The Future of Web Startups

_(This essay is derived from a keynote at FOWA in October 2007.)_

There's something interesting happening right now. Startups are undergoing the same transformation that technology does when it becomes cheaper.

It's a pattern we see over and over in technology. Initially there's some device that's very expensive and made in small quantities. Then someone discovers how to make them cheaply; many more get built; and as a result they can be used in new ways.

Computers are a familiar example. When I was a kid, computers were big, expensive machines built one at a time. Now they're a commodity. Now we can stick computers in everything.

This pattern is very old. Most of the turning points in economic history are instances of it. It happened to steel in the 1850s, and to power in the 1780s. It happened to cloth manufacture in the thirteenth century, generating the wealth that later brought about the Renaissance. Agriculture itself was an instance of this pattern.

Now as well as being produced by startups, this pattern is happening _to_ startups. It's so cheap to start web startups that orders of magnitudes more will be started. If the pattern holds true, that should cause dramatic changes.

**1\. Lots of Startups**

So my first prediction about the future of web startups is pretty straightforward: there will be a lot of them. When starting a startup was expensive, you had to get the permission of investors to do it. Now the only threshold is courage.

Even that threshold is getting lower, as people watch others take the plunge and survive. In the last batch of startups we funded, we had several founders who said they'd thought of applying before, but weren't sure and got jobs instead. It was only after hearing reports of friends who'd done it that they decided to try it themselves.

Starting a startup is hard, but having a 9 to 5 job is hard too, and in some ways a worse kind of hard. In a startup you have lots of worries, but you don't have that feeling that your life is flying by like you do in a big company. Plus in a startup you could make much more money.

As word spreads that startups work, the number may grow to a point that would now seem surprising.

We now think of it as normal to have a job at a company, but this is the thinnest of historical veneers. Just two or three lifetimes ago, most people in what are now called industrialized countries lived by farming. So while it may seem surprising to propose that large numbers of people will change the way they make a living, it would be more surprising if they didn't.

**2\. Standardization**

When technology makes something dramatically cheaper, standardization always follows. When you make things in large volumes you tend to standardize everything that doesn't need to change.

At Y Combinator we still only have four people, so we try to standardize everything. We could hire employees, but we want to be forced to figure out how to scale investing.

We often tell startups to release a minimal version one quickly, then let the needs of the users determine what to do next. In essense, let the market design the product. We've done the same thing ourselves. We think of the techniques we're developing for dealing with large numbers of startups as like software. Sometimes it literally is software, like [Hacker News](http://news.ycombinator.com) and our application system.

One of the most important things we've been working on standardizing are investment terms. Till now investment terms have been individually negotiated. This is a problem for founders, because it makes raising money take longer and cost more in legal fees. So as well as using the same paperwork for every deal we do, we've commissioned generic angel paperwork that all the startups we fund can use for future rounds.

Some investors will still want to cook up their own deal terms. Series A rounds, where you raise a million dollars or more, will be custom deals for the forseeable future. But I think angel rounds will start to be done mostly with standardized agreements. An angel who wants to insert a bunch of complicated terms into the agreement is probably not one you want anyway.

**3\. New Attitude to Acquisition**

Another thing I see starting to get standardized is acquisitions. As the volume of startups increases, big companies will start to develop standardized procedures that make acquisitions little more work than hiring someone.

Google is the leader here, as in so many areas of technology. They buy a lot of startups— more than most people realize, because they only announce a fraction of them. And being Google, they're figuring out how to do it efficiently.

One problem they've solved is how to think about acquisitions. For most companies, acquisitions still carry some stigma of inadequacy. Companies do them because they have to, but there's usually some feeling they shouldn't have to—that their own programmers should be able to build everything