Take the "seems like a bad idea" bit. Many of the big hits are really well-worn ideas done with better marketing, better timing, and a user experience which makes it available to new markets.
Dropbox? File sharing. Facebook? Geocities. Both are interesting in that they take something that was a giant pain in the neck but useful enough to put up with anyway, and then they make it usable enough that virtually anyone can do that stuff routinely.
But the meta-cognition isn't all that important. What's important is that they're getting out there and helping new companies learn and grow. They can be wrong all day (or not) about the why because they've developed a process which provably works, and which they can measure and improve upon.
Can you honestly not tell the difference between Facebook and Geocities?
Also, the fact that Dropbox and Facebook were "unoriginal" is exactly what made them seem like bad ideas at the time. I saw Dropbox present at demoday, and the main question on my mind was, "How is this different from the million other attempts at online file storage? (xdrive, etc)".
If I had the time, I would do a bunch of research into trying to determine what made Dropbox, Facebook, AirBnB, et al, succeed in their markets. I assume the answer involves the founding teams, but what traits did these founders have that others did not?
I don't have the time though, so if any bloggers/journalists are reading, this could be an interesting article, or even book, if you get enough info.
Whether or not this info would actually help another team become successful is another story though.
The big successes that I've seen all have exceptional founders, but that's clearly not enough. Timing is a huge component as well. Often a good idea will fail simply because the market or technology isn't ready. My own experience with Gmail reflects some of that. When we decided to write the whole frontend in JS, everyone said that it was a bad idea doomed to failure. It had been tried before (e.g. desktop.com) and had always been a disaster. They were right about the past, but wrong about the future. We released Gmail right around the time that browsers were finally getting good enough, and were were very careful to keep our code as fast and slim as possible.
The actual formula that academics use is Performance = AMO, ability * motivation * opportunity. I think there are a couple of modified versions but I can't remember what they are off the top of my head.
I've found that in instances where my ability is 7 and motivation is 34 but opportunity is something like, say, 23, I've had better performance than when my ability is 22 and my motivation is 12 compared with a 13 opportunity.
This is to say that my experience confirms that there probably is some completely subjective formula that will fool people into thinking there is some reason behind my good luck. :-)
I am sure that you knew that browsers were finally getting good enough. Getting the timing right is still difficult but it is not pure luck. I suppose you also need some luck (and skill) to convince others that something is now becoming possible. Finding an investor that also sees the opportunity can be hard.
Isn't this an example of the winner take all phenomenon?
It seems to me that both Dropbox & Facebook are example of companies pursuing good ideas that lots of other companies were also pursuing. They just happened to be the ones that executed the best (and possibly also had the best luck) so they were able to win the market.
If this is the case then your job as a funder of startups might be to try to identify the companies capable of out executing everyone else on a good idea that a lot of people are working on.
This is much different than the great idea that looks bad phenomenon that pg discusses in his essay.
History tends to get rewritten by big successes, so that in retrospect it seems obvious they were going to make it big. For that reason one of my most valuable memories is how lame Facebook sounded to me when I first heard about it.
As a thought experiment, I would love to hear what pg and team would have thought about the following companies, had they applied to YC before they grew in popularity (assuming YC existed when they were starting out):
PayPal, Twitter, Pandora, SalesForce, Instagram, FourSquare, and Pinterest. And perhaps a few others as well.
I feel pretty sure we'd have been impressed enough by Max and Peter to fund them regardless of the idea (which initially had almost nothing in common with Paypal).
I knew Ev before Twitter so I'm sure we would have funded that.
Pandora I know nothing about, so I can't guess there.
SalesForce I'm pretty sure we would have funded because Benioff radiates "winner" in much the same overwhelming way that Zuckerberg does.
Instagram is the one we'd most likely have missed. It all depends when we'd talked to them. They were a kind of overnight success in traffic. If we'd talked to them even a day after they launched we would certainly have said yes. But before that it might have seemed too speculative.
I don't know about FourSquare. I've never met the founders and don't understand the business.
Pinterest we definitely would have funded, because Ben is a two time YC alum (with different companies alas). We knew he was good because the first time he was part of a startup that as an experiment we didn't make move to California. As Demo Day approached, they were in terrible shape. But Ben swooped in at the last moment and gave one of the most convincing Demo Day presentations.
It strikes me as smacking of old-school fatalistic "some are born winners" type thinking which is fundamentally contrary to everything we are led to believe about startups (namely; success is a function of smarts, hustle and luck).
I have not met either of them. And while I have met a few individuals who have achieved success I can honestly say I have never met anyone who I thought radiated success or was otherwise predisposed to success.
This is exactly how many VC work. They will only fund projects that involve people they know. Those people are almost always ones who have a history of past success. It's simply a way to manage risk with minimised effort.
Deal with people you already know.
If the project turns out to be a dud, the past history of success of the people involved negates any arguments that it was not the right decision to fund it. No one is going to question that the people involved were not "winners". They had proven that already; that's why the project received funding: because those particular people were involved with it.
To use an oft regurgitated title: "No one ever got fired for funding a project that involved [insert so-called born winner name here]"
Just for fun: How about Andrew Mason, the guy behind Groupon. How far do you think he would have gotten by taking the YC route? Is he a "born winner"? Groupon made some investors very happy.
One might wonder why no one can tell us who the "born winners" are until after they've had some "victories".
startup founders win [...] more on determination than brains. The simplest form of determination is sheer willfulness. [...] A good deal of willfulness must be inborn
You are, perhaps, reading too much into the word "winner" to mean "automatically succeeds" rather than "is unstoppable and bowls over obstacles that would stop most people".
Have you never met anyone with an unusually high mix of intelligence, determination, focus, and charisma (to randomly pick a few traits)? If you have, are you more likely to bet for or against them in their chosen field?
If you haven't, that is entirely possible. Such people are, by definition, rare.
No matter how much you might wish it, a purely meritocratic system is not possible, not when there are people involved. There will always be subjectivity and biases. SV is more meritocratic than most other industries, and I do believe that most people in SV honestly try to be impartial, but that doesn't actually pan out a lot of the time.
What do you think he actually means by 'radiate "winner"'? What if he'd said they radiate 'smarts and hustle'? That's two out the three qualities you name. (If he said they radiate luck, I would understand being put off).
"I have not met either of them. And while I have met a few individuals who have achieved success I can honestly say I have never met anyone who I thought radiated success or was otherwise predisposed to success."
Where in the above two statements do you contradict the idea that Benioff and Zuckerberg do give this impression in person? Notice that pg doesn't say that about everyone who is successful.
I have once met Benioff (never have met MZ), and what really struck me as odd about him was how unfazed he was by occurrences that would really shake a regular person up and throw them in a spiral of self-doubt.
He seemed to never lose an ounce of morale from anyone telling him "no", he seemed to be doing this pretty naturally by never faulting or doubting himself but rather placing the blame on the nay-sayer. The take-away for me was someone whose morale cannot be broken is an unstoppable train. I have to be honest, it seemed full-fledged delusional to see someone never question them self based on other people (and some very important/influential people's) judgement. But that seemed to be him.
Consider 'winner' as being shorthand for: "someone who, given the right environment, timing, and support, can take over the world. Given two of the three, they will manifest the third."
It's just something you are. A bottom of the org chart stinky sysadmin doesn't just wake up one day and have the personality and determination of a world class CEO.
In a more grim outlook, it's genetic. The disconnect is when people want to be 'winners' but are, at heart, bottom of the org chart stinky sysadmins. You can work your way up to lifestyle business, but the next step of multi-billion pants in the air growth company is probably out of reach.
This seems to suggest the decision to fund has less to do with the idea and more to do with the founders. We already knew that.
Does this also mean that the "big winners" will not come merely from a pool of what appear to be bad ideas, but from a subset of that pool: bad ideas put forth by founders the VC thinks are impressive? That too, seems somewhat obvious.
Taking it one step further, can you separate the "idea" from the "founder" in assessing the project's chances of being a "big winner"?
Maybe that was the goal of requesting that people should apply to YC even if they had no "idea".
After all, the supply of "bad ideas" is potentially limitless.
Yes -- this is why, for example, we (at A16Z) have such a strong bias towards technical founders with strong personalities, typically with a background of accomplishment of some reasonably strong form (even if very young). You have to screen at the founder level since there are too many bad ideas from less qualified founders otherwise.
Have you ever experimented with an opposing strategy? (Funding "non-technical" founders with "weak" personalities.)
Probably not, lest you would risk your reputation. Hence, you might not have evidence to show that this approach would not yield suffcient numbers of "big winners" to justify the investments. For example, if someone sugested the hypothesis that from a set of a given size of non-technical founders with weak personalities, some "big winners" will emerge, could you disprove that? If you wanted to be scientific, you would have to test it, repeatedly.
From my intepretation, I think one of the points in the pg essay is that human "intuition" will only take you so far toward the "big rewards". By its very nature it steers us away from the counterintuitive and protects us from taking what others would perceive as unreasonable risks. It will stop you from adopting a strategy that no one else is using that might get you labelled as foolish (but, as history shows us time and again, might actually yield an enormous reward).
In hindsight we'll continue to see that some of the biggest winners would have been viewed as unreasonable risks by many VC. Foresight won't allow us that vision. So-called intuition will stop you from investing in a "big winner". Hard to accept, but true.
I don't recall arguing that our criteria are the only criteria one could use. I would love for someone to start the venture firm that focuses on non-technical founders with weak personalities! It would either be highly profitable or highly entertaining to watch...
Some internet VC, I can't remember who, was answering some interview questions from a journalist recently and made a comment to the effect that, with respect to financing startups, capital is too concentrated. (Sort of like the returns from startups are so concentrated in only a few.) 100 million in one project instead of 10 million in 10 projects, something like that. If it were somehow possible to achieve, maybe the process of spreading out venture capital that he alluded to would involve some of it going to "unlikely recipients". Black swans. Non-technical founders with weak personalities. Or something even more unusual.
It might not yield any "big winners" (then again it might) but it would in either case produce evidence that we could use to try to disprove certain theories.
"highly profitable or highly entertaning to watch..."
We've seen a quadrant close to this space thoroughly explored: Non-technical founders with strong personalities. MBAs were the most heavily funded during the first bubble in the 90s, far more so than technical people.
"Cowan’s college friend rented her garage to Sergey and Larry for their first year. In 1999 and 2000 she tried to introduce Cowan to “these two really smart Stanford students writing a search engine”. Students? A new search engine? In the most important moment ever for Bessemer’s anti-portfolio, Cowan asked her, “How can I get out of this house without going anywhere near your garage?”"
I still shake my head with AirBnB, a total ripoff of couch surfing. For it to be comparable in any way, shape or form to the innovative and beautifully executed Dropbox boggles the mind.
I used to think airbnb was a direct for-profit, money grubbing ripoff of the pure-of-heart couchsurfing. Then I tried to use couchsurfing this year. Their website is virtually unusable. It looks like it hasn't been updated since 1995. They have a horrific profile system and verification process. They have one 500,000th of the audience they could have.
If you stagnate, you will be eaten. Just keep swimming.
Nicely said. I'll have to give you that. I used couch surfing a few years ago and distinctly remember thinking I should redo the site for them. I may have even written it on my profile.
There's a similarity to Thiel's analysis -- that few outliers provide all the returns -- but also a difference: PG seems more comfortable with the idea that early on, the ultimate winners are completely unknowable, and so 'many trails' (diversification) is absolutely necessary.
Meanwhile, throughout his lectures, Thiel seems to emphasize that with enough focus on the right people. important projects, and right 'secrets', outcomes are not as random as they seem... and both individuals and investors must concentrate on some big bets rather than endlessly diversify.
There is going to be nothing that will "explain" why or which companies could be the big winners. Trying to is falling into the narrative fallacy trap Taleb writes about.
Best strategy is to "win" in other ways, and let the cards fall where they may.
Best strategy is to "win" in other ways, and let the cards fall where they may.
So you're saying that the probability of picking up the big winners would be the same if YC accepted applicants at random?
Edit: I have sympathy for the Black Swan theory, but I also believe that the startup market is way more tractable than, say, the CDO market – that there do actually exist investment strategies that will increase your chances of hitting the billion dollar jackpot.
Taleb has an exact translation of what Paul is talking about -- Taleb would, and has, described what Paul is saying as "construct a portfolio of cheap high-risk long-dated options, each of which has a high probability of losing all of your money but also uncapped upside". "Uncapped upside" being the key, of course.
Taleb's new book coming out soon will describe all this in a lot more detail -- should be very interesting.
The counter-intuitive nature of startup investing is a big part of what makes it so interesting to me. In most aspects of life, we are trained to avoid risk and only pursue "good ideas" (e.g. try to be a lawyer, not a rock star). With startups, I get to focus on things that are probably bad ideas, but possibly great ideas. It's not for everyone, but for those of us who love chasing dreams, it can be a great adventure.
Peter Thiel recently talked a little about this[1] counter-intutive phenomena (that pg states as that effectively all the returns are concentrated in a few big winners):
One intuition is that people do not believe in a power law distribution. They intuitively don’t believe that returns could be that uneven. So when you have an up round with a big increase in valuation, many or even most VCs tend to believe that the step up is too big and they will thus underprice it.
Which is intersting, because he actually talked a little to pg about this during the class where he said it:
Peter Thiel: Do Y-Combinator companies follow a power law distribution?
Paul Graham: Yes. They’re very power law
But Thiel was not happy just stating the phenomena, but he also states on why most people discredit it, when he talked about secrets[2]:
The power law secret operates similarly. In one sense it’s a secret about finance. Startup outcomes are not evenly distributed; the follow a power law distribution. But in another sense it’s a very human secret. People are uncomfortable talking about inequality, so they either ignore it or rationalize it away. It is psychologically difficult for investors to admit that their best investment is worth more than the rest of their portfolio companies combined. So they ignore or hide that fact, and it becomes a secret.
The distribution secret also has two sides to it. Distribution is much more important than people think. That makes it a business secret. But it’s a human secret too, since the people involved in distribution work very hard to hide what’s going on. Salespeople do best when people do not know they’re dealing with salespeople.
That actually makes a lot of sense. Ive been having some of the same thoughts, as almost all the profits from my own portfolio is from Apple stock, even though i also own, Amazon, Tesla, Arm and so on.
Perhaps thats why index investing is so succesfull, because you get the benefit of the outliers.. the bad ideas, or long shots, that suddenly skyrocket..
all the profits from my own portfolio is from Apple stock, even though i also own, Amazon, Tesla, Arm and so on.
No! That is different.
These are public companies, and the fact you are seeing amazing share price growth from Apple is an exception.
Usually[1] on the public share market you'll see growth rates of ~8% pa, with some slightly above that and some below that.
The continued rapid rise in Apple's share price in exceptional, and is having an effect on your portfolio that is unlikely to be seen again in our lifetime.
That is completely different to pre-A-round investing, where it is expected to see (say) 1% of companies return 1000%.
TLDR; Apple is an exception. Don't think PG's essay applies to public markets.
[1] "Usually" in the sense of the pre-2008 sharemarket.
Do you have more data on this? I just did some quick searching, but couldn't find any firm numbers for what the 99th percentile return for individual public companies actually is. I certainly wouldn't be surprised if it was 1000% per year at some point in the tail, if not at 1% then for the top .01 percent of companies. I'd love if you could point to a graph of the tail so I can recalibrate.
Here's some links on average returns for the Dow Jones (ie, top public companies in the US): [1][2]
I certainly wouldn't be surprised if it was 1000% per year at some point in the tail, if not at 1% then for the top .01 percent of companies.
I'm having trouble parsing that sentence. I think you are saying that you think 1000% per year returns are normal for the top 0.1% of companies.
This is absolutely not the case. Even Apple (by far the best example of rapid share price growth in a large company) might, maybe manage to increase its share price 100% this year (low of ~$374 in Nov last year, currently at ~$662). That's exceptional - companies like Standard Oil, Exxon, etc never managed that.
(Occasionally you may get a smaller resource oriented company that fids oil, gold reserves or something and sees a 1000% increase. Or a small drug company that has a successful trial. These are very unusual too though, and more similar to VC investing that the typical public markets).
Here's some links on average returns for the Dow Jones (ie, top public companies in the US): [1][2]
I appreciate the links, but didn't find information about the extremes. What I'm looking for would be something more like this paper [1] on Extreme Value Theory but with more pretty pictures.
I got lost in this one soon after the introduction, but was interested in their statements "cross country evidence that the tail behaviour of returns is leptokurtic" and "the tail distribution is of the Fréchet type, hence fat-tailed". I was hoping for a cartoon graph showing just how fat that tail is.
I think you are saying that you think 1000% per year returns are normal for the top 0.1% of companies.
Essentially, but subtly different. Saying that I "wouldn't be surprised" was more to express the degree of my uncertainty than to state my belief. And I posited .01%, rather than .1%. To put numbers on it, it strikes me as plausible that 3 out of the 2700 listed Nasdaq issues would be up 10x for the year.
Occasionally you may get a smaller resource oriented company that fids oil, gold reserves or something and sees a 1000% increase. Or a small drug company that has a successful trial. These are very unusual too though
How unusual? I'd like to put a number on it. Is a gain of 10x over a year a 1 out of 1000 event, which would make it likely for a couple Nasdaq stocks a year? What about 100x returns over a larger number of years? I'd guess that it's happened at least a few times, but don't know.
My instinct would be that it's a fat tail, but not as fat as the VC market. Rather than hoping for 10x over 10 years (26% year-over-year) with carefully chosen startups, with a broad market index you'd probably lucky to hit 3x (12% compounded).
But what would the long term expected returns be for a broad portfolio of mining companies, pre-trial pharmaceuticals, and internet IPO's? And how would it compare to an average VC firm? I have no idea.
How unusual? I'd like to put a number on it. Is a gain of 10x over a year a 1 out of 1000 event, which would make it likely for a couple Nasdaq stocks a year?
I don't know, but the data is out there. You can buy the complete stock history of the Nasdaq fairly cheaply. If you only want day's end prices it might even be available for free.
A quick search found some links for best performing stocks per year[1][2], which indicates that 10x is rare enough that it only happens once every few years.
So, if you randomly decided which startups to invest in, would you be more successful? Can you really predict anything? If you randomly invested in 100 startups, would your returns be better than your screening process? Can you test this?
They do something similar with equity trades. They get professionals and public entrants to select stocks and include a 'dartboard'. From my limited reading experience the dartboard rarely wins implying people do add value, but it would be interesting if someone could find a history (I didn't with a quick Google). In Australia one news paper includes an Astrologer which I find amusing.
With start-ups I think it would be too expensive an experiment to fund.
"From my limited reading experience the dartboard rarely wins implying people do add value"
This is wrong. If the dartboard consistently underperformed most stockpickers (i.e. say it ranked around the 30th percentile year over year) then you could make the case that (some) people add value. If, on the other hand, the dartboard is near the mean of the distribution of outcomes, you could make a case that it's all luck.
The fundamental fallacy underlying the "Darts are just as good as people" is that the _entire reason_ the dartboard approach is so successful is because of the massive number of experts who have priced everything close to perfectly.
No such market exists for startups - so selection is required.
You're right. The dartboard experiment would be better (faster) if you had just as many dartboards as investors. Then you could compare the distribution and not just a single result.
On October 7, 1998 the Journal presented the results of the 100th dartboard contest. So who won the most contests and by how much? The pros won 61 of the 100 contests versus the darts. That's better than the 50% that would be expected in an efficient market.
We have a good deal of evidence that our selection process is better than random. We know it's at least internally consistent, in the sense that startups that are ranked higher in the application phase are more likely to make it past the interview phase. And we also in turn have (a necessarily small amount of) evidence that the startups that turn out to be big winners do the best in the interview phase.
Are you willing to share what your evidence is that the big winners do the best during the interview phase? Do you rank all startups that are accepted into YCombinator?
Have later YCombinator classes had a larger percentage of homeruns? If you have more applicants and have gotten better at selecting, this should be the case.
Is it about selecting winners, or weeding out losers? Are there companies that you know will fail? Who would be least likely to succeed as an entrepreneur?
Sure; the evidence is pretty low tech. Between us we can remember the interviews of all the most successful startups, and in no case there was any debate about whether we should fund them.
Home runs are so rare that it's not a matter of percentage per batch. A batch will have 1 or 0, and probably 0. It will be a few years before I can tell if the rate is increasing.
Selecting winners and weeding out losers seem the same thing to me. There are companies we think will almost certainly fail, but we can never be sure. An ineffectual person would be least likely to succeed as a startup founder.
You mentioning rock stars make me wonder if being a scout for a record label is similar. A band that's going to define a new genre or movement will sound nothing like anything currently popular, so it seems you have to identify the things that sound nothing like what's popular but that sound like what will be popular.
The returns aren't as dominated by just a few big successes, though. Although I suppose one-hit wonders are a manifestation of something similar: All the returns come from one song out of who knows how many dozens a band or artist may have come up with.
You mentioning rock stars make me wonder if being a scout for a record label is similar. A band that's going to define a new genre or movement will sound nothing like anything currently popular, so it seems you have to identify the things that sound nothing like what's popular but that sound like what will be popular.
Publishers, from what I can tell, have the same problem. One thing that I'm struck by is how many novels that we now consider classic, or novelists who we now consider important, barely scraped into publication. Tolkien famously saw Lord of the Rings in print because of Rayner Unwin, the then nine-year-old (I think) son of a publisher liked LOTR. John Barth and William Goldman have both written about how close they were to pursuing other opportunities—a PhD and insurance, IIRC. A Confederacy of Dunces was only published after O'Toole killed himself. Melville's poetry was self-published IIRC. Virginia Woolf needed to start her own press.
There are probably others with similar stories.
Not only that, but I have to wonder who barely didn't make the cut. Given the large number of writers who skated into print, there must be at least an equally large group who "should" have, but left no marks on history sufficiently legible to trace.
I think about these issues a lot for two reasons. The first is that I've had many close calls with literary agents, all of whom eventually said, "I like you, but not in that way." The second is the technological environment: now that ebooks mean self-publishing is much more pragmatic than it used to be, people who really want to publish have a means of going outside the conventional system. Some power-law-style stars have already emerged (Amanda Hocking, the 50 Shades of Grey author). Others probably will. Maybe I'll be one. But if I'm not, I don't think I'll be too bothered: I mostly want to write.
Yeah, 99% of self-published books are probably un- or poorly edited dreck, but that 1% count for a lot.
With self publishing now, it is likely that unpopular works will persist. Over time there is more of a chance that anything great that was passed over will eventually find it's audience. Whereas in the past that stuff that didn't get published may have only existed as a single or few copies and was eventually lost to the passage of time.
That would be great, but it assumes a writer with marketing and promotion skills. Even if a large potential audience exists for a book, reaching that audience can be very difficult, which is a big part of the value large publishers offer.
I am loathe to admit record labels providing any value, but they do this as well, helping good (and bad) artists rise above the noise floor to reach a mass audience.
Back in the deep, dark days of the internet, when Napster was new, I believe this was one of the arguments that Def Leppard used against file-sharing.
Namely, that record companies are like VC funds, and the massive cash they make from Def Leppard (or Lady Gaga or whoever) pays for the 1000's of other acts that they fund and then fail.
But with self-publishing mechanisms we no longer need the record labels to risk all that money to produce bands that will likely fail. Now people can just put stuff on youtube, most will fail, but some like Justin Bieber, and Skrillex will get noticed.
"The underlying thesis behind Andreessen Horowitz’s investing strategy is that in any given year only 15 companies will make up more than 90 percent of the returns. So it pays to get into those companies at almost any price."
I guess once you figure out who the big winners are going to be, getting in is worth it at basically any cost when the returns are going to be so high. If others aren't comfortable with that much risk, you can win big because the price isn't driven up to expectation, leaving room for more profit.
This is probably true also for evaluating entrepreneurs where blindest is even greater (I call it "young white male syndrome").
It seems like if an entrepreneur is a little different (black, hispanic, women, little eccentric, older, etc.) he/she need to act and behave like "white young male" in order get noticed and funded. However, in that case he/she might be hiding the characteristics which will make them "rock star".
Ageism, racism, and sexism all in one, impressive. And what stereotypes do you attribute to that demographic which are unique and oppressive to others? Seems to me the only thing in question here is creativity and ambition.
> "The counter-intuitive nature of startup investing..."
The hidden premise of that statement, appears to imply there exists a universal intuition to which this is "counter". I'm not sure that is completely accurate, and is perhaps more useful to think about it in terms of a bifurcated process that can roughly segment the populace into two modes of preferred intuitive operation, but possibly more.
Without going into detail, both types of intuition make subconscious predictions, yet do so in markedly contrasting approaches, which may explain the root cause of arguments between a priori/a posteriori, bayesian/frequentist debates. The underlying ideologies may not necessarily be the effect of environmental upbringing as often assumed, but could instead be structurally rooted in the fundamental wiring and decision making of our cognition.
I'm sure some will disagree, but I naturally find frequentist methods rather challenging to understand, and typically intuit in a distinctly bayesian manner (which is probably less common, typically VC's tend to be good pattern matchers and skilled numeracy - aka natural frequentists). Coincidentally what PG thinks is counter-intuitive (like in this article), could seem rather intuitive to some. Likewise there are almost certainly other insights that are mundane, boring obvious and intuitive to PG, yet are highly counter-intuitive (and interesting) to others.
Of course it's all just anecdote and opinion for now and probably a controversial position, but hoping advancements in cognitive neuroscience research, would one day be able to test this empirically.
I think you're bluffing. For someone with normal human intuitions, the reward curve of startup investing should be counterintuitive, because it's very different from all the reward curves that were available in the ancestral environment.
Is it really that counter-intuitive, though? A sample of two "rock stars" doesn't seem to be enough to draw conclusions from it.
For instance, whereas Airbnb can admittedly be seen as a questionable idea (but not outright bad), Dropbox (the idea, before implementation) sounds like a very good idea. Maybe not a $7b idea, but still very good.
Of course, among the YC funded startups, there may be a lot of ideas that sounded bad at first; but if all those startups are in fact financially irrelevant, should they be used to try to build a theory of success?
- - -
It's interesting to learn that if YC funded 10x more startups they would be just as successful (and maybe more, since there could be a big success in the startups that are left out) -- it means that if the selection process rate is around 10%, YC could do without it entirely, with no significant effect to its bottom line.
Dropbox (the idea, before implementation) sounds like a very good idea. Maybe not a $7b idea, but still very good
I don't think so. My first encounter with DropBox was very similar to my first encounter with Google... but it was "Oh look - another way to share files" rather than "Oh look - another search engine".
Or indeed many, many people's reaction to the release of the first iPod ("Oh look - another mp3 player").
Predicting their current level of success from the point of initial investment - pretty close to impossible without the benefit of 20/20 hindsight. Their success depending so much on how well they executed and the smart changes of direction that those companies made along the way.
(with, maybe, the exception of the iPod which was a bit more obvious for those that paid attention to iTunes)
E.g. Would DropBox be anywhere close to their current position if they hadn't figured out their freemium / recommendation based model for customer acquisition?
Although I predicted the iPod would fail (...!!), I strongly disagree with you about Dropbox.
I dreamed about something like Dropbox before Dropbox existed; I always have had many different machines that needed to be "synchronized" by hand. I carried around hard drives, and Iomega disks and whatnot, and used "Beyond compare" to sync all of those and it was a nightmare.
The recommendation model of Dropox had nothing to do with me adopting it -- I didn't receive a recommendation and didn't send any. But I was very excited when I was first able to use it, and still find it amazing.
Before I used it DropBox was just another file sharing/syncing software. One of a whole stack of 'em that all seemed to suck in one way or another.
I'm sure that they all promised that they would be bringing cloud file storage to the masses as part of the initial pitch.... and I tried them all because, like you, I wanted this service before any of 'em existed.
Why did DropBox win and all of those others failed (or, at least, didn't succeed so wildly)? Why was it obvious to investors that DropBox was going to win, and the others "fail"?
Was it obvious? I always thought DropBox won because of its built-in viral marketing through sharing and the streamlined installation + web frontend. But was that before or after investors began pouring money into it?
We obviously agree on everything... except the "Dropbox promise". I don't think Dropbox had any competitor when it was founded and I'm not sure it has any now.
Dropbox is not another file sharing software; the application form to YC doesn't even mention file sharing:
Dropbox synchronizes your files between your different computers -- silently, automatically, without you doing anything except turn those machines on.
Nobody did this before Dropbox and still nobody is doing it now (except maybe AeroFS, which is much more difficult to setup and use -- but certainly not iCloud or any other "solution" that is restricted to one OS or company, and certainly no backup solution either).
That's why it was a fantastic idea... which has since been coupled with a brilliant execution, yes. But the idea itself was amazing.
I'm sure there were companies that were doing the same thing as Dropbox at the time that Dropbox was released. To name one example - Microsoft's SkyDrive (apparently called Windows Live Folders at the time), released either around the same time or prior to DropBox, depending on your definition. It's been a while since I've used it, but I remember the functionality being roughly equivalent between the two products (in that they fulfill the base use case of silent synching between two computers)
That isn't to say Dropbox didn't blow them out of the water in regards to execution, but it wasn't an idea that was completely without precedent. Ideas rarely are, even if they seem like that in retrospect due to one company out executing everyone to an insane degree.
> but certainly not iCloud or any other "solution" that is restricted to one OS or company,
This part is important. The Microsoft service only synced to your other Microsoft things. iCloud only syncs to your Apple things. Dropbox syncs everywhere.
The reason dropbox wasn't an obvious winner was that it had so few features.
"I can't sync more than one folder? It syncs everything to every device? (not anymore). It doesn't use WebDAV? Oh well, at least it's simple. I'll just use it until something better comes along."
And they win.
Of course they have plenty of features, an API and much more flexibility that before if you want it, but none of that complicate the core function - a directory that syncs.
Go to pretty much any college and see how students share files.
Dropbox is to file sharing, as facebook was to social networking as Google was to search.
When I try to IM a person a picture, they may be on any one of a dozen IM systems (almost all of the compatible with Adium) - and my success in DMing them a picture is <10% trying to get through firewall. Email used to be my goto approach, but that took a bit of the spontaneity out of it.
Dropbox gives me the ability to drop an image on our shared folder and "real time" have it pop up on their side. I do this all the time, and it's just one of many, many common uses of Dropbox.
Easily the most useful new utility that I've added in the past three years to my OS X system.
But - your perspective on Dropbox - is precisely why it was so hard to predict - even after using it, who on earth would have know that it would have taken over the file sharing space so quickly? And _everyone_ thought google was going to get into this space much, much earlier.
As it is - on the surface, google offers better value and more space for your money - but I don't have a single friend who has switched over to their shared drive. We've all stayed on Dropbox because of the network effect (we've all got shared files via Dropbox - don't want to add yet another file sharing system to slow down our computer.)
We'll see if that works out in the long term - it certainly did with search.
There speaks the man who never had to share files with twenty different people, each using different computing platforms and of varying technical competence.
Cross-platform internet file sharing in a transparent way is a (surprisingly?) hard problem. Before Dropbox there were many companies who had tried to make a success of it and they had all failed[1] in one way or another. (Not cross-platform enough, not seamless enough, reliance on ads for income etc etc.) DropBox succeeded because they took that hard problem and made it look easy.
I have to think about it all the time. It flatly fails to serve my gaming club. We have a Gb of card images for our card games. Almost every club member cannot share these files, since they run out of space.
Think about it. Sharing files between 25 club members, using our own bandwidth, our own disk space. And Dropbox thinks we should pay them big bucks for this. For what? Storing our files on their server, insecurely? If they had an option to stop doing that, I would select it.
Well, OK. The fact that it doesn't solve any problems for you has little bearing on the excitement of those who, like me, find that it solves many of their problems.
The reason that storing files on their server (and using their bandwidth, as well as yours) is important is that it means I don't have to keep all my synced computers on at all times. That's a big deal for me.
It sounds like yours is another problem, which Dropbox is not well adapted to. Perhaps you'd be better off with PowerFolder or similar.
Just posting my experience, like others here do all the time. Another example is instructive.
My problem is, Dropbox scales the cost as the number of people looking at a folder increases. As an Engineer I see that as marketing, their cost doesn't increase incrementally in this case. It seems unnecessary and blocks me.
Btw you would only have to keep 1 synced computer on, some of the time. Not a big deal actually. And why keep my data around on their server after we're synced? Simpler for them I suppose, but insecure for me.
I could try and get everybody in the club to install another tool; might look into that, thx.
Because IT JUST WORKS. Dropbox is multiplatform, fast, almost zero-hassle to install and maintain and free (up to a size limit). What more could you ask?
I often work on my Macbook on the train, then when I get to the office I switch to a Win7 PC and continue working on those same files. There is zero hassle and I can hardly imagine a better solution. ()
As a bonus I get access to all my files from my smartphone and ipad. And with the ipad being such a pain in the ass to synchronize, you really need some kind of dropbox-like solution.
() - Maybe if you did all your work inside VMWare and had the state of the OS image automatically synced between computers that would be a nicer solution... Then you would not have to close your project files on computer #1 and reopen them on computer #2.
Quoth pg: It would hurt YC's brand (at least among the innumerate) if we invested in huge numbers of risky startups that flamed out.
Paul, you're sounding like a venture capitalist who is worried about whether he can find investors for his next fund.
I would posit that the people whose opinions you should care about are potential founders; and that their primary concern is themselves, not the performance of a fund (oops, I mean class) as a whole. You're damn right that it would hurt YC's brand if 70% of each class didn't survive past Demo Day -- because for an individual founder, success is pretty much binary, and having a 50% chance of becoming a millionaire is more attractive than having a 5% chance of becoming a billionaire, despite the 100-fold reduction in mean wealth.
You may be in in the business of farming black swans, but if they're all you worry about you'll find that all the swans end up laying their eggs elsewhere.
I do care about would-be founders' opinions, but surely I don't have to use every essay I write to convince people to apply to YC. I've already written elsewhere about the founder's eye view of YC (e.g. http://ycombinator.com/atyc.html). This essay is just an exploration of the strangeness of startup investing as a business. The goal is not to convince anyone to do anything.
Off-topic, but something I've been chewing on lately: what's it like to have your every written (or spoken!) word analyzed by a bunch of people? Esp. people that you end up having some form of contact with.
It seems like it would be difficult to just have a public conversation about a topic. Do you think about that much when you write?
It's pretty grim. I think that's one of the reasons I write fewer essays now.
After I wrote this one, I had to go back and armor it by pre-empting anything I could imagine anyone willfully misunderstanding to use as a weapon in comment threads. The whole of footnote 1 is such armor for example. I essentially anticipated all the "No, what I said was" type comments I'd have had to make on HN and just included them in the essay.
It's a uniquely bad combination to both write essays and run a forum. It's like having comments enabled on your blog whether you want them or not.
Having people pick over every detail of what I write is something I like about HN -- it forces me to think more carefully about what I'm saying, and on a few occasions (tptacek, I'm looking at you) has even prompted me to go back and write further blog posts about specific points.
Of course, my blog posts don't get nearly as much attention as your essays, and I don't have the problem of having people try to draw attention to themselves in the hopes of being remembered when applications are considered for the next YC round.
I can't tell here if you're just off-hand mentioning something you like about HN, or if you're also suggesting that it's something other people should like too.
Your posts are more technical in nature, and can benefit from debate. Other people might write things that are more personal, or opinion, or thinking-aloud, and while a little bit of good-natured feedback from trusted people might be appreciated, lots of nitpicking and debate and very public arguing is not.
I can't tell here if you're just off-hand mentioning something you like about HN, or if you're also suggesting that it's something other people should like too.
The point I was trying to make was that I would be disappointed if what pg clearly saw as a problem was "fixed", because for me it's a feature.
For you it is, for others it is not. You would be disappointed, others would be contented.
(I'm not picking on you btw, I have a tremendous amount of respect for you. But I don't think your desire for debate on what you write is suitable justification for other people putting up with the same, especially when it's discouraging them from writing.)
Well, I still enjoy your essays. Let this comment be the generic encouragement of those who aren't trying to pointless dispute and who are usually silent.
At least some of the people who are questioning you are probably doing so out of intellectual curiosity, rather than animosity. You probably know that intellectually, but for many people—including me—it's sometimes hard to remember that in the heat of the reading moment.
I hope this buried comment isn't overlooked, but let me caution the reader that intellectual curiosity is often interpreted as animosity. It took me many years to realize that my constant barrage of questions on, well, anything was offputing to a significant fraction of people I interacted with. Perhaps this is obvious to many of you, but it was not to me.
> I had to go back and armor it by pre-empting anything I could imagine anyone willfully misunderstanding to use as a weapon in comment threads
This is perhaps the worst thing about discourse on the internet. If you and I were having a conversation in room, you'd never pretend to not understand me to rip into me (maybe to understand my point better.) But on the internet, so many people are just trying to score points that it's nearly impossible to have a conversation.
After I wrote this one, I had to go back and armor it by pre-empting anything I could imagine anyone willfully misunderstanding to use as a weapon in comment threads. The whole of footnote 1 is such armor for example.
You don't give your detractors enough credit. Many of these misunderstandings are not willful, and actively seeking to avoid them is almost always good practice on your part. (In my opinion.) For the record, I found footnote 1 illuminating.
I'm sure that the intense scrutiny you get would annoy any writer. But I think it genuinely makes your essays stronger, too, and I hope you don't hate it too much.
1, that's terrible. So many benefit from the ability to read (and interact with) your opinions. It's so much more valuable than a random once-off Reddit AMA. It's a shame the value is reduced through the actions of a few.
2, this community attracts young smart people, exactly those who might want to match wits with you. Some of it is valuable, some is just annoying. I'm reminded of the niceness value in discussion; if everyone was nice about it, maybe you wouldn't feel as apprehensive or besieged and we could still have a good debate to extract the maximum benefit.
In the end, I hope you find some way to care less about the opinions, because what you do and write about are so valuable. In the spirit of "If you aren't writing enough wrong stuff, maybe you're being too cautious."
When I saw this comment (before reading the essay) I was ready to decry this armoring. But now, having read the essay, I think it's a good thing. This essay flows nicely and is clear. Footnote 1 is a good clarification, especially if someone hadn't read your other essays.
I think at least half of the misunderstandings that arise in HN comment threads are honest misunderstandings.
You're missing my point -- I was objecting to the "(at least among the innumerate)" bit. It would hurt YC's reputation among everybody who matters, whether innumerate or not, if 70% of YC companies didn't survive past Demo Day.
Maybe this is just idiomatic, but when I see "it is thought (at least by people with property foo) that...", I read the parenthetical comment as meaning "people without property foo don't think this way".
"I do care about would-be founders' opinions, but surely I don't have to use every essay I write to convince people to apply to YC."
The essay reminds me a bit of the argument that the Native Americans actually got a great deal when they sold Manhattan for $24, because that money would be worth about $30 trillion today if it had been invested at a return of just 7.5% for the past 385 years. I think it's interesting and worthwhile to explore these sorts of mathematical ideas, but at the same time it's impossible to make good business decisions without fundamentally basing them on human needs, human scales, and human timeframes.
It would hurt founders' perceptions but wouldn't actually decrease any individual founder's chances of success. YC would just accept a bunch of people who aren't likely to get funded.
What would happen if you split up the batches into two groups, YC Classic and YC Black Swan, and placed founders into the groups post-interview? People who were placed in YC Classic could continue to have the expectation of ~100% demo day success they do now, while the people placed in YC Black Swan would be told "I find your idea interesting and we'll let you in but don't expect funding after demo day." People could take the Black Swan offers as rejections if they wanted.
There are a bunch of problems with this approach, but I wouldn't be totally surprised if way more than 30% of YC Black Swan was funded.
I love this idea, because it addresses the two fundamental issues at play here: the social and the financial. Considering YC as a single entity, the optimal funding strategy must take into account both the power law on returns and the prestige of the program. If YC loses its place as the most prominent and well-respected startup incubator, the Dropboxes and Airbnbs of the future will either forgo the application or suffer from lack of investor interest. If YC limits itself to only those companies that have an extremely high chance of getting funded, the outliers will never find a way in.
Let's say that p_accept is the probability that YC accepts the founders of the next Dropbox. YC itself cannot optimize for p_accept because of the factors mentioned above: instead, it has to optimize for p_apply * p_accept * p_fund, the product of the chances that those golden founders will apply to the program, be accepted, and find the funding they need to grow and thrive.
With the hypothetical YC / YC Black Swan split, the original YC can optimize for p_apply * p_fund, and YC Black Swan can optimize for p_accept. Not only that, but since all Black Swan candidates would have started as applicants to YC, Black Swan's p_apply would equal that of the original YC. Numerate investors with the same sense of the power law as pg would take care of Black Swan's p_fund.
Thus, all the prestige, cultural appeal, and midsize exits would derive from the original YC, but all the power-law returns would emerge from Black Swan.
If you could pull that off without discrimination that would be an awesome idea. It may cause somewhat of a North/South Korea kind of thing but if it can be done it would be a great data collection exercise that investors, founders can really learn from.
Would be interesting to learn why the black swans have done better then the normal batch, or why the normal batch did better or why it was a 50/50 split.
You might even learn that because a startup is considered as a black swan founders in that group work harder and thus have a higher success rate. This would really put into light debates about how much intelligence vs hard work may effect success rates in the world of startups.
It would hurt founders' perceptions but wouldn't actually decrease any individual founder's chances of success.
In a world where potential founders are making a choice between YC or doing the startup anyway without YC, sure. But the world is more complicated than that, and I'm sure there are plenty of potential founders whose decisions are informed by what they hear from YC.
[...] split up the batches into two groups, YC Classic and YC Black Swan [...] People could take the Black Swan offers as rejections if they wanted.
This sounds like a very good model, in that it would separate the "is this something YC wants to invest in?" axis from the "does Paul Graham think that I'll succeed?" axis.
Interesting, but am not sure it'll work from a marketing/founder-motivation perspective. There may be a segregation VCs can see, but it is not clear what effects it'll have on the company/founder's future efforts/commitment to the startup business.
The group-think effects are to be considered, before adopting this model. Am obviously not predicting anything, except perhaps this move might make the Black swans even more unpredictable.i.e: if you look at the Tableau of payoffs here(http://edge.org/conversation/the-fourth-quadrant-a-map-of-th...). this move can push investments from complex payoffs to very complex payoffs easily.
Personally, i am likely to even shoot for the YC Classic group deliberately or in rare optimistic moments, the Black Swan group.
The problem is you are applying post-hoc analysis.
While a theme was that the outsized returns can come from ideas which sound bad, it doesn't necessarily say that all outsized returns come from bad-sounding ideas.
Not only that, but I think reading the essay will show that the outsized returns are not known until several years after demo day.
Sometimes bad ideas are just bad ideas. In the Venn intersection between bad-sounding-ideas and good-ideas - the 'bad sounding and not good' is a much bigger area.
To me, the entire essay is about making sure that institutionally, the bad-sounding-but-ultimately-good ideas are not left out. Trying to further identify and silo them at application stage would be even more fraught.
Khosla Ventures actually has two separate kinds of funds set up for such funding -- KV Seed for science experiments, and a larger fund for more classic investments.
The main difference in branding for KV's funds is really only to the LPs, though they do mention it to founders on their website. They want to cover themselves in case the seed funding both doesn't return anything and looked to be imprudent in retrospect. Luckily I think they're doing well.
Vinod is actually quite explicit about trying to find black swans in his pitches :-)
Isn't there a simple solution to this problem? Bundle the unfundable ideas into a secretive spinoff. Say, call it YC BlackOps, or something. Keep it mysterious, like Google X Labs. If you do it right, it won't hurt the YC brand.
There's a pretty interesting lesson for potential YC candidates, particularly the ones that get turned down, here.
When you interview a startup and think "they seem likely to succeed," it's hard not to fund them. And yet, financially at least, there is only one kind of success: they're either going to be one of the really big winners or not, and if not it doesn't matter whether you fund them, because even if they succeed the effect on your returns will be insignificant.
What this means is that YC is not looking for sustainable businesses, but homeruns. Which is entirely fair, that's the business they're in.
But you and your startup are in a different business: Your measure of success isn't the same as Ycombinators. If your startup ends up making you a million dollars a year you will probably be very happy and rightfully call yourself a success. But as the post points out that won't be enough for YC since they need to fund a lot of other startups that will inevitably fail out of their minority share. Thus they need a much bigger success.
If you get turned down for YC it might well be that your idea is just a sound business idea that YC doesn't consider just crazy enough that it might make them a billion dollars. But that doesn't mean that it won't make you a million.
At the same time YC doesn't mind those businesses and certainly ha a lot to offer them. Just when defining success of the fund as a whole these businesses at comparatively little to that.
Granted when they initially pick your business it is probably by because you explained what a great lifestyle business it will be.
That was my knee-jerk reaction to it too, but I re-read it more carefully and paid attention to the parts that specifically say that that's not what they're looking for. e.g.:
> I'm not saying that the big winners are all that matters, just that they're all that matters financially for investors. Since we're not doing YC mainly for financial reasons, the big winners aren't all that matters to us.
Also,
> If we ever got to the point where 100% of the startups we funded were able to raise money after Demo Day, it would almost certainly mean we were being too conservative.
(and the entire rest of that section talking about how they can afford to take huge risks, and should be.)
On the whole, this piece sounds like some observations and thoughts from pg, and nothing more. I think founders shouldn't try to read too much into it, specifically whether or not YC would be interested in their business.
YC might choose to fund you just because they like you.
I've been rejected from YC several times, two of which were in interviews. The most recent rejection was supposedly because they thought it was unclear we could become a large venture backed company. I've also had YC founders trying to hire my co-founder and I, questioning why we were still running our company after the rejection.
Despite the rejection we are growing each month, turning down acquisition offers, our customers love our products, and at 24 years old, we are learning a ton. We have no investors, are profitable, and have a lot of time to grow the company and work on crazy ideas. I am having the time of my life.
It's really important to understand the business YC is in, and to separate your self-worth from it. It's also important to not hold any negative feelings towards them, since they are merely trying to maximize their outcomes, and they know the market quite well.
Go follow your passions and make stuff people love. The rest will follow.
But you have to convey the sense that annual profits of one million is not your idea of "success". Because if that is your idea of success, you will not likely be the "big winner" that YC is looking for.
Put an evil twinkle in your eye and make internet VC think you want to rule the world and will lie, cheat and steal to achieve this, when truly you're just an honest kid with good morals who'd be happy living a modest but financially secure lifestyle.
> If your startup ends up making you a million dollars a year you will probably be very happy and rightfully call yourself a success.
I see this a lot from various corners of the startup ecosystem, particularly 37 Signals and their followers. The problem is that it's not really true, by which I mean there are not very many examples of it begin true, and there is an excellent reason to believe that it may never be true. Which is: you need to find a market big enough to support "lifestyle income" (or your million dollars a year) but not big enough that a startup or growth technology company that is really good at doing things at scale isn't just going to eat it, and kill you in the process.
One of the reasons Jason Fried needs to yell so loudly about 37 Signals being the model for lots of other companies is because it's really not -- it's really rare to find a lifestyle technology business.
it's really rare to find a lifestyle technology business.
The traditional challenge you'd level here is "Name three" (37signals, Fog Creek, Balsamiq) but, due to the type of people I hang out with, I could get to fifty before having to slow down and start checking my Gmail. A friend of mine who is in the selling shovels business estimated that there are 30,000 firms selling SaaS. (That number struck me as crazy until I realized that, oh yeah, I'm routinely in rooms with several hundred of them at once.) The overwhelming majority will never raise outside capital.
Are those fifty making 1 million dollars a year (per founder) from products? I mean it's obvious that you can make a good living in tech by consulting, but I'm curious how many "lifestyle" product companies are out there that make profit in millions.
I don't think profit per year per founder is a good definition of "lifestyle business", a better definition would be "can you make money while you're sleeping/on holiday?". If you're a consultant, then you don't make money while on holiday. I don't even think you need €1,000,000 per annum to count as success, I'd set the bar at €100,000. I'd be quite happy to make that amount per year in my sleep.
"a million dollars a year for you" was a limit given in mixmax's comment, and Marc also use that.
So I'm just curious if Patrick was really meaning that he can without pausing name 50 non-VC backed lifestyle product companies that are making $1M in salaries and profits for their founders, or that he meant that he can name 50 companies that are generally well-off, and are making e.g. a few thousand dollars per year for their founders.
The difference is important in my opinion, as I can name a several that make a few thousand dollars a year by consulting, but I don't know people that make over a million a year for themselves with an internet product without an investment. Those that I personally know that earn $1m, are in more fishy type of business (E.g. quick SMS loans) and have a sizeable financial backing from more traditional investors.
Any multi-person consultancy in our industry can easily be doing $1MM.
Most companies that build and ship product can easily consult, so, any of those companies that continue to ship product for multiple years should cause you to ask how much more than $1MM they must be making.
"Salaries and profits" is an awfully weird metric, since salary is the #1 cost factor both for consultancies and product companies. Maybe you should just say "revenue".
I respectfully suggest that your radar is off here. No, you don't need to be in "fishy types of businesses" to break $1MM.
Maybe my English is causing problems here (I'm not a native speaker). Of course there is a huge amount of lifestyle companies doing millions in revenue.
But that's not what founders themselves earn. Founder's personal salary and a slice of pure profits that are not reinvested to company growth can be considered a total that founders "earn" in lifestyle businesses.
Even with this metric, of course there is a lot of lifestyle internet companies in the world that do over $1M per founder. I'm just interested if Patrick meant that he can name 50 companies (presumably from his network) that are doing this well.
If the founders are smart, they will personally earn very little, and funnel as many of their expenses through the business as possible, for tax reasons.
I worked for consultant who had a lifestyle business. He pulled in nearly half a million dollars in revenue per year, but I got paid a higher salary than he did. But I drove my own car, and he drove a company car. He didn't own a computer, but the company had a fiber connection, a server room and several very nice recent laptops. He didn't own a cell phone or a camera, but the company supplied him with a nice world smart phone and multiples of the latest cameras. He rarely took vacations, but the company paid for him to travel the world to visit clients and trade shows. Etc.
It's for this reason that revenue is often a better gauge of success for a lifestyle business, than profit or salary.
>it's really rare to find a lifestyle technology business.
You... must live in a different world from me. I mean, I am a lifestyle "technology" business. Most of my customers are, too... a whole lot of them are so small that they still have dayjobs. For that matter, most of my suppliers are, too.
But think of all the web design firms that exist. All of the small-business IT firms. The small consulting shops of various stripes. There are huge numbers of these "too small for important people to care" companies. and so many web applications are thrown together by one person, just messing around.
Many, probably most of my suppliers and competitors are also small operations owned by one or two people. Linode, as far as I can tell, started a lot like I did; and so did most of my smaller competitors. (Slicehost is the counterexample; my understanding is that they started in a very startup-y manner.)
I mean, obviously, you get fewer firms as you raise your revenue cutoff. If you require millions of dollars a year in revenue, nearly all my customers fall off the list... but actually, probably not that many of my suppliers. I mean, I'm buying one rack from coresite, 5g from cogent, and 1.1G and 2 racks from he.net, but that's less than half my monthly outlay, and other than that, all that money goes to small private companies (and really, he.net might be considered a small private company that grew to be a not-so-small private company.)
Slicehost is the counterexample; my understanding is that they started in a very startup-y manner.
Maxed out their credit cards, tried to find angel funding in St. Louis, and got told the going terms were "We'll get 50% of the company to cosign a loan for you" so they continued to bootstrap, managed to successfully structure a pricing model such that customers pre-paid for services (allowing them to service most of demand), rode on to acquisition by Rackspace... if I recall correctly. (Pours one out for Slicehost.)
hm. do you know where I can read more about them? or is this stuff you know personally?
They did seem to grow... very quickly. My impression was that they grew much faster than linode or I. Of course, I have no numbers to back that up either way.
I relate to "I have a limited shelf life in a big company" I mean, I'm literally 1/10th the size of slicehost when they were bought, but I have gotten a few companies courting me for a buyout... The thing is, at this point, they want the company for me, and it's pretty clear that I... well, I might stick around for a few years, but working for someone else just isn't what I want to do.
I mean, I can be bought, like anyone, but I imagine that because I know this about myself? I kinda think that my attitude would scare off anyone that might buy us. I mean, to save time, I've actually come up with a formula for how much money I'd want; some lump sum dependent on the size of my company, plus another large sum for every year they want me to work for them, plus another (smaller) sum for every year they want me to avoid competing with them.
I dono. This was mostly to save time; I was hit with two courtships within a relatively short period, and felt I was spending too much effort on it, but eh... I dono. I haven't gotten other nibbles for a while, so it's likely that it's rare enough that time spent on it isn't a huge deal.
I've always taken Linode as the model for where I want to take my company; of course, I've gone off in kindof a different direction; I want to own a network, and a datacenter, while Linode has preferred to have multiple locations. (I mean, it's one or the other.)
man, 0-20,000 users in less than 3 years? damn. I've been at it for what, seven now? eight? and I've achieved 1/10th that. Even if we only count from the time when I kinda figured out the hardware end of things, 2007 or so, that's still five years.
Congratulations on your success. The overwhelming majority of people will never run a hosting company. Of those that do, many of them will be unable to sustain it to 2k customers and run it profitably for half a decade.
With regards to the new knowledge that 20k customers is possible, that just gives you something to shoot for next, right? There's something you can do that starts at 2k users today and gets you to 20k users. You know that is possible, because other people have done it. So work on that. (Knowing from previous conversations that you're rate limited on customer acquisition by processes other than marketing I'd suggest, as the Slicehost guys did, "automating the "%#)(% out of everything" and then focusing on customer acquisition as your primary job, if that is a huge priority for you.)
More broadly: philosophically, if we consider ourselves failures for not doing things other people have done, then we'll all be failures essentially all of the time. That strikes me as an unhappy bit of philosophy to adopt then.
>With regards to the new knowledge that 20k customers is possible, that just gives you something to shoot for next, right?
Well, yes. Mostly I'm just amazed how they did that so quickly. That is admirable. But, I guess most of my growth has been in mad dashes, too... mad dashes followed by lulls where subscriptions keep pace with cancellations. I can see how it'd be possible to keep up those mad dashes, if your automation was better to start with, and if your support was better, and the marketing. All these are things I can improve; but it's admirable how they absolutely nailed all those things in such a short period of time.
>I'd suggest, as the Slicehost guys did, "automating the "%#)(% out of everything" and then focusing on customer acquisition as your primary job
Yeah. This. I mean, I make the excuse that I'm too busy 'shooting alligators' but you really have to set aside time to drain the swamp (and let's be honest here, I've started a bunch of different projects... time that would have been better spent on draining the swamp by automating more of this stuff.) I did actually make a lot of progress automating the killing of old accounts the night you wrote that. (It's still a manual process, but I wrote some scripts that took it from being an all-day thing to clear out everyone to it being a 10 minute thing to clear out everyone.)
>More broadly: philosophically, if we consider ourselves failures for not doing things other people have done, then we'll all be failures essentially all of the time. That strikes me as an unhappy bit of philosophy to adopt then.
The balance between arrogance and considering oneself a failure is a tricky one. I mean, I know that the only thing that has come close to destroying me was that confidence. (Well, after getting out of school. That's a long story; but there certainly were plenty of strong voices saying that I can't do it then; they were all, of course, trying to get me to put in the effort to get into a reasonable college, the upshot, of course, being that nearly everyone told me I was going to work at 7-11 if I didn't go to college, and it was obvious that I wasn't going to do so. I think a lot of my arrogance is innate, but a lot of it also comes from just how easy the real world was for me, compared to school.)
But yeah, PG wrote about confidence in a way that I related to, perhaps better than anyone else I've read:
"But you should treat your optimism the way you'd treat the core of a nuclear reactor: as a source of power that's also very dangerous. You have to build a shield around it, or it will fry you."
That line, really, is why I got interested in his writing and in this community. I've gotten burned badly, several times, by raising the control rods too much. I know that for most people I know, their big mistakes usually have to do with hitting the metaphorical SCRAM button before the reactor even gets warm, but for me? The big problems have always been that over-reach; the over confidence.
Of course, Graham goes on to say:
"The shielding of a reactor is not uniform; the reactor would be useless if it were. It's pierced in a few places to let pipes in. An optimism shield has to be pierced too. I think the place to draw the line is between what you expect of yourself, and what you expect of other people. It's ok to be optimistic about what you can do, but assume the worst about machines and other people."
which, of course, I believe is Very Bad Advice if you are a flawed individual. Self-doubt is essential to survival. Personally, I like the control-rod metaphor. When things get too hot? you lower the rods and let things cool down. Need more power? raise the rods.
But always be aware that while having no power is a problem, it's easier to clean up after a SCRAM than a meltdown.
Of course, much like how it may be best for the military to select fighter pilots with irrational levels of confidence, I can see how it would be best for an investor to select founders with irrational levels of confidence. If th...
I am the business guy; that was kindof the point of this experiment. I don't have some other idiot telling me what to do. (I mean, sometimes I still have an idiot telling me what to do, but it's not some other idiot.)
There was one guy that I turned down that I probably shouldn't have turned down. But he was more technical than I am, too. That was probably a mistake, but he's working on his own thing now.
The thing is, nobody else would have had the follow through to keep bleeding money on the thing for as long as it took me to figure out what the hell I was doing. I mean, would that have been better? maybe. Almost certainly my lifetime earnings up 'till now would have been greater. Or maybe a business person would have kicked my ass 'till we came up with a solution that kindof worked even though I didn't know what I was doing? Or maybe they would have come with enough money that I could have compressed those lessons into a shorter timeframe? (Most of my early mistakes had to do with hardware and the cheaping out on thereof. With sufficient capital, I could have moved on to making other mistakes earlier.)
But really, having a business guy would have been counter to most of the reasons I went into business in the first place. I thought I could do it better. If I really am wrong, I need to accept my place and get a job.
First, I hope you take what I am going to say as a compliment. Since I've heard nothing but good things about your company (specifically from a guy that is very technical that told me about it originally that I highly respect so you get blessed by that association).
The thing that is holding you back is that you are very honest and conscientious. All you have to do to determine that is to read your page on "colo" at your site where you are very frank about the fact that the rent might go up. That is very atypical in business. I've seen the same ethics hold many people back. I'm not saying at all that everyone who makes it big is unethical because of course that's not the case. But I've seen many people who haven't made it who are just to damn honest and I've seen many people make it that are just unethical and easily pull the wool over people's eyes.
Now of course everyone fibs a bit here and there. It's not like a person is either totally honest or a total cheat. There is a gray area and it's a continuum.
Anyway that's my take on things. I can point to the obvious example of Jobs and Woz (of course Woz had no business sense but the fact is he really didn't even know it was possible to be screwed by Jobs so he couldn't even protect against it.)
I think you have a great thing going. Personally I feel you should move away from the hacker market and move more mainstream and raise your prices. Or perhaps develop a different site to address that market. If you are interested, I'd get involved in that possibly.
>The thing that is holding you back is that you are very honest and conscientious.
I don't know if that's true or not, on either side, but it's certainly a great compliment. I definitely want to be seen as honest to a fault. (the counter argument is that I do often over promise. I do not always temper my confidence with enough reality. I'm not trying to be dishonest in those cases, but the effect is the same.)
Really, though, saying "I'm not successful because I'm too honest" sounds a little too much like sour grapes for me to accept it as the truth. I mean, I'm a cynical person, but it just doesn't ring true. Markets are more complex than that. Yes, there is a constant arms race between buyer and seller, an arms race of deception, but participating in that arms race is very expensive. I believe this is a lot of why "cloud hosting" and other transparently priced services are so much more expensive than colocation. People are willing to pay extra to avoid that expensive bullshit. (the other reason is that it's so easy to raise prices on hosted products... I will explain near the end of this message.)
Well, and more to the point, I'm mostly doing this for fun. I can make a lot of money working for other people, I mean, before I was published I was working at what I consider absolutely ridiculous rates. there's way less upside risk; but making bay area computer nerd wages is plenty comfortable. If I have to do things that make me feel bad to work for myself? eh, I'll just go back to working for other people. I mean, I'm not saying that I wouldn't do something I felt unethical if I were starving or I couldn't provide for my family or whatever... but I'm not in that position. My 'plan b' in case of failure is downright cushy.
>All you have to do to determine that is to read your page on "colo" at your site where you are very frank about the fact that the rent might go up.
Co-location is run like commercial leases; e.g. when it comes time for renewal, the amount the rent goes up is determined by how hard the landlord thinks it will be for you to move. You can have empty units on either side of you and the landlord is gonna say "Yup, market rents have gone up!" if the guy knows that you've put down roots and moving would be difficult.
The thing is, co-location, by it's very nature, is difficult to move, just like commercial real-estate. And if you say it's extra hard to move? well, I told one provider that it would be difficult for me to change IP addresses. Within a week (and this was about a month after I signed a 2 year contract /after/ feeling like they screwed me while I was on a month to month, thinking the contract would protect me.) bam. Suddenly I'm paying a buck fifty per month per IP address (that's a reasonable price for one IP. but I had 768. ouch.) Now, I don't know the whole story; they say their provider (the ones that actually own the IPs) started charging them and they are just passing that through, so who knows, but I certainly felt like I was getting screwed.
So yeah; a rational actor expects providers to screw him as much as possible, and does not expect contracts to mitigate that risk very much.
If there was a way to honestly signal that you were not going to do that, I think you could attract customers.
One possible way of doing this is charging all customers the same amount for the same services; If I did that in a way my customers could verify, they would know at least that I could not raise prices more than what the average customer would tolerate (e.g. the customers that make it obvious that it's hard for them to move would not get extra screwed, they'd be protected by the customers that could easily move.) which is something. This is what I'm trying first, but it's complicated by the fact that everyone is used to getting custom configs in co-location. Salesguys love custom configs, because it makes it harder for customers to compare prices.
Really, though, this is not a complete solution. I don't know of a complete solution yet....
Thanks for the insightful reply which I will read again to fully digest.
One thing I wanted to add though on the issue of your costs increasing and the "retail" market. The retail market hates to switch (as much as you hate to move colo) and will stay with their current solution to avoid having to make changes (and that goes for the "tech" guy that works for the retail customer it's not to his benefit to switch hosting if he can simply pass the cost on to his customer or his customer pays directly).
So while your costs increase on a wholesale level the amount your customers can and will pay will increase as a much larger number. (If you want.)
I would explore a deal with your landlord that allows you to pay him a % for your success which takes the uncertainty out of your costs. This is similar to what is done at a shopping mall. The tenant pays for "sales" in addition to a base. While it might seem counter intuitive to do a deal like this I know I wouldn't want the uncertainty of pricing increasing and having to be negotiated in real time. That way your interest and that of the landlord are in line. And anything can be negotiated.
Generally in retail realty, a store will sign a lease and have options to renew at a preset rate that protects them. Starbucks doesn't sign a lease nor does the local pizza shop and then be held hostage. They do agree (nnn lease) though to cover any increase in costs that the landlord has in taxes etc which the tenant knows can be verified and make sense. Generally. It won't be a deal where the landlord sees they are successful and then makes a decision that they can't move and they play this game and jacks up the rent. That is what appears to be happening with your situation so I would work to get around that.
I'd be glad to do strategy with you on this further if you want. Feel free to contact me.
Isn't this article implying that it's awfully hard to find success in the VC model as well? With the traditional funding model, you're either an AirBnB, DropBox, or someone who ultimately isn't going to make much of a lot of money at all. If you're lucky, you'll come out of it with something that maybe makes up for the blood and sweat equity you put into the company for little or no pay.
Ultimately, I'd agree that successfully getting a 37 signals, Balsamiq, or Fog Creek off the ground is difficult, but compared to the VC model of "DropBox or bust", it seems like a much more attainable goal.
I think the main lesson is that there's really no free lunch in the startup world - we've all heard it a hundred times before, but there's no silver bullet that guarantees success, or even a decent chance at success in this business. It's not quite the lottery, but a 1 in 50 shot probably isn't unrealistic odds.
There's a huge world of $M businesses out there outside of the narrow Techcrunch-oriented ad-driven consumer internet biz. I did consulting for a while and met tons of small niche companies making millions for crappy software (and often crappy service). Long ago a guy at MSR told me they wrote up business ideas for Bill Gates' Think Weeks. He said it was easy to come up with lots of $100M ideas, but no one cared. MS needs $1-10B ideas to make it worth their while.
The reason I'm not rich is because these niches are hard to break into. It's all about enterprise sales to obscure niches. In fact, we need a dating event to pair enterprise sales people and tech founders. I tried enterprise sales, but within a month I wanted to kill myself. It takes a special breed of human to do that.
"What this means is that YC is not looking for sustainable businesses, but homeruns. Which is entirely fair, that's the business they're in."
I think it means more than this - it means if you invest in companies the homeruns will dominate your returns no matter your preferences for it to be otherwise. So there might be no model of systematic investment that makes sense investing in companies with no homerun potential. At least at the risk levels of software startups.
"A Demo Day where only 30% of the startups were fundable would be a shambles. Everyone would agree that YC had jumped the shark."
The reason that angels and VCs show up is because YC is providing a service for them, so from their perspective you would have jumped the shark. Each angel only has so much money to invest, and VCs feel it's necessary to provide value-add in other ways, so because their ends don't scale I'm having trouble seeing this purely mathematical strategy benefitting anyone besides YC. If there were a way for follow-on investors to benefit in a way that helps improve the overall startup ecosystem then it makes a lot of sense, but I think that's a case that needs to be made that this essay didn't touch on.
I remember hearing PG comment that as a founder you need just a few million from a startup. That's as true today.
Perhaps the relationship between exit valuation and wealth created is elastic. If the goal is to make wealth, perhaps lots of 10-100M startups has a bigger impact on society than a couple of billion-dollar startups.
There should be value in increasing the class size if (a) the number of applicants increases and (b) the average quality of the top applicants remains at least constant.
During YC's history so far, we know (a) is true and (b) seems anecdotally to be true.
What strikes me about Dropbox and Airbnb more than anything is that they had incredibly strong growth strategies.
* Dropbox used rewards for more storage, as well as its fundamental file-sharing tools, to encourage users to sign up their friends and family.
* Airbnb gamed Craigslist [1] to encourage property owners to signup on Airbnb. With a strong supply of rental properties, Airbnb was able to build a true case for its value in the minds of travelers.
By definition, every huge success has a strong growth strategy :)
That said, it often isn't obvious from the beginning. When I met Dropbox at YC, I don't recall them having any great plans for how to grow. I think that was discovered later on.
Also, that often-repeated Craigslist claim about AirBnB is actually false. They got very few listings from Craigslist.
Well, the way you should think about it is that in order to become big successful businesses, Airbnb and Dropbox needed to have incredibly strong growth strategies. Airbnb struggled for many years before hitting a solid growth strategy (which is far beyond CL) and Dropbox tried tons of other user acquisition strategies before realizing that the double-sided reward system was their way to go.
Thiel had a nice way of approaching this question in his CS183 class. In assessing a venture's probability of success, think in terms of calculus -- and not statistically. Since many of these founders are charting new territory, the standard deviation in this sample size of 1 will be infinite. Statistical analysis can't happen.
So instead you treat it as a calculus problem. The metaphor Thiel used was that of space travel and the Apollo missions. You assume you know exactly what's going to happen and behave as such. In a nutshell, "no-one would want to ride in a statistically, probabilistically-informed spaceship."
It's a hard task spotting black swan founders (so instead you just leave yourself as open as possible to them). But the conviction of calculus (in them and in you) is almost certainly a necessary ingredient.
You could stretch a Wilde one-liner around this: "We are all in the gutter, but some of us are looking at the stars."
Great post. I hope that by "idea", what is really meant is a more general notion of "some kind of weighted average of the idea, the context, the team dynamics, and an estimate of how capable they could be in the execution".
Did Dropbox appear to be a bad idea at the time? I seem to recall that the market was pretty crowded when Dropbox launched, and that everyone was expecting Google to announce a "GDrive".
Or does PG mean that the idea can seem bad because the market is already very crowded? I remember talking to William Morgan about the early days of GitHub. He knew the founders from Powerset, and he told me that at the time he thought to himself, "Really? Another hosted version control startup? That seems like a bad idea."
Yes, Dropbox was in the Google category of bad ideas: there were already lots of similar things. Success turned out to depend on execution. Dropbox was the first application of its type that worked sufficiently well. But that sort of thing is hard to predict.
I asked a similar question of paul down below but it seems to me that big successes can come in 2 flavors:
1) Execution driven success in a winner take all market. The idea seems good, but there is lots of competition so it's hard to see how the startup will break through & win the market.
2) A genuinely "good idea that initially looks bad" like you describe in your essay.
It's hard to think back and decide which, now successful, companies are 1 vs 2 because of the memory distortion effect, but it really does seem to me like #1 is more common. What do you think?
I'd give bonus points to #2 if the idea seems so bad that you go though periods of doubt yourself, but keep on returning to the view that "it's great".
If you're absolutely certain of yourself, chances are that there are others out there who are just as certain, so you will have competition. If you're uncertain, and feeling lonely, there's a better chance that you have the field to yourself.
My experience of this is being involved in the development of the first WiFi (802.11a) system. It was only with hindsight that the significance was clear. The reality at the time was an isolated toil in the dark, not a high flying roller coaster ride.
Turns out my memory was only half right. DropBox had many people that loved the idea and thought it would revolutionize filesharing. It also had a large number of people who pointed out all the reasons why it wouldn't work.
I wonder if there's a lesson here in that good ideas that seem bad tend to be highly polarizing. I've recalled Paul Buchheit say here that GMail met a lot of internal resistance, with many Googlers saying it was a distraction and would never work. I also recall Larry saying that there was significant support for GMail at all levels of the company, going up to the founders, and many Googlers loved it.
> I wonder if there's a lesson here in that good ideas that seem bad tend to be highly polarizing.
Yes -- exactly -- and they tend to generate a lot of heat in group discussions. One of the indicators we watch for are people getting visibly angry during the discussion -- either angry that other people aren't "getting it" or angry that other people ARE "getting it".
> It also had a large number of people who pointed out all the reasons why it wouldn't work.
To be fair, it's not actually possible to present a new idea on this forum (or any forum with technical-minded people), without getting a flood of reasons why it won't work.
I'm curious if this would affect how you give advice to founders. For example, let's say a team is working on an idea that isn't working out. If you had two ideas or recommendations in your head, one that seems intuitively good and one intuitively bad, would you ignore the intuitively good idea in favor of the intuitively bad idea because it seems that the best ideas start out as bad ones?
What is the value of all companies that weren't picked by YC? Are there any notable black swans that are known YC-rejects?
It would be interesting to do an analysis of those companies that were rejected by YC, and see how many "black swans" were present in those rejects, as well as maybe relative value of the rejected startups vs the chosen ones to see how effective the YC selection process is.
There aren't any black swans yet that I know of, though there are at least two companies we rejected that must have valuations close to a hundred million, judging from the amounts they've raised. What worries me most is the possibility that we missed some we never heard about, because they either died or didn't happen.
The chance of that having happened or happening in the future is surely 100% at the stage you invest at. There are also undoubtedly many companies who could have been black swans that you did/will invest in who don't for execution's sake.
Is that really a black swan, tho? I used the term the other day wrt wearing eyeguards while playing squash (to avoid losing an eye) but think I misused it then, too.
Interesting to observe from that really big successes are better executed versions of ideas/products that exist on the market in a big way already (e.g. airbnb, facebook, dropbox, google) and the reason they seem like a bad idea (to investors) is not because they offer something nobody wants, but because they already exist in a too-big-to-challenge of a way? And that they might also seem bad because their starting point might seem like a niche (facebook).
I think the unproportional returns of the really big hits are blinding investors, and even pg a bit in this essay. Yes, it's easy to look at it from that viewpoint and say - 3/4 of our returns are from 2 companies and 1/4 from all the rest. But it misses a couple of important points - 1/4 of 10 billion is not small change, you would still like to have those companies in your portfolio, all things considered, and second, considering the (very) small sample size - it could've been just 1 company worth a 1/4 of the total or 0. That's how variable it is.
Another thing to consider is that the best teams often pivot into a big success rather than start with it. There are countless of such examples, and it just goes to show that even starting with what appears a relatively safe but limited idea can eventually grow into a huge success. Sometimes founders need to get their hands dirty in the market to realize what is the real opportunity. If you pass those teams up because you think their idea cap is too small, you'll be missing a lot of big hits.
What it all comes to for me is investing in people. People make big hits, not markets. Markets can grow and startups can span multiple markets, but it all starts with the people who direct it forwards.
I think the opportunity to reinvest in repeat founders is a large, if currently potential, factor. Stripe & Hipmunk being the likely big win examples, but in our batch there was shoptiques and exec.
I expect it will take a few more years but it will turn out to be financially rational to invest in teams with repeat YC founders.
From the essay: "And since risk is usually proportionate to reward, if you can afford to take more risk you should."
I think I understand the intent of what you're saying here, but it could also be read to mean that you can increase your reward simply by taking on more risk. It might help to clarify that whenever a market isn't perfectly efficient (which is apparently always, unless P=NP), there will be investments that carry more risk without offering a higher return (i.e. that have a negative alpha). Perhaps it's better to state that as the potential reward (or return) of an investment increases, you can tolerate more risk.
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[ 2.9 ms ] story [ 236 ms ] threadTake the "seems like a bad idea" bit. Many of the big hits are really well-worn ideas done with better marketing, better timing, and a user experience which makes it available to new markets.
Dropbox? File sharing. Facebook? Geocities. Both are interesting in that they take something that was a giant pain in the neck but useful enough to put up with anyway, and then they make it usable enough that virtually anyone can do that stuff routinely.
But the meta-cognition isn't all that important. What's important is that they're getting out there and helping new companies learn and grow. They can be wrong all day (or not) about the why because they've developed a process which provably works, and which they can measure and improve upon.
Also, the fact that Dropbox and Facebook were "unoriginal" is exactly what made them seem like bad ideas at the time. I saw Dropbox present at demoday, and the main question on my mind was, "How is this different from the million other attempts at online file storage? (xdrive, etc)".
I don't have the time though, so if any bloggers/journalists are reading, this could be an interesting article, or even book, if you get enough info.
Whether or not this info would actually help another team become successful is another story though.
The big successes that I've seen all have exceptional founders, but that's clearly not enough. Timing is a huge component as well. Often a good idea will fail simply because the market or technology isn't ready. My own experience with Gmail reflects some of that. When we decided to write the whole frontend in JS, everyone said that it was a bad idea doomed to failure. It had been tried before (e.g. desktop.com) and had always been a disaster. They were right about the past, but wrong about the future. We released Gmail right around the time that browsers were finally getting good enough, and were were very careful to keep our code as fast and slim as possible.
The actual formula that academics use is Performance = AMO, ability * motivation * opportunity. I think there are a couple of modified versions but I can't remember what they are off the top of my head.
This is to say that my experience confirms that there probably is some completely subjective formula that will fool people into thinking there is some reason behind my good luck. :-)
It seems to me that both Dropbox & Facebook are example of companies pursuing good ideas that lots of other companies were also pursuing. They just happened to be the ones that executed the best (and possibly also had the best luck) so they were able to win the market.
If this is the case then your job as a funder of startups might be to try to identify the companies capable of out executing everyone else on a good idea that a lot of people are working on.
This is much different than the great idea that looks bad phenomenon that pg discusses in his essay.
As a thought experiment, I would love to hear what pg and team would have thought about the following companies, had they applied to YC before they grew in popularity (assuming YC existed when they were starting out):
PayPal, Twitter, Pandora, SalesForce, Instagram, FourSquare, and Pinterest. And perhaps a few others as well.
I feel pretty sure we'd have been impressed enough by Max and Peter to fund them regardless of the idea (which initially had almost nothing in common with Paypal).
I knew Ev before Twitter so I'm sure we would have funded that.
Pandora I know nothing about, so I can't guess there.
SalesForce I'm pretty sure we would have funded because Benioff radiates "winner" in much the same overwhelming way that Zuckerberg does.
Instagram is the one we'd most likely have missed. It all depends when we'd talked to them. They were a kind of overnight success in traffic. If we'd talked to them even a day after they launched we would certainly have said yes. But before that it might have seemed too speculative.
I don't know about FourSquare. I've never met the founders and don't understand the business.
Pinterest we definitely would have funded, because Ben is a two time YC alum (with different companies alas). We knew he was good because the first time he was part of a startup that as an experiment we didn't make move to California. As Demo Day approached, they were in terrible shape. But Ben swooped in at the last moment and gave one of the most convincing Demo Day presentations.
I sincerely hope you're being flippant and don't mean that as a serious answer.
I have not met either of them. And while I have met a few individuals who have achieved success I can honestly say I have never met anyone who I thought radiated success or was otherwise predisposed to success.
Deal with people you already know.
If the project turns out to be a dud, the past history of success of the people involved negates any arguments that it was not the right decision to fund it. No one is going to question that the people involved were not "winners". They had proven that already; that's why the project received funding: because those particular people were involved with it.
To use an oft regurgitated title: "No one ever got fired for funding a project that involved [insert so-called born winner name here]"
Just for fun: How about Andrew Mason, the guy behind Groupon. How far do you think he would have gotten by taking the YC route? Is he a "born winner"? Groupon made some investors very happy.
One might wonder why no one can tell us who the "born winners" are until after they've had some "victories".
startup founders win [...] more on determination than brains. The simplest form of determination is sheer willfulness. [...] A good deal of willfulness must be inborn
Have you never met anyone with an unusually high mix of intelligence, determination, focus, and charisma (to randomly pick a few traits)? If you have, are you more likely to bet for or against them in their chosen field?
If you haven't, that is entirely possible. Such people are, by definition, rare.
"I have not met either of them. And while I have met a few individuals who have achieved success I can honestly say I have never met anyone who I thought radiated success or was otherwise predisposed to success."
Where in the above two statements do you contradict the idea that Benioff and Zuckerberg do give this impression in person? Notice that pg doesn't say that about everyone who is successful.
He seemed to never lose an ounce of morale from anyone telling him "no", he seemed to be doing this pretty naturally by never faulting or doubting himself but rather placing the blame on the nay-sayer. The take-away for me was someone whose morale cannot be broken is an unstoppable train. I have to be honest, it seemed full-fledged delusional to see someone never question them self based on other people (and some very important/influential people's) judgement. But that seemed to be him.
It's just something you are. A bottom of the org chart stinky sysadmin doesn't just wake up one day and have the personality and determination of a world class CEO.
In a more grim outlook, it's genetic. The disconnect is when people want to be 'winners' but are, at heart, bottom of the org chart stinky sysadmins. You can work your way up to lifestyle business, but the next step of multi-billion pants in the air growth company is probably out of reach.
Does this also mean that the "big winners" will not come merely from a pool of what appear to be bad ideas, but from a subset of that pool: bad ideas put forth by founders the VC thinks are impressive? That too, seems somewhat obvious.
Taking it one step further, can you separate the "idea" from the "founder" in assessing the project's chances of being a "big winner"?
Maybe that was the goal of requesting that people should apply to YC even if they had no "idea".
After all, the supply of "bad ideas" is potentially limitless.
Have you ever experimented with an opposing strategy? (Funding "non-technical" founders with "weak" personalities.)
Probably not, lest you would risk your reputation. Hence, you might not have evidence to show that this approach would not yield suffcient numbers of "big winners" to justify the investments. For example, if someone sugested the hypothesis that from a set of a given size of non-technical founders with weak personalities, some "big winners" will emerge, could you disprove that? If you wanted to be scientific, you would have to test it, repeatedly.
From my intepretation, I think one of the points in the pg essay is that human "intuition" will only take you so far toward the "big rewards". By its very nature it steers us away from the counterintuitive and protects us from taking what others would perceive as unreasonable risks. It will stop you from adopting a strategy that no one else is using that might get you labelled as foolish (but, as history shows us time and again, might actually yield an enormous reward).
In hindsight we'll continue to see that some of the biggest winners would have been viewed as unreasonable risks by many VC. Foresight won't allow us that vision. So-called intuition will stop you from investing in a "big winner". Hard to accept, but true.
It might not yield any "big winners" (then again it might) but it would in either case produce evidence that we could use to try to disprove certain theories.
"highly profitable or highly entertaning to watch..."
or highly informative
"Rookie team, regulatory nightmare"
http://www.bvp.com/portfolio/antiportfolio
"Cowan’s college friend rented her garage to Sergey and Larry for their first year. In 1999 and 2000 she tried to introduce Cowan to “these two really smart Stanford students writing a search engine”. Students? A new search engine? In the most important moment ever for Bessemer’s anti-portfolio, Cowan asked her, “How can I get out of this house without going anywhere near your garage?”"
If you stagnate, you will be eaten. Just keep swimming.
pg is basically writing http://blakemasters.tumblr.com/post/21869934240/peter-thiels...
Meanwhile, throughout his lectures, Thiel seems to emphasize that with enough focus on the right people. important projects, and right 'secrets', outcomes are not as random as they seem... and both individuals and investors must concentrate on some big bets rather than endlessly diversify.
Best strategy is to "win" in other ways, and let the cards fall where they may.
Edit: I have sympathy for the Black Swan theory, but I also believe that the startup market is way more tractable than, say, the CDO market – that there do actually exist investment strategies that will increase your chances of hitting the billion dollar jackpot.
Taleb's new book coming out soon will describe all this in a lot more detail -- should be very interesting.
One intuition is that people do not believe in a power law distribution. They intuitively don’t believe that returns could be that uneven. So when you have an up round with a big increase in valuation, many or even most VCs tend to believe that the step up is too big and they will thus underprice it.
Which is intersting, because he actually talked a little to pg about this during the class where he said it:
Peter Thiel: Do Y-Combinator companies follow a power law distribution?
Paul Graham: Yes. They’re very power law
But Thiel was not happy just stating the phenomena, but he also states on why most people discredit it, when he talked about secrets[2]:
The power law secret operates similarly. In one sense it’s a secret about finance. Startup outcomes are not evenly distributed; the follow a power law distribution. But in another sense it’s a very human secret. People are uncomfortable talking about inequality, so they either ignore it or rationalize it away. It is psychologically difficult for investors to admit that their best investment is worth more than the rest of their portfolio companies combined. So they ignore or hide that fact, and it becomes a secret.
The distribution secret also has two sides to it. Distribution is much more important than people think. That makes it a business secret. But it’s a human secret too, since the people involved in distribution work very hard to hide what’s going on. Salespeople do best when people do not know they’re dealing with salespeople.
[1] http://blakemasters.tumblr.com/post/21869934240/peter-thiels...
[2] http://blakemasters.tumblr.com/post/22866240816/peter-thiels...
Perhaps thats why index investing is so succesfull, because you get the benefit of the outliers.. the bad ideas, or long shots, that suddenly skyrocket..
No! That is different.
These are public companies, and the fact you are seeing amazing share price growth from Apple is an exception.
Usually[1] on the public share market you'll see growth rates of ~8% pa, with some slightly above that and some below that.
The continued rapid rise in Apple's share price in exceptional, and is having an effect on your portfolio that is unlikely to be seen again in our lifetime.
That is completely different to pre-A-round investing, where it is expected to see (say) 1% of companies return 1000%.
TLDR; Apple is an exception. Don't think PG's essay applies to public markets.
[1] "Usually" in the sense of the pre-2008 sharemarket.
I certainly wouldn't be surprised if it was 1000% per year at some point in the tail, if not at 1% then for the top .01 percent of companies.
I'm having trouble parsing that sentence. I think you are saying that you think 1000% per year returns are normal for the top 0.1% of companies.
This is absolutely not the case. Even Apple (by far the best example of rapid share price growth in a large company) might, maybe manage to increase its share price 100% this year (low of ~$374 in Nov last year, currently at ~$662). That's exceptional - companies like Standard Oil, Exxon, etc never managed that.
(Occasionally you may get a smaller resource oriented company that fids oil, gold reserves or something and sees a 1000% increase. Or a small drug company that has a successful trial. These are very unusual too though, and more similar to VC investing that the typical public markets).
[1] http://observationsandnotes.blogspot.com.au/2009/03/average-...
[2] (pdf, sorry) http://www.risadvisory.com/images/uploads/Rydex_Historical_t...
I appreciate the links, but didn't find information about the extremes. What I'm looking for would be something more like this paper [1] on Extreme Value Theory but with more pretty pictures.
I got lost in this one soon after the introduction, but was interested in their statements "cross country evidence that the tail behaviour of returns is leptokurtic" and "the tail distribution is of the Fréchet type, hence fat-tailed". I was hoping for a cartoon graph showing just how fat that tail is.
I think you are saying that you think 1000% per year returns are normal for the top 0.1% of companies.
Essentially, but subtly different. Saying that I "wouldn't be surprised" was more to express the degree of my uncertainty than to state my belief. And I posited .01%, rather than .1%. To put numbers on it, it strikes me as plausible that 3 out of the 2700 listed Nasdaq issues would be up 10x for the year.
Occasionally you may get a smaller resource oriented company that fids oil, gold reserves or something and sees a 1000% increase. Or a small drug company that has a successful trial. These are very unusual too though
How unusual? I'd like to put a number on it. Is a gain of 10x over a year a 1 out of 1000 event, which would make it likely for a couple Nasdaq stocks a year? What about 100x returns over a larger number of years? I'd guess that it's happened at least a few times, but don't know.
My instinct would be that it's a fat tail, but not as fat as the VC market. Rather than hoping for 10x over 10 years (26% year-over-year) with carefully chosen startups, with a broad market index you'd probably lucky to hit 3x (12% compounded).
But what would the long term expected returns be for a broad portfolio of mining companies, pre-trial pharmaceuticals, and internet IPO's? And how would it compare to an average VC firm? I have no idea.
[1] http://www.hec.fr/var/fre/storage/original/application/3b27b... (PDF)
I don't know, but the data is out there. You can buy the complete stock history of the Nasdaq fairly cheaply. If you only want day's end prices it might even be available for free.
A quick search found some links for best performing stocks per year[1][2], which indicates that 10x is rare enough that it only happens once every few years.
[1] http://www.dailyfinance.com/2010/12/08/2010-top-10-stocks-sa...
[2] http://money.cnn.com/galleries/2011/markets/1112/gallery.for...
With start-ups I think it would be too expensive an experiment to fund.
This is wrong. If the dartboard consistently underperformed most stockpickers (i.e. say it ranked around the 30th percentile year over year) then you could make the case that (some) people add value. If, on the other hand, the dartboard is near the mean of the distribution of outcomes, you could make a case that it's all luck.
No such market exists for startups - so selection is required.
Well, you could try ranking results and calculating a score based on how each person outperformed the dartboard, then calculating a score over time.
On October 7, 1998 the Journal presented the results of the 100th dartboard contest. So who won the most contests and by how much? The pros won 61 of the 100 contests versus the darts. That's better than the 50% that would be expected in an efficient market.
Have later YCombinator classes had a larger percentage of homeruns? If you have more applicants and have gotten better at selecting, this should be the case.
Is it about selecting winners, or weeding out losers? Are there companies that you know will fail? Who would be least likely to succeed as an entrepreneur?
Home runs are so rare that it's not a matter of percentage per batch. A batch will have 1 or 0, and probably 0. It will be a few years before I can tell if the rate is increasing.
Selecting winners and weeding out losers seem the same thing to me. There are companies we think will almost certainly fail, but we can never be sure. An ineffectual person would be least likely to succeed as a startup founder.
The returns aren't as dominated by just a few big successes, though. Although I suppose one-hit wonders are a manifestation of something similar: All the returns come from one song out of who knows how many dozens a band or artist may have come up with.
Publishers, from what I can tell, have the same problem. One thing that I'm struck by is how many novels that we now consider classic, or novelists who we now consider important, barely scraped into publication. Tolkien famously saw Lord of the Rings in print because of Rayner Unwin, the then nine-year-old (I think) son of a publisher liked LOTR. John Barth and William Goldman have both written about how close they were to pursuing other opportunities—a PhD and insurance, IIRC. A Confederacy of Dunces was only published after O'Toole killed himself. Melville's poetry was self-published IIRC. Virginia Woolf needed to start her own press.
There are probably others with similar stories.
Not only that, but I have to wonder who barely didn't make the cut. Given the large number of writers who skated into print, there must be at least an equally large group who "should" have, but left no marks on history sufficiently legible to trace.
I think about these issues a lot for two reasons. The first is that I've had many close calls with literary agents, all of whom eventually said, "I like you, but not in that way." The second is the technological environment: now that ebooks mean self-publishing is much more pragmatic than it used to be, people who really want to publish have a means of going outside the conventional system. Some power-law-style stars have already emerged (Amanda Hocking, the 50 Shades of Grey author). Others probably will. Maybe I'll be one. But if I'm not, I don't think I'll be too bothered: I mostly want to write.
Yeah, 99% of self-published books are probably un- or poorly edited dreck, but that 1% count for a lot.
(A side note: I wrote about this a little more at the bottom of this post: http://jseliger.wordpress.com/2012/07/29/links-the-time-for-...).
Namely, that record companies are like VC funds, and the massive cash they make from Def Leppard (or Lady Gaga or whoever) pays for the 1000's of other acts that they fund and then fail.
"The underlying thesis behind Andreessen Horowitz’s investing strategy is that in any given year only 15 companies will make up more than 90 percent of the returns. So it pays to get into those companies at almost any price."
(Source: http://techonomy.com/2012/08/the-andreessen-horowitz-effect/)
I guess once you figure out who the big winners are going to be, getting in is worth it at basically any cost when the returns are going to be so high. If others aren't comfortable with that much risk, you can win big because the price isn't driven up to expectation, leaving room for more profit.
It seems like if an entrepreneur is a little different (black, hispanic, women, little eccentric, older, etc.) he/she need to act and behave like "white young male" in order get noticed and funded. However, in that case he/she might be hiding the characteristics which will make them "rock star".
The hidden premise of that statement, appears to imply there exists a universal intuition to which this is "counter". I'm not sure that is completely accurate, and is perhaps more useful to think about it in terms of a bifurcated process that can roughly segment the populace into two modes of preferred intuitive operation, but possibly more.
Without going into detail, both types of intuition make subconscious predictions, yet do so in markedly contrasting approaches, which may explain the root cause of arguments between a priori/a posteriori, bayesian/frequentist debates. The underlying ideologies may not necessarily be the effect of environmental upbringing as often assumed, but could instead be structurally rooted in the fundamental wiring and decision making of our cognition.
I'm sure some will disagree, but I naturally find frequentist methods rather challenging to understand, and typically intuit in a distinctly bayesian manner (which is probably less common, typically VC's tend to be good pattern matchers and skilled numeracy - aka natural frequentists). Coincidentally what PG thinks is counter-intuitive (like in this article), could seem rather intuitive to some. Likewise there are almost certainly other insights that are mundane, boring obvious and intuitive to PG, yet are highly counter-intuitive (and interesting) to others.
Of course it's all just anecdote and opinion for now and probably a controversial position, but hoping advancements in cognitive neuroscience research, would one day be able to test this empirically.
For instance, whereas Airbnb can admittedly be seen as a questionable idea (but not outright bad), Dropbox (the idea, before implementation) sounds like a very good idea. Maybe not a $7b idea, but still very good.
Of course, among the YC funded startups, there may be a lot of ideas that sounded bad at first; but if all those startups are in fact financially irrelevant, should they be used to try to build a theory of success?
- - -
It's interesting to learn that if YC funded 10x more startups they would be just as successful (and maybe more, since there could be a big success in the startups that are left out) -- it means that if the selection process rate is around 10%, YC could do without it entirely, with no significant effect to its bottom line.
Also, I took this picture this summer http://i.imgur.com/B30hL.jpg
I don't think so. My first encounter with DropBox was very similar to my first encounter with Google... but it was "Oh look - another way to share files" rather than "Oh look - another search engine".
Or indeed many, many people's reaction to the release of the first iPod ("Oh look - another mp3 player").
Predicting their current level of success from the point of initial investment - pretty close to impossible without the benefit of 20/20 hindsight. Their success depending so much on how well they executed and the smart changes of direction that those companies made along the way.
(with, maybe, the exception of the iPod which was a bit more obvious for those that paid attention to iTunes)
E.g. Would DropBox be anywhere close to their current position if they hadn't figured out their freemium / recommendation based model for customer acquisition?
I dreamed about something like Dropbox before Dropbox existed; I always have had many different machines that needed to be "synchronized" by hand. I carried around hard drives, and Iomega disks and whatnot, and used "Beyond compare" to sync all of those and it was a nightmare.
The recommendation model of Dropox had nothing to do with me adopting it -- I didn't receive a recommendation and didn't send any. But I was very excited when I was first able to use it, and still find it amazing.
Before I used it DropBox was just another file sharing/syncing software. One of a whole stack of 'em that all seemed to suck in one way or another.
I'm sure that they all promised that they would be bringing cloud file storage to the masses as part of the initial pitch.... and I tried them all because, like you, I wanted this service before any of 'em existed.
Why did DropBox win and all of those others failed (or, at least, didn't succeed so wildly)? Why was it obvious to investors that DropBox was going to win, and the others "fail"?
Dropbox is not another file sharing software; the application form to YC doesn't even mention file sharing:
http://dl.dropbox.com/u/27532820/app.html
Dropbox isn't even about cloud storage.
Dropbox synchronizes your files between your different computers -- silently, automatically, without you doing anything except turn those machines on.
Nobody did this before Dropbox and still nobody is doing it now (except maybe AeroFS, which is much more difficult to setup and use -- but certainly not iCloud or any other "solution" that is restricted to one OS or company, and certainly no backup solution either).
That's why it was a fantastic idea... which has since been coupled with a brilliant execution, yes. But the idea itself was amazing.
That isn't to say Dropbox didn't blow them out of the water in regards to execution, but it wasn't an idea that was completely without precedent. Ideas rarely are, even if they seem like that in retrospect due to one company out executing everyone to an insane degree.
This part is important. The Microsoft service only synced to your other Microsoft things. iCloud only syncs to your Apple things. Dropbox syncs everywhere.
"I can't sync more than one folder? It syncs everything to every device? (not anymore). It doesn't use WebDAV? Oh well, at least it's simple. I'll just use it until something better comes along."
And they win.
Of course they have plenty of features, an API and much more flexibility that before if you want it, but none of that complicate the core function - a directory that syncs.
Dropbox is to file sharing, as facebook was to social networking as Google was to search.
When I try to IM a person a picture, they may be on any one of a dozen IM systems (almost all of the compatible with Adium) - and my success in DMing them a picture is <10% trying to get through firewall. Email used to be my goto approach, but that took a bit of the spontaneity out of it.
Dropbox gives me the ability to drop an image on our shared folder and "real time" have it pop up on their side. I do this all the time, and it's just one of many, many common uses of Dropbox.
Easily the most useful new utility that I've added in the past three years to my OS X system.
But - your perspective on Dropbox - is precisely why it was so hard to predict - even after using it, who on earth would have know that it would have taken over the file sharing space so quickly? And _everyone_ thought google was going to get into this space much, much earlier.
As it is - on the surface, google offers better value and more space for your money - but I don't have a single friend who has switched over to their shared drive. We've all stayed on Dropbox because of the network effect (we've all got shared files via Dropbox - don't want to add yet another file sharing system to slow down our computer.)
We'll see if that works out in the long term - it certainly did with search.
Cross-platform internet file sharing in a transparent way is a (surprisingly?) hard problem. Before Dropbox there were many companies who had tried to make a success of it and they had all failed[1] in one way or another. (Not cross-platform enough, not seamless enough, reliance on ads for income etc etc.) DropBox succeeded because they took that hard problem and made it look easy.
1. Keeping all my documents in sync between several computers, so that I can pick up work on any one of them at any time
2. Off-site incremental backup
3. Sharing and working on a set of project files with non-technically-minded collaborators
4. Sending and receiving large files
Moreover, it just sits there quietly solving problems 1 - 3 day-in, day-out, and I never have to think about it.
Think about it. Sharing files between 25 club members, using our own bandwidth, our own disk space. And Dropbox thinks we should pay them big bucks for this. For what? Storing our files on their server, insecurely? If they had an option to stop doing that, I would select it.
SO no, it doesn't solve any hard problems for us.
The reason that storing files on their server (and using their bandwidth, as well as yours) is important is that it means I don't have to keep all my synced computers on at all times. That's a big deal for me.
It sounds like yours is another problem, which Dropbox is not well adapted to. Perhaps you'd be better off with PowerFolder or similar.
My problem is, Dropbox scales the cost as the number of people looking at a folder increases. As an Engineer I see that as marketing, their cost doesn't increase incrementally in this case. It seems unnecessary and blocks me.
Btw you would only have to keep 1 synced computer on, some of the time. Not a big deal actually. And why keep my data around on their server after we're synced? Simpler for them I suppose, but insecure for me.
I could try and get everybody in the club to install another tool; might look into that, thx.
I often work on my Macbook on the train, then when I get to the office I switch to a Win7 PC and continue working on those same files. There is zero hassle and I can hardly imagine a better solution. ()
As a bonus I get access to all my files from my smartphone and ipad. And with the ipad being such a pain in the ass to synchronize, you really need some kind of dropbox-like solution.
() - Maybe if you did all your work inside VMWare and had the state of the OS image automatically synced between computers that would be a nicer solution... Then you would not have to close your project files on computer #1 and reopen them on computer #2.
Paul, you're sounding like a venture capitalist who is worried about whether he can find investors for his next fund.
I would posit that the people whose opinions you should care about are potential founders; and that their primary concern is themselves, not the performance of a fund (oops, I mean class) as a whole. You're damn right that it would hurt YC's brand if 70% of each class didn't survive past Demo Day -- because for an individual founder, success is pretty much binary, and having a 50% chance of becoming a millionaire is more attractive than having a 5% chance of becoming a billionaire, despite the 100-fold reduction in mean wealth.
You may be in in the business of farming black swans, but if they're all you worry about you'll find that all the swans end up laying their eggs elsewhere.
It seems like it would be difficult to just have a public conversation about a topic. Do you think about that much when you write?
After I wrote this one, I had to go back and armor it by pre-empting anything I could imagine anyone willfully misunderstanding to use as a weapon in comment threads. The whole of footnote 1 is such armor for example. I essentially anticipated all the "No, what I said was" type comments I'd have had to make on HN and just included them in the essay.
It's a uniquely bad combination to both write essays and run a forum. It's like having comments enabled on your blog whether you want them or not.
Of course, my blog posts don't get nearly as much attention as your essays, and I don't have the problem of having people try to draw attention to themselves in the hopes of being remembered when applications are considered for the next YC round.
Your posts are more technical in nature, and can benefit from debate. Other people might write things that are more personal, or opinion, or thinking-aloud, and while a little bit of good-natured feedback from trusted people might be appreciated, lots of nitpicking and debate and very public arguing is not.
The point I was trying to make was that I would be disappointed if what pg clearly saw as a problem was "fixed", because for me it's a feature.
(I'm not picking on you btw, I have a tremendous amount of respect for you. But I don't think your desire for debate on what you write is suitable justification for other people putting up with the same, especially when it's discouraging them from writing.)
At least some of the people who are questioning you are probably doing so out of intellectual curiosity, rather than animosity. You probably know that intellectually, but for many people—including me—it's sometimes hard to remember that in the heat of the reading moment.
This is perhaps the worst thing about discourse on the internet. If you and I were having a conversation in room, you'd never pretend to not understand me to rip into me (maybe to understand my point better.) But on the internet, so many people are just trying to score points that it's nearly impossible to have a conversation.
You don't give your detractors enough credit. Many of these misunderstandings are not willful, and actively seeking to avoid them is almost always good practice on your part. (In my opinion.) For the record, I found footnote 1 illuminating.
I'm sure that the intense scrutiny you get would annoy any writer. But I think it genuinely makes your essays stronger, too, and I hope you don't hate it too much.
1, that's terrible. So many benefit from the ability to read (and interact with) your opinions. It's so much more valuable than a random once-off Reddit AMA. It's a shame the value is reduced through the actions of a few.
2, this community attracts young smart people, exactly those who might want to match wits with you. Some of it is valuable, some is just annoying. I'm reminded of the niceness value in discussion; if everyone was nice about it, maybe you wouldn't feel as apprehensive or besieged and we could still have a good debate to extract the maximum benefit.
In the end, I hope you find some way to care less about the opinions, because what you do and write about are so valuable. In the spirit of "If you aren't writing enough wrong stuff, maybe you're being too cautious."
I think at least half of the misunderstandings that arise in HN comment threads are honest misunderstandings.
The essay reminds me a bit of the argument that the Native Americans actually got a great deal when they sold Manhattan for $24, because that money would be worth about $30 trillion today if it had been invested at a return of just 7.5% for the past 385 years. I think it's interesting and worthwhile to explore these sorts of mathematical ideas, but at the same time it's impossible to make good business decisions without fundamentally basing them on human needs, human scales, and human timeframes.
What would happen if you split up the batches into two groups, YC Classic and YC Black Swan, and placed founders into the groups post-interview? People who were placed in YC Classic could continue to have the expectation of ~100% demo day success they do now, while the people placed in YC Black Swan would be told "I find your idea interesting and we'll let you in but don't expect funding after demo day." People could take the Black Swan offers as rejections if they wanted.
There are a bunch of problems with this approach, but I wouldn't be totally surprised if way more than 30% of YC Black Swan was funded.
Let's say that p_accept is the probability that YC accepts the founders of the next Dropbox. YC itself cannot optimize for p_accept because of the factors mentioned above: instead, it has to optimize for p_apply * p_accept * p_fund, the product of the chances that those golden founders will apply to the program, be accepted, and find the funding they need to grow and thrive.
With the hypothetical YC / YC Black Swan split, the original YC can optimize for p_apply * p_fund, and YC Black Swan can optimize for p_accept. Not only that, but since all Black Swan candidates would have started as applicants to YC, Black Swan's p_apply would equal that of the original YC. Numerate investors with the same sense of the power law as pg would take care of Black Swan's p_fund.
Thus, all the prestige, cultural appeal, and midsize exits would derive from the original YC, but all the power-law returns would emerge from Black Swan.
So, pg, new business model?
Would be interesting to learn why the black swans have done better then the normal batch, or why the normal batch did better or why it was a 50/50 split.
You might even learn that because a startup is considered as a black swan founders in that group work harder and thus have a higher success rate. This would really put into light debates about how much intelligence vs hard work may effect success rates in the world of startups.
In a world where potential founders are making a choice between YC or doing the startup anyway without YC, sure. But the world is more complicated than that, and I'm sure there are plenty of potential founders whose decisions are informed by what they hear from YC.
[...] split up the batches into two groups, YC Classic and YC Black Swan [...] People could take the Black Swan offers as rejections if they wanted.
This sounds like a very good model, in that it would separate the "is this something YC wants to invest in?" axis from the "does Paul Graham think that I'll succeed?" axis.
The group-think effects are to be considered, before adopting this model. Am obviously not predicting anything, except perhaps this move might make the Black swans even more unpredictable.i.e: if you look at the Tableau of payoffs here(http://edge.org/conversation/the-fourth-quadrant-a-map-of-th...). this move can push investments from complex payoffs to very complex payoffs easily. Personally, i am likely to even shoot for the YC Classic group deliberately or in rare optimistic moments, the Black Swan group.
While a theme was that the outsized returns can come from ideas which sound bad, it doesn't necessarily say that all outsized returns come from bad-sounding ideas.
Not only that, but I think reading the essay will show that the outsized returns are not known until several years after demo day.
Sometimes bad ideas are just bad ideas. In the Venn intersection between bad-sounding-ideas and good-ideas - the 'bad sounding and not good' is a much bigger area.
To me, the entire essay is about making sure that institutionally, the bad-sounding-but-ultimately-good ideas are not left out. Trying to further identify and silo them at application stage would be even more fraught.
The main difference in branding for KV's funds is really only to the LPs, though they do mention it to founders on their website. They want to cover themselves in case the seed funding both doesn't return anything and looked to be imprudent in retrospect. Luckily I think they're doing well.
Vinod is actually quite explicit about trying to find black swans in his pitches :-)
When you interview a startup and think "they seem likely to succeed," it's hard not to fund them. And yet, financially at least, there is only one kind of success: they're either going to be one of the really big winners or not, and if not it doesn't matter whether you fund them, because even if they succeed the effect on your returns will be insignificant.
What this means is that YC is not looking for sustainable businesses, but homeruns. Which is entirely fair, that's the business they're in.
But you and your startup are in a different business: Your measure of success isn't the same as Ycombinators. If your startup ends up making you a million dollars a year you will probably be very happy and rightfully call yourself a success. But as the post points out that won't be enough for YC since they need to fund a lot of other startups that will inevitably fail out of their minority share. Thus they need a much bigger success.
If you get turned down for YC it might well be that your idea is just a sound business idea that YC doesn't consider just crazy enough that it might make them a billion dollars. But that doesn't mean that it won't make you a million.
Granted when they initially pick your business it is probably by because you explained what a great lifestyle business it will be.
> I'm not saying that the big winners are all that matters, just that they're all that matters financially for investors. Since we're not doing YC mainly for financial reasons, the big winners aren't all that matters to us.
Also,
> If we ever got to the point where 100% of the startups we funded were able to raise money after Demo Day, it would almost certainly mean we were being too conservative.
(and the entire rest of that section talking about how they can afford to take huge risks, and should be.)
On the whole, this piece sounds like some observations and thoughts from pg, and nothing more. I think founders shouldn't try to read too much into it, specifically whether or not YC would be interested in their business.
YC might choose to fund you just because they like you.
Despite the rejection we are growing each month, turning down acquisition offers, our customers love our products, and at 24 years old, we are learning a ton. We have no investors, are profitable, and have a lot of time to grow the company and work on crazy ideas. I am having the time of my life.
It's really important to understand the business YC is in, and to separate your self-worth from it. It's also important to not hold any negative feelings towards them, since they are merely trying to maximize their outcomes, and they know the market quite well.
Go follow your passions and make stuff people love. The rest will follow.
Put an evil twinkle in your eye and make internet VC think you want to rule the world and will lie, cheat and steal to achieve this, when truly you're just an honest kid with good morals who'd be happy living a modest but financially secure lifestyle.
Founder 1 Internet VC 0
I see this a lot from various corners of the startup ecosystem, particularly 37 Signals and their followers. The problem is that it's not really true, by which I mean there are not very many examples of it begin true, and there is an excellent reason to believe that it may never be true. Which is: you need to find a market big enough to support "lifestyle income" (or your million dollars a year) but not big enough that a startup or growth technology company that is really good at doing things at scale isn't just going to eat it, and kill you in the process.
One of the reasons Jason Fried needs to yell so loudly about 37 Signals being the model for lots of other companies is because it's really not -- it's really rare to find a lifestyle technology business.
Another reason: marketing. People don't get that.
The traditional challenge you'd level here is "Name three" (37signals, Fog Creek, Balsamiq) but, due to the type of people I hang out with, I could get to fifty before having to slow down and start checking my Gmail. A friend of mine who is in the selling shovels business estimated that there are 30,000 firms selling SaaS. (That number struck me as crazy until I realized that, oh yeah, I'm routinely in rooms with several hundred of them at once.) The overwhelming majority will never raise outside capital.
So I'm just curious if Patrick was really meaning that he can without pausing name 50 non-VC backed lifestyle product companies that are making $1M in salaries and profits for their founders, or that he meant that he can name 50 companies that are generally well-off, and are making e.g. a few thousand dollars per year for their founders.
The difference is important in my opinion, as I can name a several that make a few thousand dollars a year by consulting, but I don't know people that make over a million a year for themselves with an internet product without an investment. Those that I personally know that earn $1m, are in more fishy type of business (E.g. quick SMS loans) and have a sizeable financial backing from more traditional investors.
Most companies that build and ship product can easily consult, so, any of those companies that continue to ship product for multiple years should cause you to ask how much more than $1MM they must be making.
"Salaries and profits" is an awfully weird metric, since salary is the #1 cost factor both for consultancies and product companies. Maybe you should just say "revenue".
I respectfully suggest that your radar is off here. No, you don't need to be in "fishy types of businesses" to break $1MM.
But that's not what founders themselves earn. Founder's personal salary and a slice of pure profits that are not reinvested to company growth can be considered a total that founders "earn" in lifestyle businesses.
Even with this metric, of course there is a lot of lifestyle internet companies in the world that do over $1M per founder. I'm just interested if Patrick meant that he can name 50 companies (presumably from his network) that are doing this well.
I worked for consultant who had a lifestyle business. He pulled in nearly half a million dollars in revenue per year, but I got paid a higher salary than he did. But I drove my own car, and he drove a company car. He didn't own a computer, but the company had a fiber connection, a server room and several very nice recent laptops. He didn't own a cell phone or a camera, but the company supplied him with a nice world smart phone and multiples of the latest cameras. He rarely took vacations, but the company paid for him to travel the world to visit clients and trade shows. Etc.
It's for this reason that revenue is often a better gauge of success for a lifestyle business, than profit or salary.
You... must live in a different world from me. I mean, I am a lifestyle "technology" business. Most of my customers are, too... a whole lot of them are so small that they still have dayjobs. For that matter, most of my suppliers are, too.
But think of all the web design firms that exist. All of the small-business IT firms. The small consulting shops of various stripes. There are huge numbers of these "too small for important people to care" companies. and so many web applications are thrown together by one person, just messing around.
Many, probably most of my suppliers and competitors are also small operations owned by one or two people. Linode, as far as I can tell, started a lot like I did; and so did most of my smaller competitors. (Slicehost is the counterexample; my understanding is that they started in a very startup-y manner.)
I mean, obviously, you get fewer firms as you raise your revenue cutoff. If you require millions of dollars a year in revenue, nearly all my customers fall off the list... but actually, probably not that many of my suppliers. I mean, I'm buying one rack from coresite, 5g from cogent, and 1.1G and 2 racks from he.net, but that's less than half my monthly outlay, and other than that, all that money goes to small private companies (and really, he.net might be considered a small private company that grew to be a not-so-small private company.)
Maxed out their credit cards, tried to find angel funding in St. Louis, and got told the going terms were "We'll get 50% of the company to cosign a loan for you" so they continued to bootstrap, managed to successfully structure a pricing model such that customers pre-paid for services (allowing them to service most of demand), rode on to acquisition by Rackspace... if I recall correctly. (Pours one out for Slicehost.)
They did seem to grow... very quickly. My impression was that they grew much faster than linode or I. Of course, I have no numbers to back that up either way.
http://37signals.com/founderstories/slicehost
I relate to "I have a limited shelf life in a big company" I mean, I'm literally 1/10th the size of slicehost when they were bought, but I have gotten a few companies courting me for a buyout... The thing is, at this point, they want the company for me, and it's pretty clear that I... well, I might stick around for a few years, but working for someone else just isn't what I want to do.
I mean, I can be bought, like anyone, but I imagine that because I know this about myself? I kinda think that my attitude would scare off anyone that might buy us. I mean, to save time, I've actually come up with a formula for how much money I'd want; some lump sum dependent on the size of my company, plus another large sum for every year they want me to work for them, plus another (smaller) sum for every year they want me to avoid competing with them.
I dono. This was mostly to save time; I was hit with two courtships within a relatively short period, and felt I was spending too much effort on it, but eh... I dono. I haven't gotten other nibbles for a while, so it's likely that it's rare enough that time spent on it isn't a huge deal.
I've always taken Linode as the model for where I want to take my company; of course, I've gone off in kindof a different direction; I want to own a network, and a datacenter, while Linode has preferred to have multiple locations. (I mean, it's one or the other.)
With regards to the new knowledge that 20k customers is possible, that just gives you something to shoot for next, right? There's something you can do that starts at 2k users today and gets you to 20k users. You know that is possible, because other people have done it. So work on that. (Knowing from previous conversations that you're rate limited on customer acquisition by processes other than marketing I'd suggest, as the Slicehost guys did, "automating the "%#)(% out of everything" and then focusing on customer acquisition as your primary job, if that is a huge priority for you.)
More broadly: philosophically, if we consider ourselves failures for not doing things other people have done, then we'll all be failures essentially all of the time. That strikes me as an unhappy bit of philosophy to adopt then.
Well, yes. Mostly I'm just amazed how they did that so quickly. That is admirable. But, I guess most of my growth has been in mad dashes, too... mad dashes followed by lulls where subscriptions keep pace with cancellations. I can see how it'd be possible to keep up those mad dashes, if your automation was better to start with, and if your support was better, and the marketing. All these are things I can improve; but it's admirable how they absolutely nailed all those things in such a short period of time.
>I'd suggest, as the Slicehost guys did, "automating the "%#)(% out of everything" and then focusing on customer acquisition as your primary job
Yeah. This. I mean, I make the excuse that I'm too busy 'shooting alligators' but you really have to set aside time to drain the swamp (and let's be honest here, I've started a bunch of different projects... time that would have been better spent on draining the swamp by automating more of this stuff.) I did actually make a lot of progress automating the killing of old accounts the night you wrote that. (It's still a manual process, but I wrote some scripts that took it from being an all-day thing to clear out everyone to it being a 10 minute thing to clear out everyone.)
>More broadly: philosophically, if we consider ourselves failures for not doing things other people have done, then we'll all be failures essentially all of the time. That strikes me as an unhappy bit of philosophy to adopt then.
The balance between arrogance and considering oneself a failure is a tricky one. I mean, I know that the only thing that has come close to destroying me was that confidence. (Well, after getting out of school. That's a long story; but there certainly were plenty of strong voices saying that I can't do it then; they were all, of course, trying to get me to put in the effort to get into a reasonable college, the upshot, of course, being that nearly everyone told me I was going to work at 7-11 if I didn't go to college, and it was obvious that I wasn't going to do so. I think a lot of my arrogance is innate, but a lot of it also comes from just how easy the real world was for me, compared to school.)
But yeah, PG wrote about confidence in a way that I related to, perhaps better than anyone else I've read:
"But you should treat your optimism the way you'd treat the core of a nuclear reactor: as a source of power that's also very dangerous. You have to build a shield around it, or it will fry you."
That line, really, is why I got interested in his writing and in this community. I've gotten burned badly, several times, by raising the control rods too much. I know that for most people I know, their big mistakes usually have to do with hitting the metaphorical SCRAM button before the reactor even gets warm, but for me? The big problems have always been that over-reach; the over confidence.
Of course, Graham goes on to say:
"The shielding of a reactor is not uniform; the reactor would be useless if it were. It's pierced in a few places to let pipes in. An optimism shield has to be pierced too. I think the place to draw the line is between what you expect of yourself, and what you expect of other people. It's ok to be optimistic about what you can do, but assume the worst about machines and other people."
which, of course, I believe is Very Bad Advice if you are a flawed individual. Self-doubt is essential to survival. Personally, I like the control-rod metaphor. When things get too hot? you lower the rods and let things cool down. Need more power? raise the rods.
But always be aware that while having no power is a problem, it's easier to clean up after a SCRAM than a meltdown.
Of course, much like how it may be best for the military to select fighter pilots with irrational levels of confidence, I can see how it would be best for an investor to select founders with irrational levels of confidence. If th...
Do you have a "business guy" helping you? Have you ever? If not, why not? (Never met one, didn't know you needed one, etc?)
There was one guy that I turned down that I probably shouldn't have turned down. But he was more technical than I am, too. That was probably a mistake, but he's working on his own thing now.
The thing is, nobody else would have had the follow through to keep bleeding money on the thing for as long as it took me to figure out what the hell I was doing. I mean, would that have been better? maybe. Almost certainly my lifetime earnings up 'till now would have been greater. Or maybe a business person would have kicked my ass 'till we came up with a solution that kindof worked even though I didn't know what I was doing? Or maybe they would have come with enough money that I could have compressed those lessons into a shorter timeframe? (Most of my early mistakes had to do with hardware and the cheaping out on thereof. With sufficient capital, I could have moved on to making other mistakes earlier.)
But really, having a business guy would have been counter to most of the reasons I went into business in the first place. I thought I could do it better. If I really am wrong, I need to accept my place and get a job.
The thing that is holding you back is that you are very honest and conscientious. All you have to do to determine that is to read your page on "colo" at your site where you are very frank about the fact that the rent might go up. That is very atypical in business. I've seen the same ethics hold many people back. I'm not saying at all that everyone who makes it big is unethical because of course that's not the case. But I've seen many people who haven't made it who are just to damn honest and I've seen many people make it that are just unethical and easily pull the wool over people's eyes.
Now of course everyone fibs a bit here and there. It's not like a person is either totally honest or a total cheat. There is a gray area and it's a continuum.
Anyway that's my take on things. I can point to the obvious example of Jobs and Woz (of course Woz had no business sense but the fact is he really didn't even know it was possible to be screwed by Jobs so he couldn't even protect against it.)
I think you have a great thing going. Personally I feel you should move away from the hacker market and move more mainstream and raise your prices. Or perhaps develop a different site to address that market. If you are interested, I'd get involved in that possibly.
I don't know if that's true or not, on either side, but it's certainly a great compliment. I definitely want to be seen as honest to a fault. (the counter argument is that I do often over promise. I do not always temper my confidence with enough reality. I'm not trying to be dishonest in those cases, but the effect is the same.)
Really, though, saying "I'm not successful because I'm too honest" sounds a little too much like sour grapes for me to accept it as the truth. I mean, I'm a cynical person, but it just doesn't ring true. Markets are more complex than that. Yes, there is a constant arms race between buyer and seller, an arms race of deception, but participating in that arms race is very expensive. I believe this is a lot of why "cloud hosting" and other transparently priced services are so much more expensive than colocation. People are willing to pay extra to avoid that expensive bullshit. (the other reason is that it's so easy to raise prices on hosted products... I will explain near the end of this message.)
Well, and more to the point, I'm mostly doing this for fun. I can make a lot of money working for other people, I mean, before I was published I was working at what I consider absolutely ridiculous rates. there's way less upside risk; but making bay area computer nerd wages is plenty comfortable. If I have to do things that make me feel bad to work for myself? eh, I'll just go back to working for other people. I mean, I'm not saying that I wouldn't do something I felt unethical if I were starving or I couldn't provide for my family or whatever... but I'm not in that position. My 'plan b' in case of failure is downright cushy.
>All you have to do to determine that is to read your page on "colo" at your site where you are very frank about the fact that the rent might go up.
Co-location is run like commercial leases; e.g. when it comes time for renewal, the amount the rent goes up is determined by how hard the landlord thinks it will be for you to move. You can have empty units on either side of you and the landlord is gonna say "Yup, market rents have gone up!" if the guy knows that you've put down roots and moving would be difficult.
The thing is, co-location, by it's very nature, is difficult to move, just like commercial real-estate. And if you say it's extra hard to move? well, I told one provider that it would be difficult for me to change IP addresses. Within a week (and this was about a month after I signed a 2 year contract /after/ feeling like they screwed me while I was on a month to month, thinking the contract would protect me.) bam. Suddenly I'm paying a buck fifty per month per IP address (that's a reasonable price for one IP. but I had 768. ouch.) Now, I don't know the whole story; they say their provider (the ones that actually own the IPs) started charging them and they are just passing that through, so who knows, but I certainly felt like I was getting screwed.
So yeah; a rational actor expects providers to screw him as much as possible, and does not expect contracts to mitigate that risk very much.
If there was a way to honestly signal that you were not going to do that, I think you could attract customers.
One possible way of doing this is charging all customers the same amount for the same services; If I did that in a way my customers could verify, they would know at least that I could not raise prices more than what the average customer would tolerate (e.g. the customers that make it obvious that it's hard for them to move would not get extra screwed, they'd be protected by the customers that could easily move.) which is something. This is what I'm trying first, but it's complicated by the fact that everyone is used to getting custom configs in co-location. Salesguys love custom configs, because it makes it harder for customers to compare prices.
Really, though, this is not a complete solution. I don't know of a complete solution yet....
One thing I wanted to add though on the issue of your costs increasing and the "retail" market. The retail market hates to switch (as much as you hate to move colo) and will stay with their current solution to avoid having to make changes (and that goes for the "tech" guy that works for the retail customer it's not to his benefit to switch hosting if he can simply pass the cost on to his customer or his customer pays directly).
So while your costs increase on a wholesale level the amount your customers can and will pay will increase as a much larger number. (If you want.)
I would explore a deal with your landlord that allows you to pay him a % for your success which takes the uncertainty out of your costs. This is similar to what is done at a shopping mall. The tenant pays for "sales" in addition to a base. While it might seem counter intuitive to do a deal like this I know I wouldn't want the uncertainty of pricing increasing and having to be negotiated in real time. That way your interest and that of the landlord are in line. And anything can be negotiated.
Generally in retail realty, a store will sign a lease and have options to renew at a preset rate that protects them. Starbucks doesn't sign a lease nor does the local pizza shop and then be held hostage. They do agree (nnn lease) though to cover any increase in costs that the landlord has in taxes etc which the tenant knows can be verified and make sense. Generally. It won't be a deal where the landlord sees they are successful and then makes a decision that they can't move and they play this game and jacks up the rent. That is what appears to be happening with your situation so I would work to get around that.
I'd be glad to do strategy with you on this further if you want. Feel free to contact me.
Ultimately, I'd agree that successfully getting a 37 signals, Balsamiq, or Fog Creek off the ground is difficult, but compared to the VC model of "DropBox or bust", it seems like a much more attainable goal.
I think the main lesson is that there's really no free lunch in the startup world - we've all heard it a hundred times before, but there's no silver bullet that guarantees success, or even a decent chance at success in this business. It's not quite the lottery, but a 1 in 50 shot probably isn't unrealistic odds.
The reason I'm not rich is because these niches are hard to break into. It's all about enterprise sales to obscure niches. In fact, we need a dating event to pair enterprise sales people and tech founders. I tried enterprise sales, but within a month I wanted to kill myself. It takes a special breed of human to do that.
I think it means more than this - it means if you invest in companies the homeruns will dominate your returns no matter your preferences for it to be otherwise. So there might be no model of systematic investment that makes sense investing in companies with no homerun potential. At least at the risk levels of software startups.
Not really. He's saying that going by the numbers _should_ be only looking for homeruns but, for a number of different reasons, they don't do that.
The reason that angels and VCs show up is because YC is providing a service for them, so from their perspective you would have jumped the shark. Each angel only has so much money to invest, and VCs feel it's necessary to provide value-add in other ways, so because their ends don't scale I'm having trouble seeing this purely mathematical strategy benefitting anyone besides YC. If there were a way for follow-on investors to benefit in a way that helps improve the overall startup ecosystem then it makes a lot of sense, but I think that's a case that needs to be made that this essay didn't touch on.
I remember hearing PG comment that as a founder you need just a few million from a startup. That's as true today.
Perhaps the relationship between exit valuation and wealth created is elastic. If the goal is to make wealth, perhaps lots of 10-100M startups has a bigger impact on society than a couple of billion-dollar startups.
If there's only one winner in a class, at best, does it matter if the class is 10 or 50? 50 isn't going to give 5 winners, is it?
Is the idea that 50 gives a 5 times higher chance of finding the 1? Is that really true, though?
Would focusing on a smaller number of potentials actually be better for finding the 1? Thinking through the scenarios more thoroughly?
During YC's history so far, we know (a) is true and (b) seems anecdotally to be true.
* Dropbox used rewards for more storage, as well as its fundamental file-sharing tools, to encourage users to sign up their friends and family.
* Airbnb gamed Craigslist [1] to encourage property owners to signup on Airbnb. With a strong supply of rental properties, Airbnb was able to build a true case for its value in the minds of travelers.
[1] http://venturebeat.com/2011/06/02/airbnb-admits-gaming-craig...
That said, it often isn't obvious from the beginning. When I met Dropbox at YC, I don't recall them having any great plans for how to grow. I think that was discovered later on.
Also, that often-repeated Craigslist claim about AirBnB is actually false. They got very few listings from Craigslist.
So instead you treat it as a calculus problem. The metaphor Thiel used was that of space travel and the Apollo missions. You assume you know exactly what's going to happen and behave as such. In a nutshell, "no-one would want to ride in a statistically, probabilistically-informed spaceship."
It's a hard task spotting black swan founders (so instead you just leave yourself as open as possible to them). But the conviction of calculus (in them and in you) is almost certainly a necessary ingredient.
You could stretch a Wilde one-liner around this: "We are all in the gutter, but some of us are looking at the stars."
http://blakemasters.tumblr.com/post/21869934240/peter-thiels...
Or does PG mean that the idea can seem bad because the market is already very crowded? I remember talking to William Morgan about the early days of GitHub. He knew the founders from Powerset, and he told me that at the time he thought to himself, "Really? Another hosted version control startup? That seems like a bad idea."
1) Execution driven success in a winner take all market. The idea seems good, but there is lots of competition so it's hard to see how the startup will break through & win the market.
2) A genuinely "good idea that initially looks bad" like you describe in your essay.
It's hard to think back and decide which, now successful, companies are 1 vs 2 because of the memory distortion effect, but it really does seem to me like #1 is more common. What do you think?
If you're absolutely certain of yourself, chances are that there are others out there who are just as certain, so you will have competition. If you're uncertain, and feeling lonely, there's a better chance that you have the field to yourself.
My experience of this is being involved in the development of the first WiFi (802.11a) system. It was only with hindsight that the significance was clear. The reality at the time was an isolated toil in the dark, not a high flying roller coaster ride.
http://news.ycombinator.com/item?id=8863
Turns out my memory was only half right. DropBox had many people that loved the idea and thought it would revolutionize filesharing. It also had a large number of people who pointed out all the reasons why it wouldn't work.
I wonder if there's a lesson here in that good ideas that seem bad tend to be highly polarizing. I've recalled Paul Buchheit say here that GMail met a lot of internal resistance, with many Googlers saying it was a distraction and would never work. I also recall Larry saying that there was significant support for GMail at all levels of the company, going up to the founders, and many Googlers loved it.
Yes -- exactly -- and they tend to generate a lot of heat in group discussions. One of the indicators we watch for are people getting visibly angry during the discussion -- either angry that other people aren't "getting it" or angry that other people ARE "getting it".
To be fair, it's not actually possible to present a new idea on this forum (or any forum with technical-minded people), without getting a flood of reasons why it won't work.
Assume you could separate the funding vehicle from the YC reputation, having it as a separate unassociated entity.
That is, assume the "reputational" cost could be managed. And no one would accuse you of being "insane".
I liked this essay. I think it's sufficiently honest.
It would be interesting to do an analysis of those companies that were rejected by YC, and see how many "black swans" were present in those rejects, as well as maybe relative value of the rejected startups vs the chosen ones to see how effective the YC selection process is.
Take the swans you get an enjoy them. :)
Another thing to consider is that the best teams often pivot into a big success rather than start with it. There are countless of such examples, and it just goes to show that even starting with what appears a relatively safe but limited idea can eventually grow into a huge success. Sometimes founders need to get their hands dirty in the market to realize what is the real opportunity. If you pass those teams up because you think their idea cap is too small, you'll be missing a lot of big hits.
What it all comes to for me is investing in people. People make big hits, not markets. Markets can grow and startups can span multiple markets, but it all starts with the people who direct it forwards.
I expect it will take a few more years but it will turn out to be financially rational to invest in teams with repeat YC founders.
I think I understand the intent of what you're saying here, but it could also be read to mean that you can increase your reward simply by taking on more risk. It might help to clarify that whenever a market isn't perfectly efficient (which is apparently always, unless P=NP), there will be investments that carry more risk without offering a higher return (i.e. that have a negative alpha). Perhaps it's better to state that as the potential reward (or return) of an investment increases, you can tolerate more risk.