevor, who put in another $50k each. So YC started with $200k. Jessica was so happy to be able to quit her job and start her own company that I took her picture when we got home. The company wasn't called Y Combinator yet. At first we called it Cambridge Seed. But that name never saw the light of day, because by the time we announced it a few days later, we'd changed the name to Y Combinator. We realized early on that what we were doing could be national in scope and we didn't want a name that tied us to one place. Initially we only had part of the idea. We were going to do seed funding with standardized terms. Before YC, seed funding was very haphazard. You'd get that first $10k from your friend's rich uncle. The deal terms were often a disaster; often neither the investor nor the founders nor the lawyer knew what the documents should look like. Facebook's early history as a Florida LLC shows how random things could be in those days. We were going to be something there had not been before: a standard source of seed funding. We modelled YC on the seed funding we ourselves had taken when we started Viaweb. We started Viaweb with $10k we got from our friend Julian Weber, the husband of Idelle Weber, whose painting class I took as a grad student at Harvard. Julian knew about |
but you would not describe him as a suit. Among other things he'd been president of the _National Lampoon_. He was also a lawyer, and got all our paperwork set up properly. In return for $10k, getting us set up as a company, teaching us what business was about, and remaining calm in times of crisis, Julian got 10% of Viaweb. I remember thinking once what a good deal Julian got. And then a second later I realized that without Julian, Viaweb would never have made it. So even though it was a good deal for him, it was a good deal for us too. That's why I knew there was room for something like Y Combinator. Initially we didn't have what turned out to be the most important idea: funding startups synchronously, instead of asynchronously as it had always been done before. Or rather we had the idea, but we didn't realize its significance. We decided very early that the first thing we'd do would be to fund a bunch of startups over the coming summer. But we didn't realize initially that this would be the way we'd do all our investing. The reason we began by funding a bunch of startups at once was not that we thought it would be a better way to fund startups, but simply because we wanted to learn how to be angel investors, and a summer program for undergrads seemed the fastest way to do it. No one takes summer jobs that seriously. The opportunity cost for a bunch of undergrads to spend a summer working on startups was low enough that we wouldn't feel guilty encouraging them to do it. We knew students would already be making plans for the summer, so we did what we're always telling startups to do: we launched fast. Here are the initial announcement and description of what was at the time called the Summer Founders Program. We got lucky in that the length and structure of a summer program turns out to be perfect for what we do. The structure of the YC cycle is still almost identical to what it was that first summer. We also got lucky in who the first batch of founders were. We never expected to make any money from that first batch. We thought of the money we were investing as a combination of an educational expense and a charitable donation. But the founders in the first batch turned out to be surprisingly good. And great people too. We're still friends with a lot of them today. It's hard for people to realize now how inconsequential YC seemed at the time. I can't blame people who didn't take us seriously, because we ourselves didn't take that first summer program seriously in the very beginning. But as the summer progressed we were increasingly impressed by how well the startups were doing. Other people started to be impressed too. Jessica and I invented a term, "the Y Combinator effect," to describe the moment when the realization hit someone that YC was not totally lame. When people came to YC to speak at the dinners that first summer, they came in the spirit of someone coming to address a Boy Scout troop. By the time they left the building they were all saying |
variant of "Wow, these companies might actually succeed." Now YC is well enough known that people are no longer surprised when the companies we fund are legit, but it took a while for reputation to catch up with reality. That's one of the reasons we especially like funding ideas that might be dismissed as "toys" because YC itself was dismissed as one initially. When we saw how well it worked to fund companies synchronously, we decided we'd keep doing that. We'd fund two batches of startups a year. We funded the second batch in Silicon Valley. That was a last minute decision. In retrospect I think what pushed me over the edge was going to Foo Camp that fall. The density of startup people in the Bay Area was so much greater than in Boston, and the weather was so nice. I remembered that from living there in the 90s. Plus I didn't want someone else to copy us and describe it as the Y Combinator of Silicon Valley. I wanted YC to be the Y Combinator of Silicon Valley. So doing the winter batch in California seemed like one of those rare cases where the self-indulgent choice and the ambitious one were the same. If we'd had enough time to do what we wanted, Y Combinator would have been in Berkeley. That was our favorite part of the Bay Area. But we didn't have time to get a building in Berkeley. We didn't have time to get our own building anywhere. The only way to get enough space in time was to convince Trevor to let us take over part of his (as it then seemed) giant building in Mountain View. Yet again we lucked out, because Mountain View turned out to be the ideal place to put something like YC. But even then we barely made it. The first dinner in California, we had to warn all the founders not to touch the walls, because the paint was still wet. --- * * * --- |
| | **Want to start a startup?** Get funded by Y Combinator. --- September 2010 The reason startups have been using more convertible notes in angel rounds is that they make deals close faster. By making it easier for startups to give different prices to different investors, they help them break the sort of deadlock that happens when investors all wait to see who else is going to invest. By far the biggest influence on investors' opinions of a startup is the opinion of other investors. There are very, very few who simply decide for themselves. Any startup founder can tell you the most common question they hear from investors is not about the founders or the product, but "who else is investing?" That tends to produce deadlocks. Raising an old-fashioned fixed-size equity round can take weeks, because all the angels sit around waiting for the others to commit, like competitors in a bicycle sprint who deliberately ride slowly at the start so they can follow whoever breaks first. Convertible notes let startups beat such deadlocks by rewarding investors willing to move first with lower (effective) valuations. Which they deserve because they're taking more risk. It's much safer to invest in a startup Ron Conway has already invested in; someone who comes after him should pay a higher price. The reason convertible notes allow more flexibility in price is that valuation caps aren't actual valuations, and notes are cheap and easy to do. So you can do high-resolution fundraising: if you wanted you could have a separate note with a different cap for each investor. That cap need not simply rise monotonically. A startup could also give better deals to investors they expected to help them most. The point is simply that different investors, whether because of the help they offer or their willingness to commit, have different values for startups, and their terms should reflect that. Different terms for different investors is clearly the way of the future. Markets always evolve toward higher resolution. You may not need to use convertible notes to do it. With sufficiently lightweight standardized equity terms (and some changes in investors' and lawyers' expectations about equity rounds) you might be able to do the same thing with equity instead of debt. Either would be fine with startups, so long as they can easily change their valuation. Deadlocks weren't the only problem with fixed-size equity rounds. Another was that startups had to decide in advance how much to raise. I think it's a mistake for a startup to fix upon a specific number. If investors are easily convinced, the startup should raise more now, and if investors are skeptical, the startup should take a smaller amount and use that to get the company to the point where it's more convincing. It's just not reasonable to expect startups to pick an optimal round size in advance, because that depends on the reactions of investors, and those are impossible to predict. Fixed-size, multi-investor angel rounds are |
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