Well, or they fail spectacularly and we turn their business model into a running gag. But then, most "Googles" seem to have a business model that would have been a running gag had it failed.
True. Causality vs Correlation. I would imagine that many if not most big successes had an acquisition offer along the way but could it be that becoming a google, apple, microsoft or oracle is much more a function of good strategy, good execution, good markets, good timing and good luck than a function of an entrepreneur walking away from an acquisition offer?
This is true. However, I think the point being made here is that while you need strategy, execution, timing, all of the things you just listed above (and more), even if you have all of these things, you still can't become "a Google" if you don't resist early offers.
Perhaps an enterprising Angel Group can try to package or commoditize the process of making Angel-sized (six figure) investments. I'm not sure the term "Angel Group" would still apply after adopting this model, but Angel Groups seem well-positioned to evolve into this new "new venture animal."
It is my understanding that Angel Groups presently serve more to facilitate connections between Entrepreneurs and Angel Investors, rather than investing collaboratively. The size of the investments they facilitate vary (likely to fall between seed/YC [5 figures] and VC [7 figures or +] sizes).
Traditional angel groups have so far been a complete disappointment. They're more conservative than VCs.
But I would not be surprised if a new form of angel
group starts to emerge. There are a couple syndicates of ex-Googlers that look very promising. They have lots of money, and they were all smart enough to get hired as early employees at Google.
"the kind of founders who have the balls to turn down a big offer also tend to be very successful"
Or they tend to fail spectacularly. The more risk you are willing to take the more you will tend to go towards the extremes: One extreme is huge succes, the other is bankruptcy.
Absolutely agree. I know more people who have turned down big offers and ended up with $0 than people who have gone on to tremendous success after turning down an offer. There are definitely other variables involved. But I would guess:
P(COMPANY TURNED DOWN BUYOUT OFFER(S) | COMPANY BECOMES LARGE SUCCESS) = 1.
But the reverse wouldn't be as good a predictor as PG feels.
You guys are confusing competence with confidence. If you're riding a motorcycle really fast, would you rather be confident with yourself being able to control it, or would you rather be competent?
People who go all in are not always just confident, and bold, but also might know what they're doing as well.
So the biggest gap is between angels/yc clones and VCs? It appears that there is a far bigger disparity between potential startups and angels who will fund them. This may be hard to grasp, depending on where you sit, but there is still a truly microscopic percentage of the workforce that gets in at the ground floor of a startup that gets funded by outside angels.
This is to say that percentages are what should be considered in measuring "ease" of getting an investment at each stage. 0.001% of groups that desire an early stage angel investment can get it, 30% of angel funded groups can get a successive intermediate investment, 50% of the groups that make it to the intermediate stage can get VC money, etc.
> The reason there aren't more Googles is not that investors encourage innovative startups to sell out, but that they won't even fund them.
This goes for YC as well. Surely there are some technically innovative applicants that don't fit the mould of web sites to make quizzes or 10-second cartoons or other such dubious acceptees.
Google itself would have been rejected on at least a couple of grounds: project being too big to make much progress in 3 months (crawling the entire web!), and needing too much money ($15k ought to be enough for anybody!). IIRC they got not only the $100k from Bechtolsheim but also a similar amount from Cheriton.
> And yet it's the bold ideas that generate the biggest returns.
Yet YC sticks with smaller ideas...
> It's remarkable how wedded they are to their standard m.o.
This also seems to apply to YC. Small idea, $15k, 3 months, move your ass to Boston (then move again to SV, where you should have been in the first place), standard terms, no negotiation of the offer if YC accepts you.
From your previous letter: "We rejected a lot of proposals [...] because the project seemed too big to start on only three months of funding."
All your non-defunct fundees are still "building", but that's not the same as accepting groups you know are going to take two years and a lot more funding right at the outset.
As for caring about the founders/investing in people instead of ideas, that doesn't hold up for several reasons: 1) If you really end up changing the idea so often anyway, as often claimed, the idea proposed wouldn't be grounds for rejection if the founders were otherwise good; 2) Many founders don't have track records, thus you have nothing to judge them on; 3) Some applicants do have track records, but you reject them without reviewing the stuff they've done due to lack of time or other reasons.
That sentence isn't in the most recent emails. I took it out precisely because it's no longer true. It was in the rejection email we sent the first summer, and as often happens with text you rarely look at, it stayed around after it had become false.
And by building, I meant two years to launch. There's a startup we funded two years ago that's launching in late spring or early summer.
It still doesn't make sense. You say two years ago you had this max-timeframe criteria; but there's a startup you funded two years ago that has yet to launch. Well, you can't use them as an example of your foresight if they accidentally slipped through your filter, or if they accidentally ended up taking much longer than expected. Fo' shizzle, G.
It's kind of amusing the rejectees not only got a form letter, but a recycled one, which wasn't even accurate!
Probably not. I turned 40 last month. I find that I'm much less likely to write the wrong year on my checks than I was 10 years ago. When you're younger, what year it is seems permanent, hard to change. Later you're no more likely to forget what year it is than you are to forget what month it is.
Heck, I'm only 24 and I was just noticing that the other day. I remember when I was in second grade, and the year switched, I put the wrong year for months. Now the turning of a year just doesn't seem that momentous anymore.
I wonder why time seems to accelerate as we age. Is it because we are more busy, and hence spend less time being bored? Or is it somehow related to the fact that any given year's memories are an ever shrinking percentage of my overall memory store? If I were rich I would study people's perception of time, because it seems so non-linear.
I think it's largely the latter. When you have fewer memories, everything is newer, so each moment is more vivid. As time seems to slow when we have adrenaline rushes, the same with vivid experiences.
I'm curious: Where does the $15k number fit into that? At one point it was explained as "this should be enough money for you to live off for three months" -- if you're funding groups which take 2 years to launch, how are they supporting themselves for the remaining 21 months?
I've been quite surprised by the "get more traction" argument. It's like, if I had traction, what the hell would I need you for! Aren't you supposed to be the cowboys of investing? Sheesh. Tell me my idea sucks, that I suck or that my market sucks, anything but "your company doesn't exist yet so we can't fund it." Sort of a self defeating argument.
Heh, I get the same thing. I am launching a service based business. Someday I am going to thank the 25 VC firms that gave me that "more traction" statement as I bootstrap the business.
When I pitched my previous startup, a few years back, VCs made us jump through those standard hoops:
us: here's our Powerpoint presentation
VC: nice concept, come back when you have a product
[1 year later]
us: here's our product, let me give you a demo
VC: nice product. Come back when you have one customer.
[6 months later]
us: great news, we just signed XYZ, Inc. (big name) as our first customer.
VC: congratulations. Come back when you have traction (that is, multiple customers)
....
True story. We eventually got funding, 3 rounds. In another post, I'll discuss the other lesson I learned in VC funding: don't raise money when you need money.
I agree with your point here. Some ideas seem so radically out of touch, that they actually are out of touch. The founder of Intuit once said that 'your competition isn't other companies, but the way things are done now'. Some companies like to invent ideas about what people actually do. Therefore: observe how people spend their time, and make something that makes that better or more valuable. Then you can make sure you're not making something 'actually bad'!
As Niels Bohr (to Wolfgang Pauli(or vice versa)) once said,
"We are all agreed that your theory is crazy. The question which divides us is whether it is crazy enough to have a chance of being correct. My own feeling is that it is not crazy enough."
Comparisons to Google are worthless, primarily for 2 reasons:
1. Every logical mind (even within Google) in 1999 would have seen that Google was heading for failure - there was no money in search. They got lucky in finding one -adwords - that worked.
2. Had the timing of their discovery been off, or had the dot-com bubble busted a few months earlier, they would have died.
In saying that, they are useless as a measure of anything because they are such an anomaly that they shouldn't be used as a guidepost to success. In other words: If you were to operate the way Google did today, 99 times out of 100 you would fail. They are the exception to the rule.
Although, PG's comparison to Facebook is apt, as they're also in the same position as Google was. I'll put my money on them being in the majority though.
I did like Paul's point about VC's, but then again, you could extend that to how pretty much any industry operates. That's why innovation is so profitable, after all.
Every logical mind (even within Google) in 1999 would have seen that Google was heading for failure
I didn't think that. I remember telling the powers that be at Yahoo in 1999 (I worked there then) that they ought to buy Google, and it was the only company I ever suggested they buy.
Yahoo's MO at the time was to swap in the current "cool kid" of algorithmic search to fill out Yahoo's own search results. Google didn't really have much of a business outside of selling their results to folks like Yahoo, so I think many logical minds would've agreed that Google was heading for failure--short of being acquired by Yahoo or something other big guy in search.
At the least, you'd have a hard time making a believable argument that they'd be making billions of dollars a year in less than a half decade. And, truthfully, an even harder time trying to make that same sort of argument if they were actually acquired by Yahoo.
Fair enough Paul, but I think we've already proved your as much an exception to the rule as Google is. :-)
My point was that "most people" would have considered Google a bad investment prior to adwords. Given the response, it's obvious I should have been more clear.
Every logical mind (even within Google) in 1999 would have seen that Google was heading for failure
From a make something people want theory of value, they were worth way more than anybody back then. I used to jump from engine to engine trying boolean queries, metacrawlers, keyword mixing, etc, coming up snake eyes.
I think most engines were on the 'portal' kick, which I think meant beating people over the head with banner ads and trying to force them to go to content partners. I think if those sites just stopped for a second and histogrammed what users used rather than what they were trying to force them to do, it would have been absolutely obvious that search was the key.
I remember my search engine of choice was hotbot, because they had advanced search on the front page. And you sure as hell needed advanced search then.
1. Every logical mind (even within Google) in 1999 would have seen that Google was heading for failure - there was no money in search. They got lucky in finding one -adwords - that worked.
Lots of "logical minds" invested in Google in 1998. In 1999, Yahoo was profitable; Excite was bought for billions; Compaq and then CMGI tried to relaunch AltaVista. The best ways to maximize search revenue were not yet clear, and many thought the existing search incumbents would be harder to displace, but many smart people saw there was "money in search" and clearly did not think Google was "headed for failure".
Google didn't "get lucky in finding" a model; they looked around for what was working for others. They first tried CPM ads -- "text banners" starting December 1999 -- and later in 2002 moved to Goto.com's wildly successful CPC formula. And they were making money outside of advertising before the AdWords rocket took off.
2. Had the timing of their discovery been off, or had the dot-com bubble busted a few months earlier, they would have died.
Google raised money in 1998 -- so even moving the 2000-2001 bust forward a year wouldn't have put them on thin ice. And the search-linked ads market didn't collapse post-bubble; Goto.com reached strong profitability on search CPC ads in 2001, a "bust year" of very low overall ad spending.
Anything as successful as Google is, at some level, sui generis. Survivorship bias also makes it hard to draw lessons from winners. But your characterization of Google as being just a lucky discovery and a few months' timing away from inexorable failure is inconsistent with the real events of 1998-2001.
This essay doesn't quite sit right for me. My skeptical side constructs the message "invest 400k in YCombinator startups and you will have a piece of the next Google."
I think I see that because I assume that PG is not being hypocritical; ie. VC's should make bold investments -> YCombinator must already be making bold investments.
I am not under the impression that this message is intentional, it just seems that the argument flows to that point.
I was hoping for examples of YCombinator companies to go with each of the arguments about success (or failure, but that might be picking on them). That would have bolstered the assertions and made it sit better with me.
I think what's being overlooked by the article is the actual development of some good technology -- there seems to be so much focus on the exit rather than what a startup is actually doing.
So many of these Web 2.0 startups seem to want to grab a piece of the pie by diverting traffic rather than growing the pie by offering something fundamentally useful.
I am seriously having issues visualizing someone saying "this is not a good idea" to google founders. Perhaps I am too young or perhaps S&L were terrible salesmen, but I simply fail to see how come a relevant search seemed like a bad idea to VCs they talked to: and this is not 1995 we're talking here, back when Google was starting it was clear to many that everything was going to be online, and finding stuff will be hard, this is why everyone was into catalogs/portals.
Maybe I am too much of an "idea guy", but in my opinion the reason why there aren't many googles is simply because there aren't many good ideas around. I don't even consider social networking to be of any significant value (I'm with Maroon on this one). In that regard it was awkward to see Facebook and Google mentioned in the same sentence several times.
Even something as awesome as RSS isn't taking off (and it's been like 5 years already), let alone toys like Twitter that only a certain "inner circle" of people are using talking mostly to themselves. Not good enough.
Yes, yes - "implementation is more important", but without an idea there is nothing to implement to begin with. Most startups I know a little bit about seem more like an excuse for smart and driven people to work together: they aren't building anything particularly innovative. An no, they won't become next google regardless of what VCs or potential acquirers will do, it's a very rare case where I don't agree with Paul at all.
Google will be obsolete once the semantic web arrives ;)
I remember being pretty skeptical of Google. Better search seemed like a nice idea, but it wasn't clear how they were going to compete with the established players who all had more money, more users, more engineers, more features, etc. Also, Google wasn't the only company trying to build a better search engine. It seemed like there was a new one every month.
How did you bump into Google, coming from the middle of the country? What made you get over the initial skepticism and join? (If you don't mind me asking.)
The rest is history. I was interviewing at Altera and Xilinx at the time. Never would have occured to me that something that big was brewing not to far away.
..on a business card printed out from a laser printer on ordinary office paper. The guy pushing this on you is some grad school dropout with a strange voice who keeps saying he's going to change the world.
"The low cost of starting a startup means the average good bet is a riskier one, but most existing VC firms still operate as if they were investing in hardware startups in 1985."
I don't understand the idea behind this sentence. In this context what is a good bet, a company with certain traits or does this refer to a certain type of portfolio strategy, say one that expects most startups to fail and a few to win big? Also, how does the falling cost of startups make the average good bet riskier? Is it because it lowers the barriers for competitors? Or is it because any idiot can say they're doing a startup so it's harder for investors to know which ones are good and which ones are bad? Also, what was investing in hardware startups like in 1985? Are you saying that VCs today evaluate companies with low capital requirements and high risk as if they are capital intensive with low risk? This has multiple implications, and which one(s) was in your head when you wrote this is not entirely clear to me.
Hardware companies are not inherently low risk because they involve hardware. They are often, in fact, capital intensive and high risk. See early PC makers, telecom bust, pen computing, etc...
My thinking was that it might be easier to judge the risks involved since starting a hardware company usually requires getting an EE degree and then spending several years learning by working for an established company. Whereas since it is possible do a successful web startup with no previous experience or credentials, VCs have less data points to evaluate the chances of success.
In any event, this debate only underscores my point about the clarity of the sentence in question.
this article makes the good point that the mba types who are running vc funds are fundamentally ill-suited for identifying and investing in technology startups. paul graham identified this as true for managers of startups as well; and this is a defining feature of yc--investing in technology people vs. investing in mba types who hire programmers. of course, the logical extension is that the people doing the investing themselves should be technology people because they alone can recognize value in the technology sector. whatever value mba vc types did bring to the table, understanding of business management and such, is becoming less relevant with smaller startups and less money to be allocated.
whatever value mba vc types did bring to the table, understanding of business management and such, is becoming less relevant with smaller startups and less money to be allocated.
I completely agree. The answer isn't to convince VCs to invest in companies they aren't suited to be messing around with. Something new needs to happen. PG pointing it out to outsiders should help the free market in the right direction...
whatever value mba vc types did bring to the table
I still don't understand how they are valued at all. They don't invent anything, don't know how to help people who do, and are often bad at caretaking what has been built.
This is not meant as a swipe at them, but I honestly do not understand why they are highly valued.
Just look at the CVs and salary data (if available) at any VC firm, or, outside of the startup world, grep for median MBA compensation and compare it to any tech field median salary.
Because, at least according to a handful of VCs at DFJ, 70% of the work they do involves interacting with and convincing other people (usually people who can help their portfolio companies in some way, shape, or form).
In general, MBAs are better at this than those with technical training.
Further, a VC doesn't have to understand the intimate technical details of an opportunity to recognize that it is a valuable opportunity.
I'm not saying this makes for a good relationship with your VC, but that's why the equilibrium set of employees tends towards MBAs instead of PhDs.
However, I think you'll find that many VCs in the top-tier did engineering at undergrad, then got an MBA.
Investment and acquisition issues aside, the reason there aren't more Googles is because... there aren't that many Googles. Their mission statement is huge: "organize the world's information. From the get-go they had a unique algorithm that could do it. They just needed money to keep expanding their infrastructure.
I'm not convinced there are many bold, innovative founders with world-changing inventions that are falling through the cracks. The genius maverick entrepreneur is mostly an imaginary romantic archetype. Many founders these days seem as conservative as investors if you compare the scope of their ideas to Google, Apple, Ebay, Skype, or other projects that did change the world. The modus operandi for founders these days seems to be "aim sorta low and cash out early."
I just read a fascinating book - Gut Feelings by Gerd Gigerenzer. It's by the guy who did most of the research that Malcolm Gladwell's Blink is based upon. The central thesis was that people have evolved heuristics for decision making that let them quickly make snap decisions more effectively than gathering full information, but a couple chapters were on an interesting corollary: in the absence of hard data on their performance, most people's decision-making heuristic falls back to "Will I be blamed for this decision?"
He provided a bunch of examples from different professions. For example, doctors' decisions often aren't based on solid evidence-based medicine (which is often contradictory), but rather on "Will I be sued if I do or don't perform this treatment?" If you want the doctor's actual opinion, you should ask "If it were your own mother, what would you recommend?" instead of "What would you recommend I do?" - the former shifts the doctor's perspective so that they're thinking "How can I provide the best care?" rather than "Will this person sue me?" A study of UK magistrates found that 92% of their bail decisions could be predicted by the following heuristic: "Did any of the prosecution, police, or previous court recommend bail?" If not, and the defendant commits a crime, it falls into the category of unforeseeable events and the magistrate can't be blamed for it.
A similar effect may be at work with VCs. It's usually impossible to know, even with hindsight, what the opportunity cost of a lost deal was. If a VC turns down the next Google, chances are nothing happens and the company just fizzles. If a VC invests and it goes bust, however, everyone knows. So it pays for the VC to invest like everyone else does: then they can blame any failure on "Well, this was completely unforeseeable: everyone else was sure they'd be a success too." It's the combination of risk aversion, self-interest, and lack of feedback that drives this. If VCs actually had solid conceptual frameworks and good data for evaluating possible opportunities, they could rely on that rather than on their peers' evaluations. (Maybe this explains Sequoia...)
"If VCs actually had solid conceptual frameworks and good data for evaluating possible opportunities, they could rely on that rather than on their peers' evaluations."
This is basically the argument for thesis driven investing. If you Google the term there is some good stuff, especially the posts by Bill Burnham and Fred Wilson.
Ironic that you mention Fred Wilson, since he (or his doppelganger) apparently read drafts of PG's essay (and hence presumably influenced it somewhat).
It's great to hear discussion around Umair's thought patterns that add even more depth...
I think what he was trying to say might be a little different from PG's interpretation...
Umair might have said, "every company that had the potential to be economically revolutionary over the last five years sold out [to an acquirer devoid of strategic imagination or the capabilities to discontinuously continue their trajectory]," ergo ending the disruption gravy train.
That is, it's not necessarily "selling out" that blows things up; it's selling out to companies only driven to "increase market share", etc.
Or something like that.
I also think it is really interesting how your view of how the GOOG acquisition/IPO story played out vs. Umair's version:
"If all Larry, Sergey, and Google's investors had wanted to do was to sell out fast to the highest bidder, they could have done so at any time. But they didn't: they chose to revolutionize something that sucked - and so a tsunami of new value was unlocked."
That clearly doesn't square with how you saw it (even though it's an inspiring revision). I unfortunately lost my copy of Battelle's book before I got this far in the story, otherwise I would weigh in.
Clearly PG, Fred, Umair, and other smart ones agree on the need for more, smaller risks and purposeful management.
At any rate, whoever these "new investors" are that are going to fill the void between bottstrapping at Series A are going to make a FORTUNE. And they can't show up soon enough!
I disagree Google had a number. It was clear from many stories that they were really not interested in selling at all, so they would throw around some outrageous number (knowing it was outrageous), so nothing would happen.
Calling such a person a seller-but-for-the-price is incorrect, IMHO.
I totally understand them...they were in a position to pick a number that said, "You know what, if someone actually puts this up, we can take the deal and have absolutely no regrets."
[If this stands to reason], it wasn't "outrageously high because they didn't want to sell"; it was just the true price.
They knew how enormous GOOG's potential was and acquirers didn't, hence the asymmetric information situation that leads to your thesis that "turning down reasonable offers is the most reliable test you could invent for whether a startup will make it big."
The article makes some good points on the effects of funding on startup success, but it doesn't mention one the
"other" reasons there aren't more Googles (or Microsofts, or Ebays): huge markets that startups can disrupt so successfully are rare. Facebook, for example, which is probably the biggest startup success story since Google, could be doing everything right but it may never be as big as Google because it's playing in a smaller market.
Instead of making one $2 million investment, make five $400k investments... If you're investing at a tenth the valuation, you only have to be a tenth as sure.
I don't agree with this. The investors have to be just as sure of the risk involved in each valuation as before in order to have the same expected value for the overall portfolio. However, investing $400K in 5 companies instead of $2M in a single company will reduce the variance of the return on investment.
I think it's a tradeoff for the VCs between variance in the portfolio and the amount of work involved in finding 5 times as many companies. Given the amount of funding they deal with, I can understand them leaning towards the companies looking for $2M rounds.
It seems obvious. But I've proposed to several VC firms that they set aside some money and designate one partner to make more, smaller bets, and they react as if I'd proposed the partners all get nose rings.
As I pointed out above, the partner has to be just as sure of each of the 5 bets as he would be of one. I'd react the same way if someone suggested I'd do better at my job if I worked 5 times as hard.
Suppose your threshold for investing in a startup is an n% confidence that they'll one day have a market cap of a billion dollars.
Suppose instead you split that investment between 10 companies at a tenth the valuation. How confident do you have to be that any given one will become a billion dollar company? You have the same percentage in all these companies that you would have had in the case of a single, big investment, so now you only need one of the 10 to succeed in order to get the same return.
This makes complete sense if you assume that a company that only needs a few hundred thousand to "figure things out" has an equal chance of becoming a billion dollar company as a company that is looking for a multi-million dollar investment that "is already taking off." That's evident to us inside, but your own description of the companies is enough to make a VC understandably skittish.
I understand your overall point, and I agree with it, but I don't think this assumption was clear the first time I read through the article.
I wholeheartedly agree that convincing VCs of this isn't the way to go, and that others are going to make a killing by stepping in. My main point is only that the VCs aren't being irrational.
VC's likely believe lowering the dilligence and involvement level lowers the likelihood of success. If VC's believe, rightly or wrongly, the success rate drops from 10% to 5%, then by lowering selection criteria and involvement, they've lowered the rate of return by diversifying into a pool of lower quality. The key is whether those things really matter. In justifying their paychecks, however, they are vital.
There is a tradeoff though--accepting a smaller probability of success increases the variance, which deterministically drags down the returns. To see the effect, extend your argument to the extreme case of very very early valuations. You have $100k to invest, and you invest $1 each in 100k companies, each with a 1 in a billion chance of being a billion dollar company. Though your expected value is the same, at the end of the year, most likely you have no money left to invest for next year. The same effect holds in less extreme cases--if you increase your variance and lose 50% of your money, you can't just make it back by having a 50% upswing the next year--you need a 100% return to recoup it. So variance matters.
> Suppose instead you split that investment between 10 companies at a tenth the valuation. How confident do you have to be that any given one will become a billion dollar company?
You'd have to be more confident in aggregate.
Let's say in the former case you have a 50% certainty with one company; and in the latter case you have 5% confidence with each of 10 companies.
The chance that NONE of them succeed to that degree is 0.95^10, or about 60%. So only a 40% chance someone will make it, vs. 50% for the former.
With smaller probabilities the difference is less, but guesstimating at billions is such a crapshoot. How about something more realistic?
How about doubling your money: Let's say you put $1 mil into the former company. If it doubles its worth, you've doubled your money. But in the $100k for each of 10 companies case, they all have to double their worth, or one has to grow 20x.
Let's say you think it's a 50% safe bet in the former case, but a whopping 90% chance in the smaller cases. The chance they ALL double up is 0.90^10, or about 35%. So you're probably losing money.
Sure, some might do 3x or 4x to make up for a couple of the flops, but you probably aren't going to let a 100k investment just die; you'll be sinking more into the money losers, so the successes have to do even better to make up for the bailouts.
You made the right decision. The big point everyone here seems to be missing is the diminishing value of money. If you sold for even $1 million, that's enought to live off interest for the rest of your life.
AGE is the reason. SOFTWARE is the YOUNGEST OF ALL SCIENCES.
I doubt that the reason has a lot to do with valuation and acquisition. The simple reason is AGE. the WEB is still young. Seriously the web is really less than 20 years old. And please do not tell me that NASA and the NSA were using the internet 50 years ago. Medecine has been around thousands of years. Same for Architecture and Mathematics etc..... But the science of Computers and Computing is still an INFANT. Whether there are more acquisitions in the future or less, there will be tons of more Computing Innovation just because the field will MATURE. We still have not grasp the full potential of this field and frankly i think Google is just a drop of water in the ocean of possibilities.
So far, the "design spec" for the next-generation vc seems to be:
1. Invests $250-500k
2. Gets back to the applicants with a yes/no decision in 24 hours (can't find the pg essay).
I'm thinking there should be some kind of software, an algorithm, to help such a vc make decisions... what kind of factors would be part of it, and what else would be needed?
This has the sense of a ploy to spur on companies to buyout for huge amounts - furthering YC's interests. Also suggests VCs should take on more risk - furthering YC's interests. Urges entrepreneurs to hold out even longer - furthering YC's interests (if these entrepreneurs are in YC).
I don't disagree this message - but the motivation for writing this seems extremely transparent.
Not every buyout makes sense. Buying out Facebook for the valuation given to them roughly by the MSFT investment looks ridiculous considering Facebook's inability to monetize their traffic.
VCs fundamentally are trying to be risk adverse in a high risk environment. They all want to have a slightly higher success rate than average and do great.
Entrepreneurs always will hit a point where it makes sense to sell out and get rid of the risk on their end of holding on. If you have a portfolio of 100 companies, it makes sense to want each to hold out as long as possible. If you have one company you own a major stake of, it makes sense at a much lower value to liquidate.
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[ 4.7 ms ] story [ 293 ms ] threadExcept of course, there was a big famous example -- Friendster. http://www.nytimes.com/2006/10/15/business/yourmoney/15frien...
That is, refusing early offers doesn't guarantee you'll be the next Google, but accepting one guarantees you won't.
But I would not be surprised if a new form of angel group starts to emerge. There are a couple syndicates of ex-Googlers that look very promising. They have lots of money, and they were all smart enough to get hired as early employees at Google.
Or they tend to fail spectacularly. The more risk you are willing to take the more you will tend to go towards the extremes: One extreme is huge succes, the other is bankruptcy.
P(COMPANY TURNED DOWN BUYOUT OFFER(S) | COMPANY BECOMES LARGE SUCCESS) = 1.
But the reverse wouldn't be as good a predictor as PG feels.
People who go all in are not always just confident, and bold, but also might know what they're doing as well.
This is to say that percentages are what should be considered in measuring "ease" of getting an investment at each stage. 0.001% of groups that desire an early stage angel investment can get it, 30% of angel funded groups can get a successive intermediate investment, 50% of the groups that make it to the intermediate stage can get VC money, etc.
This goes for YC as well. Surely there are some technically innovative applicants that don't fit the mould of web sites to make quizzes or 10-second cartoons or other such dubious acceptees.
Google itself would have been rejected on at least a couple of grounds: project being too big to make much progress in 3 months (crawling the entire web!), and needing too much money ($15k ought to be enough for anybody!). IIRC they got not only the $100k from Bechtolsheim but also a similar amount from Cheriton.
> And yet it's the bold ideas that generate the biggest returns.
Yet YC sticks with smaller ideas...
> It's remarkable how wedded they are to their standard m.o.
This also seems to apply to YC. Small idea, $15k, 3 months, move your ass to Boston (then move again to SV, where you should have been in the first place), standard terms, no negotiation of the offer if YC accepts you.
All your non-defunct fundees are still "building", but that's not the same as accepting groups you know are going to take two years and a lot more funding right at the outset.
As for caring about the founders/investing in people instead of ideas, that doesn't hold up for several reasons: 1) If you really end up changing the idea so often anyway, as often claimed, the idea proposed wouldn't be grounds for rejection if the founders were otherwise good; 2) Many founders don't have track records, thus you have nothing to judge them on; 3) Some applicants do have track records, but you reject them without reviewing the stuff they've done due to lack of time or other reasons.
And by building, I meant two years to launch. There's a startup we funded two years ago that's launching in late spring or early summer.
It's kind of amusing the rejectees not only got a form letter, but a recycled one, which wasn't even accurate!
The first batch was in the summer of 2005.
I wonder why time seems to accelerate as we age. Is it because we are more busy, and hence spend less time being bored? Or is it somehow related to the fact that any given year's memories are an ever shrinking percentage of my overall memory store? If I were rich I would study people's perception of time, because it seems so non-linear.
us: here's our Powerpoint presentation
VC: nice concept, come back when you have a product
[1 year later]
us: here's our product, let me give you a demo
VC: nice product. Come back when you have one customer.
[6 months later]
us: great news, we just signed XYZ, Inc. (big name) as our first customer.
VC: congratulations. Come back when you have traction (that is, multiple customers)
....
True story. We eventually got funding, 3 rounds. In another post, I'll discuss the other lesson I learned in VC funding: don't raise money when you need money.
Alain - fairsoftware.net
pg, can I ask for examples ? I am genuinely curious.
This is a very true statement. The danger that I've seen is so often people think, "My idea seems bad to most people, ergo it must be good!"
How do you separate the seemingly bad from the actual bad? Figure _that_ out, and you'll make something of yourself.
I generally shy away from the numbered list blog format, but this is a classic read IMO.
Try it and find out.
This is basically the business YC is in. The short answer is: practice. One day I'll try writing down the long answer.
"We are all agreed that your theory is crazy. The question which divides us is whether it is crazy enough to have a chance of being correct. My own feeling is that it is not crazy enough."
1. Every logical mind (even within Google) in 1999 would have seen that Google was heading for failure - there was no money in search. They got lucky in finding one -adwords - that worked. 2. Had the timing of their discovery been off, or had the dot-com bubble busted a few months earlier, they would have died.
In saying that, they are useless as a measure of anything because they are such an anomaly that they shouldn't be used as a guidepost to success. In other words: If you were to operate the way Google did today, 99 times out of 100 you would fail. They are the exception to the rule.
Although, PG's comparison to Facebook is apt, as they're also in the same position as Google was. I'll put my money on them being in the majority though.
I did like Paul's point about VC's, but then again, you could extend that to how pretty much any industry operates. That's why innovation is so profitable, after all.
I didn't think that. I remember telling the powers that be at Yahoo in 1999 (I worked there then) that they ought to buy Google, and it was the only company I ever suggested they buy.
At the least, you'd have a hard time making a believable argument that they'd be making billions of dollars a year in less than a half decade. And, truthfully, an even harder time trying to make that same sort of argument if they were actually acquired by Yahoo.
My point was that "most people" would have considered Google a bad investment prior to adwords. Given the response, it's obvious I should have been more clear.
From a make something people want theory of value, they were worth way more than anybody back then. I used to jump from engine to engine trying boolean queries, metacrawlers, keyword mixing, etc, coming up snake eyes.
I think most engines were on the 'portal' kick, which I think meant beating people over the head with banner ads and trying to force them to go to content partners. I think if those sites just stopped for a second and histogrammed what users used rather than what they were trying to force them to do, it would have been absolutely obvious that search was the key.
Lots of "logical minds" invested in Google in 1998. In 1999, Yahoo was profitable; Excite was bought for billions; Compaq and then CMGI tried to relaunch AltaVista. The best ways to maximize search revenue were not yet clear, and many thought the existing search incumbents would be harder to displace, but many smart people saw there was "money in search" and clearly did not think Google was "headed for failure".
Google didn't "get lucky in finding" a model; they looked around for what was working for others. They first tried CPM ads -- "text banners" starting December 1999 -- and later in 2002 moved to Goto.com's wildly successful CPC formula. And they were making money outside of advertising before the AdWords rocket took off.
2. Had the timing of their discovery been off, or had the dot-com bubble busted a few months earlier, they would have died.
Google raised money in 1998 -- so even moving the 2000-2001 bust forward a year wouldn't have put them on thin ice. And the search-linked ads market didn't collapse post-bubble; Goto.com reached strong profitability on search CPC ads in 2001, a "bust year" of very low overall ad spending.
Anything as successful as Google is, at some level, sui generis. Survivorship bias also makes it hard to draw lessons from winners. But your characterization of Google as being just a lucky discovery and a few months' timing away from inexorable failure is inconsistent with the real events of 1998-2001.
I think I see that because I assume that PG is not being hypocritical; ie. VC's should make bold investments -> YCombinator must already be making bold investments.
I am not under the impression that this message is intentional, it just seems that the argument flows to that point.
So many of these Web 2.0 startups seem to want to grab a piece of the pie by diverting traffic rather than growing the pie by offering something fundamentally useful.
http://www.techcrunch.com/2008/03/14/y-combinator-demo-day-r...
Maybe I am too much of an "idea guy", but in my opinion the reason why there aren't many googles is simply because there aren't many good ideas around. I don't even consider social networking to be of any significant value (I'm with Maroon on this one). In that regard it was awkward to see Facebook and Google mentioned in the same sentence several times.
Even something as awesome as RSS isn't taking off (and it's been like 5 years already), let alone toys like Twitter that only a certain "inner circle" of people are using talking mostly to themselves. Not good enough.
Yes, yes - "implementation is more important", but without an idea there is nothing to implement to begin with. Most startups I know a little bit about seem more like an excuse for smart and driven people to work together: they aren't building anything particularly innovative. An no, they won't become next google regardless of what VCs or potential acquirers will do, it's a very rare case where I don't agree with Paul at all.
I remember being pretty skeptical of Google. Better search seemed like a nice idea, but it wasn't clear how they were going to compete with the established players who all had more money, more users, more engineers, more features, etc. Also, Google wasn't the only company trying to build a better search engine. It seemed like there was a new one every month.
Semantic web jokes are the best..
http://www.mathewingram.com/work/2006/12/04/let-me-cut-you-w...
I also know a guy that Sergey tried to recruit in the early years. Imagine if you saw this logo:
http://blogoscoped.com/files/google-com-history/1998.jpg
..on a business card printed out from a laser printer on ordinary office paper. The guy pushing this on you is some grad school dropout with a strange voice who keeps saying he's going to change the world.
Look like a winner to you?
I don't understand the idea behind this sentence. In this context what is a good bet, a company with certain traits or does this refer to a certain type of portfolio strategy, say one that expects most startups to fail and a few to win big? Also, how does the falling cost of startups make the average good bet riskier? Is it because it lowers the barriers for competitors? Or is it because any idiot can say they're doing a startup so it's harder for investors to know which ones are good and which ones are bad? Also, what was investing in hardware startups like in 1985? Are you saying that VCs today evaluate companies with low capital requirements and high risk as if they are capital intensive with low risk? This has multiple implications, and which one(s) was in your head when you wrote this is not entirely clear to me.
EDIT: Rewrote the last few sentences
Hardware companies are not inherently low risk because they involve hardware. They are often, in fact, capital intensive and high risk. See early PC makers, telecom bust, pen computing, etc...
In any event, this debate only underscores my point about the clarity of the sentence in question.
I completely agree. The answer isn't to convince VCs to invest in companies they aren't suited to be messing around with. Something new needs to happen. PG pointing it out to outsiders should help the free market in the right direction...
I still don't understand how they are valued at all. They don't invent anything, don't know how to help people who do, and are often bad at caretaking what has been built.
This is not meant as a swipe at them, but I honestly do not understand why they are highly valued.
In general, MBAs are better at this than those with technical training.
Further, a VC doesn't have to understand the intimate technical details of an opportunity to recognize that it is a valuable opportunity.
I'm not saying this makes for a good relationship with your VC, but that's why the equilibrium set of employees tends towards MBAs instead of PhDs.
However, I think you'll find that many VCs in the top-tier did engineering at undergrad, then got an MBA.
I'm not convinced there are many bold, innovative founders with world-changing inventions that are falling through the cracks. The genius maverick entrepreneur is mostly an imaginary romantic archetype. Many founders these days seem as conservative as investors if you compare the scope of their ideas to Google, Apple, Ebay, Skype, or other projects that did change the world. The modus operandi for founders these days seems to be "aim sorta low and cash out early."
I just read a fascinating book - Gut Feelings by Gerd Gigerenzer. It's by the guy who did most of the research that Malcolm Gladwell's Blink is based upon. The central thesis was that people have evolved heuristics for decision making that let them quickly make snap decisions more effectively than gathering full information, but a couple chapters were on an interesting corollary: in the absence of hard data on their performance, most people's decision-making heuristic falls back to "Will I be blamed for this decision?"
He provided a bunch of examples from different professions. For example, doctors' decisions often aren't based on solid evidence-based medicine (which is often contradictory), but rather on "Will I be sued if I do or don't perform this treatment?" If you want the doctor's actual opinion, you should ask "If it were your own mother, what would you recommend?" instead of "What would you recommend I do?" - the former shifts the doctor's perspective so that they're thinking "How can I provide the best care?" rather than "Will this person sue me?" A study of UK magistrates found that 92% of their bail decisions could be predicted by the following heuristic: "Did any of the prosecution, police, or previous court recommend bail?" If not, and the defendant commits a crime, it falls into the category of unforeseeable events and the magistrate can't be blamed for it.
A similar effect may be at work with VCs. It's usually impossible to know, even with hindsight, what the opportunity cost of a lost deal was. If a VC turns down the next Google, chances are nothing happens and the company just fizzles. If a VC invests and it goes bust, however, everyone knows. So it pays for the VC to invest like everyone else does: then they can blame any failure on "Well, this was completely unforeseeable: everyone else was sure they'd be a success too." It's the combination of risk aversion, self-interest, and lack of feedback that drives this. If VCs actually had solid conceptual frameworks and good data for evaluating possible opportunities, they could rely on that rather than on their peers' evaluations. (Maybe this explains Sequoia...)
This is basically the argument for thesis driven investing. If you Google the term there is some good stuff, especially the posts by Bill Burnham and Fred Wilson.
I think what he was trying to say might be a little different from PG's interpretation...
Umair might have said, "every company that had the potential to be economically revolutionary over the last five years sold out [to an acquirer devoid of strategic imagination or the capabilities to discontinuously continue their trajectory]," ergo ending the disruption gravy train.
That is, it's not necessarily "selling out" that blows things up; it's selling out to companies only driven to "increase market share", etc.
Or something like that.
I also think it is really interesting how your view of how the GOOG acquisition/IPO story played out vs. Umair's version:
"If all Larry, Sergey, and Google's investors had wanted to do was to sell out fast to the highest bidder, they could have done so at any time. But they didn't: they chose to revolutionize something that sucked - and so a tsunami of new value was unlocked."
That clearly doesn't square with how you saw it (even though it's an inspiring revision). I unfortunately lost my copy of Battelle's book before I got this far in the story, otherwise I would weigh in.
Clearly PG, Fred, Umair, and other smart ones agree on the need for more, smaller risks and purposeful management.
At any rate, whoever these "new investors" are that are going to fill the void between bottstrapping at Series A are going to make a FORTUNE. And they can't show up soon enough!
These statements don't conflict. They didn't sell out to the highest bidder, because the highest bidder wasn't offering enough, but they had a number.
Calling such a person a seller-but-for-the-price is incorrect, IMHO.
I totally understand them...they were in a position to pick a number that said, "You know what, if someone actually puts this up, we can take the deal and have absolutely no regrets."
[If this stands to reason], it wasn't "outrageously high because they didn't want to sell"; it was just the true price.
They knew how enormous GOOG's potential was and acquirers didn't, hence the asymmetric information situation that leads to your thesis that "turning down reasonable offers is the most reliable test you could invent for whether a startup will make it big."
At least, that's how I'm reading it ;-)
Yay or nay, pg?
I don't agree with this. The investors have to be just as sure of the risk involved in each valuation as before in order to have the same expected value for the overall portfolio. However, investing $400K in 5 companies instead of $2M in a single company will reduce the variance of the return on investment.
I think it's a tradeoff for the VCs between variance in the portfolio and the amount of work involved in finding 5 times as many companies. Given the amount of funding they deal with, I can understand them leaning towards the companies looking for $2M rounds.
It seems obvious. But I've proposed to several VC firms that they set aside some money and designate one partner to make more, smaller bets, and they react as if I'd proposed the partners all get nose rings.
As I pointed out above, the partner has to be just as sure of each of the 5 bets as he would be of one. I'd react the same way if someone suggested I'd do better at my job if I worked 5 times as hard.
Suppose instead you split that investment between 10 companies at a tenth the valuation. How confident do you have to be that any given one will become a billion dollar company? You have the same percentage in all these companies that you would have had in the case of a single, big investment, so now you only need one of the 10 to succeed in order to get the same return.
I understand your overall point, and I agree with it, but I don't think this assumption was clear the first time I read through the article.
I wholeheartedly agree that convincing VCs of this isn't the way to go, and that others are going to make a killing by stepping in. My main point is only that the VCs aren't being irrational.
VC's likely believe lowering the dilligence and involvement level lowers the likelihood of success. If VC's believe, rightly or wrongly, the success rate drops from 10% to 5%, then by lowering selection criteria and involvement, they've lowered the rate of return by diversifying into a pool of lower quality. The key is whether those things really matter. In justifying their paychecks, however, they are vital.
You'd have to be more confident in aggregate.
Let's say in the former case you have a 50% certainty with one company; and in the latter case you have 5% confidence with each of 10 companies.
The chance that NONE of them succeed to that degree is 0.95^10, or about 60%. So only a 40% chance someone will make it, vs. 50% for the former.
With smaller probabilities the difference is less, but guesstimating at billions is such a crapshoot. How about something more realistic?
How about doubling your money: Let's say you put $1 mil into the former company. If it doubles its worth, you've doubled your money. But in the $100k for each of 10 companies case, they all have to double their worth, or one has to grow 20x.
Let's say you think it's a 50% safe bet in the former case, but a whopping 90% chance in the smaller cases. The chance they ALL double up is 0.90^10, or about 35%. So you're probably losing money.
Sure, some might do 3x or 4x to make up for a couple of the flops, but you probably aren't going to let a 100k investment just die; you'll be sinking more into the money losers, so the successes have to do even better to make up for the bailouts.
http://www.crv.com/AboutCRV/QuickStart.html
It sounds like a savvy move. But I haven't heard of a single instance of someone using it, successfully or not!
I doubt that the reason has a lot to do with valuation and acquisition. The simple reason is AGE. the WEB is still young. Seriously the web is really less than 20 years old. And please do not tell me that NASA and the NSA were using the internet 50 years ago. Medecine has been around thousands of years. Same for Architecture and Mathematics etc..... But the science of Computers and Computing is still an INFANT. Whether there are more acquisitions in the future or less, there will be tons of more Computing Innovation just because the field will MATURE. We still have not grasp the full potential of this field and frankly i think Google is just a drop of water in the ocean of possibilities.
1. Invests $250-500k
2. Gets back to the applicants with a yes/no decision in 24 hours (can't find the pg essay).
I'm thinking there should be some kind of software, an algorithm, to help such a vc make decisions... what kind of factors would be part of it, and what else would be needed?
I don't disagree this message - but the motivation for writing this seems extremely transparent.
Not every buyout makes sense. Buying out Facebook for the valuation given to them roughly by the MSFT investment looks ridiculous considering Facebook's inability to monetize their traffic.
VCs fundamentally are trying to be risk adverse in a high risk environment. They all want to have a slightly higher success rate than average and do great.
Entrepreneurs always will hit a point where it makes sense to sell out and get rid of the risk on their end of holding on. If you have a portfolio of 100 companies, it makes sense to want each to hold out as long as possible. If you have one company you own a major stake of, it makes sense at a much lower value to liquidate.