There definitely is. People are running around chicken-litteling like the sky is falling. In the meantime, I'm bootstrapping a services company because the person that provides the megaphones while everybody is screaming at the sky is the one who makes the money.
It's not just less competition, it's the extant players in any market assuming there is less competition and getting blindsided by upstarts.
> For years I've been telling founders that the surest route to success is to be the cockroaches of the corporate world.
This has always seemed incompatible with the VC model, which involves raising a ton of money, putting the company on an 18 month clock, spending the money so you can hit key milestones, and then raising even more money when the clock runs out.
I have heard of a few companies that were on the VC track, raised money, and stayed frugal. But my impression is that investors want to see you swing for the fences, which involves spending all the money they invested, and fast.
You shouldn't need VC to start (maybe ever) and probably shouldn't be thinking about it until you've got some traction and customer validation - which can take some time.
Uncommon. You're right. This advice just doesn't work for most startups.
If you're pre-seed stage, in Silicon Valley, and the founders have a "good" background (the right companies, knowing the right people, etc), then sure you might raise a small round. If you're any later than that, or anywhere else in the world, you need results, and results don't come as easily in a recession.
Depending on your segment it may be easier to sell products in a recession. Tools which cut cost and are below a certain monthly spend actually become easier.
So is this something PG wrote before YC was so deep in the VC ecosystem, and that's why it makes sense for him to have said? What would he have advised a startup to do back then, after raising a $2M round? Would he have told them to keep their burn rate low enough to stay default-alive?
If you compare the pg essays from 2000-2010 to 2010-now, there's a very noticeable shift in tone on this exact topic, even moreso if you zoom out of pg and consider YC messaging then and now.
Tons of old pg essays sound straight from something like Indie Hackers or Microconf with their "avoid raising VC money" angle. He even literally predicts the death of VC in web SaaS, saying "investors aren't worth the trouble": http://www.paulgraham.com/divergence.html .
His YC cofounder Jessica Livingston wrote a book "Founders at Work" and about half the founders in the book are bootstrappers (DHH, Joel Spolosky, Craigslist). The other half are mostly founders recounting horror stories of interacting with VCs.
Compare that to modern YC where there are videos where they say _everyone_ should consider applying to YC with the _only_ exception being people that want to bootstrap. Modern Startup School says: "Without startup funding the vast majority of startups will die." (https://www.ycombinator.com/library/4A-a-guide-to-seed-fundr...).
There's something very important to note which is that YC did not change the deal from 125k for 7% to 500k for 7%. It's still 125k for 7% plus 375k worth of equity on your next raise. Which only makes sense if there is a next raise. So obviously they discourage bootstrapping since their whole model has been built around you raising at least one more round after YC.
Seems a pretty simple case of "follow the incentives." YC basically became more of a traditional VC over time. And I think pg was still closer to a founder in the early 2000s, from a founder perspective, it's more of a set of tradeoffs whether you should bootstrap or seek VC. But from a VC's perspective, obviously they want you to seek VC since they can't get involved if you bootstrap and bootstrapped startups won't get the outsized returns they need.
My opinion is, pg is a smart guy, there's still a ton of wisdom to learn from in his essays, but as with every other person on the planet, consider their motivation and incentives for telling you what they're telling you.
Also worth noting the 14 year tech bull run and ever increasing amounts of capital looking for a return. In 2000-2010 it was in many ways easier to bootstrap as everything was smaller, complexity was less with simpler browsers and no smart phones, UX expectations were less, and salaries for software engineers were more in line with average professional salaries.
Not that I disagree with your assessment on pg's incentives and YC's change in position over time, but the environment for software startups is also materially different now that affect you whether you take VC money or not.
Key costs like hosting are way cheaper, back then you probably had to rack server in a data center, now you can deploy a free/cheap PaaS with a free/cheap database while you find PMF.
Marketing is way cheaper, social media is a grind but it's a game you can play to acquire users/customers for _free_.
There's more stuff going on online, more people, more businesses, more everything. Think about the entire "creator economy", other bootstrappers, Shopify sites, etc.
Yeah some stuff has gotten harder, more platforms, higher UX standards. But on the whole I'd rather bootstrap in 2023 then 2010.
> Key costs like hosting are way cheaper, back then you probably had to rack server in a data center, now you can deploy a free/cheap PaaS with a free/cheap database while you find PMF.
Back in the day I have delivered several different cheap 1U rackmount servers to data centres. Once took one - using public transport - to whatever suitable spot in the Docklands in East London. Travelling on the DLR with a server under one arm was a a memorable experience.
Long story short: you can do a lot from a $1000 server, if you put your mind to it.
Yet these days it seems PaaS is better, (over-)paying GCP/AWS/Azure, while you grope around to find a product that will sell for $$$ before your cloud credits run out?
Back in 2009 I had a dedicated server for $89/month
It wasn't the greatest thing in the world, but it was dual-core, 2GB RAM, 160GB HD. I ran a small forum, email server, and a couple buddies used it for shells and running whatever PHP apps they wanted.
Does the current VC model only work in a bull run driven by cheap money? One the one hand cheap money driving growth of unprofitable startups subsidizing a market and on the other hand cheap money is ready to acquire these firms and /or invest in them once they IPO...but this only works if money remains cheap and in plentiful supply.
I wish this comment was on the top level comment in this thread. The divergence of pg from his original message is really sad. The more you gaze into the abyss, the abyss gazes back into you.
This is an excellent point. I'm with you - I still trust his advice if not for his judgement for the fact that the sample population of startups he's worked with is so high.
But this bias is there. I'd wager if YC started HN today, it wouldn't be called HN. That name is uniquely related to the times YC & PG came into.
I think you're right, but I think it's unsurprising.
It's a bit like trusting an insurance broker's opinion on your own personal insurance necessity -- it'd be unsurprising to me for a broker to tell me that I need the most comprehensive (expensive) plan that they sell.
To a cynical curmudgeon, it is a pyramid scheme for 100% of startups. To normal people, it is a pyramid scheme when you have a company like Theranos, which represents a very small percentage of dishonest founders in technology, overall.
The key phrase is "in a downturn". When it is not a downturn, VCs encourage startups to grow at all costs. And it's extremely difficult to change course. VCs can change advice overnight but companies don't have that flexibility
Bootstrapped small businesses can have the same scaling potential as startups. They just value sustainable growth over business fragility. It seems foolish during summers but that mentality allows bootstrapped businesses to survive winters in a way that startups can't.
> small businesses can have the same scaling potential as startups
Usually not. Most small businesses have geographic limits to their scaling potential. That said, yes, there are niches where small businesses will beat a start-up competitor, at least in the short run.
I think you are missing the bigger point. VC money puts pressure to grow at any cost and very quickly. That takes away the freedom founders/teams could have to do a few things at a different pace and more sustainably which can still lead to scaling. VC = fast or die. No middle ground. But there are ways to scale even without that level of pressure but VC doesn't allow that.
More time. There are examples of bootstrapped businesses that may be took a decade to get to first few million which will be dead in VC terms. But they continued and got to 100s of Millions. VC model would tell them to kill it if after a decade, they were doing a lousy couple million in revenue even if on the right path with PMF.
It happened last year to my current employer. It also was the 20 years anniversary of the company.
Everything changed and I’ve seen it change from a
small agile business with nice people to a baby corporation with up or out mentality, useless processes everywhere, harassment methods from HR department. In one year, VC money created as many millionaires as employee burn-outs.
I don't think any VC would back a startup to get to 2M in 10 years. They may do it as a nice gesture if they were failing anyway but no VC would want that outcome after a decade. One example: Gumroad. The investors were nice to let the founder keep going while they let him buy them out for like $1 or something. Today Gumroad is much bigger and decently successful company. Mailchimp was bootstrapped for many years with a service component. If they had raised VC money, they would have been forced to pivot or die early.
That's an interesting question. If you are dead set on being frugal and don't need help from your investors (in the form of introductions, etc.), then you could draw a line in the sand and refuse to cross it.
If things don't go well, it would probably be hard to raise money for a future startup, due to the reputational damage of not having followed the VC playbook.
If things go fine, the VCs would probably say you could have grown even faster by spending faster. And what's considered a 'fine' outcome for you (selling for $15M with 1/3 for you) is not considered 'fine' for a VC whose model requires bigger wins — even if they take much longer.
You might be able to raise seed money from VCs and not swing for the fences. If they are good VCs, they aren't depending on their seed investments to all necessarily pan out within a few years, if there is good reason to be more frugal. Series A+ is a different story.
Not on all cases, but I personally know one startup where the VC told the investors to hire as many people as possible, regardless of whether they were actually needed. This anecdote seems to ring true with what I hear elsewhere.
No VC is telling companies to just to wastefully hire people they don't need. That wastes money and creates friction and bigger problems inside of a company.
They do tell you to hire aggressively, and you often present them with a model that shows _how_ you will use the money you raise, and sometimes you hire too many people on accident. But no VC is pounding their fists on the table telling founders to explicitly go hire people that aren't needed. That's directly against the interest of both the founder and the investor.
That was the way in the days of negative interest rates, and cheap and easy money. We are headed for the greatest contraction of capital since the great depression soon[1], and that will no longer occur.
1. According to Zeihan, who points out that with the retirement of the boomers their 401k accounts that have been funding all this money are going to get cashed out and withdrawn, reducing the amount of money for lending, leading to an overall capital contraction.
What is the difference between a startup and a business nowadays?
I can start a business without an investment round, but not a startup? Is it a startup if it involves tech, a business if not? What if they use SOME tech, but not necessarily innovative tech? Or is this one of those 'you know it when you see it' kind of things? Has the term startup become a buzzword like "optimize" or "synergy"?
Seriously asking, not being snarky.
edit: thank you, for the responses that clarifiesthe distinction
According to PG, a startup is a company designed to grow fast. [1] Again, this is a bit at odds with the advice to be frugal. It's not that you can't do both, it's that you have to strike a balance because they are in many ways at the opposite ends of a spectrum.
> I can start a business without an investment round, but not a startup?
The answer around me seems to be that a startup comes out of an idea without the capital worked out. That the equity they have to offer is worth nothing, unless they execute the plan with money they don't have.
If you have the capital worked out, you can go ahead into the business phase of the process right away, where profitability is king and there's no plan needed to answer the "how to raise more?" question.
A lot of what we associate with startups is the justifications towards raising and a lot of what we see from a "business" is geared towards margins.
For instance, better margins by extracting more profits on a lower revenue is better for one, but looks bad for the other.
My colloquial understanding is that Startup is meant to grow fast, Business is meant to grow slow.
Some of the causes and effects:
1. New business may have a proven business model, customers, product, market. Startup may have to find or create any of those
2. New business may have some capital to build/invest itself (I've worked in a restaurant, saved up, now opening my own). Startup is based on idea/people/work, but likely has no internal capital
3. Both have risk; but in some ways New business risk is known & understood. Startup's risk may be as undefined as their product/market.
As frequently used, there's also a
4. Expectation of profit / failure rate. A new business would be happy to succeed with small profits, certainly very much over bankruptcy/shutdown. Startup ecosystem/expectations are built around fail or succeed wildly.
I think the first point is probably the most differentiating characteristic. Startups are typically about innovating, doing something differently from what's expected or the norm. Typically, but not always, this leads to disruption in the domain if the startup is successful. But it should always be about innovating or attempting something different in its domain, otherwise it's just another business.
the word "startup" has been a buzz word since ~2012 from my perspective. Ever since I saw established companies start to describe their approach as becoming more "startup-like".
The grow fast part is key. If you can out spend your competition and out grow them it is much easier to monopolize your market. That is how you become a FAANG. Not all businesses have that potential however - which is why so many fail. Failure in this case does not necessarily mean the business is not successful - simply not successful enough.
I'm not a business person, but I always assumed "startup" meant that you take venture capital. That in turn means you now have a financial need to grow to a certain size for the investors to recoup.
Yeah, I know of some that have pivoted at least once and are still alive and kicking. I wonder how YC thought through the costs/benefits of increasing the invested amount so much.
When you start your startup, you are by definition pre-PMF. There is only a weak relationship between what you spend and what comes out the other side. Once you're post-PMF this changes and you may need to jack up the spending in order to grow as quickly as possible.
Lots of companies screw this up and scale up spending when they're pre-PMF. In 2021 those companies could keep raising, but now they're probably going to die.
Pre-PMF companies need to experiment and nail down their PMF. So what should they be spending on, and what shouldn't they be spending on? I assume conference booths fall into the latter category. Is there anything other than product dev and design that falls into the former? Where does marketing land, in order to make sure enough people are in the funnel to be able to meaningfully experiment and gather data?
IMO sales and marketing expenses should be minimal—essentially limited to testing different channels to see if they work.
I'm sure this depends on the business but I'd say if you need a lot of marketing spend in order to experiment it's a sign that you may not be enough of an expert on where to find your customers and you either need to find a way to gain that expertise or pivot to an area where you already have it.
IMO start up or not depends on growth, growth in terms of learning the product/industry. Many VC funded companies achieve growth by throwing money on to problem, which works. But if you manage to out learn your competitors while still staying alive, essentially being cockroach, it is still start up.
VC care about three things: percentage of ownership, growth, and a liquidity event.
If a startup doesn’t need the capital to grow, they’re not likely to take on VC funds. If they do, the startup will need to sell equity, which based on funding round have norms based on equity given for capital received. If the startup is frugal with the capital, but still manages to hit growth targets and reach an acceptable liquidity event for the VC, then any unspent capital would only add to the valuation of the company.
Is that common, no, but it does happen; if it does, generally means founders gave up equity unnecessarily. Regardless, VC measure ROI on capital invested in the startup not if the capital they invested was spent by the startup.
We've bucked this trend at auxon.io, and for the large part it has been stalwartly supported by our investors. Quality pre-seed and seed stage investors seem to have a different mantra than is being expressed here. Though I've certainly encountered investors who typify the criticism here. However, what I heard a lot of from our investors is something more akin to, "The biggest killer of startups is premature scale."
Somewhat amusingly now that the capital environment has shifted dramatically, we have investors coming around who used to give us side-eye for being discerning and fastidious (and also our investing resources early to acquire government & adjacent customers), but now they treat us like secret geniuses or something. Because we have a reasonably stable baseline to build from. We're aligned with key markets that continue to spend money even during down markets and recessions. Not to mention we're also not in crisis having to massively disrupt progress and morale by laying off a bunch of people (in fact we're hiring, though still judiciously of course), which is HUGE since team and execution is everything.
You can also just not take VC money. There are a couple of ways to do this:
(a) Work at a big co, save a boatload of money, quit after a few years, and then fund it yourself without the bullshit coffee chats* and 18-month clock.
(b) Work somewhere that has good work-life balance, pays you enough, is okay with you spending your free time doing something that doesn't compete with the company, and then build it on the side until it makes enough money to replace your day job, and only then quit your day job.
* There are good VCs out there, but 95% of VCs will waste your time, and you'll have to wade through them in your search for funding. The amount of coffee chats you'll go through will literally destroy your company because you won't have time to do real work.
This is easy enough to understand when you decouple “success” vs “VC success”. If you survive as a business long enough you’ll be successful almost by default. It might not be the next Facebook, but it should net you a nice life.
However, a long-lived, yet non-home-run business is actually a negative in a VC portfolio. Because of the nature of VC, they need big wins to give returns to their fund investors. Their model intentionally decreases average success probability for a business as a filtering mechanism to find big wins as quickly as possible, so they can provide those returns to their own investors on an acceptable timeline.
You can push back in the early stages before >50% board dilution (and this is who pg assumes is his audience), but typically founders are very willing participants in all the spending
If there is true intrinsic value in the company’s offering, I wonder if there’s opportunity for fully bootstrapped startups to thrive. Maybe the growth isn’t explosive, but it might be more sustainable.
I mean it will be harder to raise capital extensive seed rounds but i'm sure small seed rounds will still be fine.
As in I would be really shocked to see a new Uber for X or grocery delivery startup raise tens of millions right now, but yes small teams building something that isn't very capital intensive will likely still be able to raise money.
There's a theory that I've seen on HN: in the event of a civilization-destroying apocalypse, future civilizations will find it incredibly harder to industrialize, because our current society has used up all of the cheap energy supplies and easy to extract mineral resources.
I wonder if that is applicable here as a metaphor.
I've seen that theory here too. A counterargument is that we've also brought a lot of valuable resources to the surface. Industrialization may simply be 'differently hard'.
To apply that back to the metaphor, it's also said that one salutary side effect of the dotcom bubble is all of the infrastructure built during it, such as high-speed fiber, which were fundamental for the Web 2.0 wave. So perhaps that is the "surfacing" of resources that a later tech boom- our boom- profited from.
I've pondered this from the perspective of the Fermi Paradox; that Earth had a really fortuitous series of events where the planet went down one line of flora/fauna evolution that, despite millions of years of evolution didn't to our knowledge amount to intelligent life; experienced a global apocalypse which allowed that (plus later/earlier) flora/fauna to decay and become an easily available source of energy; then had a second line of evolution which did, for whatever reason, result in intelligent life; which now has access to all that energy from the last iteration.
To me, that's a really convincing explanation for the Fermi Paradox. There may be other intelligent species out there, but evolution on earth seems to have a history of producing killing machines (and crabs. its always crabs). So, the gate to get to intelligent life isn't probable; and then you hit the gate of "does that intelligent life have enough local resources to escape the gravity well of its own planet", a gate which for earth practically required a prior chain of hundreds of millions of years of evolution, and an opportune asteroid impact to clear that chain out and make way for a new one to roll the dice again.
The mitigating factor for the second gate is: There could be other resources which could provide the power to escape a gravity well independent of biological decay (e.g. uranium, hydrogen). But at least in human history: think of what it took for us to fully understand how to harness oil, let alone uranium or hydrogen, create a rocket, and get to space safely; we did that with the tremendous benefit of plentiful hydrocarbon resources (global shipping, computers, mining rigs, plastic, etc). At minimum; a species without this advantage would take a lot longer to get to our level; but we did it in just a couple hundred years.
Universal timescales help, but they also work against; as the earth has showcased, planets get bombarded by civilization-ending asteroids often. So, either an element of luck, or: a species has to have these structural advantages, and apply them for the purposes of asteroid defense before the next one hits; or its all over and the clock resets.
Point being if I were a betting man: there are probably between 1 to 4 civilizations in our galaxy (including us) which have reached a similar or greater level of technology; but a great number more that are functionally trapped in a steampunk age, unable to escape their own planets.
My other more fringe theory for the Fermi Paradox, which to be fair is practically the entire plot of The Last of Us, is: that the Apex Predator on every planet that is capable of evolving carbon-based life is Fungus. Eventually, Fungus always wins; and takes intelligent civilization with it.
The two examples given early in the article, Apple and Microsoft were basically both started by a couple of guys in their garage. Not a whole lot of capital was needed initially. Sure, in later stages of both companies capital was needed, but the initial development stage were mostly self funded (some loans from parents likely involved at some point). Capital was way more expensive in the 70s when both of these companies were founded than it is now.
According to Wikipedia, he joined an existing law firm, and his name was added to the firm's name. [1] That firm later merged with other firms, and continues to bear its name even decades after his retirement. I imagine he/they made a good deal of money on their client Microsoft, especially during their antitrust trial!
It's a beautiful story of nepotism and rent-seeking.
Bill got the job from a powerful friend of his mother, bought someone else's work outright, customized it, and licensed it to IBM on incredibly Gates-friendly terms (pay per-unit, non-exclusive license).
> Mary was a respected businesswoman with many responsibilities, including her membership on the board of nonprofit organization United Way of King County. There, she met the late John Opel, then-chairman of IBM, who also was a member of the United Way board.
> IBM's talks with Digital Research started to flounder, and when assessing options, Opel remembered Microsoft as the company "run by Bill Gates, Mary Gates' son," according to The Seattle Times.
> When Microsoft won the job, it didn't actually have an operating system of its own. So in 1981, the company bought QDOS, an operating system created by hardware company Seattle Computer Products, and with it developed MS-DOS, the Microsoft Disk Operating System. Microsoft licensed its MS-DOS to IBM to use as the operating system for its personal computer. (In addition to Microsoft, IBM also contracted Digital Research and SofTech Microsystems to use their operating systems for IBM's personal computer.)
I mean isn't even "bad" right now at all by most measures. Employment is still very strong, growth is slowed, but not stopped. Only inflation is elevated. The two things that incentivize starting a business in a recession are low rates (more VC money available) and high unemployment (cheaper, freer labor) and we have neither of those. Even after dumping 100K or so engineers on the market, that is barely enough to soak up all the undersupply of the past 5 years.
Then you just need to find an angel investor. The capital has to go somewhere. The wealthy aren't just going to leave their money in publicly-traded stocks, they want some risk in their portfolio.
Not really sure how this advice is still relevant since Facebook with its own app store model helped save the tech industry in 2007 from the downturn like the one in 2001-3.
The next big thing appears to be AI (not VR), but I don't really see how it can really compete with that historic low cost startup. What would a MVP AI even look like? Would it only be a good AI part of the time? We already have that. Try using Siri.
> That was the task for some Stanford students in the fall of 2007, in what became known here as the “Facebook Class.”
> The students ended up getting millions of users for free apps that they designed to run on Facebook. And, as advertising rolled in, some of those students started making far more money than their professors.
> “Everything was happening so fast,” recalls Joachim De Lombaert, now 23. His team’s app netted $3,000 a day and morphed into a company that later sold for a six-figure sum.
> Early on, the Facebook Class became a microcosm of Silicon Valley. Working in teams of three, the 75 students created apps that collectively had 16 million users in just 10 weeks.
And it's astounding how much Facebook apps have been forgotten, with Meta's neglect and abandonment of their own platform. Not that it was a technology with an extended lifespan anyway, users were only going to stomach endless notifications from FarmVille and Mafia Wars for so long.
I wouldn't say Facebook apps were forgotten as much as actively suppressed by Facebook after a certain point in time.
In the early days of the platform app developers had a huge amount of freedom in terms of accessing users' social graphs, pushing notifications to timelines, and so on. It made it incredibly easy to build a viral loop and push out an app that spread like wildfire.
Obvious downsides to that - big privacy issues, and annoying users with endless notifications like you said. Facebook had to start restricting what app developers could do, and once that happened it became much harder for apps to get traction.
2008 was a huge outlier though. This was the start of the hugely lucrative cloud, app-payment, SAS, smartphone, 4g, app-store, social networking, mobile confluence. Also, low interest rates forever. A typical bad economy is not like 2008. But sound advice
Yeah, I think the last two recessions just happened to have coincided with a technological revolution (the internet, then mobile) - and were managing our way out of the recession by reducing interest rates, which spurs growth.
It's worth looking at the current macro climate through the lens of what is different, not what is the same. It remains to be seen if we land a meaningful revolution this time: lord knows it ain't the blockchain, but will it be AI? The other difference is as you point out, we're raising rates into this recession not lowering them. The intent right now is to slow growth and destroy demand making this an inherently more challenging time start.
Which problem has AI solved so far that has led to cost savings without sacrificing customer experience? Or an application where AI led to more profitable sales?
Ah to be clear I didn't mean to imply there was not going to be one (or many). I think those are broadly extremely promising areas even if I'd quibble with the inclusion of one or two of them. I'm eager to see how this all plays out.
Those are (except for one) all things that have been about to be massively revolutionary any day now for my entire life, and I'm in my 50s. Recessions generally only last for a few years, with a few more years of hangover after that. Lets say in the 3 to 5 year range before we're (hopefully) solidly into recovery. For a technology to actually make a material economic difference in that time frame it needs to have been out of the lab and going into mass adoption right now.
In 2008 the iPhone was already out and the App Store was launched that year, but arguably the smartphone didn't become a significant economic factor until around 2012. All the other services paulpauper cited as playing a role in the post 2008 recovery had been out for years, some of them almost a decade, but they just hit critical mass where they became economically impactful around then.
Green tech is the main exception, it's solidly into the steep phase of the adoption curve and has received a massive boots in investment in the last 12 months as a result of the Inflation Reduction Act*, plus the Ukraine war and the pivot away from Russian hydrocarbons.
* Gotta love US bill names. You just know the "Cute kittens appreciation act" is going to cull and stuff all the cute kittens.
Well, every company is looking to save money and be more efficient. Meanwhile we're having technical and inflection point breakthroughs in AI-powered language and image models.
I wouldn't be surprised to see a crop of start-ups focused around that space.
On the other hand, things indeed did suck terribly bad in terms of funding, job market, etc. back in 2008-2009. A lot worse than in an average recession.
It’s probably cheaper now to get a sublease on commercial real estate or a lease in a class B/C building in most parts of the US than renting the equivalent sized residential garage. It certainly is in SF at least.
I don't know much about commercial real estate, so I checked LoopNet for my area. If you're not picky about the neighborhood, I'm surprised how cheaply you can get a garage-sized space.
This. People underestimate how much technological progress has been slowing every decade. 2008 was even slower than 1998, which was even slower than 1988. Meanwhile almost nothing new has happened since 2013.
VC has unfortunately pushed forward a model that rarely helped building sustainable businesses, but rather grow fast, build hype, IPO, cash out move on
model. It definitely benefitted few at the expense of many.
People have accepted to work tireless hours for peanuts and paper money
with the promise they will become rich: this rarely happen. Don't buy the
hype. It is more the exception than the rule.
Many multi billion dollar VC funded business are still not profitable
and often don't have a path to profitability.
Both of the companies cited as examples early on the the article, Microsoft and Apple were basically started by a couple of guys in a garage (or dorm room). VC wasn't involved until later stages. Probably most of their early funding came from parents. There are plenty of things that don't need VC funding to get going - they can either be self-funded or with loans from relatives in the early stages. At some point the decision can be made as to whether VC is needed to expand or if it's just fine to stay small.
In the 90s my wife worked at a software company that makes scientific imaging software. They have a nice niche and continue to sell their software into academic and research labs. They never had more than about 7 employees - now about 5. It's a decent business that never needed VC funding and has gone for about 30 years now.
> Probably most of their early funding came from parents.
Perhaps VC is an equalizer here. It makes it possible for founders (like me) to start the next Microsoft without having to rely on privilege.
I understand allocation of VC resources has its own privilege issues but I'll take that slightly more accessible world over a world where your family determines the outcome.
Apple had Mark Markkula and Don Valentine, now-legendary VCs, investing at or near the company's incorporation (this is 8 months after Jobs and Woz started working together and after they had released the Apple I, funded by Jobs and Woz's personal funds).
Exactly. But then most of the Valley was founded this way. The historical precedent was set in 1957 by Fairchild Semiconductor, the engineer founders of which went on to found other companies (Intel) or VC firms (Kleiner Perkins).
Just to add on, Microsoft never actually needed VC money if I remember correctly. Gates got VC funding more for the connections than needing the money.
I think this is the old way of thinking in the VC world. Yes, it still happens, but I think enough VCs have been burned by garbage deals that they are starting to look under the hood more carefully. No VC wants to be funding the next Theranos or WeWork. Bad economy doesn't mean going back to 2008 funding levels. I think a bad economy today means that the companies being created need to have a viable path for growth as well as profitability.
> No VC wants to be funding the next Theranos or WeWork.
All things being equal, you’d rather not fund failures. But VCs care more about missing Facebook than getting conned by FTX. Most of their investments go to zero anyway.
>but rather grow fast, build hype, IPO, cash out move on model
you missed the step where you completely destroy the established market, and then when you're the only game left in town, make for a more expensive and/or worse product/service than what existed before.
I’m ignoring even “existing market destroying” and just looking for tech companies that are even consistently profitable that went public in the last decade.
No matter whatever else I accomplish I will still die. I won't get any more years. Better to fail quickly than slowly.
It's not about getting rich. It's about being able to give yourself a realistic shot at each of many things you care about. If I do the slow path, I get maybe one or two shots and if I'm not ready for that industry or if I fuck it up, I'm borked. Succeeding or failing fast lets me do this the way I have succeeded at everything else: trying many times.
But this is pointless. Those who get what I'm saying need no convincing. Those who don't can't be convinced by me.
I think, in that case, the slow and steady ones will outcompete us rushing few and all will stabilize soon. Until then, I'll be seeing you guys on the playing field.
> that rarely helped building sustainable businesses
I think this falls under the founders' shoulders. Some founders tried to "hack" their way to "fake out" large growth that they themselves know are not sustainable, just so they can fool the VCs they are raising money from.
"But it doesn't matter much either way. It's the people that matter. And for a given set of people working on a given technology, the time to act is always now."
So agree with this sentiment. It matters less about when you start a company. It's how you execute. You might be building something very timely, but if you can't scale then it hardly matters whether there's a recession or not.
It's an open secret that investors get 20% of the upside for 1% of the work of founders. Parrot enough plausible nonsense to impressionable people to get favorable investment terms and you're well on your way to monetizing your position as a newly minted thought leader.
It's also an "open secret" that investors lose their investment when the founder fails. In addition, more than 90% of VCs are money losers, overall. Founders are taking the risk with their time, investors are taking risk with their money.
Investors are taking a risk with other peoples' money. And their management fees usually cover very juicy base compensation, so their downside risk is minimal.
It's irrelevant to some degree if this growth is real (driven by a better product), or inflated (by offering steep discounts, ads, marketing, etc).
It looks good on paper, and allows raising the next round. This is of course an order of magnitude bigger and demands even more growth. VCs look like geniuses in that case. Value of fund goes up, fees go up. Until they don't.
I would say whether PG is right or not depends on how much initial funding the founders have and what they're trying to build.
If you have not a lot of savings to live from, and your runway is therefore short, you'd be stupid to quid your day job and launch your startup: your small savings will quickly be used up and that'll be the end, because you won't be able to raise a round.
If, however, you have substantial savings to deploy so that you can get far enough to afford to pivot 1-2 times until you find product-market fit, then PG is right and taking the plunge is the right thing, regardless of business environment.
If your plan relies on customers, then it also depends on whether your product or service is aimed at reducing customer cost or has value in a different way.
To exemplify the above: I claim "You can/should start something like AirBnb in a bad economy, but not Google."
> I claim "You can/should start something like AirBnb in a bad economy, but not Google."
Yet AirBnB was born into a good economy (that, in fairness, was on the cusp of going quite bad), while Google was born into an economy that was just starting to recover from being bad. Not when you start but when your product is ready to ship may be more significant. By the time Google was ready for prime time we were in a good economy. When AirBnB was ready for prime time, we were in a bad economy.
> while Google was born into an economy that was just starting to recover from being bad.
Huh? Google was started in the mid to late 90s (incorporated 1998 but started earlier at Stanford). It was quite literally during the peak years of the dot com bubble and the US economy was doing fantastically well. The Clinton administration was even trying to draw up plans for what to do if the national debt was paid off...
Are you thinking about when Google went public in 2004?
Work on Google started in 1996. While things weren't bad per se, we were still working through recovery from the early 90s recession. It wasn't bad but it wasn't good either. By 1998, when Google was ready to ship, things were quite good.
If, in an alternate universe, work on Google had started in 1998 when the economy was strong and didn't ship until 2000, things could have been quite different. It was no doubt important that they were ready to ship when the economy was at its peak. That means starting when things aren't so good.
96 is when I got into the industry. There was definitely money and buzz in the air, but it wasn't anything like 99/'00, or other booms that have followed. It was really just the prelude leading up to that, where some infrastructure was being put in place. Online commerce, credit card processing, etc. online was still quite rare. Even in '95, '96 running banner advertising on web sites was still kind of a faux-pas. Media beyond fairly crappy images was non-existent, because bandwidth wasn't there. Actual profitable business models hadn't been proved.
People building Internet infrastructure (Cisco, Sun, etc.) were making some decent money, but actual Internet businesses? Not really.
In fact even by 98, 99, '00, Google itself had no real viable business model. Despite becoming a household name already.
All that's true enough, but do you agree with the original statement:
> Google was born into an economy that was just starting to recover from being bad.
I don't think being grad students at Stanford and then incorporating in 1998 counts as "just starting to recover". The economy in 1996 wasn't bad. 1998 definitely wasn't.
> If, however, you have substantial savings to deploy so that you can get far enough to afford to pivot 1-2 times until you find product-market fit, then PG is right and taking the plunge is the right thing, regardless of business environment. [snip] I claim "You can/should start something like AirBnb in a bad economy, but not Google."
Q: How many times did AirBnb and/or Google have to pivot to find product-market fit?
PMF is tricky. Google's first product was a hit, but it wasn't a market fit because nobody was paying for it so there was no market. They were attempting to sell an enterprise version (the search appliance). They pivoted pretty fast to AdWords.
Like, is there PMF if no money is changing hands. I saw Docker be described as having extreme PMF but they went down because they had a product, but giving away cool stuff does not create a market.
> so that you can get far enough to afford to pivot 1-2 times until you find product-market fit,
This line of reasoning has always felt so bizarre to me: try to start a business doing something you think is important and when you find it doesn’t work, try some other business until it does. I understand it as a response to things not working out as expected, but people go into business with this as a strategy.
I assume the idea is that the initial impulse was in the right area, but the first attempt itself isn’t quite correct.
So you learned a bunch and therefore aren’t starting from scratch with the 2nd try.
I.e. you make some environmental tool and try to sell it to the government. You learn that the government is a byzantine mess. You then sell the tool as part of a service to the corporations causing the mess to prevent future lawsuits. You pivoted, but the tool itself still had value.
is that not just describing the process of finding customers?
What happens if you don't find a customer, even after some several iterations/searchings? How do you know the tool has value in that case, other than personal conviction?
I think its a distinction between the type of person that says "I want to build a business, I think building product X sounds like a good way to do so" and the type that thinks "I want to build product X, I think building a business sounds like a good way to do so"
What’s interesting to me is that Amazon appears to be the former. Bezos wanted to start an Internet business, and he thought that books were a good way to do it. He was much more interested in the business model than anything to do with books specifically.
For me, I just wanted to learn React/Node and picked the context of Electron.
Since I was a hardware/software integrator… I thought: what is the best common hardware with the worst software? Label printers!
Now, after 4 years of pure software I’m launching a new brand of 300 dpi label printers.
The value I’m offering Mac users is a blue ocean strategy: creating huge value at low cost whereas my windows version is more purple ocean (some blood in the water)… since I’m disrupting incumbents on the lower/middle sized end.
Failure isn't a strategy but it's a very likely outcome that you have to plan for. A startup fails to raise each successive round something like 67% of the time. [1] Of course you have to work on something you care about, but I think 'something you care about' can be a meaningful business that creates value to customers. Once you have traction you'll start to love it - or you won't.
Very very few truly do as you state at face value. Most people go in with a plan and rarely want to hard pivot.
But, starting a business is a test and the outcomes of the test shows whether it's working for you or not. Many times its fundamental business problems (homejoy) other times it's you (friendster vs fb).
There's no right/wrong way to decide what is the correct move because whatever example someone provides, there's plenty of counter examples.
But, firing as many bullets as possible helps reveal what potentially works and to double down on. Sometimes what is showing signs of life is an aspect of the business that's not directly related to your current core, but pivoting there means survival. That is the hard pivot (segment.io).
We're not in the same market as this article. Typically, in a bad economy salary expectations are lower making a startup launch more "affordable." Unfortunately, that is not the case currently with ongoing inflation. Salary expectations continue to increase on average, not decrease.
> Salary expectations continue to increase on average, not decrease
I would argue though that tech salaries are highly overpriced right now. A lot of software engineers in the valley should be able to live quite comfortable life even with 50% pay cuts.
Please remember that PG is a financially very secure person, who is in the business of getting people on board with YC and committing to throw themselves 100% into tech companies that will individually more than likely fail.
If PG says "you should start a startup in a bad economy" it's simply a clever sales pitch, a spin on the current circumstances. Back in 2008 when this was posted it was presumably in response to the Global Financial Crisis (or "Credit Crunch" in the UK), I'm guessing it's being posted again due to the recent layoffs.
It may be the right time for you to take the plunge, but you should be reading this article with a clear head and remember that this is not an old friend giving you some sage advice, but someone who is incentivised to get you to take risks on their behalf.
Yeah. The alternative is to chill out at your current job and be able to pay your mortgage, and then start a startup when money is raining from the sky like it was in 2021. It's cyclical. Tech isn't dead forever, and what's a good idea today will still be a good idea in a couple years. You'll also be a couple years wiser, which is never bad.
or, someone will simply start your idea (assuming it's original and good) and be first to market. lots more nuances around first to market, but PG has a point. there's no right answer and it's all personal, but if you do have an awesome idea, and it makes sense financially for you, then there's no point in waiting X years. you're just throwing those years out. worst case, what, you get rejected from funding because of a grim financial future? it's still extremely valuable spending that time building your project and getting that awesome experience of pitching/getting rejected.
there's always an optimistic take to everything and a pessimistic one. if you're always taking the wait and see approach, chances are you're not going to do anything later, either. be somebody who does things and doesn't just sit around dreaming and waiting (like me)
Any startup that will hire someone focused on resting and vesting hasn't figured out their hiring, which is a 100% indication that the vesting is not going to be valuable.
Any startup that has a business model which cannot accommodate the incumbent work culture hasn't figured out their business model, which is 100% indication that the vesting is not going to be valuable.
eh, even original and good ideas aren't that valuable. Sometimes an individual can get lucky with a gimmick but a sustainable business is usually successful when a team of great people are both having and executing on good ideas on a daily basis - and still needs luck.
yep. further proving my point that building such a team equals time. and you need to start asap to do something like that, not just sit around wasting valuable years of your life
I can't figure out if you're being sarcastic, because if so, you're nailing it. If not, literally every single argument you brought up is against the consensus in the YC community, which doesn't mean you're wrong, but it still stands out as a massively contrarian position on this site.
I get that people are concerned about their ideas being stolen, but honestly, you can probably come up with another idea. I think what most people who have their ideas stolen find is that it turned out to not be a good business, and someone else invested 2 years of their life on a painful slog to discover that. On to the next idea!
The advice could be for people that were laid off and face months of unemployment. Quitting your job now to start a startup might make less sense. But also, quitting your job now and getting a grant when stocks are undervalued, could be a good move too.
Also can also hack up an proof of concept or MVP during that time as well, a few hours a week at a time. Even if you don't complete it, you'll have that much more progress towards it when you decide to take the plunge later.
Aren't you just seeing your failed business without actually having to fail? You have some idea to change the world, someone copies it, they failed miserably; how do you lose there?
There are so many things that were "before their time" and failed, like garbage-collected programming languages. C beat Lisp, because GC was too slow. Then Java beat C, because manual memory management was too dangerous. Being too early is almost scarier than being too late.
When the economy turns, people get scared and want to take less risks. This is an attempt to nudge you to maybe take some risks rather than spend a bit more time upskilling and/or searching for a role in an existing company.
It's not technically wrong or anything, it's just business. But people sometimes forget that because we do get good, honest, selfless advice on here and it's sometimes hard to differentiate.
Not necessarily. If you say starting a company is great because you asked 10 post-exit founders what they thought and they said “lots of work but totally worth it” that’s survivorship bias. Founders that didn’t survive wouldn’t say the same thing. If you’re saying that founding a startup in a down economy is a good idea because of a higher chance of survival that’s not survivorship bias. The non-survivors aren’t ignored, they’re included in the rate calculation.
I think year here is also super important. In 2008, even without the benefit of hindsight, investing in tech is not a crazy idea. We had a real-estate/banking crisis and there was a lot of people looking to figure out where to put their money.
Tech in 2008 looked very healthy, and VC funding only went up from there.
We're looking at an actual contraction in the tech sector now. We can argue how about whether this is a small "correction" or something more major, but I think it is a good idea to not just blindly apply good market advice from 2008 to the 2023 landscape.
It probably is a great time for a startup, just probably not a tech startup.
> It probably is a great time for a startup, just probably not a tech startup
Well, it's not really an issue of tech vs. non tech anymore is it? A good chunk of the largest companies are now under the "tech company" bucket. It boils down at the end of the day in whether they invest heavily in tech or if it's incidental.
This mashes together companies as diverse as Tesla, Snowflake, and Airbnb together. The former is a car company with inventory, etc. The middle one is a SaaS company. The latter a travel company platform.
Ultimately, a few things are clear-- even after 5% interest rates get slashed (which looks increasingly likely to happen in 2024 and not 2023) investors are no longer interested in businesses that have no idea how they'll attain profitability. I would argue this is a good thing-- it now forces companies to be strategic in what they invest in.
Your sentiment is overall very valid, however please also remember this was PG who wrote this in 2008 and YC was only 3 years in.
> I'm guessing it's being posted again due to the recent layoffs.
This was submitted again (by someone not affiliated with YC), but it's a repost.
Objectively speaking starting a startup in a recession / bad economy is actually a good idea. There are numerous examples of why this is the case, but the simplest explanation is that you get to follow a regular venture cycle that correlates to the highest returns. Since it usually takes about 7~10 years to get to $1b+ valuation, this follows a normal market cycle. There is a reason an unprecedented amount of software companies IPO'd 2020~2021, because valuations were sky high, and not because of those individual businesses were strong but simply because the market was hot. If you can ride that wave you can create incremental wealth for yourself, regardless of whether a VC is involved. In other words, timing is everything and starting when the market is at the bottom is good timing.
I didn't intend to imply there's anything untoward going on here re posted/submitted, it's the same to me and I acknowledge in my post that it was originally posted a long time ago.
How I read it is, during a good economy money will be more plentiful and investors will be more willing to invest in your startup. If you know it's easy to get investor dollars and every subsequent round of funding is almost guaranteed, you have the luxury of not being immediately profitable. It's much easier to peruse a business plan where you peruse growth and larger long term profitability at the expense of short term profitability when the economy is good because you are constantly getting investor funds and it's easier to sell new investors on your idea.
In a bad economy you don't have that luxury. Not only is there not as much cash to go around, investors are pickier with the cash that they do hand out. This means you can no longer pursue a business plan that sacrifices profitability for growth, you have to prioritize making money. Assuming your business succeeds, it will then be better prepared to get investor cash when the economy improves and can theoretically weather future financial storms better.
I realize this is a very idyllic way of looking at it and there are a million other variables that come into play, but I think pg is definitely looking at it in idyllic terms in his piece.
Some people seem to be overthinking this by a long shot. If you have a company you want to build, then it's always the right time to start. The greater economy will always have influence both positive and negative. But considering this, it's probably better to start in a "bad economy" than a "good economy" assuming it's a strong business idea that you can keep alive and grow until the economy becomes "good" again, and then you can exit into the good environment rather than starting when things are rosy and wanting/needing to exit when things inevitably turn south again.
Taking this with a pinch of salt given the nature of our current situation vs. 2008.
> Technology progresses more or less independently of the stock market.
Progress could be defined in many ways, but sure as hell there is less money in the tech sector, and funding is very difficult right now as far as I understand.
I do agree with the sentiment that the market shouldn't affect your timing if it can be avoided, but I wouldn't expect it to be very easy to start something capital intensive with a long road to profit right now...
The single best reason I'd give, for why it's a good time to start a startup in a downturn, is that it's all signal. There's little or no noise. No noise from buyers who are just tyre kickers, or who buy a little but dont truly adopt, even from VCs who might at other times waste a lot of your time.
The runway from nothing to something is about ten years on average. If you start when times are hot, you’re closer to the next reset event and more likely to experience the reset before you exit. If you start when things are dead, you have the most time to figure things out and exit when things are hopefully not dead yet.
I'm of the opinion that the right time is always now.
However, when things are great, large wealthy companies over-hire and over-pay everyone. It sedates good employees to stay and be comfortable.
When things hit the fan, the larger and fatter a company is, the more likely they will throw the baby out with the bathwater. They go into ultra-stupid cost-cutting mode and that is a great opportunity to hire some of the best dormant employees you'll ever meet.
Since the best determinant of a company's success is the makeup of the team, I'd say when the economy is bad is the best time to start a company. You'll land some of the best talent and that'll give you the best chances of success.
Just because bitcoin and OpenAI have nontrivial value doesn't mean we're not in a bad economy.
Inflation is rampant still, even wealthier folks are cutting back, and interest rate hikes are destroying markets. Keep in mind markets always lead the broader economy by at least several months. They'll crash well before earnings consistently start looking bad and recover before you see earnings recover. US interest rate hikes are also having an outsized effect on other countries vs. the domestic economy.
its a very mixed bag. e.g., mortgage delinquency rates near historical lows [0]. I picked those valuation examples to illustrate that 1) there is a lot of discretionary "investment" wealth around and 2) people are still clinging to the various "disruption" narratives.
obviously inflation is real and the new rates regime is real but it feels that people are pre-emptively trying to cool things down, build some buffers etc. rather than an already realized economic malaise.
the implication for the "time your startup" narrative of OP is that it is even less clearcut of a decision than if it was a real (let alone deep) recession.
From Paul's perspective in 2008, this makes sense. And generally, this is sound advice.
However, in the 2010s, we saw an explosion in tech business opportunities and cheap capital during strong economic times. Most of today's unicorns are from this era.
Is the economy really bad now? US unemployment rate is lowest it has been since 1970, where I live the restaurants are full, roads are full of cars, planes are full of people, hotels are booked for events well in advance. What exactly is bad besides people having less throwaway cash because eggs and bread is more expensive? Tech layoffs are, IMHO, more an excuse to cull bloated orgs without getting negative press because everyone is doing it, not because of necessity. We're past the Ukraine/Russia war shock and resource shortage scares, what else?
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[ 3.0 ms ] story [ 266 ms ] threadIt's not just less competition, it's the extant players in any market assuming there is less competition and getting blindsided by upstarts.
This has always seemed incompatible with the VC model, which involves raising a ton of money, putting the company on an 18 month clock, spending the money so you can hit key milestones, and then raising even more money when the clock runs out.
I have heard of a few companies that were on the VC track, raised money, and stayed frugal. But my impression is that investors want to see you swing for the fences, which involves spending all the money they invested, and fast.
How common is it for startups to buck this trend?
If you're pre-seed stage, in Silicon Valley, and the founders have a "good" background (the right companies, knowing the right people, etc), then sure you might raise a small round. If you're any later than that, or anywhere else in the world, you need results, and results don't come as easily in a recession.
Depending on your segment it may be easier to sell products in a recession. Tools which cut cost and are below a certain monthly spend actually become easier.
Hiring is MUCH MUCH easier.
Raising money is harder.
If you want to be frugal and grow responsibly, you have to do it without VC money.
What would he say now?
Tons of old pg essays sound straight from something like Indie Hackers or Microconf with their "avoid raising VC money" angle. He even literally predicts the death of VC in web SaaS, saying "investors aren't worth the trouble": http://www.paulgraham.com/divergence.html .
His YC cofounder Jessica Livingston wrote a book "Founders at Work" and about half the founders in the book are bootstrappers (DHH, Joel Spolosky, Craigslist). The other half are mostly founders recounting horror stories of interacting with VCs.
Compare that to modern YC where there are videos where they say _everyone_ should consider applying to YC with the _only_ exception being people that want to bootstrap. Modern Startup School says: "Without startup funding the vast majority of startups will die." (https://www.ycombinator.com/library/4A-a-guide-to-seed-fundr...).
There's something very important to note which is that YC did not change the deal from 125k for 7% to 500k for 7%. It's still 125k for 7% plus 375k worth of equity on your next raise. Which only makes sense if there is a next raise. So obviously they discourage bootstrapping since their whole model has been built around you raising at least one more round after YC.
Seems a pretty simple case of "follow the incentives." YC basically became more of a traditional VC over time. And I think pg was still closer to a founder in the early 2000s, from a founder perspective, it's more of a set of tradeoffs whether you should bootstrap or seek VC. But from a VC's perspective, obviously they want you to seek VC since they can't get involved if you bootstrap and bootstrapped startups won't get the outsized returns they need.
My opinion is, pg is a smart guy, there's still a ton of wisdom to learn from in his essays, but as with every other person on the planet, consider their motivation and incentives for telling you what they're telling you.
Not that I disagree with your assessment on pg's incentives and YC's change in position over time, but the environment for software startups is also materially different now that affect you whether you take VC money or not.
Key costs like hosting are way cheaper, back then you probably had to rack server in a data center, now you can deploy a free/cheap PaaS with a free/cheap database while you find PMF.
Marketing is way cheaper, social media is a grind but it's a game you can play to acquire users/customers for _free_.
There's more stuff going on online, more people, more businesses, more everything. Think about the entire "creator economy", other bootstrappers, Shopify sites, etc.
Yeah some stuff has gotten harder, more platforms, higher UX standards. But on the whole I'd rather bootstrap in 2023 then 2010.
Check in with me in a year though.
Back in the day I have delivered several different cheap 1U rackmount servers to data centres. Once took one - using public transport - to whatever suitable spot in the Docklands in East London. Travelling on the DLR with a server under one arm was a a memorable experience.
Long story short: you can do a lot from a $1000 server, if you put your mind to it.
Yet these days it seems PaaS is better, (over-)paying GCP/AWS/Azure, while you grope around to find a product that will sell for $$$ before your cloud credits run out?
It wasn't the greatest thing in the world, but it was dual-core, 2GB RAM, 160GB HD. I ran a small forum, email server, and a couple buddies used it for shells and running whatever PHP apps they wanted.
An $80 Linode these days only has 16GB and 320GB.
Here's what you can get for $89+: https://www.hetzner.com/sb?price_from=89
For 92 euro: 128 GB RAM, 3 TB SSD, 8 core i9-9900K, unlimited bandwidth.
You get 50x value for the 2009 price.
If in 2009 you served 480p videos that was fine, now you have to serve 4k or you will look like a tool. Various grumbling about JS bloat is optional.
free marketing through effort is by no means a new concept.
( and it's not free. )
But this bias is there. I'd wager if YC started HN today, it wouldn't be called HN. That name is uniquely related to the times YC & PG came into.
It's a bit like trusting an insurance broker's opinion on your own personal insurance necessity -- it'd be unsurprising to me for a broker to tell me that I need the most comprehensive (expensive) plan that they sell.
If you’ve taken VC, you had a bad VC. Otherwise, this misconstrues most VCs’ advice in a downturn, which is to prioritise staying alive.
The defining difference between a startup and small business is scaling potential. If you can’t grow, you shouldn’t take VC.
Usually not. Most small businesses have geographic limits to their scaling potential. That said, yes, there are niches where small businesses will beat a start-up competitor, at least in the short run.
VC is expensive capital. The same dilemma exists for companies that issue high-yield debt.
> there are ways to scale even without that level of pressure but VC doesn't allow that
Genuine question: what is this?
More time. There are examples of bootstrapped businesses that may be took a decade to get to first few million which will be dead in VC terms. But they continued and got to 100s of Millions. VC model would tell them to kill it if after a decade, they were doing a lousy couple million in revenue even if on the right path with PMF.
Isn't the criticism of the last decade of VC that it backed many of these?
Everything changed and I’ve seen it change from a small agile business with nice people to a baby corporation with up or out mentality, useless processes everywhere, harassment methods from HR department. In one year, VC money created as many millionaires as employee burn-outs.
If things don't go well, it would probably be hard to raise money for a future startup, due to the reputational damage of not having followed the VC playbook.
If things go fine, the VCs would probably say you could have grown even faster by spending faster. And what's considered a 'fine' outcome for you (selling for $15M with 1/3 for you) is not considered 'fine' for a VC whose model requires bigger wins — even if they take much longer.
No VC is telling companies to just to wastefully hire people they don't need. That wastes money and creates friction and bigger problems inside of a company.
They do tell you to hire aggressively, and you often present them with a model that shows _how_ you will use the money you raise, and sometimes you hire too many people on accident. But no VC is pounding their fists on the table telling founders to explicitly go hire people that aren't needed. That's directly against the interest of both the founder and the investor.
1. According to Zeihan, who points out that with the retirement of the boomers their 401k accounts that have been funding all this money are going to get cashed out and withdrawn, reducing the amount of money for lending, leading to an overall capital contraction.
I can start a business without an investment round, but not a startup? Is it a startup if it involves tech, a business if not? What if they use SOME tech, but not necessarily innovative tech? Or is this one of those 'you know it when you see it' kind of things? Has the term startup become a buzzword like "optimize" or "synergy"?
Seriously asking, not being snarky.
edit: thank you, for the responses that clarifiesthe distinction
Most small businesses do not plan to grow very quickly.
Startup incubators would rather have their 999 startups go broke and the 1000th become "next Google" than have average RoI on all 1000.
1: http://www.paulgraham.com/growth.html
The answer around me seems to be that a startup comes out of an idea without the capital worked out. That the equity they have to offer is worth nothing, unless they execute the plan with money they don't have.
If you have the capital worked out, you can go ahead into the business phase of the process right away, where profitability is king and there's no plan needed to answer the "how to raise more?" question.
A lot of what we associate with startups is the justifications towards raising and a lot of what we see from a "business" is geared towards margins.
For instance, better margins by extracting more profits on a lower revenue is better for one, but looks bad for the other.
Some of the causes and effects:
1. New business may have a proven business model, customers, product, market. Startup may have to find or create any of those
2. New business may have some capital to build/invest itself (I've worked in a restaurant, saved up, now opening my own). Startup is based on idea/people/work, but likely has no internal capital
3. Both have risk; but in some ways New business risk is known & understood. Startup's risk may be as undefined as their product/market.
As frequently used, there's also a
4. Expectation of profit / failure rate. A new business would be happy to succeed with small profits, certainly very much over bankruptcy/shutdown. Startup ecosystem/expectations are built around fail or succeed wildly.
A startup is an organisation in search of a scalable, profitable and repeatable business model.
(Scalable is relative but at minimum exponential. Linear growth does not a startup make.)
The above definition has helped me delineate between a tech smb and what one feels is a “startup”.
When you start your startup, you are by definition pre-PMF. There is only a weak relationship between what you spend and what comes out the other side. Once you're post-PMF this changes and you may need to jack up the spending in order to grow as quickly as possible.
Lots of companies screw this up and scale up spending when they're pre-PMF. In 2021 those companies could keep raising, but now they're probably going to die.
I'm sure this depends on the business but I'd say if you need a lot of marketing spend in order to experiment it's a sign that you may not be enough of an expert on where to find your customers and you either need to find a way to gain that expertise or pivot to an area where you already have it.
If a startup doesn’t need the capital to grow, they’re not likely to take on VC funds. If they do, the startup will need to sell equity, which based on funding round have norms based on equity given for capital received. If the startup is frugal with the capital, but still manages to hit growth targets and reach an acceptable liquidity event for the VC, then any unspent capital would only add to the valuation of the company.
Is that common, no, but it does happen; if it does, generally means founders gave up equity unnecessarily. Regardless, VC measure ROI on capital invested in the startup not if the capital they invested was spent by the startup.
Somewhat amusingly now that the capital environment has shifted dramatically, we have investors coming around who used to give us side-eye for being discerning and fastidious (and also our investing resources early to acquire government & adjacent customers), but now they treat us like secret geniuses or something. Because we have a reasonably stable baseline to build from. We're aligned with key markets that continue to spend money even during down markets and recessions. Not to mention we're also not in crisis having to massively disrupt progress and morale by laying off a bunch of people (in fact we're hiring, though still judiciously of course), which is HUGE since team and execution is everything.
(a) Work at a big co, save a boatload of money, quit after a few years, and then fund it yourself without the bullshit coffee chats* and 18-month clock.
(b) Work somewhere that has good work-life balance, pays you enough, is okay with you spending your free time doing something that doesn't compete with the company, and then build it on the side until it makes enough money to replace your day job, and only then quit your day job.
* There are good VCs out there, but 95% of VCs will waste your time, and you'll have to wade through them in your search for funding. The amount of coffee chats you'll go through will literally destroy your company because you won't have time to do real work.
However, a long-lived, yet non-home-run business is actually a negative in a VC portfolio. Because of the nature of VC, they need big wins to give returns to their fund investors. Their model intentionally decreases average success probability for a business as a filtering mechanism to find big wins as quickly as possible, so they can provide those returns to their own investors on an acceptable timeline.
It's "bad" now because central banks are actively making capital more expensive, which makes it harder to raise money for a speculative bet.
As in I would be really shocked to see a new Uber for X or grocery delivery startup raise tens of millions right now, but yes small teams building something that isn't very capital intensive will likely still be able to raise money.
I wonder if that is applicable here as a metaphor.
To me, that's a really convincing explanation for the Fermi Paradox. There may be other intelligent species out there, but evolution on earth seems to have a history of producing killing machines (and crabs. its always crabs). So, the gate to get to intelligent life isn't probable; and then you hit the gate of "does that intelligent life have enough local resources to escape the gravity well of its own planet", a gate which for earth practically required a prior chain of hundreds of millions of years of evolution, and an opportune asteroid impact to clear that chain out and make way for a new one to roll the dice again.
The mitigating factor for the second gate is: There could be other resources which could provide the power to escape a gravity well independent of biological decay (e.g. uranium, hydrogen). But at least in human history: think of what it took for us to fully understand how to harness oil, let alone uranium or hydrogen, create a rocket, and get to space safely; we did that with the tremendous benefit of plentiful hydrocarbon resources (global shipping, computers, mining rigs, plastic, etc). At minimum; a species without this advantage would take a lot longer to get to our level; but we did it in just a couple hundred years.
Universal timescales help, but they also work against; as the earth has showcased, planets get bombarded by civilization-ending asteroids often. So, either an element of luck, or: a species has to have these structural advantages, and apply them for the purposes of asteroid defense before the next one hits; or its all over and the clock resets.
Point being if I were a betting man: there are probably between 1 to 4 civilizations in our galaxy (including us) which have reached a similar or greater level of technology; but a great number more that are functionally trapped in a steampunk age, unable to escape their own planets.
My other more fringe theory for the Fermi Paradox, which to be fair is practically the entire plot of The Last of Us, is: that the Apex Predator on every planet that is capable of evolving carbon-based life is Fungus. Eventually, Fungus always wins; and takes intelligent civilization with it.
1: https://en.wikipedia.org/wiki/Preston_Gates_%26_Ellis
https://www.nytimes.com/1994/06/11/obituaries/mary-gates-64-...
https://www.cnbc.com/2020/08/05/how-bill-gates-mother-influe...
> Mary was a respected businesswoman with many responsibilities, including her membership on the board of nonprofit organization United Way of King County. There, she met the late John Opel, then-chairman of IBM, who also was a member of the United Way board.
> IBM's talks with Digital Research started to flounder, and when assessing options, Opel remembered Microsoft as the company "run by Bill Gates, Mary Gates' son," according to The Seattle Times.
> When Microsoft won the job, it didn't actually have an operating system of its own. So in 1981, the company bought QDOS, an operating system created by hardware company Seattle Computer Products, and with it developed MS-DOS, the Microsoft Disk Operating System. Microsoft licensed its MS-DOS to IBM to use as the operating system for its personal computer. (In addition to Microsoft, IBM also contracted Digital Research and SofTech Microsystems to use their operating systems for IBM's personal computer.)
The next big thing appears to be AI (not VR), but I don't really see how it can really compete with that historic low cost startup. What would a MVP AI even look like? Would it only be a good AI part of the time? We already have that. Try using Siri.
> That was the task for some Stanford students in the fall of 2007, in what became known here as the “Facebook Class.”
> The students ended up getting millions of users for free apps that they designed to run on Facebook. And, as advertising rolled in, some of those students started making far more money than their professors.
> “Everything was happening so fast,” recalls Joachim De Lombaert, now 23. His team’s app netted $3,000 a day and morphed into a company that later sold for a six-figure sum.
> Early on, the Facebook Class became a microcosm of Silicon Valley. Working in teams of three, the 75 students created apps that collectively had 16 million users in just 10 weeks.
https://www.nytimes.com/2011/05/08/technology/08class.html
In the early days of the platform app developers had a huge amount of freedom in terms of accessing users' social graphs, pushing notifications to timelines, and so on. It made it incredibly easy to build a viral loop and push out an app that spread like wildfire.
Obvious downsides to that - big privacy issues, and annoying users with endless notifications like you said. Facebook had to start restricting what app developers could do, and once that happened it became much harder for apps to get traction.
It's worth looking at the current macro climate through the lens of what is different, not what is the same. It remains to be seen if we land a meaningful revolution this time: lord knows it ain't the blockchain, but will it be AI? The other difference is as you point out, we're raising rates into this recession not lowering them. The intent right now is to slow growth and destroy demand making this an inherently more challenging time start.
As they say, don't fight the Fed.
Facebook’s ML models contribute massively to their profitability.
There's still ample tech innovation happening right now.
> It remains to be seen if we land a meaningful revolution this time: lord knows it ain't the blockchain, but will it be AI?
In 2008 the iPhone was already out and the App Store was launched that year, but arguably the smartphone didn't become a significant economic factor until around 2012. All the other services paulpauper cited as playing a role in the post 2008 recovery had been out for years, some of them almost a decade, but they just hit critical mass where they became economically impactful around then.
Green tech is the main exception, it's solidly into the steep phase of the adoption curve and has received a massive boots in investment in the last 12 months as a result of the Inflation Reduction Act*, plus the Ukraine war and the pivot away from Russian hydrocarbons.
* Gotta love US bill names. You just know the "Cute kittens appreciation act" is going to cull and stuff all the cute kittens.
I wouldn't be surprised to see a crop of start-ups focused around that space.
2023 feels a little like the start of the start with shades of 2008.
People have accepted to work tireless hours for peanuts and paper money with the promise they will become rich: this rarely happen. Don't buy the hype. It is more the exception than the rule.
Many multi billion dollar VC funded business are still not profitable and often don't have a path to profitability.
In the 90s my wife worked at a software company that makes scientific imaging software. They have a nice niche and continue to sell their software into academic and research labs. They never had more than about 7 employees - now about 5. It's a decent business that never needed VC funding and has gone for about 30 years now.
Perhaps VC is an equalizer here. It makes it possible for founders (like me) to start the next Microsoft without having to rely on privilege.
I understand allocation of VC resources has its own privilege issues but I'll take that slightly more accessible world over a world where your family determines the outcome.
https://en.wikipedia.org/wiki/Fairchild_Semiconductor
Edit: HP started earlier in 1939, but was bootstrapped and didn’t do silicon till much later.
I wouldn't bet on it. Wait for $$$ to become cheap again and you will see all sorts of garbage with multi million $$$$ evaluation out of thin air.
All things being equal, you’d rather not fund failures. But VCs care more about missing Facebook than getting conned by FTX. Most of their investments go to zero anyway.
you missed the step where you completely destroy the established market, and then when you're the only game left in town, make for a more expensive and/or worse product/service than what existed before.
It's not about getting rich. It's about being able to give yourself a realistic shot at each of many things you care about. If I do the slow path, I get maybe one or two shots and if I'm not ready for that industry or if I fuck it up, I'm borked. Succeeding or failing fast lets me do this the way I have succeeded at everything else: trying many times.
But this is pointless. Those who get what I'm saying need no convincing. Those who don't can't be convinced by me.
Unicorns are rare. Businesses that pay 2-5x the local salaries and let their founders get 8 hours of sleep are more common, I'd argue.
> But this is pointless. Those who get what I'm saying need no convincing. Those who don't can't be convinced by me.
That's an odd way to join a conversation, since that's precisely why we have them.
I think this falls under the founders' shoulders. Some founders tried to "hack" their way to "fake out" large growth that they themselves know are not sustainable, just so they can fool the VCs they are raising money from.
So agree with this sentiment. It matters less about when you start a company. It's how you execute. You might be building something very timely, but if you can't scale then it hardly matters whether there's a recession or not.
Nice work, if you can stomach it.
"Capitalism!"
It's irrelevant to some degree if this growth is real (driven by a better product), or inflated (by offering steep discounts, ads, marketing, etc).
It looks good on paper, and allows raising the next round. This is of course an order of magnitude bigger and demands even more growth. VCs look like geniuses in that case. Value of fund goes up, fees go up. Until they don't.
If you have not a lot of savings to live from, and your runway is therefore short, you'd be stupid to quid your day job and launch your startup: your small savings will quickly be used up and that'll be the end, because you won't be able to raise a round.
If, however, you have substantial savings to deploy so that you can get far enough to afford to pivot 1-2 times until you find product-market fit, then PG is right and taking the plunge is the right thing, regardless of business environment.
If your plan relies on customers, then it also depends on whether your product or service is aimed at reducing customer cost or has value in a different way.
To exemplify the above: I claim "You can/should start something like AirBnb in a bad economy, but not Google."
Yet AirBnB was born into a good economy (that, in fairness, was on the cusp of going quite bad), while Google was born into an economy that was just starting to recover from being bad. Not when you start but when your product is ready to ship may be more significant. By the time Google was ready for prime time we were in a good economy. When AirBnB was ready for prime time, we were in a bad economy.
Skate where the puck is going, as they say.
Huh? Google was started in the mid to late 90s (incorporated 1998 but started earlier at Stanford). It was quite literally during the peak years of the dot com bubble and the US economy was doing fantastically well. The Clinton administration was even trying to draw up plans for what to do if the national debt was paid off...
Are you thinking about when Google went public in 2004?
If, in an alternate universe, work on Google had started in 1998 when the economy was strong and didn't ship until 2000, things could have been quite different. It was no doubt important that they were ready to ship when the economy was at its peak. That means starting when things aren't so good.
https://fred.stlouisfed.org/graph/?g=YUZM
Sure, it was still above 5% in 96 nationally. But strongly down from the summer of 92 peak.
Additionally, Netscape's IPO was in August 1995. I wouldn't call that a bad environment for starting an internet company.
People building Internet infrastructure (Cisco, Sun, etc.) were making some decent money, but actual Internet businesses? Not really.
In fact even by 98, 99, '00, Google itself had no real viable business model. Despite becoming a household name already.
> Google was born into an economy that was just starting to recover from being bad.
I don't think being grad students at Stanford and then incorporating in 1998 counts as "just starting to recover". The economy in 1996 wasn't bad. 1998 definitely wasn't.
Q: How many times did AirBnb and/or Google have to pivot to find product-market fit?
I'm not sold on pivoting, and I'm not the only one. See:
Too Many Pivots, Too Little Passion https://hbr.org/2012/09/too-many-pivots-too-little-passion
Like, is there PMF if no money is changing hands. I saw Docker be described as having extreme PMF but they went down because they had a product, but giving away cool stuff does not create a market.
If it's not profitable, it's not PMF.
I think PG is fairly criticized for some things, but on this topic I trust that he knows what he's talking about.
This line of reasoning has always felt so bizarre to me: try to start a business doing something you think is important and when you find it doesn’t work, try some other business until it does. I understand it as a response to things not working out as expected, but people go into business with this as a strategy.
I guess I’m just not that type of person.
So you learned a bunch and therefore aren’t starting from scratch with the 2nd try.
I.e. you make some environmental tool and try to sell it to the government. You learn that the government is a byzantine mess. You then sell the tool as part of a service to the corporations causing the mess to prevent future lawsuits. You pivoted, but the tool itself still had value.
What happens if you don't find a customer, even after some several iterations/searchings? How do you know the tool has value in that case, other than personal conviction?
Apple and google seem to be more of the latter
For me, I just wanted to learn React/Node and picked the context of Electron.
Since I was a hardware/software integrator… I thought: what is the best common hardware with the worst software? Label printers!
Now, after 4 years of pure software I’m launching a new brand of 300 dpi label printers.
The value I’m offering Mac users is a blue ocean strategy: creating huge value at low cost whereas my windows version is more purple ocean (some blood in the water)… since I’m disrupting incumbents on the lower/middle sized end.
You only fail when you stop trying.
[1] https://medium.com/journal-of-empirical-entrepreneurship/dis...
Very very few truly do as you state at face value. Most people go in with a plan and rarely want to hard pivot.
But, starting a business is a test and the outcomes of the test shows whether it's working for you or not. Many times its fundamental business problems (homejoy) other times it's you (friendster vs fb).
There's no right/wrong way to decide what is the correct move because whatever example someone provides, there's plenty of counter examples.
But, firing as many bullets as possible helps reveal what potentially works and to double down on. Sometimes what is showing signs of life is an aspect of the business that's not directly related to your current core, but pivoting there means survival. That is the hard pivot (segment.io).
I would argue though that tech salaries are highly overpriced right now. A lot of software engineers in the valley should be able to live quite comfortable life even with 50% pay cuts.
Show us the math, please.
Their stock is down by 50-70%. Their base is not that high compare to the insane rent.
If PG says "you should start a startup in a bad economy" it's simply a clever sales pitch, a spin on the current circumstances. Back in 2008 when this was posted it was presumably in response to the Global Financial Crisis (or "Credit Crunch" in the UK), I'm guessing it's being posted again due to the recent layoffs.
It may be the right time for you to take the plunge, but you should be reading this article with a clear head and remember that this is not an old friend giving you some sage advice, but someone who is incentivised to get you to take risks on their behalf.
there's always an optimistic take to everything and a pessimistic one. if you're always taking the wait and see approach, chances are you're not going to do anything later, either. be somebody who does things and doesn't just sit around dreaming and waiting (like me)
I get that people are concerned about their ideas being stolen, but honestly, you can probably come up with another idea. I think what most people who have their ideas stolen find is that it turned out to not be a good business, and someone else invested 2 years of their life on a painful slog to discover that. On to the next idea!
Just as a couple of concrete examples:
A paid-for app was a great idea in 2009, but a bad idea in 2013.
A dedicated handheld PlayStation was a great idea in 2005 but an awful idea in 2012.
Self-driving car companies were a great idea in 2017, but a bad idea in 2020.
I think the point is that technology changes and sometimes you need to strike whole the iron's hot.
There are so many things that were "before their time" and failed, like garbage-collected programming languages. C beat Lisp, because GC was too slow. Then Java beat C, because manual memory management was too dangerous. Being too early is almost scarier than being too late.
It's not technically wrong or anything, it's just business. But people sometimes forget that because we do get good, honest, selfless advice on here and it's sometimes hard to differentiate.
Tech in 2008 looked very healthy, and VC funding only went up from there.
We're looking at an actual contraction in the tech sector now. We can argue how about whether this is a small "correction" or something more major, but I think it is a good idea to not just blindly apply good market advice from 2008 to the 2023 landscape.
It probably is a great time for a startup, just probably not a tech startup.
Well, it's not really an issue of tech vs. non tech anymore is it? A good chunk of the largest companies are now under the "tech company" bucket. It boils down at the end of the day in whether they invest heavily in tech or if it's incidental.
This mashes together companies as diverse as Tesla, Snowflake, and Airbnb together. The former is a car company with inventory, etc. The middle one is a SaaS company. The latter a travel company platform.
Ultimately, a few things are clear-- even after 5% interest rates get slashed (which looks increasingly likely to happen in 2024 and not 2023) investors are no longer interested in businesses that have no idea how they'll attain profitability. I would argue this is a good thing-- it now forces companies to be strategic in what they invest in.
> I'm guessing it's being posted again due to the recent layoffs.
This was submitted again (by someone not affiliated with YC), but it's a repost.
Objectively speaking starting a startup in a recession / bad economy is actually a good idea. There are numerous examples of why this is the case, but the simplest explanation is that you get to follow a regular venture cycle that correlates to the highest returns. Since it usually takes about 7~10 years to get to $1b+ valuation, this follows a normal market cycle. There is a reason an unprecedented amount of software companies IPO'd 2020~2021, because valuations were sky high, and not because of those individual businesses were strong but simply because the market was hot. If you can ride that wave you can create incremental wealth for yourself, regardless of whether a VC is involved. In other words, timing is everything and starting when the market is at the bottom is good timing.
In a bad economy you don't have that luxury. Not only is there not as much cash to go around, investors are pickier with the cash that they do hand out. This means you can no longer pursue a business plan that sacrifices profitability for growth, you have to prioritize making money. Assuming your business succeeds, it will then be better prepared to get investor cash when the economy improves and can theoretically weather future financial storms better.
I realize this is a very idyllic way of looking at it and there are a million other variables that come into play, but I think pg is definitely looking at it in idyllic terms in his piece.
> Technology progresses more or less independently of the stock market.
Progress could be defined in many ways, but sure as hell there is less money in the tech sector, and funding is very difficult right now as far as I understand.
I do agree with the sentiment that the market shouldn't affect your timing if it can be avoided, but I wouldn't expect it to be very easy to start something capital intensive with a long road to profit right now...
When things hit the fan, the larger and fatter a company is, the more likely they will throw the baby out with the bathwater. They go into ultra-stupid cost-cutting mode and that is a great opportunity to hire some of the best dormant employees you'll ever meet.
Since the best determinant of a company's success is the makeup of the team, I'd say when the economy is bad is the best time to start a company. You'll land some of the best talent and that'll give you the best chances of success.
Business cycles, timing the downturn and all that, does this Warren Buffet type "sound contrarian advice" apply also in Alice in Wonderland economies?
Inflation is rampant still, even wealthier folks are cutting back, and interest rate hikes are destroying markets. Keep in mind markets always lead the broader economy by at least several months. They'll crash well before earnings consistently start looking bad and recover before you see earnings recover. US interest rate hikes are also having an outsized effect on other countries vs. the domestic economy.
obviously inflation is real and the new rates regime is real but it feels that people are pre-emptively trying to cool things down, build some buffers etc. rather than an already realized economic malaise.
the implication for the "time your startup" narrative of OP is that it is even less clearcut of a decision than if it was a real (let alone deep) recession.
[0] https://fred.stlouisfed.org/series/DRSFRMACBS
My thinking was if I can survive in the lean times, I can survive in the better times.
However, in the 2010s, we saw an explosion in tech business opportunities and cheap capital during strong economic times. Most of today's unicorns are from this era.