Good article, but I disagree with the Microsoft/Apple example in the beginning. MS and Apple happened to come along when the microcomputer was really starting to take off, and they were able to ride that wave (while 1000's of other microcomputer startups crashed).
One thing that worries me personally about starting the "stereotypical" HN startup right now, is that I think the free/fremium model is going to lose steam FAST. My prediction is that you will see more companies trying to start monetizing their web-app soon. FWIW, TipJoy is well positioned to take advantage of this if my prediction is true.
Of course, I've always been a hardware/product startup hacker, but I've had a couple of rounds in software and Web 2.0 companies. So, I'm not as immersed in web-app funding cycles as some others here are.
I would look to solar and certain other viable alternative energy options right now as the next major tech growth sector. I think the tech startup world needs to see more "inventions" (again, admitting my own bias).
While many here may disagree with me, one of the problems with web-apps is that while they are cheap to get going (relatively speaking), I think that the saturation of non-revenue producing web-app companies, coupled with the low cost of starting them, will make many traditional VCs look elsewhere for their next investments. The web-app community needs more investors like YC, that keep the investments and process realistic.
Indeed, there are a ton of web-apps that probably will never take off. Still, there is the big advantage that you can build a prototype almost for free.
Other fields (solar, biotech, whatever) might require way more money to start. For real stuff, like machines, not for swag and parties.
Having nothing than an idea, how do you convince a VC that you need a ton of money, given the current economic situation?
Still, there is the big advantage that you can build a prototype almost for free.
As we build, this point still amazes me. If you're willing to put in the time and effort, the cost is not prohibitive. Build in spite of the VCs, not because of them. If your product is good enough, users will force them to find a path to your door. And, of course, you still have a day and a half:
MS and Apple happened to come along when the microcomputer was really starting to take off, and they were able to ride that wave
That was the point I was making with those examples: that technology evolves independently of the stock market. So if it's time to build the Apple I or Altair Basic, do it whether the economy is good or bad.
After reading the Woz interview in Founders, it's obvious that he wasn't paying much attention to the stock market. He was too busy doing what he loved. Their initial business approach (cash for product) may have been produced by their times, but they didn't let that stand in the way.
And that's the lesson for me. All I can control is my immediate situation. The other stuff is just noise best drowned out by hard work at things I enjoy.
Technology doesn't evolve independently of a market for it. While "make something people want" is true in any economy, the problem is that what people want changes with the state of the economy. So startup founders need to reassess the market for their products (building iPods or building pacemakers?), and I'd guess many will decide this is not the right economy for their startups, and some will now discover new opportunities.
You do touch upon this a little bit in your article, where you mention startups that save customers money will succeed more in a bad economy. But I thought the more general assertion wasn't made.
I've often thought that the mantra make something people want should be amended to make something people want to pay for. It's an important distinction. It's the difference between Richard Stallman and Steve Jobs, between Linus Torvalds and Bill Gates. I have great respect for all of those individuals, but I don't look to Stallman or Torvalds for business inspiration. I don't doubt that all YC companies have made something people want, but I wonder whether all have made something people want to pay for.
Neither Stallman nor Torvalds are scrambling to pay rent.
So it depends if you want to be "well off" (Stallman), "obscenely rich" (Torvalds), "shockingly rich" (Jobs), or "embarassingly rich" (Gates).
And I think that most would, given the choice, rather be the BDFL of a project they obviously enjoy (Torvalds), than spend all day in meetings, or managing management, or whatever Gates has done for the last decade. Unless you're a masochist, or a megalomaniac.
And besides that, lightning has to strike the same place 200 times before you make it to the 99.9th percentile.
"I'm trying to make a living; if you're trying to make a killing then you're stuck in the system."
If you can make something that people want, but don't want to pay for, then you can probably make money indirectly from it: by selling t-shirts, giving after-dinner speeches, or whatever.
> I would look to solar and certain other viable alternative energy options right now as the next major tech growth sector.
Right. The next wave is further electrification, new power generation, and first world infrastructure renewal. New advanced rail and massive rail line build outs. Rebuilding sewage and water systems. Alternative energy. Revamping agriculture for expensive oil and scarce fresh water will also be a big hi-tech area.
I'm sure the garage hackers will make money here and there as part of the wave, but they will be auxiliary; not like with the PC or internet booms. The main stage will be the capital intensive stuff working with actual raw materials.
Why stop there? I think the next wave is that the world will revert to a mainly agricultural economy. I'm sure artisans will make money here and there (repairing plows and so on) but they will be auxiliary...
A modern vegetable farm or hothouse operation is eight times as hi-tech as your ruby on rails site. A maglev train and its infrastructure eight times again.
I wonder if a cooler external economy might actually give a startup more time to stabilize its platform, find its market, etc. etc. before exiting. This might actually produce better startups, on average.
(Here, "better" = chance of becoming profitable, and relevant to the web, for the long term; "better" != chance of cashing out for megabucks within a year or two; i.e. "better" for me as a web user.)
One of the underlying things here is that there is very little use saying 'bad economy' & leaving it at that. Bad what? What are the actual effects.
A startup might be affected by:
Customers/market - These are not necessarily the problem. True. Particularly if you are evolving in this economy, Like a Neanderthal in an ice age. This point is probably neutral on average.
Investors - This may be a problem. This is a market that can shy. But only a problem if you need them. This point is negative.
Buyers- (Of some description) Definitely a negative. But you don't need them right away & you can probably be more flexible waiting for the right time. If Cockaroach doesn't do it.. endospore.
You can't have everything.
Comeptitors - A plus. Fewer investors (including founders as the essay implies) by definition means fewer startups.
Great article and the example from the 70s (brk has some good points) was a good one. A LOT of innovation happened in what were very difficult times on a macro level. Living / working cheap is absolutely key. I knew the economy was going to tank back in January when I started my company, but I still did it.
I'd also like to see more "inventions" (another good point from brk). There may be a certain amount of critical mass of development that has to happen around other technologies. The last 10 years or so have seen optimization in the development cycle for web apps, resulting in their relative low barrier of entry today. It could be my ignorance, but I don't detect the same level of commoditization in other industries. Of course, a higher barrier of entry is great for the people already involved.
Another way to look at the "inventions" issue is the rather quick evolution of non-web technologies to web accessible interfaces. We've seen this happen with telephony, video, radio, print, television, navigation, security systems, and many more, I'm sure. It's pretty amazing actually. I think you'll continue to see more of this over the next few years, so we'll all still have stuff to work on.
I'm not sure I follow that bad times being a good time to invest means that its a good time to start a company. Investors want a low price, but for founders I would have thought the amount of effort (price paid) is fairly much independent of the economy.
"Last year you had to be prepared to explain how your startup was viral. Next year you'll have to explain how it's recession-proof."
In my experience, what's true of investors here is also true of potential co-founders. It's so much easier to get other people to work with you if your project is in a trendy field or appeals to the dominant logic of the afternoon. And it's really really frustrating.
I never said it in the essay, but we have actually been thinking it at YC. One of the hardest things we have to do in the selection process is filter out people who are smart but uncommitted. (Smartness is much easier to judge than commitment in a 10-minute interview.) And now the economy is going to be doing it for us. So frankly I'd prefer to be operating in a mild recession. Unfortunately this one sounds like it is scheduled to be a few notches above mild.
My tiny startup has a small but stable amount of funding. In our case, it's enough to provide a two-year runway to finish development and iterate the product a couple of times before reaching break-even.
Up until this month, I've had trouble finding A-list programmers because I don't offer a large salary and benefits. This month, I've suddenly found it easier to attract high-skill employees and I expect it to get easier still as the recession deepens. Many are involved in loss-generating startups which they anticipate will soon fail as funding dries up. (Not all these experts choose to return to grad school...some, for instance, are too old for that culture shift or don't have liquid assets to sustain them.)
As you discuss, the recession may make it easier or harder for startups depending on their value proposition and their reliance on additional investments. I encourage you to write on how easier access to expert programmers changes the equation. In my case, I must decide whether to commit our resources to, say, hire another brilliant programmer because it's now possible OR to hold at our current headcount to maximize survivability.
Another variable is whether brilliant hires in this economy are likely to stick with the company when the economy improves in, say 12-18 months. An HR expert who's weathered a few of these cycles pointed out that while it's easier to hire good people in a recession, some of these hires are more likely to jump ship when the economy turns around. I think the description would be "fair weather hires".
Intuitively that makes sense but I'm not sure if it's actually true. It's relatively easy to convince someone who would otherwise go into hedge funds to instead do a web startup with you. It's much more difficult, however, to convince that person to do a startup to the field of, say, ethnic pharmacology. That doesn't mean the hedge fund guy would necessarily make a bad partner for a web startup though. (Stereotypes about finance people aside.)
Also, I know pg says that not being able to find a cofounder after a certain point signals a lack of competence or a bad idea, which is generally of correct, but also realize that in some areas finding a cofounder is literally 10x harder than in others-- independent of the merits of the founder or the idea.
This article seems to ignore the main argument I've heard: exit strategies are fewer in a recession. IPOs are out of the question and few companies are in an acquisition mood. So instead of growing fast and selling out before you hit your plateau, you have keep your traffic climbing until the market picks back up. That's really hard, esp. since founders have a tendency to get bored. I expect many will start something new at that point anyway, so I can see why it'd be tempting to skip the step in between. (That said, it's hard to think of a better way to spend the time -- even a failed startup's more educational than grad school.)
While exit strategies might be fewer during a recession, the point of starting now is that the economy will (hopefully) be out of the recession by the time you want to exit (typically beyond 12-18 months).
Agreed. With some exceptions, startups are more like marathons than sprints. Investors often look for an exit in ~5 years, while too many founders think that they'll be out, as a success or failure, in 18 months.
Good point, but there IS a delay. Some companies have a 6 month triumph like Omnisio, but most follow a multi-year path to liquidity. Maybe not the 5-7 that is tradition for VCs, but at least a few years.
So starting up now, founders should ask themselves-- what's liquidity look like in 3-5+ years? The correct answer is, "I have no clue"-- but if you start now, you'll probably have a better shot at liquidity in 3-5 years because all of the other hackers went to grad school. ;-)
Existing startups will probably have a hard time trying to decrease the burn rate and at the same time growing traffic.
On the contrary, potential startup founders will have more reasons to think of their projects as businesses - trying to grow revenues, not traffic. And to get revenue, you have to solve real problems.
People starting companies now can choose ideas that lead to profitability rather than "exits" (IPOs and acquisitions). Ideas along the lines of what 37signals does. As long as they do that, one can argue that startups are not any less feasible now than they were last year, as follows. PG's essay of a few years ago on why you should take VC gave as one big reason, Well, you competitors are probably going to take VC (which allows them to progress faster than you can if you do not take VC). The credit crunch makes it harder for you to get VC, but it makes it harder for your competitors, too. Now, what would people do who decide not to found companies? Well, become employees. But the employment market really does get a whole lot more competitive during a big economic downturn, whereas if the analysis I just gave is right, the start-up sector does not (at least the part of the sector in which success is not dependent on an IPO or acquisition does not).
There is a hidden assumption in the above: it assumes that a startup's competitors are other startups, not established firms. Established firms have easier access to credit than startups. (They can fund new lines of business out of profits from existing lines of business, for example, which is a form of "access to credit" for the sake of this discussion, which is about starting new lines of business -- i.e., exploiting new markets.) This is a real disadvantage of startups relative to established firms, and the disadvantage gets bigger because of the economic downturn, but the disadvantage of being an employee of an established firm when lots of job hunters are in the market might get even bigger.
There are ways in which startups have been able to neutralize the funding advantage held by established firms. One big way is to be more agile. "Agility" means adopting new technologies and entering new market more quickly. Changes in technology and changes in markets and potential markets continue to occur during economic downturns.
So who should start a startup? Someone who is a good hacker,
between about 23 and 38, and who wants to solve the money problem in one shot instead of getting paid gradually over a
conventional working life.
So writing about startups is always implicitly about making money. (Not that there's anything wrong with that.)
In your search did you find any other examples? The original comment said "all the time". That's a very different reading from mine and I'm frankly not sure where it comes from. Even that essay you cite, the quote is a tangent. It's not the central thesis.
But "solving the money problem" is about gaining the freedom to do what you love, without having to worry about putting food on the table. The problem is really a problem of freedom, which it just so happens can be solved by acquiring a load of dosh. So it's only about making money as a means to the end of freedom.
Why would you gamble with your freedom? Most of Paul Graham's fans could easily do 3 years of lawschool at a top tier school and could then work 5 years and retire for life.
Typically, you're about $160k in debt from law school, so the first year is spent paying that back. The next 4 years taken together is only $795k, nowhere near enough to retire for life. All the associate years together is only about $1.6M, still not enough to retire after 11 years.
Then you have to make partner; if you don't, you're out of the firm and usually have to set yourself up as a sole proprietor. If you do make partner, you're set for life, but at 11 years getting there, the road is nearly as long as becoming a tenured professor and usually longer than becoming a successful entrepreneur.
To a hacker's mind, solving the money problem is less about money in and of itself and more about making efficient use of our time. Wasting time is the worst of sins.
I feel this way as well--except I think I'm what he calls a "hacker", and as someone mentions above, I only like making money--so far in my professional career, anyway--because it represents freedom to work on stuff I care about, in some sense. Usually people call this "time"; if you have the money to keep yourself alive without working constantly on things you don't care about, then you have time for things you care about. I think of it as something more like "energy" myself, since even when I don't have a paying job at all (and thus have lots and lots of time), I still can only stand working in a few fairly short, intense bursts per day, due to the rise and fall of my inspiration and fatigue and so forth.
But back onto Mr. Graham: Since I'm a "hacker", I already know a lot of stuff he knows about software development, and in fact it's clear that I also know a lot that he doesn't address in his essays and probably isn't even aware of. I mean, I'm a video game developer who writes in Java on Windows machines, and I've got good reason to be such. Why should I pay attention to Mr. Lisp here who scorns Windows and has never used Java, and who doesn't even mention playing games, let alone programming them?* I'm sure I could learn some things from him, but he is ignorant of my world, however much he may know about his own kind of software development.
He is far from ignorant, however, about startups. And he's got interesting things to say about various other, non-technical subjects too. So let him talk about those!
* I suspect there are plenty of Mac fans and Lisp fans and C++ fans among this site's readers who could snappily answer this question. I do not have time to armor this comment against techie criticism; that would itself require an essay. Suffice to say that I claim I could if I wanted to. :)
One of the strange consequences of writing about several mostly unrelated topics is that you pick up readers with quite different interests. Then whatever you write next, the ones not interested in that topic complain that you've jumped the shark. I doubt I've written a single essay since about 2002 when someone didn't say something of the form "pg was ok when he was writing about x, but I wish he would stop writing about y."
And incidentally, it's not the making money aspect of startups that interests me the most. I'm mostly interested in startups as agents of change. We could right now be in the middle of a shift on the scale of the Industrial Revolution. Or not; always hard to tell from so close. But there is certainly something interesting happening.
There's a wonderful quote from Brian Eno about the conservative force that comes from having people who like your work:
"I'm afraid to say that admirers can be a tremendous force for conservatism, for consolidation. Of course it's really wonderful to be acclaimed for things you've done - in fact it's the only serious reward, because it makes you think "it worked! I'm not isolated!" or something like that, and it makes you feel gratefully connected to your own culture. But on the other hand, there's a tremendously strong pressure to repeat yourself, to do more of that thing we all liked so much. I can't do that - I don't have the enthusiasm to push through projects that seem familiar to me ( - this isn't so much a question of artistic nobility or high ideals: I just get too bloody bored), but at the same time I do feel guilt for 'deserting my audience' by not doing the things they apparently wanted. I'd rather not feel this guilt, actually, so I avoid finding out about situations that could cause it. The problem is that people nearly always prefer what I was doing a few years earlier - this has always been true. The other problem is that so, often, do I! Discovering things is clumsy and sporadic, and the results don't at first compare well with the glossy and lauded works of the past. You have to keep reminding yourself that they went through that as well, otherwise they become frighteningly accomplished. That's another problem with being made to think about your own past - you forget its genesis and start to feel useless awe towards your earlier self: "How did I do it? Wherever did these ideas come from?". Now, the workaday everyday now, always looks relatively less glamorous than the rose-tinted then (except for those magic hours when your finger is right on the pulse, and those times only happen when you've abandoned the lifeline of your own history)."
I think one problem of the Web is that it can reinforce one-dimensionality in some people. People seek out only the narrow set of things they are interested in instead of taking advantage of the breadth it has to offer. So you get people complaining that pg or Joel Spolsky don't talk about what they used to talk about anymore.
That's a really bad place to put yourself. My business ideas are pretty far from what I see discussed here, but I still get a lot of useful knowledge from hanging around. I'd say that the fact that the startups here are different from what I'm likely to do is valuable in its own way: forces me to see the common technology from another perspective and that itself generates further ideas.
"... We could right now be in the middle of a shift on the scale of the Industrial Revolution. Or not; always hard to tell from so close. But there is certainly something interesting happening ..."
Incidentally, if you had to pick a single rubric by which you could gauge the eventual interestingness of an agent of change, you could do a lot worse than profitability.
I'm guessing a lot of the revolutionaries in the Industrial Revolution weren't thinking so much about causing a revolution. They were "just" trying to get rich.
Seems to me that making money has always been a common theme in pg's essays. The "you should start a startup" message is stronger than ever, but that's always been there to some extent as well.
Immediately after the dot com bust, they were acquiring companies and hiring like crazy. The general pace of the stock market had little to do with how they were performing. It was a bit surprising considering they produce an enterprise software package and you would expect sales to be heavily tied to the market. But they produced a quality product that people wanted, and were able to push the knowledge management/collaboration angle well enough that companies felt like it was an investment they were making.
"Last year you had to be prepared to explain how your startup was viral. Next year you'll have to explain how it's recession-proof."
You should have to explain how it's going to make money, no matter the economy. Founders need to stop thinking they can just magically monetize later after reaching one fobillion users. If it happens, awesome, but don't bank on it. Google was an anomaly, but you wouldn't know it from the attitudes of others towards them.
Do you have examples of sites with a "fobillion" (or close) users that still failed? I'm really curious. The examples I can think of, like friendster, really went under because of lack of users.
I agree that you shouldn't bank on getting this fobillion users and after that monetizing them. But that's because the real hard part is getting that much users in the first place.
That was an obvious hyperbole. The point is: 50,000 or even 100,000 users =! success, and you don't necessarily need users to make money (although it helps!).
The grow-users-before-revenue strategy has several spectacular success stories: Google, YouTube, Facebook, Flickr, MySpace, etc. etc.
That's not to say it's the only valid strategy, but it's certainly a valid strategy. In fact, it probably has the highest payoff, albeit with the highest variance.
From my pov those are anomalies, rather than the norm.
For every Google, Youtube and Facebook, there are thousands of startups with similar strategies that fail.
I think it is safer to go the long route and start small, working your way to the top, charging a price right from the beginning. If your application is useful, users will pay for it.
When you're introducing revenue later, you have to provide extra value. This means more features and so you're endangering your core values.
When you're starting to charge for existing features, by limiting the free accounts, you will surely upset your existing users. Google tried to introduce advertising in YouTube videos, and the community was not happy about it ... and imagine a site like YouTube placing a limit on how many videos you can watch. No matter how hooked your users are, you still can lose them, not to mention that popular services like YouTube got cloned and there is competition waiting for those users.
People have been charging money or other goods in exchange for products/services since forever. I don't really understand this trend of releasing products for free. The only viable exit strategy is for your company to be acquired by a big player, but if you want your business model to be sustainable you should question this trend.
I exactly agree that they're anomalies...but they're by far the most profitable anomalies. Almost all the top websites grew users before revenue! High variance, high payoff. It is certainly safer to start small and grow revenue first; it's also likely not to produce the next Google (or Yahoo, or Facebook, or YouTube, etc.)
I think that is the exact difference between building a "small" business and a startup. Businesses are made to be essentially sustainable from the start (or at least soon after start). Startups are trying to become large in a hurry and are cool with losing a lot of money upfront to generate it later. Obviously however, there are a million examples of companies and businesses that blur the line.
-Youtube might have been fucked if it didn't get acquired. It was hemorrhaging cash like Pac Man Jones & Robert Downey Jr. trapped in a strip club.
-Flickr was _priced_ like a talent acquisition.
-Like most acquisitions, the Myspace acquisition has largely failed according to Google, their primary advertiser. Additionally, Myspace's contribution to News Corp's earnings have been piss poor.
I agree that it's a valid strategy (especially for a company like Justin.TV), but IMHO opinion most companies have tunnel vision when it comes to turning in to a real business. It almost makes them risk seeking. Although getting acquired is nice, it sure as hell isn't a strategy - it's a cop out.
I'm trying to come up with companies that tried this strategy and either worked (issued dividends continuously) or was acquired and actually benefited (i.e. was worth their acquisition price based on DCF) their acquiring company. I'm sure there are examples, I just can't think of any off the top of my head.
Listen, I understand that this is the kind of thing you might expect to read in a 1998 edition of Wired and does not fit with the 'getting real' mantra, but (at the very least) eyeballs are monetizable trough advertisement. It's a time tested strategy that has worked just fine in other mediums.
Sites like youtube and myspace did not need to worry about the monetizing part as they got acquired quickly, had they not, maybe the story would be different. I still can't think of sites with a huge and active userbase that failed.
Ugh that getting real shit makes me barf. Applying blanket statements like "you shouldn't need to take VC money" only demonstrates the tunnel vision of working on one business for so long. Much of their advice is very good, but there's too many absolutes for my liking..
Anyway, all I'm saying is too many people are applying the blanket statement "worry about monetization later" when not all of them should be.
In my opinion, it can be easier for businesses to reach the tipping point of paying customers (i.e. break even) vs. the tipping point of users (???, profitability?, acquisition?). I think MM touched on this.
Myspace hasn't show itself to be a real business yet and either has Youtube. I still can't think of user based acquisitions that have quantifiably proved themselves to be a wise decision, though I think Youtube will.
>In My opinion, it can be easier for businesses to reach the tipping point of paying customers (i.e. break even) vs. the tipping point of users (???, profitability?, acquisition?). I think MM touched on this.
Completely agree, but the possible payoff in the latter case tends to be quite higher.
>Myspace hasn't show itself to be a real business yet and either has Youtube. I still can't think of user based acquisitions that have quantifiably proved themselves to be a wise decision, though I think Youtube will.
I think that's hard to say. Take hotmail for example, while it might have not generated a $100 mil in revenues yet (or maybe it has?), I would doubt that the purchase was a strategic decision they regret over at Redmond. I think the same could be said for Youtube. If NewsCorp has regrets over the MySpace purchase, they are quite likely much more due to FB´s growth than to MySpace's current revenue.
If all these companies decided to grow users before revenue when they where a startup, it makes little sense to try to squeeze revenues quickly out of them, at the expense of user growth, once they've been acquired by a company with much larger pockets. I think the logical thing to do, in those cases, would be to continue the same growth strategy for a few years while calmly exploring ways to monetize them.
Startups that don´t get acquired are obviously more pressed to find a way to monetize quickly.
" Take hotmail for example, while it might have not generated a $100 mil in revenues yet"
I'd bet it's way more than that due to volume, brand recognition and since it directly circulates hotmail users to microsoft properties. But similar to you, I don't know either. However, I think that's a great example of a user acquisition that has worked so far - thank you - I was having problems thinking of examples.
Not to sounds too 37signally, but what about the freemium model?
I think it's great, but don't see it as a viable option for some products.
I also think micro-payments can be an option one day when someone gets around to making it less painful and more available. I think this will probably involve cellphone companies but I digress.
In any case, I think selling ads can be a very profitable route for others.
Google and Yahoo are both obvious successes. Amazon is another. One Google outweighs hundreds or thousands of failures. You can't dismiss them as merely "anomolous" - among the biggest internet companies most of them followed this strategy.
MySpace's acquisition hasn't failed: it's a profitable enterprise for NewsCorp and still growing. It paid back the purchase price in the first year! So that's a success, not a failure.
The jury is still out on YouTube, Facebook, and Flickr as to whether they will be long term businesses, so they are not yet data points one way or another. They are clear success stories for the founders though.
Amazon had a business model from day 1. I don't think they really apply to this conversation. They weren't profitably early on, but that's way different from not having business model.
"Among the biggest internet companies, most of them followed this strategy."
You could be right, but I honestly have no idea. What sources are you using? How are you measuring this?
"It paid back the purchase price in the first year!"
Microsoft - revenue before users, although their internet properties consistently lose money. Not really an internet company.
MySpace - users before revenue, success (MySpace is profitable already)
Facebook - users before revenue, undecided
Blogger - users before revenue, probably a success although google doesn't release numbers so it's hard to say how much money they make on it
Orkut - same as Blogger
RapidShare - users before revenue, success (very profitable freemium model)
Baidu - I'm not sure. I presume they follow the same path as Google did, but with an obvious example of how to succeed already in place.
QQ - users before revenue, success (virtual goods turn out to be a great way to monetize a free chat product in China)
eBay - revenue before users; they didn't make auctions free
Hi5 - users before revenue, undecided
In addition to being the biggest internet companies, these are among the most profitable. Several of the top 20 were acquired by other companies, making it difficult to judge how successful they would be independently. Several are still so new it's hard to tell. There's exactly one which took money over user growth (eBay).
Of the companies in that list the only one that I am sure actually turned a profit is Google. Youtube, Facebook, and MySpace don't have a business model. No idea about Flickr, but iirc they were acquired for a pretty low dollar amount.
Wow, way to call me out just as I am preparing for the GREs and grad school applications. In my defense, I've previously wanted to go to grad school also, and even then, because I wanted to meet more people that would be potentially good cofounders.
The cofounder issue is also why I'm not starting another company (yet). I thought about going to grad school, but now am looking more towards getting a job at one of the big tech companies in the Valley. That at least will get me into the right geographic area, and with any luck I'll find some smart coworkers or friends there.
"If we've learned one thing from funding so many startups, it's that they succeed or fail based on the qualities of the founders. The economy has some effect, certainly, but as a predictor of success it's rounding error compared to the founders."
This is confusing -- wasn't Y Combinator started in 2005? Was PG funding startups before that?
"What if you quit your job to start a startup that fails, and you can't find another? Good hackers can always get some kind of job. It might not be your dream job, but you're not going to starve."
Hmm, isn't that kind of a low bar? I worry that I'll be 40 before I know it, with no savings to show for my years of work. Isn't opportunity cost a concern?
I wouldn't go that far. Startups and freelancing in general present definite opportunities and advantages. But the risks need to be aired out more. Mental preparation makes success more likely.
I'm 26, married with a mortgage, car payment, student loans, etc. The economy isn't going to stop me - my wife is willing to sell our house at the drop of a hat if we have to, move to another city if we have to, etc. You sacrifice short term for the long term gain, and if you're married to someone that supports you, they ride the roller coaster with you.
I'm 39, married, have a 7yo daughter, but luckily no mortgage. But I have $425 on a savings account to balance off having no mortgage :-)
And I'm throat deep in a startup for 2 years already, it's just a beginning.
Starting up a tech company in lean times is certaintly different from any other business whose products are tangible. The startup and operational costs are much lower and surely, making wise choices the startup can outperform competitors.
Clicked through to Bountii, and then onto their API TOS, and found this:
"[you agree not to] use the Bountii API to operate nuclear facilities, life support, or other mission critical application where human life or property may be at stake. You understand that the Bountii API is not designed for such purposes and that their failure in such cases could lead to death, personal injury, or severe property or environmental damage for which Bountii is not responsible;"
My suggestion is to be sure to advertise and push your project especially hard when your competitors are dropping like flies. If you mearly hang on you will come out the other end with a whole new slate of competitors that will be funded so you need to be in a strong position to take them on.
I agree. Startups that start now and are able to come out strong after the recession would have proved their mettle and hence will be successful. Also, this is the right time to form a strong team, coz most of the good hackers are looking for something interesting to work on (less competition).
There is about to be a whole raft of federal packages for small plumbing companies; that is the real reason to get started. Apparently you don't even need a license.
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[ 4.6 ms ] story [ 276 ms ] threadOne thing that worries me personally about starting the "stereotypical" HN startup right now, is that I think the free/fremium model is going to lose steam FAST. My prediction is that you will see more companies trying to start monetizing their web-app soon. FWIW, TipJoy is well positioned to take advantage of this if my prediction is true.
Of course, I've always been a hardware/product startup hacker, but I've had a couple of rounds in software and Web 2.0 companies. So, I'm not as immersed in web-app funding cycles as some others here are.
I would look to solar and certain other viable alternative energy options right now as the next major tech growth sector. I think the tech startup world needs to see more "inventions" (again, admitting my own bias).
While many here may disagree with me, one of the problems with web-apps is that while they are cheap to get going (relatively speaking), I think that the saturation of non-revenue producing web-app companies, coupled with the low cost of starting them, will make many traditional VCs look elsewhere for their next investments. The web-app community needs more investors like YC, that keep the investments and process realistic.
Other fields (solar, biotech, whatever) might require way more money to start. For real stuff, like machines, not for swag and parties.
Having nothing than an idea, how do you convince a VC that you need a ton of money, given the current economic situation?
As we build, this point still amazes me. If you're willing to put in the time and effort, the cost is not prohibitive. Build in spite of the VCs, not because of them. If your product is good enough, users will force them to find a path to your door. And, of course, you still have a day and a half:
http://ycombinator.com/w2009.html
That was the point I was making with those examples: that technology evolves independently of the stock market. So if it's time to build the Apple I or Altair Basic, do it whether the economy is good or bad.
And that's the lesson for me. All I can control is my immediate situation. The other stuff is just noise best drowned out by hard work at things I enjoy.
You do touch upon this a little bit in your article, where you mention startups that save customers money will succeed more in a bad economy. But I thought the more general assertion wasn't made.
So it depends if you want to be "well off" (Stallman), "obscenely rich" (Torvalds), "shockingly rich" (Jobs), or "embarassingly rich" (Gates).
And I think that most would, given the choice, rather be the BDFL of a project they obviously enjoy (Torvalds), than spend all day in meetings, or managing management, or whatever Gates has done for the last decade. Unless you're a masochist, or a megalomaniac.
And besides that, lightning has to strike the same place 200 times before you make it to the 99.9th percentile.
"I'm trying to make a living; if you're trying to make a killing then you're stuck in the system."
I've heard rumors that Torvalds wishes he had the money Jobs and Gates have. So, yeah, a little unhappy.
>And besides that, lightning has to strike the same place 200 times before you make it to the 99.9th percentile.
That's if you're in a bell-curve. If you're in a zipf-distribution, lightning only has to strike once.
It's not a bug, it's a feature.
There are very good waves to ride right now. For example: Cloud computing, IPv6, Energy Saving, and moving everything out there to AJAX.
All of those will obsolete other technologies and most will save money.
Right. The next wave is further electrification, new power generation, and first world infrastructure renewal. New advanced rail and massive rail line build outs. Rebuilding sewage and water systems. Alternative energy. Revamping agriculture for expensive oil and scarce fresh water will also be a big hi-tech area.
I'm sure the garage hackers will make money here and there as part of the wave, but they will be auxiliary; not like with the PC or internet booms. The main stage will be the capital intensive stuff working with actual raw materials.
(Here, "better" = chance of becoming profitable, and relevant to the web, for the long term; "better" != chance of cashing out for megabucks within a year or two; i.e. "better" for me as a web user.)
A startup might be affected by:
Customers/market - These are not necessarily the problem. True. Particularly if you are evolving in this economy, Like a Neanderthal in an ice age. This point is probably neutral on average.
Investors - This may be a problem. This is a market that can shy. But only a problem if you need them. This point is negative.
Buyers- (Of some description) Definitely a negative. But you don't need them right away & you can probably be more flexible waiting for the right time. If Cockaroach doesn't do it.. endospore.
You can't have everything. Comeptitors - A plus. Fewer investors (including founders as the essay implies) by definition means fewer startups.
I'd also like to see more "inventions" (another good point from brk). There may be a certain amount of critical mass of development that has to happen around other technologies. The last 10 years or so have seen optimization in the development cycle for web apps, resulting in their relative low barrier of entry today. It could be my ignorance, but I don't detect the same level of commoditization in other industries. Of course, a higher barrier of entry is great for the people already involved.
Another way to look at the "inventions" issue is the rather quick evolution of non-web technologies to web accessible interfaces. We've seen this happen with telephony, video, radio, print, television, navigation, security systems, and many more, I'm sure. It's pretty amazing actually. I think you'll continue to see more of this over the next few years, so we'll all still have stuff to work on.
If the economy were good, the opportunity cost of building a startup would be a high paying job as a quant.
Since it's bad, all I'm missing out on is a shot at postdoc #2 or a faculty position.
PG has it exactly right. Startups are HARD and there are so many factors that are more important than the state of economy.
The odds of success are low enough with a startup already that the economy shouldn't really change the decision making process.
Sorry for the plug, I just thought it was funny that we're on the same side of the equation, when everyone else in the world isn't.
It seems to me that somewhere along the evolution of the internet we forgot the golden rule of any business:
If you make stuff people want, they'll pay for it (either directly or indirectly), and you'll make money. Recession or not.
In my experience, what's true of investors here is also true of potential co-founders. It's so much easier to get other people to work with you if your project is in a trendy field or appeals to the dominant logic of the afternoon. And it's really really frustrating.
/end rant
But I was thinking, "If the economy is stopping you, you're not the type to start one."
Up until this month, I've had trouble finding A-list programmers because I don't offer a large salary and benefits. This month, I've suddenly found it easier to attract high-skill employees and I expect it to get easier still as the recession deepens. Many are involved in loss-generating startups which they anticipate will soon fail as funding dries up. (Not all these experts choose to return to grad school...some, for instance, are too old for that culture shift or don't have liquid assets to sustain them.)
As you discuss, the recession may make it easier or harder for startups depending on their value proposition and their reliance on additional investments. I encourage you to write on how easier access to expert programmers changes the equation. In my case, I must decide whether to commit our resources to, say, hire another brilliant programmer because it's now possible OR to hold at our current headcount to maximize survivability.
Another variable is whether brilliant hires in this economy are likely to stick with the company when the economy improves in, say 12-18 months. An HR expert who's weathered a few of these cycles pointed out that while it's easier to hire good people in a recession, some of these hires are more likely to jump ship when the economy turns around. I think the description would be "fair weather hires".
Also, I know pg says that not being able to find a cofounder after a certain point signals a lack of competence or a bad idea, which is generally of correct, but also realize that in some areas finding a cofounder is literally 10x harder than in others-- independent of the merits of the founder or the idea.
EDIT: Just to be clear: That doesn't rule out enterprise applications. People in companies have needs too!
So starting up now, founders should ask themselves-- what's liquidity look like in 3-5+ years? The correct answer is, "I have no clue"-- but if you start now, you'll probably have a better shot at liquidity in 3-5 years because all of the other hackers went to grad school. ;-)
On the contrary, potential startup founders will have more reasons to think of their projects as businesses - trying to grow revenues, not traffic. And to get revenue, you have to solve real problems.
There is a hidden assumption in the above: it assumes that a startup's competitors are other startups, not established firms. Established firms have easier access to credit than startups. (They can fund new lines of business out of profits from existing lines of business, for example, which is a form of "access to credit" for the sake of this discussion, which is about starting new lines of business -- i.e., exploiting new markets.) This is a real disadvantage of startups relative to established firms, and the disadvantage gets bigger because of the economic downturn, but the disadvantage of being an employee of an established firm when lots of job hunters are in the market might get even bigger.
There are ways in which startups have been able to neutralize the funding advantage held by established firms. One big way is to be more agile. "Agility" means adopting new technologies and entering new market more quickly. Changes in technology and changes in markets and potential markets continue to occur during economic downturns.
Funny, you can take the exact same software and position it as a totally different product in a different economy.
Instead of "This software does a better job," imagine, "Our subscription fee is 10% your current cost of ownership. How will that affect your budget?"
Once your customers start shopping with a "recession mindset", you'll already be positioned before your competitors.
Without changing a single line of code.
More to the point: To me, a startup isn't about money. It's about freedom. That's where I've found much to like in his essays.
So who should start a startup? Someone who is a good hacker, between about 23 and 38, and who wants to solve the money problem in one shot instead of getting paid gradually over a conventional working life.
So writing about startups is always implicitly about making money. (Not that there's anything wrong with that.)
http://en.wikipedia.org/wiki/Law_firm#Salaries
Typically, you're about $160k in debt from law school, so the first year is spent paying that back. The next 4 years taken together is only $795k, nowhere near enough to retire for life. All the associate years together is only about $1.6M, still not enough to retire after 11 years.
Then you have to make partner; if you don't, you're out of the firm and usually have to set yourself up as a sole proprietor. If you do make partner, you're set for life, but at 11 years getting there, the road is nearly as long as becoming a tenured professor and usually longer than becoming a successful entrepreneur.
But back onto Mr. Graham: Since I'm a "hacker", I already know a lot of stuff he knows about software development, and in fact it's clear that I also know a lot that he doesn't address in his essays and probably isn't even aware of. I mean, I'm a video game developer who writes in Java on Windows machines, and I've got good reason to be such. Why should I pay attention to Mr. Lisp here who scorns Windows and has never used Java, and who doesn't even mention playing games, let alone programming them?* I'm sure I could learn some things from him, but he is ignorant of my world, however much he may know about his own kind of software development.
He is far from ignorant, however, about startups. And he's got interesting things to say about various other, non-technical subjects too. So let him talk about those!
* I suspect there are plenty of Mac fans and Lisp fans and C++ fans among this site's readers who could snappily answer this question. I do not have time to armor this comment against techie criticism; that would itself require an essay. Suffice to say that I claim I could if I wanted to. :)
And incidentally, it's not the making money aspect of startups that interests me the most. I'm mostly interested in startups as agents of change. We could right now be in the middle of a shift on the scale of the Industrial Revolution. Or not; always hard to tell from so close. But there is certainly something interesting happening.
"I'm afraid to say that admirers can be a tremendous force for conservatism, for consolidation. Of course it's really wonderful to be acclaimed for things you've done - in fact it's the only serious reward, because it makes you think "it worked! I'm not isolated!" or something like that, and it makes you feel gratefully connected to your own culture. But on the other hand, there's a tremendously strong pressure to repeat yourself, to do more of that thing we all liked so much. I can't do that - I don't have the enthusiasm to push through projects that seem familiar to me ( - this isn't so much a question of artistic nobility or high ideals: I just get too bloody bored), but at the same time I do feel guilt for 'deserting my audience' by not doing the things they apparently wanted. I'd rather not feel this guilt, actually, so I avoid finding out about situations that could cause it. The problem is that people nearly always prefer what I was doing a few years earlier - this has always been true. The other problem is that so, often, do I! Discovering things is clumsy and sporadic, and the results don't at first compare well with the glossy and lauded works of the past. You have to keep reminding yourself that they went through that as well, otherwise they become frighteningly accomplished. That's another problem with being made to think about your own past - you forget its genesis and start to feel useless awe towards your earlier self: "How did I do it? Wherever did these ideas come from?". Now, the workaday everyday now, always looks relatively less glamorous than the rose-tinted then (except for those magic hours when your finger is right on the pulse, and those times only happen when you've abandoned the lifeline of your own history)."
That's a really bad place to put yourself. My business ideas are pretty far from what I see discussed here, but I still get a lot of useful knowledge from hanging around. I'd say that the fact that the startups here are different from what I'm likely to do is valuable in its own way: forces me to see the common technology from another perspective and that itself generates further ideas.
Internet of things? ~ http://en.wikipedia.org/wiki/Internet_of_Things which Bruce Stirling has been writing about (Shaping Things, 2005) ~ http://en.wikipedia.org/wiki/Spime#Novels Ipso? (IP for Smart Objects) ~ http://www.google.com.au/search?q=Ipso+ip+smart+objects IP enabled things when IPV6 rolls out? These ideas are related to this article ~ http://news.ycombinator.com/item?id=333542
I'm guessing a lot of the revolutionaries in the Industrial Revolution weren't thinking so much about causing a revolution. They were "just" trying to get rich.
http://www.paulgraham.com/avg.html
http://www.paulgraham.com/road.html
http://www.paulgraham.com/gap.html
http://www.paulgraham.com/hiring.html
http://www.paulgraham.com/icad.html
http://finance.google.ca/finance?chdnp=1&chdd=1&chds...
Immediately after the dot com bust, they were acquiring companies and hiring like crazy. The general pace of the stock market had little to do with how they were performing. It was a bit surprising considering they produce an enterprise software package and you would expect sales to be heavily tied to the market. But they produced a quality product that people wanted, and were able to push the knowledge management/collaboration angle well enough that companies felt like it was an investment they were making.
You should have to explain how it's going to make money, no matter the economy. Founders need to stop thinking they can just magically monetize later after reaching one fobillion users. If it happens, awesome, but don't bank on it. Google was an anomaly, but you wouldn't know it from the attitudes of others towards them.
I agree that you shouldn't bank on getting this fobillion users and after that monetizing them. But that's because the real hard part is getting that much users in the first place.
That's not to say it's the only valid strategy, but it's certainly a valid strategy. In fact, it probably has the highest payoff, albeit with the highest variance.
I think it is safer to go the long route and start small, working your way to the top, charging a price right from the beginning. If your application is useful, users will pay for it.
Charging up front puts people off, whereas if you slowly incrementally introduce revenue later, they will probably be hooked by then.
When you're starting to charge for existing features, by limiting the free accounts, you will surely upset your existing users. Google tried to introduce advertising in YouTube videos, and the community was not happy about it ... and imagine a site like YouTube placing a limit on how many videos you can watch. No matter how hooked your users are, you still can lose them, not to mention that popular services like YouTube got cloned and there is competition waiting for those users.
People have been charging money or other goods in exchange for products/services since forever. I don't really understand this trend of releasing products for free. The only viable exit strategy is for your company to be acquired by a big player, but if you want your business model to be sustainable you should question this trend.
-Youtube might have been fucked if it didn't get acquired. It was hemorrhaging cash like Pac Man Jones & Robert Downey Jr. trapped in a strip club.
-Flickr was _priced_ like a talent acquisition.
-Like most acquisitions, the Myspace acquisition has largely failed according to Google, their primary advertiser. Additionally, Myspace's contribution to News Corp's earnings have been piss poor.
I agree that it's a valid strategy (especially for a company like Justin.TV), but IMHO opinion most companies have tunnel vision when it comes to turning in to a real business. It almost makes them risk seeking. Although getting acquired is nice, it sure as hell isn't a strategy - it's a cop out.
I'm trying to come up with companies that tried this strategy and either worked (issued dividends continuously) or was acquired and actually benefited (i.e. was worth their acquisition price based on DCF) their acquiring company. I'm sure there are examples, I just can't think of any off the top of my head.
Sites like youtube and myspace did not need to worry about the monetizing part as they got acquired quickly, had they not, maybe the story would be different. I still can't think of sites with a huge and active userbase that failed.
Anyway, all I'm saying is too many people are applying the blanket statement "worry about monetization later" when not all of them should be.
In my opinion, it can be easier for businesses to reach the tipping point of paying customers (i.e. break even) vs. the tipping point of users (???, profitability?, acquisition?). I think MM touched on this.
Myspace hasn't show itself to be a real business yet and either has Youtube. I still can't think of user based acquisitions that have quantifiably proved themselves to be a wise decision, though I think Youtube will.
Completely agree, but the possible payoff in the latter case tends to be quite higher.
>Myspace hasn't show itself to be a real business yet and either has Youtube. I still can't think of user based acquisitions that have quantifiably proved themselves to be a wise decision, though I think Youtube will.
I think that's hard to say. Take hotmail for example, while it might have not generated a $100 mil in revenues yet (or maybe it has?), I would doubt that the purchase was a strategic decision they regret over at Redmond. I think the same could be said for Youtube. If NewsCorp has regrets over the MySpace purchase, they are quite likely much more due to FB´s growth than to MySpace's current revenue.
If all these companies decided to grow users before revenue when they where a startup, it makes little sense to try to squeeze revenues quickly out of them, at the expense of user growth, once they've been acquired by a company with much larger pockets. I think the logical thing to do, in those cases, would be to continue the same growth strategy for a few years while calmly exploring ways to monetize them.
Startups that don´t get acquired are obviously more pressed to find a way to monetize quickly.
I'd bet it's way more than that due to volume, brand recognition and since it directly circulates hotmail users to microsoft properties. But similar to you, I don't know either. However, I think that's a great example of a user acquisition that has worked so far - thank you - I was having problems thinking of examples.
Not to sounds too 37signally, but what about the freemium model?
I also think micro-payments can be an option one day when someone gets around to making it less painful and more available. I think this will probably involve cellphone companies but I digress.
In any case, I think selling ads can be a very profitable route for others.
MySpace's acquisition hasn't failed: it's a profitable enterprise for NewsCorp and still growing. It paid back the purchase price in the first year! So that's a success, not a failure.
The jury is still out on YouTube, Facebook, and Flickr as to whether they will be long term businesses, so they are not yet data points one way or another. They are clear success stories for the founders though.
"Among the biggest internet companies, most of them followed this strategy."
You could be right, but I honestly have no idea. What sources are you using? How are you measuring this?
"It paid back the purchase price in the first year!"
Wait, what? Revenue or profit? Revenue > Acquisition Cost != success.
"They are clear success stories for the founders though."
Definitely, which is probably the most important thing of all.
Yahoo - users before revenue, success
Google - users before revenue, success
YouTube - users before revenue, undecided
Microsoft - revenue before users, although their internet properties consistently lose money. Not really an internet company.
MySpace - users before revenue, success (MySpace is profitable already)
Facebook - users before revenue, undecided
Blogger - users before revenue, probably a success although google doesn't release numbers so it's hard to say how much money they make on it
Orkut - same as Blogger
RapidShare - users before revenue, success (very profitable freemium model)
Baidu - I'm not sure. I presume they follow the same path as Google did, but with an obvious example of how to succeed already in place.
QQ - users before revenue, success (virtual goods turn out to be a great way to monetize a free chat product in China)
eBay - revenue before users; they didn't make auctions free
Hi5 - users before revenue, undecided
In addition to being the biggest internet companies, these are among the most profitable. Several of the top 20 were acquired by other companies, making it difficult to judge how successful they would be independently. Several are still so new it's hard to tell. There's exactly one which took money over user growth (eBay).
One quick nitpick: I'd argue Rapidshare had a business model before users, even if it technically had users before revenue.
This is confusing -- wasn't Y Combinator started in 2005? Was PG funding startups before that?
Hmm, isn't that kind of a low bar? I worry that I'll be 40 before I know it, with no savings to show for my years of work. Isn't opportunity cost a concern?
Perhaps PG really is writing for the young.
Clicked through to Bountii, and then onto their API TOS, and found this:
"[you agree not to] use the Bountii API to operate nuclear facilities, life support, or other mission critical application where human life or property may be at stake. You understand that the Bountii API is not designed for such purposes and that their failure in such cases could lead to death, personal injury, or severe property or environmental damage for which Bountii is not responsible;"
Me he heeeeeee
(I did once use Java for offline processing of data at a nuclear reactor research facility, but human life was obviously not at stake.)
Eh? Every expert I've heard lately is fearful we're headed towards a repeat of the great depression. The one during the 1930s... not the 1970s.