Black Swan Farming
Want to start a startup?
Get funded by
Y Combinator
.
September 2012
I've done several types of work over the years but I don't know
another as counterintuitive as startup investing.
The two most important things to understand about startup investing,
as a business, are (1) that effectively all the returns are
concentrated in a few big winners, and (2) that the best ideas look
initially like bad ideas.
The first rule I knew intellectually, but didn't really grasp till
it happened to us.  The total value of the companies we've funded
is around 10 billion, give or take a few.  But just two companies,
Dropbox and Airbnb, account for about three quarters of it.
In startups, the big winners are big to a degree that violates our
expectations about variation.  I don't know whether these expectations
are innate or learned, but whatever the cause, we are just not
prepared for the 1000x variation in outcomes that one finds in
startup investing.
That yields all sorts of strange consequences.  For example, in
purely financial terms, there is probably at most one company in
each YC batch that will have a significant effect on our returns,
and the rest are just a cost of doing business.
[
1
]
I haven't
really assimilated that fact, partly because it's so counterintuitive,
and partly because we're not doing this just for financial reasons;
YC would be a pretty lonely place if we only had one company per
batch.  And yet it's true.
To succeed in a domain that violates your intuitions, you need to
be able to turn them off the way a pilot does when flying through
clouds.
[
2
]
You need to do what you know intellectually to be
right, even though it feels wrong.
It's a constant battle for us.  It's hard to make ourselves take
enough risks. 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.  In the same day of
interviews you might meet some smart 19 year olds who aren't even
sure what they want to work on. Their chances of succeeding seem
small.  But again, it's not their chances of succeeding that matter
but their chances of succeeding really big.  The probability that
any group will succeed really big is microscopically small, but the
probability that those 19 year olds will might be higher than that
of the other, safer group.
The probability that a startup will make it big is not simply a
constant fraction of the probability that they will succeed at all.
If it were, you could fund everyone who seemed likely to succeed
at all, and you'd get that fraction of big hits.  Unfortunately
picking winners is harder than that.  You have to ignore the elephant
in front of you, the likelihood they'll succeed, and focus instead
on the separate and almost invisibly intangible question of whether
they'll succeed really big.
Harder
That's made harder by the fact that the best startup ideas seem at
first like bad ideas.  I've written about this before: if a good
idea were obviously good, someone else would already have done it.
So the most successful founders tend to work on ideas that few
beside them realize are good.  Which is not that far from a description
of insanity, till you reach the point where you see results.
The first time Peter Thiel spoke at YC he drew a Venn diagram that
illustrates the situation perfectly.  He drew two intersecting
circles, one labelled "seems like a bad idea" and the other "is a
good idea."  The intersection is the sweet spot for startups.
This concept is a simple one and yet seeing it as a Venn diagram
is illuminating.  It reminds you that there is an intersection—that
there are good ideas that seem bad.  It also reminds you that the
vast majority of ideas that seem bad are bad.
The fact that the best ideas seem like bad ideas makes it even
harder to recognize the big winners.  It means the probability of
a startup making it really big is not merely not a constant fraction
of the probability that it will succeed, but that the startups with
a high probability of the former will seem to have a disproportionately
low probability of the latter.
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.  A site for college students to
waste time?  It seemed the perfect bad idea: a site (1) for a niche
market (2) with no money (3) to do something that didn't matter.
One could have described Microsoft and Apple in exactly the same
terms.
[
3
]
Harder Still
Wait, it gets worse.  You not only have to solve this hard problem,
but you have to do it with no indication of whether you're succeeding.
When you pick a big winner, you won't know it for two years.
Meanwhile, the one thing you
can
measure is dangerously
misleading.  The one thing we can track precisely is how well the
startups in each batch do at fundraising after Demo Day.  But we
know that's the wrong metric.  There's no correlation between the
percentage of startups that raise money and the metric that does
matter financially, whether that batch of startups contains a big
winner or not.
Except an inverse one.  That's the scary thing: fundraising is not
merely a useless metric, but positively misleading.  We're in a
business where we need to pick unpromising-looking outliers, and
the huge scale of the successes means we can afford to spread our
net very widely.  The big winners could generate 10,000x returns.
That means for each big winner we could pick a thousand companies
that returned nothing and still end up 10x ahead.
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.
[
4
]
It takes a conscious effort not to do that too.  After 15 cycles
of preparing startups for investors and then watching how they do,
I can now look at a group we're interviewing through Demo Day
investors' eyes.  But those are the wrong eyes to look through!
We can afford to take at least 10x as much risk as Demo Day investors.
And since risk is usually proportionate to reward, if you can afford
to take more risk you should.  What would it mean to take 10x more
risk than Demo Day investors?  We'd have to be willing to fund 10x
more startups than they would.  Which means that even if we're
generous to ourselves and assume that YC can on average triple a
startup's expected value, we'd be taking the right amount of risk
if only 30% of the startups were able to raise significant funding
after Demo Day.
I don't know what fraction of them currently raise more after Demo
Day.  I deliberately avoid calculating that number, because if you
start measuring something you start optimizing it, and I know it's
the wrong thing to optimize.
[
5
]
But the percentage is certainly
way over 30%.  And frankly the thought of a 30% success rate at
fundraising makes my stomach clench.  A Demo Day where only 30% of
the startups were fundable would be a shambles.  Everyone would
agree that YC had jumped the shark. We ourselves would feel that
YC had jumped the shark.  And yet we'd all be wrong.
For better or worse that's never going to be more than a thought
experiment.  We could never stand it.  How about that for
counterintuitive?  I can lay out what I know to be the right thing
to do, and still not do it.  I can make up all sorts of plausible
justifications.  It would hurt YC's brand (at least among the
innumerate) if we invested in huge numbers of risky startups that
flamed out.  It might dilute the value of the alumni network.
Perhaps most convincingly, it would be demoralizing for us to be
up to our chins in failure all the time.  But I know the real reason
we're so conservative is that we just haven't assimilated the fact
of 1000x variation in returns.
We'll probably never be able to bring ourselves to take risks
proportionate to the returns in this business.  The best we can
hope for is that when we interview a group and find ourselves
thinking "they seem like good founders, but what are investors going
to think of this crazy idea?" we'll continue to be able to say "who
cares what investors think?"  That's what we thought about Airbnb,
and if we want to fund more Airbnbs we have to stay good at thinking
it.
Notes
[
1
]
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.  We're delighted to have funded
Reddit, for example. Even though we made comparatively little from
it, Reddit has had a big effect on the world, and it introduced us
to Steve Huffman and Alexis Ohanian, both of whom have become good
friends.
Nor do we push founders to try to become one of the big winners if
they don't want to. We didn't "swing for the fences" in our own
startup (Viaweb, which was acquired for $50 million), and it would
feel pretty bogus to press founders to do something we didn't do.
Our rule is that it's up to the founders.  Some want to take over
the world, and some just want that first few million.  But we invest
in so many companies that we don't have to sweat any one outcome.
In fact, we don't have to sweat whether startups have exits at all.
The biggest exits are the only ones that matter financially, and
those are guaranteed in the sense that if a company becomes big
enough, a market for its shares will inevitably arise.  Since the
remaining outcomes don't have a significant effect on returns, it's
cool with us if the founders want to sell early for a small amount,
or grow slowly and never sell (i.e. become a so-called lifestyle
business), or even shut the company down.  We're sometimes disappointed
when a startup we had high hopes for doesn't do well, but this
disappointment is mostly the ordinary variety that anyone feels
when that happens.
[
2
]
Without visual cues (e.g. the horizon) you can't distinguish
between gravity and acceleration.  Which means if you're flying
through clouds you can't tell what the attitude of
the aircraft is.  You could feel like you're flying straight and
level while in fact you're descending in a spiral.  The solution
is to ignore what your body is telling you and listen only to your
instruments.  But it turns out to be very hard to ignore what your
body is telling you.  Every pilot knows about this
problem
and yet
it is still a leading cause of accidents.
[
3
]
Not all big hits follow this pattern though. The reason Google
seemed a bad idea was that there were already lots of search engines
and there didn't seem to be room for another.
[
4
]
A startup's success at fundraising is a function of two things:
what they're selling and how good they are at selling it.  And while
we can teach startups a lot about how to appeal to investors, even
the most convincing pitch can't sell an idea that investors don't
like.  I was genuinely worried that Airbnb, for example, would not
be able to raise money after Demo Day.  I couldn't convince
Fred Wilson
to fund them.  They might not
have raised money at all but for the coincidence that Greg McAdoo,
our contact at Sequoia, was one of a handful of VCs who understood
the vacation rental business, having spent much of the previous two
years investigating it.
[
5
]
I calculated it once for the last batch before a consortium of
investors started offering investment automatically to every startup
we funded, summer 2010.  At the time it was 94% (33 of 35 companies
that tried to raise money succeeded, and one didn't try because
they were already profitable).  Presumably it's lower now because
of that investment; in the old days it was raise after Demo Day or
die.
Thanks
to Sam Altman, Paul Buchheit, Patrick Collison, Jessica
Livingston, Geoff Ralston, and Harj Taggar for reading drafts of
this.


Modeling a Wealth Tax
August 2020
Some politicians are proposing to introduce wealth taxes in addition
to income and capital gains taxes. Let's try modeling the effects of various levels
of wealth tax to see what they would mean in practice for a startup
founder.
Suppose you start a successful startup in your twenties, and then
live for another 60 years. How much of your stock will a wealth tax
consume?
If the wealth tax applies to all your assets, it's easy to
calculate its effect. A wealth tax of 1% means you get to keep
99% of your stock each year. After 60 years the proportion
of stock you'll have left will be .99^60, or .547. So a
straight 1% wealth tax means the government will over the
course of your life take 45% of your stock.
(Losing shares does not, obviously, mean becoming
net
poorer unless the value per share is increasing by less than the
wealth tax rate.)
Here's how much stock the government would take over 60
years at various levels of wealth tax:
wealth tax
government takes
0.1%
6%
0.5%
26%
1.0%
45%
2.0%
70%
3.0%
84%
4.0%
91%
5.0%
95%
A wealth tax will usually have a threshold at which it starts.
How much difference would a high threshold make? To model that,
we need to make some assumptions about the initial value of
your stock and the growth rate.
Suppose your stock is initially
worth $2 million, and the company's trajectory is as follows:
the value of your stock grows 3x for 2 years, then 2x for 2 years,
then 50% for 2 years, after
which you just get a typical public company growth rate,
which we'll call 8%.
[
1
]
Suppose the wealth tax threshold is
$50 million. How much stock does the government take now?
wealth tax
government takes
0.1%
5%
0.5%
23%
1.0%
41%
2.0%
65%
3.0%
79%
4.0%
88%
5.0%
93%
It may at first seem surprising that such apparently small tax rates
produce such dramatic effects. A 2% wealth tax with a $50 million
threshold takes about two thirds of a successful founder's stock.
The reason wealth taxes have such dramatic effects is that they're
applied over and over to the same money. Income tax
happens every year, but only to that year's income. Whereas if you
live for 60 years after acquiring some asset, a wealth tax will tax
that same asset 60 times. A wealth tax compounds.
Note
[
1
]
In practice, eventually some of this 8% would come in the form of
dividends, which are taxed as income at issue, so this model actually
represents the most optimistic case for the founder.


@Subzee_singh This is not merely mistaken, but mistaken in an interesting way. Hugely successful startups often have near-death experiences at some point. And that is exactly when debt holders knife you.

@Seattleyachts Venture debt doesn't compete with the seed stage investing YC does. It's for later stage companies. By which point we're in the same boat as the founders. So when I say venture debt sucks, it's just because it does in fact suck.

@davidemanuel They think they're the exception.

Venture debt kills.

@eshear I would guess it was a combination of parents' paranoia about child abductions and that it got more interesting to stay home (due to video games and cable TV).

@TTMSqueezer @harjtaggar Fill out the application. And get a cofounder if you don't already have one.

@38capital @Matt_Pinner There may have been worries about child abductions, but I think the big nonobvious thing that changed is that it got more entertaining to stay home, due to video games and/or cable TV.

@Matt_Pinner Yes. Starting at 8 or 9 there was no explicit restriction on where one could go. When I was in 4th grade I'd bicycle several miles to friends' houses.

@harjtaggar You're lucky Trevor isn't still in the humanoid robot business, or he'd make you one with an integral espresso machine.

@ahistoryinart Is this black bit damage? https://t.co/qvUIQ6pYoA


@micsolana If candidates violate norms by behaving criminally, we should call their bluff.

@hypnoksa @WhiteHouse Just so everyone knows, ~ means not.

Someone should model in advance exactly what the consequences will be and publish their predictions. Then instead of just saying this is a stupid idea, we can quote specific numbers.

@benhylak @nftsasha Unfortunately it isn't. I asked someone involved with finance and he guessed it's not even in the top 25 holdings. If it was worth billions I'd know about it.

@benhylak Great, after dismissing one piece of bullshit I was tired of hearing, I now immediately have another...

@iamgingertrash @gwern @JacquesThibs @1010Towncrier No, it can't be sold.

@gwern @JacquesThibs @1010Towncrier Good point. Presumably it's worth more now. But hard to say how much more, because there's a cap on the returns. This is not ordinary stock but a share of the first n dollars of future profit.

@electrik_dreams @ShaanVP P. G. Wodehouse above all.

@JacquesThibs @1010Towncrier Apparently YC's later-stage fund invested $10m in the for-profit subsidiary. This was not a very big investment for those funds. And obviously it wasn't influencing me, since I found out about it 5 minutes ago.

@JacquesThibs @1010Towncrier That seems strange, because the for-profit arm didn't exist before he was full-time, but I'll ask around.


@puntium What's wrong with those? That you have to stop using them to charge them?

@Dr_Singularity The Sherlock Holmes stories. https://t.co/hU635mskpv

@ZvonimirFras Every day. (The loo is next door.)

@azeem I avoid them like the plague. But yes the display has a webcam.

@theojaffee England.

@accuratetlm13 @jiratickets It's a lens cloth.

@yegordb Sorry, but the companies' customers already do this for me.

@Sams_Antics There's a Womb Chair in the next room.

@TheMindScourge Weeel, the big library has brown bookshelves... https://t.co/KxLSPc1xb3

@leanmediaorg About 570 years.


Why TV Lost
March 2009
About twenty years ago people noticed computers and TV were on a
collision course and started to speculate about what they'd produce
when they converged.  We now know the answer: computers.  It's clear
now that even by using the word "convergence" we were giving TV too
much credit.  This won't be convergence so much as replacement.
People may still watch things they call "TV shows," but they'll
watch them mostly on computers.
What decided the contest for computers?  Four forces, three of which
one could have predicted, and one that would have been harder to.
One predictable cause of victory is that the Internet is an open
platform.  Anyone can build whatever they want on it, and the market
picks the winners.  So innovation happens at hacker speeds instead
of big company speeds.
The second is Moore's Law, which has worked its usual magic on
Internet bandwidth.
[
1
]
The third reason computers won is piracy. Users prefer it
not just because it's free, but because it's
more convenient.  Bittorrent and YouTube have already trained a new
generation of viewers that the place to watch shows is on a computer
screen.
[
2
]
The somewhat more surprising force was one specific type of innovation:
social applications.  The average teenage kid has a pretty much
infinite capacity for talking to their friends.  But they can't
physically be with them all the time.  When I was in high school
the solution was the telephone.  Now it's social networks, multiplayer
games, and various messaging applications.  The way you reach them
all is through a computer.
[
3
]
Which means every teenage kid (a)
wants a computer with an Internet connection, (b) has an incentive
to figure out how to use it, and (c) spends countless hours in front
of it.
This was the most powerful force of all.  This was what made everyone
want computers.  Nerds got computers because they liked them.  Then
gamers got them to play games on.  But it was connecting to other
people that got everyone else: that's what made even grandmas and
14 year old girls want computers.
After decades of running an IV drip right into their audience,
people in the entertainment business had understandably come to
think of them as rather passive.  They thought they'd be able to
dictate the way shows reached audiences.  But they underestimated
the force of their desire to connect with one another.
Facebook killed TV.  That is wildly oversimplified, of course, but
probably as close to the truth as you can get in three words.
___
The TV networks already seem, grudgingly, to see where things are
going, and have responded by putting their stuff, grudgingly, online.
But they're still dragging their heels.  They still seem to wish
people would watch shows on TV instead, just as newspapers that put
their stories online still seem to wish people would wait till the
next morning and read them printed on paper.  They should both just
face the fact that the Internet is the primary medium.
They'd be in a better position if they'd done that earlier.  When
a new medium arises that's powerful enough to make incumbents
nervous, then it's probably powerful enough to win, and the best
thing they can do is jump in immediately.
Whether they like it or not, big changes are coming, because the
Internet dissolves the two cornerstones of broadcast media:
synchronicity and locality.  On the Internet, you don't have to
send everyone the same signal, and you don't have to send it to
them from a local source.  People will watch what they want when
they want it, and group themselves according to whatever shared
interest they feel most strongly.  Maybe their strongest shared
interest will be their physical location, but I'm guessing not.
Which means local TV is probably dead.  It was an artifact of
limitations imposed by old technology.  If someone were creating
an Internet-based TV company from scratch now, they might have some
plan for shows aimed at specific regions, but it wouldn't be a top
priority.
Synchronicity and locality are tied together.  TV network affiliates
care what's on at 10 because that delivers viewers for local news
at 11.  This connection adds more brittleness than strength, however:
people don't watch what's on at 10 because they want to watch the
news afterward.
TV networks will fight these trends, because they don't have
sufficient flexibility to adapt to them.  They're hemmed in by local
affiliates in much the same way car companies are hemmed in by
dealers and unions.  Inevitably, the people running the networks
will take the easy route and try to keep the old model running for
a couple more years, just as the record labels have done.
A recent article in the
Wall Street Journal
described how TV networks
were trying to add more live shows, partly as a way to make viewers
watch TV synchronously instead of watching recorded shows when it
suited them.  Instead of delivering what viewers want, they're
trying to force them to change their habits to suit the networks'
obsolete business model.  That never works unless you have a monopoly
or cartel to enforce it, and even then it only works temporarily.
The other reason networks like live shows is that they're cheaper
to produce.  There they have the right idea, but they haven't
followed it to its conclusion.   Live content can be way cheaper
than networks realize, and the way to take advantage of dramatic
decreases in cost is to
increase volume
.  The networks are prevented
from seeing this whole line of reasoning because they still think
of themselves as being in the broadcast business—as sending one
signal to everyone.
[
4
]
___
Now
would be a good time to start any company that competes with
TV networks.  That's what a lot of Internet startups are, though
they may not have had this as an explicit goal.  People only have
so many leisure hours a day, and TV is premised on such long sessions
(unlike Google, which prides itself on sending users on their way
quickly) that anything that takes up their time is competing with
it.  But in addition to such indirect competitors, I think TV
companies will increasingly face direct ones.
Even in cable TV, the long tail was lopped off prematurely by the
threshold you had to get over to start a new channel.  It will be
longer on the Internet, and there will be more mobility within it.
In this new world, the existing players will only have the advantages
any big company has in its market.
That will change the balance of power between the networks and the
people who produce shows.  The networks used to be gatekeepers.
They distributed your work, and sold advertising on it.  Now the
people who produce a show can distribute it themselves.  The main
value networks supply now is ad sales.  Which will tend to put them
in the position of service providers rather than publishers.
Shows will change even more.  On the Internet there's no reason to
keep their current format, or even the fact that they have a single
format.  Indeed, the more interesting sort of convergence that's
coming is between shows and games.  But on the question of what
sort of entertainment gets distributed on the Internet in 20 years,
I wouldn't dare to make any predictions, except that things will
change a lot.  We'll get whatever the most imaginative people can
cook up.  That's why the Internet won.
Notes
[
1
]
Thanks to Trevor Blackwell for this point.  He adds: "I
remember the eyes of phone companies gleaming in the early 90s when
they talked about convergence.  They thought most programming would
be on demand, and they would implement it and make a lot of money.
It didn't work out. They assumed that their local network infrastructure
would be critical to do video on-demand, because you couldn't
possibly stream it from a few data centers over the internet. At
the time (1992) the entire cross-country Internet bandwidth wasn't
enough for one video stream. But wide-area bandwidth increased more
than they expected and they were beaten by iTunes and Hulu."
[
2
]
Copyright owners tend to focus on the aspect they see of
piracy, which is the lost revenue.  They therefore think what drives
users to do it is the desire to get something for free.  But iTunes
shows that people will pay for stuff online, if you make it easy.
A significant component of piracy is simply that it offers a better
user experience.
[
3
]
Or a phone that is actually a computer.  I'm not making any
predictions about the size of the device that will replace TV, just
that it will have a browser and get data via the Internet.
[
4
]
Emmett Shear writes: "I'd argue the long tail for sports may
be even larger than the long tail for other kinds of content. Anyone
can broadcast a high school football game that will be interesting
to 10,000 people or so, even if the quality of production is not
so good."
Thanks
to Sam Altman, Trevor Blackwell, Nancy Cook, Michael Seibel,
Emmett Shear, and Fred Wilson for reading drafts of this.
Japanese Translation


Whoah. The whole tech-moves-to-Miami thing seemed to be dying, but this would be the last nail in the coffin.

@sarmadgulzar Before Twitter, you couldn't hear what was going on in the heads of stupid people. They were walking past you on the sidewalk thinking about astrology or creationism or the Monte Carlo fallacy or whatever, but you couldn't tell.

@justinamash It's worse than deranged. It's authoritarian.

@SpaceWalkerReal No way. Which one?

A friend was talking about the time she worked as a supervisor in a factory, and the strange experience she once had of arguing with someone so stupid that she couldn't explain to him why he was wrong. I asked if she used Twitter. She said no.

Unless the essay I'm currently writing is really long, I have pretty much all of it loaded into my head as I'm writing it. I could probably reproduce the current one verbatim for example.

I rewrote the troublesome final paragraph of my current essay in my head as I was lying in bed this morning. It wasn't a case of "it came to me in a dream," but I wasn't entirely awake either. I often do this, but rarely more than a paragraph.

@_trish_xD I wrote about this idea here: https://t.co/9kOKObL31k

@veronica_humble That is amazing for a 6 yo.

@sidwithshadows When nothing nags at me as I read it.


Wallerant Vaillant is one of the best old masters you've never heard of. I'd never heard of him myself till a few months ago. But what a gripping portrait. https://t.co/FzjYlPw3pA

Blake Scholl sent me this picture of all of us in a mockup of a Boom fuselage about 10 years ago. Boom and our kids are now a lot bigger... https://t.co/nhLpZfWIaG

The US is now doing the kind of things we used to make fun of banana republics for doing when I was a kid.

I know not all the people who supported this man are idiots. Is there a point where the non-idiots say "enough is enough?"

The most important division between companies is between those who make things they themselves admire, and those who regard their customers as fools, and cynically give them what they want. Companies sometimes shift from the former to the latter, but never in the other direction.

One reason it's hard to shift away from selling to fools is that it's simply much harder to make great things than to push fools' buttons. But there's also another more subtle reason: you won't have the right people to make great things, or even want to.

Jessica just sent an email to a friend of ours with a 4:1 exclamation point to period ratio.

She now tells me that she'd actually taken out one exclamation point. In the initial draft there were no periods at all.

Honestly, this is embarrassingly weak.

A friend told me that now that they've had a child, her husband can't bear to watch movies in which bad things happen to kids. Same here. That was one of the most surprising things about having children. You're not just protective of your own children, but children in general.

"Andy never fails."

— me in an email to a YC partner about Andy Lapsa


@MrBohun Easily weeks, sometimes months.

On the way to school, 12 yo and I were talking about people's greatest fears. I told him that this topic got boring once people had kids, because most parents' greatest fear is the same.

A way to discover new things: if you write an essay and it isn't very good, rewrite instead of publishing. If you chose to write an essay about some topic, there's probably something interesting to say about it. So if you keep rewriting you'll eventually find it.

In a way this is good. Elite universities all seem so similar that it's hard for ambitious students to choose between them. But this test shows which of them are focused on merit, and which have been captured by ideology.

If Google is giving us their best in the "AI overviews" they sometimes show at the top of search results, they are really in trouble.

@Scientific_Bird What if you control for income?

@Liv_Boeree You get it in the number of your followers.

10 years ago, Alice's Restaurant, Santa Cruz Mountains. https://t.co/NqwrKYXwFv

Progress doesn't have to take the form of shiny things flying through the air, but I have to admit it's pretty cool when it does.

@PP_Rubens Maybe one of the 17th century Dutch church interior painters, like De Witte or van Vliet or Saenredam?


Maybe Kamala and Walz should run as the happy campaign. The closest to happy that Trump and Vance can get is smug.

Till I saw this picture I hadn't realized how long it had been since I saw anything related to politics that made me happy.

Hypothesis: We should elect people who can read to a group of little kids without seeming unnatural. https://t.co/2APn4BjkmL

@ahistoryinart 1885! Before I read the tweet I was going to say 1970.

Future excuse for politicians: I didn't actually write that. It was ChatGPT.

@remouherek I come back every summer and do office hours with the startups in the summer batch. Sometimes I also check in with the winter batches.

@cwjones89 I was surprised too.

@chrisgrayson I think the line is whether the characters in the paper were typed by the supposed author.

How to spot fake trend articles in the press: look for the weak third example. Two things happening simultaneously is a coincidence. Coincidences aren't news. So journalists stretch to find a third example, however weak, so they can call it a trend.

I'm going to be the last person left generating training data.

One pair of founders I talked to today were students at a top US university. I asked what percent of students don't use AI to write their papers for them. They said max 20%. Professors have given up trying to forbid it.


A Unified Theory of VC Suckage
March 2005
A couple months ago I got an email from a recruiter asking if I was
interested in being a "technologist in residence" at a new venture
capital fund.  I think the idea was to play Karl Rove to the VCs'
George Bush.
I considered it for about four seconds.  Work for a VC fund?  Ick.
One of my most vivid memories from our startup is going to visit
Greylock, the famous Boston VCs. They were the most arrogant
people I've met in my life.  And I've met a lot of arrogant people.
[1]
I'm not alone in feeling this way, of course.  Even a VC friend of
mine dislikes VCs.  "Assholes," he says.
But lately I've been learning more about how the VC world works,
and a few days ago it hit me that there's a reason VCs are the way
they are.  It's not so much that the business attracts jerks, or
even that the power they wield corrupts them.  The real problem is
the way they're paid.
The problem with VC funds is that they're
funds
.  Like the
managers of mutual funds or hedge funds, VCs get paid a percentage
of the money they manage: about 2% a year in management fees,
plus a percentage of the gains.  So they want
the fund to be huge-- hundreds of millions of dollars, if possible.
But that means each partner ends up being responsible for investing
a lot of money.  And since one person can only manage so many deals,
each deal has to be for multiple millions of dollars.
This turns out to explain nearly all the characteristics of VCs
that founders hate.
It explains why VCs take so agonizingly long to make up their minds,
and why their due diligence feels like a body cavity search. [2]
With so much at stake, they have to be paranoid.
It explains why they steal your ideas.  Every founder knows that
VCs will tell your secrets to your competitors if they end up
investing in them.  It's not unheard of for VCs to meet you when
they have no intention of funding you, just to pick your brain for
a competitor.  This prospect makes naive founders clumsily secretive.
Experienced founders treat it as a cost of doing business.  Either
way it sucks.  But again, the only reason VCs are so sneaky is the
giant deals they do.  With so much at stake, they have to be devious.
It explains why VCs tend to interfere in the companies they invest
in.  They want to be on your board not just so that they can advise
you, but so that they can watch you.  Often they even install a new
CEO.  Yes, he may have extensive business experience.  But he's
also their man: these newly installed CEOs always play something
of the role of a political commissar in a Red Army unit.  With
so much at stake, VCs can't resist micromanaging you.
The huge investments themselves are something founders would dislike,
if they realized how damaging they can be.  VCs don't invest $x
million because that's the amount you need, but because that's the
amount the structure of their business requires them to invest.
Like steroids, these sudden huge investments can do more harm than
good.  Google survived enormous VC funding because it could
legitimately absorb large amounts of money.  They had to buy a lot
of servers and a lot of bandwidth to crawl the whole Web.  Less
fortunate startups just end up hiring armies of people to sit around
having meetings.
In principle you could take a huge VC investment, put it in treasury
bills, and continue to operate frugally.  You just try it.
And of course giant investments mean giant valuations.  They have
to, or there's not enough stock left to keep the founders interested.
You might think a high valuation is a great thing.  Many founders
do.  But you can't eat paper.  You can't benefit from a high valuation
unless you can somehow achieve what those in the business
call a "liquidity event," and the higher
your valuation, the narrower your options for doing that.  Many a
founder would be happy to sell his company for $15 million, but VCs
who've just invested at a pre-money valuation of $8 million won't
hear of that.  You're rolling the dice again, whether you like it
or not.
Back in 1997, one of our competitors raised $20 million in a single
round of VC funding.  This was at the time more than the valuation
of our entire company.  Was I worried?  Not at all: I was delighted.
It was like watching a car you're chasing turn down a street that
you know has no outlet.
Their smartest move at that point would have been to take every
penny of the $20 million and use it to buy us.  We would have sold.
Their investors would have been furious of course.  But I think the
main reason they never considered this was that they never imagined
we could be had so cheap.  They probably assumed we were on the
same VC gravy train they were.
In fact we only spent about $2 million in our entire existence.
And that gave us flexibility.  We could sell ourselves to Yahoo for
$50 million, and everyone was delighted.  If our competitor had
done that, the last round of investors would presumably have lost
money.  I assume they could have vetoed such a deal.  But no one
those days was paying a lot more than Yahoo.  So unless their
founders could pull off an IPO (which would be difficult with Yahoo
as a competitor), they had no choice but to ride the thing down.
The puffed-up companies that went public during the Bubble didn't
do it just because they were pulled into it by unscrupulous investment
bankers.  Most were pushed just as hard from the other side by VCs
who'd invested at high valuations, leaving an IPO as the only way
out.  The only people dumber were retail investors.  So it was
literally IPO or bust.  Or rather, IPO then bust, or just bust.
Add up all the evidence of VCs' behavior, and the resulting personality
is not attractive.  In fact, it's the classic villain: alternately
cowardly, greedy, sneaky, and overbearing.
I used to take it for granted that VCs were like this. Complaining
that VCs were jerks used to seem as naive to me as complaining that
users didn't read the reference manual.  Of course VCs were jerks.
How could it be otherwise?
But I realize now that they're not intrinsically jerks.  VCs are
like car salesmen or bureaucrats: the nature of their work
turns them into jerks.
I've met a few VCs I like.  Mike Moritz seems a good guy.  He even
has a sense of humor, which is almost unheard of among VCs.  From
what I've read about John Doerr, he sounds like a good guy too,
almost a hacker.  But they work for the very best VC funds.  And
my theory explains why they'd tend to be different: just as the
very most popular kids don't have to persecute
nerds
, the very best
VCs don't have to act like VCs.  They get the pick of all the best
deals.  So they don't have to be so paranoid and sneaky, and they
can choose those rare companies, like Google, that will actually
benefit from the giant sums they're compelled to invest.
VCs often complain that in their business there's too much money
chasing too few deals.  Few realize that this also describes a flaw
in the way funding works at the level of individual firms.
Perhaps this was the sort of strategic insight I was supposed to
come up with as a "technologist in residence."  If so, the good
news is that they're getting it for free.  The bad news is it
means that if you're not one of the very top funds, you're
condemned to be the bad guys.
Notes
[1] After Greylock booted founder Philip Greenspun out of ArsDigita,
he wrote a hilarious but also very informative
essay
about it.
[2] Since most VCs aren't tech guys, the technology side of their
due diligence tends to be like a body cavity search by someone with
a faulty knowledge of human anatomy.  After a while we were quite
sore from VCs attempting to probe our nonexistent database orifice.
No, we don't use Oracle.  We just store the data in files.  Our
secret is to use an OS that doesn't lose our data.  Which OS?
FreeBSD.  Why do you use that instead of Windows NT?  Because it's
better and it doesn't cost anything.  What, you're using a
freeware
OS?
How many times that conversation was repeated.
Then when we got to Yahoo, we found they used FreeBSD and stored
their data in files too.
Chinese Translation
Japanese Translation


Startup = Growth
Want to start a startup?
Get funded by
Y Combinator
.
September 2012
A startup is a company designed to grow fast.  Being newly founded
does not in itself make a company a startup.  Nor is it necessary
for a startup to work on technology, or take venture funding, or
have some sort of "exit."  The only essential thing is growth.
Everything else we associate with startups follows from growth.
If you want to start one it's important to understand that. Startups
are so hard that you can't be pointed off to the side and hope to
succeed.  You have to know that growth is what you're after.  The
good news is, if you get growth, everything else tends to fall into
place.  Which means you can use growth like a compass to make almost
every decision you face.
Redwoods
Let's start with a distinction that should be obvious but is often
overlooked: not every newly founded company is a startup.  Millions
of companies are started every year in the US.  Only a tiny fraction
are startups.  Most are service businesses — restaurants, barbershops,
plumbers, and so on.  These are not startups, except in a few unusual
cases.  A barbershop isn't designed to grow fast.  Whereas a search
engine, for example, is.
When I say startups are designed to grow fast, I mean it in two
senses.  Partly I mean designed in the sense of intended, because
most startups fail.  But I also mean startups are different by
nature, in the same way a redwood seedling has a different destiny
from a bean sprout.
That difference is why there's a distinct word, "startup," for
companies designed to grow fast.  If all companies were essentially
similar, but some through luck or the efforts of their founders
ended up growing very fast, we wouldn't need a separate word.  We
could just talk about super-successful companies and less successful
ones.  But in fact startups do have a different sort of DNA from
other businesses.  Google is not just a barbershop whose founders
were unusually lucky and hard-working.  Google was different from
the beginning.
To grow rapidly, you need to make something you can sell to a big
market.  That's the difference between Google and a barbershop.  A
barbershop doesn't scale.
For a company to grow really big, it must (a) make something lots
of people want, and (b) reach and serve all those people.  Barbershops
are doing fine in the (a) department.  Almost everyone needs their
hair cut.  The problem for a barbershop, as for any retail
establishment, is (b).  A barbershop serves customers in person,
and few will travel far for a haircut.  And even if they did, the
barbershop couldn't accomodate them.
[
1
]
Writing software is a great way to solve (b), but you can still end
up constrained in (a).  If you write software to teach Tibetan to
Hungarian speakers, you'll be able to reach most of the people who
want it, but there won't be many of them.   If you make software
to teach English to Chinese speakers, however, you're in startup
territory.
Most businesses are tightly constrained in (a) or (b).  The distinctive
feature of successful startups is that they're not.
Ideas
It might seem that it would always be better to start a startup
than an ordinary business.  If you're going to start a company, why
not start the type with the most potential?  The catch is that this
is a (fairly) efficient market.   If you write software to teach
Tibetan to Hungarians, you won't have much competition.  If you
write software to teach English to Chinese speakers, you'll face
ferocious competition, precisely because that's such a larger prize.
[
2
]
The constraints that limit ordinary companies also protect them.
That's the tradeoff.  If you start a barbershop, you only have to
compete with other local barbers.  If you start a search engine you
have to compete with the whole world.
The most important thing that the constraints on a normal business
protect it from is not competition, however, but the difficulty of
coming up with new ideas.  If you open a bar in a particular
neighborhood, as well as limiting your potential and protecting you
from competitors, that geographic constraint also helps define your
company.  Bar + neighborhood is a sufficient idea for a small
business.  Similarly for companies constrained in (a).  Your niche
both protects and defines you.
Whereas if you want to start a startup, you're probably going to
have to think of something fairly novel.  A startup has to make
something it can deliver to a large market, and ideas of that type
are so valuable that all the obvious ones are already taken.
That space of ideas has been so thoroughly picked over that a startup
generally has to work on something everyone else has overlooked.
I was going to write that one has to make a conscious effort to
find ideas everyone else has overlooked.  But that's not how most
startups get started.  Usually successful startups happen because
the founders are sufficiently different from other people that ideas
few others can see seem obvious to them.  Perhaps later they step
back and notice they've found an idea in everyone else's blind spot,
and from that point make a deliberate effort to stay there.
[
3
]
But at the moment when successful startups get started, much of the
innovation is unconscious.
What's different about successful founders is that they can see
different problems.  It's a particularly good combination both to
be good at technology and to face problems that can be solved by
it, because technology changes so rapidly that formerly bad ideas
often become good without anyone noticing.  Steve Wozniak's problem
was that he wanted his own computer.  That was an unusual problem
to have in 1975.  But technological change was about to make it a
much more common one.  Because he not only wanted a computer but
knew how to build them, Wozniak was able to make himself one.  And
the problem he solved for himself became one that Apple solved for
millions of people in the coming years.  But by the time it was
obvious to ordinary people that this was a big market, Apple was
already established.
Google has similar origins.  Larry Page and Sergey Brin wanted to
search the web.  But unlike most people they had the technical
expertise both to notice that existing search engines were not as
good as they could be, and to know how to improve them.  Over the
next few years their problem became everyone's problem, as the web
grew to a size where you didn't have to be a picky search expert
to notice the old algorithms weren't good enough.  But as happened
with Apple, by the time everyone else realized how important search
was, Google was entrenched.
That's one connection between startup ideas and technology.  Rapid
change in one area uncovers big, soluble problems in other areas.
Sometimes the changes are advances, and what they change is solubility.
That was the kind of change that yielded Apple; advances in chip
technology finally let Steve Wozniak design a computer he could
afford.  But in Google's case the most important change was the
growth of the web. What changed there was not solubility but bigness.
The other connection between startups and technology is that startups
create new ways of doing things, and new ways of doing things are,
in the broader sense of the word, new technology.
When a startup both begins with an
idea exposed by technological change and makes a product consisting
of technology in the narrower sense (what used to be called "high
technology"), it's easy to conflate the two.  But the two connections
are distinct and in principle one could start a startup that was
neither driven by technological change, nor whose product consisted
of technology except in the broader sense.
[
4
]
Rate
How fast does a company have to grow to be considered a startup?
There's no precise answer to that.  "Startup" is a pole, not a
threshold.  Starting one is at first no more than a declaration of
one's ambitions.  You're committing not just to starting a company,
but to starting a fast growing one, and you're thus committing to
search for one of the rare ideas of that type.  But at first you
have no more than commitment.  Starting a startup is like being an
actor in that respect.  "Actor" too is a pole rather than a threshold.
At the beginning of his career, an actor is a waiter who goes to
auditions.  Getting work makes him a successful actor, but he doesn't
only become an actor when he's successful.
So the real question is not what growth rate makes a company a
startup, but what growth rate successful startups tend to have.
For founders that's more than a theoretical question, because it's
equivalent to asking if they're on the right path.
The growth of a successful startup usually has three phases:
There's an initial period of slow or no growth while the startup
  tries to figure out what it's doing.
As the startup figures out how to make something lots of people
  want and how to reach those people, there's a period of rapid
  growth.
Eventually a successful startup will grow into a big company.
  Growth will slow, partly due to internal limits and partly because
  the company is starting to bump up against the limits of the
  markets it serves.
[
5
]
Together these three phases produce an S-curve.  The phase whose
growth defines the startup is the second one, the ascent.  Its
length and slope determine how big the company will be.
The slope is the company's growth rate.  If there's one number every
founder should always know, it's the company's growth rate.  That's
the measure of a startup.  If you don't know that number, you don't
even know if you're doing well or badly.
When I first meet founders and ask what their growth rate is,
sometimes they tell me "we get about a hundred new customers a
month."  That's not a rate.  What matters is not the absolute number
of new customers, but the ratio of new customers to existing ones.
If you're really getting a constant number of new customers every
month, you're in trouble, because that means your growth rate is
decreasing.
During Y Combinator we measure growth rate per week, partly because
there is so little time before Demo Day, and partly because startups
early on need frequent feedback from their users to tweak what
they're doing.
[
6
]
A good growth rate during YC is 5-7% a week.  If you can hit 10% a
week you're doing exceptionally well.  If you can only manage 1%,
it's a sign you haven't yet figured out what you're doing.
The best thing to measure the growth rate of is revenue.  The next
best, for startups that aren't charging initially, is active users.
That's a reasonable proxy for revenue growth because whenever the
startup does start trying to make money, their revenues will probably
be a constant multiple of active users.
[
7
]
Compass
We usually advise startups to pick a growth rate they think they
can hit, and then just try to hit it every week.  The key word here
is "just." If they decide to grow at 7% a week and they hit that
number, they're successful for that week.  There's nothing more
they need to do.  But if they don't hit it, they've failed in the
only thing that mattered, and should be correspondingly alarmed.
Programmers will recognize what we're doing here.  We're turning
starting a startup into an optimization problem.  And anyone who
has tried optimizing code knows how wonderfully effective that sort
of narrow focus can be.  Optimizing code means taking an existing
program and changing it to use less of something, usually time or
memory.  You don't have to think about what the program should do,
just make it faster.  For most programmers this is very satisfying
work.  The narrow focus makes it a sort of puzzle, and you're
generally surprised how fast you can solve it.
Focusing on hitting a growth rate reduces the otherwise bewilderingly
multifarious problem of starting a startup to a single problem.
You can use that target growth rate to make all your decisions for
you; anything that gets you the growth you need is ipso facto right.
Should you spend two days at a conference?  Should you hire another
programmer?  Should you focus more on marketing?  Should you spend
time courting some big customer?  Should you add x feature? Whatever
gets you your target growth rate.
[
8
]
Judging yourself by weekly growth doesn't mean you can look no more
than a week ahead.  Once you experience the pain of missing your
target one week (it was the only thing that mattered, and you failed
at it), you become interested in anything that could spare you such
pain in the future.  So you'll be willing for example to hire another
programmer, who won't contribute to this week's growth but perhaps
in a month will have implemented some new feature that will get you
more users.   But only if (a) the distraction of hiring someone
won't make you miss your numbers in the short term, and (b) you're
sufficiently worried about whether you can keep hitting your numbers
without hiring someone new.
It's not that you don't think about the future, just that you think
about it no more than necessary.
In theory this sort of hill-climbing could get a startup into
trouble.  They could end up on a local maximum.  But in practice
that never happens.  Having to hit a growth number every week forces
founders to act, and acting versus not acting is the high bit of
succeeding.  Nine times out of ten, sitting around strategizing is
just a form of procrastination.  Whereas founders' intuitions about
which hill to climb are usually better than they realize.  Plus the
maxima in the space of startup ideas are not spiky and isolated.
Most fairly good ideas are adjacent to even better ones.
The fascinating thing about optimizing for growth is that it can
actually discover startup ideas.  You can use the need for growth
as a form of evolutionary pressure.  If you start out with some
initial plan and modify it as necessary to keep hitting, say, 10%
weekly growth, you may end up with a quite different company than
you meant to start.  But anything that grows consistently at 10% a
week is almost certainly a better idea than you started with.
There's a parallel here to small businesses.  Just as the constraint
of being located in a particular neighborhood helps define a bar,
the constraint of growing at a certain rate can help define a
startup.
You'll generally do best to follow that constraint wherever it leads
rather than being influenced by some initial vision, just as a
scientist is better off following the truth wherever it leads rather
than being influenced by what he wishes were the case.  When Richard
Feynman said that the imagination of nature was greater than the
imagination of man, he meant that if you just keep following the
truth you'll discover cooler things than you could ever have made
up. For startups, growth is a constraint much like truth. Every
successful startup is at least partly a product of the imagination
of growth.
[
9
]
Value
It's hard to find something that grows consistently at several
percent a week, but if you do you may have found something surprisingly
valuable.  If we project forward we see why.
weekly
yearly
1%
1.7x
2%
2.8x
5%
12.6x
7%
33.7x
10%
142.0x
A company that grows at 1% a week will grow 1.7x a year, whereas a
company that grows at 5% a week will grow 12.6x.  A company making
$1000 a month (a typical number early in YC) and growing at 1% a
week will 4 years later be making $7900 a month, which is less than
a good programmer makes in salary in Silicon Valley.  A startup
that grows at 5% a week will in 4 years be making $25 million a
month.
[
10
]
Our ancestors must rarely have encountered cases of exponential
growth, because our intuitions are no guide here.  What happens
to fast growing startups tends to surprise even the founders.
Small variations in growth rate produce qualitatively different
outcomes.  That's why there's a separate word for startups, and why
startups do things that ordinary companies don't, like raising money
and getting acquired.  And, strangely enough, it's also why they
fail so frequently.
Considering how valuable a successful startup can become, anyone
familiar with the concept of expected value would be surprised if
the failure rate weren't high.  If a successful startup could make
a founder $100 million, then even if the chance of succeeding were
only 1%, the expected value of starting one would be $1 million.
And the probability of a group of sufficiently smart and determined
founders succeeding on that scale might be significantly over 1%.
For the right people — e.g. the young Bill Gates — the probability
might be 20% or even 50%.  So it's not surprising that so many want
to take a shot at it.  In an efficient market, the number of failed
startups should be proportionate to the size of the successes.  And
since the latter is huge the former should be too.
[
11
]
What this means is that at any given time, the great majority of
startups will be working on something that's never going to go
anywhere, and yet glorifying their doomed efforts with the grandiose
title of "startup."
This doesn't bother me.  It's the same with other high-beta vocations,
like being an actor or a novelist.  I've long since gotten used to
it.  But it seems to bother a lot of people, particularly those
who've started ordinary businesses.  Many are annoyed that these
so-called startups get all the attention, when hardly any of them
will amount to anything.
If they stepped back and looked at the whole picture they might be
less indignant.  The mistake they're making is that by basing their
opinions on anecdotal evidence they're implicitly judging by the
median rather than the average.  If you judge by the median startup,
the whole concept of a startup seems like a fraud.  You have to
invent a bubble to explain why founders want to start them or
investors want to fund them.  But it's a mistake to use the median
in a domain with so much variation.  If you look at the average
outcome rather than the median, you can understand why investors
like them, and why, if they aren't median people, it's a rational
choice for founders to start them.
Deals
Why do investors like startups so much?  Why are they so hot to
invest in photo-sharing apps, rather than solid money-making
businesses?  Not only for the obvious reason.
The test of any investment is the ratio of return to risk.  Startups
pass that test because although they're appallingly risky, the
returns when they do succeed are so high.  But that's not the only
reason investors like startups.  An ordinary slower-growing business
might have just as good a ratio of return to risk, if both were
lower.  So why are VCs interested only in high-growth companies?
The reason is that they get paid by getting their capital back,
ideally after the startup IPOs, or failing that when it's acquired.
The other way to get returns from an investment is in the form of
dividends.  Why isn't there a parallel VC industry that invests in
ordinary companies in return for a percentage of their profits?
Because it's too easy for people who control a private company to
funnel its revenues to themselves (e.g. by buying overpriced
components from a supplier they control) while making it look like
the company is making little profit.  Anyone who invested in private
companies in return for dividends would have to pay close attention
to their books.
The reason VCs like to invest in startups is not simply the returns,
but also because such investments are so easy to oversee.  The
founders can't enrich themselves without also enriching the investors.
[
12
]
Why do founders want to take the VCs' money?  Growth, again.  The
constraint between good ideas and growth operates in both directions.
It's not merely that you need a scalable idea to grow.  If you have
such an idea and don't grow fast enough, competitors will.  Growing
too slowly is particularly dangerous in a business with network
effects, which the best startups usually have to some degree.
Almost every company needs some amount of funding to get started.
But startups often raise money even when they are or could be
profitable.  It might seem foolish to sell stock in a profitable
company for less than you think it will later be worth, but it's
no more foolish than buying insurance.  Fundamentally that's how
the most successful startups view fundraising.  They could grow the
company on its own revenues, but the extra money and help supplied
by VCs will let them grow even faster.  Raising money lets you
choose
your growth rate.
Money to grow faster is always at the command of the most successful
startups, because the VCs need them more than they need the VCs.
A profitable startup could if it wanted just grow on its own revenues.
Growing slower might be slightly dangerous, but chances are it
wouldn't kill them.  Whereas VCs need to invest in startups, and
in particular the most successful startups, or they'll be out of
business.  Which means that any sufficiently promising startup will
be offered money on terms they'd be crazy to refuse.  And yet because
of the scale of the successes in the startup business, VCs can still
make money from such investments.  You'd have to be crazy to believe
your company was going to become as valuable as a high growth rate
can make it, but some do.
Pretty much every successful startup will get acquisition offers
too.  Why?  What is it about startups that makes other companies
want to buy them?
[
13
]
Fundamentally the same thing that makes everyone else want the stock
of successful startups: a rapidly growing company is valuable.  It's
a good thing eBay bought Paypal, for example, because Paypal is now
responsible for 43% of their sales and probably more of their growth.
But acquirers have an additional reason to want startups.  A rapidly
growing company is not merely valuable, but dangerous.  If it keeps
expanding, it might expand into the acquirer's own territory.  Most
product acquisitions have some component of fear.  Even if an
acquirer isn't threatened by the startup itself, they might be
alarmed at the thought of what a competitor could do with it.  And
because startups are in this sense doubly valuable to acquirers,
acquirers will often pay more than an ordinary investor would.
[
14
]
Understand
The combination of founders, investors, and acquirers forms a natural
ecosystem.  It works so well that those who don't understand it are
driven to invent conspiracy theories to explain how neatly things
sometimes turn out.  Just as our ancestors did to explain the
apparently too neat workings of the natural world.  But there is
no secret cabal making it all work.
If you start from the mistaken assumption that Instagram was
worthless, you have to invent a secret boss to force Mark Zuckerberg
to buy it.  To anyone who knows Mark Zuckerberg, that is the reductio
ad absurdum of the initial assumption.  The reason he bought Instagram
was that it was valuable and dangerous, and what made it so was
growth.
If you want to understand startups, understand growth.  Growth
drives everything in this world.  Growth is why startups usually
work on technology — because ideas for fast growing companies are
so rare that the best way to find new ones is to discover those
recently made viable by change, and technology is the best source
of rapid change.  Growth is why it's a rational choice economically
for so many founders to try starting a startup: growth makes the
successful companies so valuable that the expected value is high
even though the risk is too.  Growth is why VCs want to invest in
startups: not just because the returns are high but also because
generating returns from capital gains is easier to manage than
generating returns from dividends.  Growth explains why the most
successful startups take VC money even if they don't need to: it
lets them choose their growth rate.  And growth explains why
successful startups almost invariably get acquisition offers.  To
acquirers a fast-growing company is not merely valuable but dangerous
too.
It's not just that if you want to succeed in some domain, you have
to understand the forces driving it.  Understanding growth is what
starting a startup
consists
of.  What you're really doing (and
to the dismay of some observers, all you're really doing) when you
start a startup is committing to solve a harder type of problem
than ordinary businesses do.  You're committing to search for one
of the rare ideas that generates rapid growth.  Because these ideas
are so valuable, finding one is hard.  The startup is the embodiment
of your discoveries so far.  Starting a startup is thus very much
like deciding to be a research scientist: you're not committing to
solve any specific problem; you don't know for sure which problems
are soluble; but you're committing to try to discover something no
one knew before.  A startup founder is in effect an economic research
scientist.  Most don't discover anything that remarkable, but some
discover relativity.
Notes
[
1
]
Strictly speaking it's not lots of customers you need but a big
market, meaning a high product of number of customers times how
much they'll pay.  But it's dangerous to have too few customers
even if they pay a lot, or the power that individual customers have
over you could turn you into a de facto consulting firm.  So whatever
market you're in, you'll usually do best to err on the side of
making the broadest type of product for it.
[
2
]
One year at Startup School David Heinemeier Hansson encouraged
programmers who wanted to start businesses to use a restaurant as
a model.  What he meant, I believe, is that it's fine to start
software companies constrained in (a) in the same way a restaurant
is constrained in (b).  I agree.  Most people should not try to
start startups.
[
3
]
That sort of stepping back is one of the things we focus on at
Y Combinator.  It's common for founders to have discovered something
intuitively without understanding all its implications.  That's
probably true of the biggest discoveries in any field.
[
4
]
I got it wrong in
"How to Make Wealth"
when I said that a
startup was a small company that takes on a hard technical
problem.  That is the most common recipe but not the only one.
[
5
]
In principle companies aren't limited by the size of the markets
they serve, because they could just expand into new markets.  But
there seem to be limits on the ability of big companies to do that.
Which means the slowdown that comes from bumping up against the
limits of one's markets is ultimately just another way in which
internal limits are expressed.
It may be that some of these limits could be overcome by changing
the shape of the organization — specifically by sharding it.
[
6
]
This is, obviously, only for startups that have already launched
or can launch during YC.  A startup building a new database will
probably not do that.  On the other hand, launching something small
and then using growth rate as evolutionary pressure is such a
valuable technique that any company that could start this way
probably should.
[
7
]
If the startup is taking the Facebook/Twitter route and building
something they hope will be very popular but from which they don't
yet have a definite plan to make money, the growth rate has to be
higher, even though it's a proxy for revenue growth, because such
companies need huge numbers of users to succeed at all.
Beware too of the edge case where something spreads rapidly but the
churn is high as well, so that you have good net growth till you run
through all the potential users, at which point it suddenly stops.
[
8
]
Within YC when we say it's ipso facto right to do whatever gets
you growth, it's implicit that this excludes trickery like buying
users for more than their lifetime value, counting users as active
when they're really not, bleeding out invites at a regularly
increasing rate to manufacture a perfect growth curve, etc.  Even
if you were able to fool investors with such tricks, you'd ultimately
be hurting yourself, because you're throwing off your own compass.
[
9
]
Which is why it's such a dangerous mistake to believe that
successful startups are simply the embodiment of some brilliant
initial idea.  What you're looking for initially is not so much a
great idea as an idea that could evolve into a great one.   The
danger is that promising ideas are not merely blurry versions of
great ones.  They're often different in kind, because the early
adopters you evolve the idea upon have different needs from the
rest of the market.  For example, the idea that evolves into Facebook
isn't merely a subset of Facebook; the idea that evolves into
Facebook is a site for Harvard undergrads.
[
10
]
What if a company grew at 1.7x a year for a really long time?
Could it not grow just as big as any successful startup?  In principle
yes, of course. If our hypothetical company making $1000 a month
grew at 1% a week for 19 years, it would grow as big as a company
growing at 5% a week for 4 years.  But while such trajectories may
be common in, say, real estate development, you don't see them much
in the technology business.  In technology, companies that grow
slowly tend not to grow as big.
[
11
]
Any expected value calculation varies from person to person
depending on their utility function for money.  I.e. the first
million is worth more to most people than subsequent millions.  How
much more depends on the person.  For founders who are younger or
more ambitious the utility function is flatter.  Which is probably
part of the reason the founders of the most successful startups of
all tend to be on the young side.
[
12
]
More precisely, this is the case in the biggest winners, which
is where all the returns come from.  A startup founder could pull
the same trick of enriching himself at the company's expense by
selling them overpriced components.  But it wouldn't be worth it
for the founders of Google to do that.  Only founders of failing
startups would even be tempted, but those are writeoffs from the
VCs' point of view anyway.
[
13
]
Acquisitions fall into two categories: those where the acquirer
wants the business, and those where the acquirer just wants the
employees.  The latter type is sometimes called an HR acquisition.
Though nominally acquisitions and sometimes on a scale that has a
significant effect on the expected value calculation for potential
founders, HR acquisitions are viewed by acquirers as more akin to
hiring bonuses.
[
14
]
I once explained this to some founders who had recently arrived
from Russia.  They found it novel that if you threatened a company
they'd pay a premium for you.  "In Russia they just kill you," they
said, and they were only partly joking.  Economically, the fact
that established companies can't simply eliminate new competitors
may be one of the most valuable aspects of the rule of law.  And
so to the extent we see incumbents suppressing competitors via
regulations or patent suits, we should worry, not because it's a
departure from the rule of law per se but from what the rule of law
is aiming at.
Thanks
to Sam Altman, Marc Andreessen, Paul Buchheit, Patrick
Collison, Jessica Livingston, Geoff Ralston, and Harj Taggar for
reading drafts of this.
Arabic Translation
Estonian Translation
Portuguese Translation
Italian Translation


@citizenwillis If this happens all hell will break loose.

12 yo was puzzled why a grocery store chain would run ads talking about their use of AI. I explained that these ads aren't aimed at customers, but investors. Their goal is to make them think of the grocery chain's stock as an AI stock.

@pitdesi @levie Or have quite bright lights on various things inside the room.

Update: Apparently the Delaware state government, realizing what's at stake, has been working to ensure that Delaware remains a safe place for startups to incorporate, and it's now a valid option again.

@Chris_arnade The agenda here is so obvious. How could anyone possibly know "they were in no way superior to their neighbors"? You could argue, unconvincingly, that there is no evidence of superiority. But no honest scholar could go further than that.

@clairlemon Unfortunately "outside of the US" is a fuzzy concept to most of its supporters. They know that in principle there is such a thing, but they've never seen it.

It's easy to make fun of founders who say this kind of thing, but Steve really meant it. He not only meant it, but did it.

"The way that we're going to ratchet up our species is to take the best and to spread it around to everybody, so that everybody grows up with better things and starts to understand the subtlety of these better things."

@RuiCarrilho5 @tedgioia It's not a burn! I like Marc. I just couldn't resist once I saw it.

@tedgioia Marc Andreessen's sister shares his interest in programming.


@MarkusOdenthal With a 1 year old definitely.

@DerangPenguin @lizthegrey Really?

@rajatsuri @Noahpinion He'll even be able to star in them himself.

@David_Ingram I've followed him for a long time and I know him to be a smart and benevolent guy.

Someone should seriously do this: create an interface to let dogs use gestures to generate programs. The programs would be very simple of course, but it would be interesting to see how complex they could get. Imagine being able to say you wrote the first no-code app for dogs.

If Bluesky ends up banning Jesse Singal, that's all we need to know about it.

Maybe the problem with Lancaster is that the center should be Edwards AFB, but this is physically impossible.

Frank Zappa described his hometown, Lancaster California, as "really bleak," so I looked it up. It would be hard to identify the center based on the street patterns. It's just many squares of similar stuff, like wallpaper. https://t.co/pBTyHnF9s9

@HProggy @patio11 He has an unfair advantage in the alien department.

@webdevMason The sad thing is, it's actually true. You can't think about it all the time or it will drive you crazy. But that doesn't mean it's false, just unbearable.


@BigTechAlert @pmarca FWIW this was news to me. I didn't unfollow him; he blocked me. No idea what for.

@sentientist I don't think it's human nature, because things aren't like this in the UK. Nor were they in the US when I was a kid. America is just extremely polarized right now.

@_realprimetime @garybasin @MsMelChen It's the essence of their job to do that. After the first shooter is killed, their number one priority is to determine if there are other threats, and to do this as quickly as possible.

@garybasin @MsMelChen Really, you can't think of a way that you could determine if there were other shooters, if you were a Secret Service agent at the site?

@gifbezos @MsMelChen Teddy Roosevelt did.

@VinnyLingham @MsMelChen The Secret Service thought it was clear, or they wouldn't have moved him.

@MsMelChen He's literally surrounded by Secret Service agents who've all been told in their earpieces that there was a single shooter and that he's been killed.

That's why they've switched to moving him, instead of keeping him down behind the podium as they were initially.

@iamgingertrash I've never scheduled a tweet. I just hadn't heard the news.

@jordnb No, I just hadn't heard the news.

@davidsirota You should already know this, but since you don't seem to, let me tell you something about audiences. They have other things they could be doing instead. So you can't assume they'll pay attention to you. You have to tell them why they should.


The manufacture of precision instruments long preceded the Industrial Revolution.

@tommycollison Drafts of the talk I have to give on tuesday. It's like having a paper due.

@paulserra @sama Apparently 114 million people in Nigeria.

Note to self: I can no longer trick him.

The specific thing he busted me for was saying that while he used to make fun of his older brother for being addicted to video games, now he knew how powerful addiction was. He said I was just giving him a hard time for playing video games, and I had to admit it.

12 yo busted me for something he had to invent a new phrase for: passive obnoxiousness. It's when you say something obnoxious but without seeming to.

@mhartl Not always. They can also expand into new territories. Apparently one of the biggest current forms of activism arose because groups formed to advocate for another cause succeeded, and thus needed a new one.

@newtonlaw A few minutes after I read this my 12 yo showed up at my office door wanting to play catch. You know what I did.

@HistoryEJ @palakzat @sama There's a power-law distribution of returns, so you only have to track the big misses.

@purrmin @palakzat @sama There's no such thing as too early, so it must have been the founders.


@CcibChris Did the plane have actual keys, or is the guy just jokingly handing over his car keys?

@Essenciverse She is, but I don't think I am.

@StevesChirps There is one: YC.

Fortunately for most of us it's a very natural kind of effort to make. Jessica and I hate the sort of bureaucratic formality you find at big companies, and so do most YC partners. Garry in particular does. So I'm pretty confident about the immediate future.

It will be YC's 20th birthday in 4 days. I'm pleased by how young YC still feels as an organization. It would be dangerous for YC to become too established. Since YC is training startups, it has to remain startupish itself. But it requires a constant effort to stay that way.

@JimmyPenland Thank you for this valuable perspective, anonymous account with a name that's meant to sound American but doesn't, created two years ago, and that only ever posts about politics.

A high school student asked if he should join a startup or go to university. I said that if he was ambitious he could learn a lot more at a university. The work you do in a startup is severely constrained. If it isn't, the startup is inefficient.

@wstv_lizzi A VC fund run by government employees. Let's see how well that works out.

@ATabarrok It's alarming that a Treasury Secretary wouldn't grasp that. But not surprising that one appointed by Trump wouldn't.

@frede_rico @NathanpmYoung Possibly the highest. Misgovernment is stupendously expensive to fix.


@TroyHeibein Which of those things did Rumeysa Ozturk do?

@habibahamid When I asked insiders who was driving the targeting of students, they told me it was Miller. So that makes sense.

If the US government is going to start deporting foreign students for having incorrect opinions, maybe one partial solution is for students who are citizens to volunteer to express their opinions for them.

@sfmcguire79 Is it done, or do all the DEI administrators still work there, just with different titles?

@ilex_ulmus It's a bit disconcerting to find that the executive director of Pause AI thinks that ChatGPT has a Studio Ghibli mode. How can you have opinions about these systems if you don't use them?

@carmenleelau IIRC it's because you normally hear your voice through the bones in your head, which change the sound to be deeper. So when you hear your actual voice it sounds high and nasal.

@migueldeicaza @RepAuchincloss When people you think are unprincipled show signs of being more principled, surely it's better to encourage them...

@Scientific_Bird The coloring of the arrows doesn't seem right. Surely the arrow leading to Iceland should be white rather than pink for example.

@grok @p_____dot I'm talking about the Studio Ghibli images.

@Betar_USA Are you saying that the arrests are in fact driven by denunciations by your organization?


@VeryVegeta Something in a tweet. Probably a phrase that looked or sounded like it.

@BoyanSlat It's hard to avoid rereading that one though.

@RichardSocher The "continuous" tells me you're not yet using AI to write these...

@mateohh Just have more companies.

If AI allows companies to be smaller, that will be a qualitative change. Lots of things break once organizations get big. We take it for granted, even in the startup world. But imagine if that stopped happening.

@notdjkhaled7 @peterboghossian @POTUS This administration.

@scienceisstrat1 @AlokSharma_RDG @JeremyFarrar @DalrympleWill @johnthornhillft The rate of change in itself makes me skeptical. Universities don't change this fast.

The phrase "Hakodate Aiport" just randomly popped into my head. It was on the box of a MIG-25 model that I built almost 50 years ago. I have not seen or heard this phrase since. How do brains do this?

@peterboghossian @POTUS This administration just makes it so hard to love them.

"The study has been cited nearly 2500 times, and would be the most cited paper ever to be retracted."

"Lesné, who did not reply to requests for comment, remains a UMN professor and receives National Institutes of Health funding."

https://t.co/wQarD7VHLo


@adamislucky He writes stories. The idea of writing essays would seem perversely boring to him.

@spectate_or He plans to put Lego on it. But that doesn't really distinguish it from other tables in our house.

@JanelCubbage In any cause the undecided are who you have to convince. So if you actually care about the cause, you can't afford the luxury of despising them, regardless of how good it might make you feel.

@amasad @spencercamp @GrowSF Not always. Things were good till Ed Lee died.

@DayoAKK Thank you, you're right, I am failing to miss the point.

Bad writers write verbosely in the US and UK too, and are encouraged to by bad teachers. It's not unique to any specific country.

@levie @tobi It's not a 66% tax rate.

@pitdesi There aren't many places in the world people pay more than in California. In fact is there anywhere?

@Viktor_shinski They have different connotations. "Seen" implies more possibility of error.

@PearlByProxy @nylonmusq Apparently Nigeria had a three day holiday.

@octal @nylonmusq There is a lot of competition in that department.