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|  **Want to start a startup?** Get funded by Y Combinator.  
  
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October 2007  
  
 _(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 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 they
need.  
  
Google's example should cure the rest of the world of this idea. Google has by
far the best programmers of any public technology company. If they don't have
a problem doing acquisitions, the others should have even less problem.
However many Google does, Microsoft should do ten times as many.  
  
One reason Google doesn't have a problem with acquisitions is that they know
first-hand the quality of the people they can get that way. Larry and Sergey
only started Google after making the rounds of the search engines trying to
sell their idea and finding no takers. They've _been_ the guys coming in to
visit the big company, so they know who might be sitting across that
conference table from them.  
  
**4\. Riskier Strategies are Possible**  
  
Risk is always proportionate to reward. The way to get really big returns is
to do things that seem crazy, like starting a new search engine in 1998, or
turning down a billion dollar acquisition offer.  
  
This has traditionally been a problem in venture funding. Founders and
investors have different attitudes to risk. Knowing that risk is on average
proportionate to reward, investors like risky strategies, while founders, who
don't have a big enough sample size to care what's true on average, tend to be
more conservative.  
  
If startups are easy to start, this conflict goes away, because founders can
start them younger, when it's rational to take more risk, and can start more
startups total in their careers. When founders can do lots of startups, they
can start to look at the world in the same portfolio-optimizing way as
investors. And that means the overall amount of wealth created can be greater,
because strategies can be riskier.  
  
**5\. Younger, Nerdier Founders**  
  
If startups become a cheap commodity, more people will be able to have them,
just as more people could have computers once microprocessors made them cheap.
And in particular, younger and more technical founders will be able to start
startups than could before.  
  
Back when it cost a lot to start a startup, you had to convince investors to
let you do it. And that required very different skills from actually doing the
startup. If investors were perfect judges, the two would require exactly the
same skills. But unfortunately most investors are terrible judges. I know
because I see behind the scenes what an enormous amount of work it takes to
raise money, and the amount of selling required in an industry is always
inversely proportional to the judgement of the buyers.  
  
Fortunately, if startups get cheaper to start, there's another way to convince
investors. Instead of going to venture capitalists with a business plan and
trying to convince them to fund it, you can get a product launched on a few
tens of thousands of dollars of seed money from us or your uncle, and approach
them with a working company instead of a plan for one. Then instead of having
to seem smooth and confident, you can just point them to Alexa.  
  
This way of convincing investors is better suited to hackers, who often went
into technology in part because they felt uncomfortable with the amount of
fakeness required in other fields.  
  
**6\. Startup Hubs Will Persist**  
  
It might seem that if startups get cheap to start, it will mean the end of
startup hubs like Silicon Valley. If all you need to start a startup is rent
money, you should be able to do it anywhere.  
  
This is kind of true and kind of false. It's true that you can now _start_ a
startup anywhere. But you have to do more with a startup than just start it.
You have to make it succeed. And that is more likely to happen in a startup
hub.  
  
I've thought a lot about this question, and it seems to me the increasing
cheapness of web startups will if anything increase the importance of startup
hubs. The value of startup hubs, like centers for any kind of business, lies
in something very old-fashioned: face to face meetings. No technology in the
immediate future will replace walking down University Ave and running into a
friend who tells you how to fix a bug that's been bothering you all weekend,
or visiting a friend's startup down the street and ending up in a conversation
with one of their investors.  
  
The question of whether to be in a startup hub is like the question of whether
to take outside investment. The question is not whether you _need_ it, but
whether it brings any advantage at all. Because anything that brings an
advantage will give your competitors an advantage over you if they do it and
you don't. So if you hear someone saying "we don't need to be in Silicon
Valley," that use of the word "need" is a sign they're not even thinking about
the question right.  
  
And while startup hubs are as powerful magnets as ever, the increasing
cheapness of starting a startup means the particles they're attracting are
getting lighter. A startup now can be just a pair of 22 year old guys. A
company like that can move much more easily than one with 10 people, half of
whom have kids.  
  
We know because we make people move for Y Combinator, and it doesn't seem to
be a problem. The advantage of being able to work together face to face for
three months outweighs the inconvenience of moving. Ask anyone who's done it.  
  
The mobility of seed-stage startups means that seed funding is a national
business. One of the most common emails we get is from people asking if we can
help them set up a local clone of Y Combinator. But this just wouldn't work.
Seed funding isn't regional, just as big research universities aren't.  
  
Is seed funding not merely national, but international? Interesting question.
There are signs it may be. We've had an ongoing stream of founders from
outside the US, and they tend to do particularly well, because they're all
people who were so determined to succeed that they were willing to move to
another country to do it.  
  
The more mobile startups get, the harder it would be to start new silicon
valleys. If startups are mobile, the best local talent will go to the real
Silicon Valley, and all they'll get at the local one will be the people who
didn't have the energy to move.  
  
This is not a nationalistic idea, incidentally. It's cities that compete, not
countries. Atlanta is just as hosed as Munich.  
  
**7\. Better Judgement Needed**  
  
If the number of startups increases dramatically, then the people whose job is
to judge them are going to have to get better at it. I'm thinking particularly
of investors and acquirers. We now get on the order of 1000 applications a
year. What are we going to do if we get 10,000?  
  
That's actually an alarming idea. But we'll figure out some kind of answer.
We'll have to. It will probably involve writing some software, but fortunately
we can do that.  
  
Acquirers will also have to get better at picking winners. They generally do
better than investors, because they pick later, when there's more performance
to measure. But even at the most advanced acquirers, identifying companies to
buy is extremely ad hoc, and completing the acquisition often involves a great
deal of unneccessary friction.  
  
I think acquirers may eventually have chief acquisition officers who will both
identify good acquisitions and make the deals happen. At the moment those two
functions are separate. Promising new startups are often discovered by
developers. If someone powerful enough wants to buy them, the deal is handed
over to corp dev guys to negotiate. It would be better if both were combined
in one group, headed by someone with a technical background and some vision of
what they wanted to accomplish. Maybe in the future big companies will have
both a VP of Engineering responsible for technology developed in-house, and a
CAO responsible for bringing technology in from outside.  
  
At the moment, there is no one within big companies who gets in trouble when
they buy a startup for $200 million that they could have bought earlier for
$20 million. There should start to be someone who gets in trouble for that.  
  
**8\. College Will Change**  
  
If the best hackers start their own companies after college instead of getting
jobs, that will change what happens in college. Most of these changes will be
for the better. I think the experience of college is warped in a bad way by
the expectation that afterward you'll be judged by potential employers.  
  
One change will be in the meaning of "after college," which will switch from
when one graduates from college to when one leaves it. If you're starting your
own company, why do you need a degree? We don't encourage people to start
startups during college, but the best founders are certainly capable of it.
Some of the most successful companies we've funded were started by undergrads.  
  
I grew up in a time where college degrees seemed really important, so I'm
alarmed to be saying things like this, but there's nothing magical about a
degree. There's nothing that magically changes after you take that last exam.
The importance of degrees is due solely to the administrative needs of large
organizations. These can certainly affect your life—it's hard to get into grad
school, or to get a work visa in the US, without an undergraduate degree—but
tests like this will matter less and less.  
  
As well as mattering less whether students get degrees, it will also start to
matter less where they go to college. In a startup you're judged by users, and
they don't care where you went to college. So in a world of startups, elite
universities will play less of a role as gatekeepers. In the US it's a
national scandal how easily children of rich parents game college admissions.
But the way this problem ultimately gets solved may not be by reforming the
universities but by going around them. We in the technology world are used to
that sort of solution: you don't beat the incumbents; you redefine the problem
to make them irrelevant.  
  
The greatest value of universities is not the brand name or perhaps even the
classes so much as the people you meet. If it becomes common to start a
startup after college, students may start trying to maximize this. Instead of
focusing on getting internships at companies they want to work for, they may
start to focus on working with other students they want as cofounders.  
  
What students do in their classes will change too. Instead of trying to get
good grades to impress future employers, students will try to learn things.
We're talking about some pretty dramatic changes here.  
  
**9\. Lots of Competitors**  
  
If it gets easier to start a startup, it's easier for competitors too. That
doesn't erase the advantage of increased cheapness, however. You're not all
playing a zero-sum game. There's not some fixed number of startups that can
succeed, regardless of how many are started.  
  
In fact, I don't think there's any limit to the number of startups that could
succeed. Startups succeed by creating wealth, which is the satisfaction of
people's desires. And people's desires seem to be effectively infinite, at
least in the short term.  
  
What the increasing number of startups does mean is that you won't be able to
sit on a good idea. Other people have your idea, and they'll be increasingly
likely to do something about it.  
  
**10\. Faster Advances**  
  
There's a good side to that, at least for consumers of technology. If people
get right to work implementing ideas instead of sitting on them, technology
will evolve faster.  
  
Some kinds of innovations happen a company at a time, like the punctuated
equilibrium model of evolution. There are some kinds of ideas that are so
threatening that it's hard for big companies even to think of them. Look at
what a hard time Microsoft is having discovering web apps. They're like a
character in a movie that everyone in the audience can see something bad is
about to happen to, but who can't see it himself. The big innovations that
happen a company at a time will obviously happen faster if the rate of new
companies increases.  
  
But in fact there will be a double speed increase. People won't wait as long
to act on new ideas, but also those ideas will increasingly be developed
within startups rather than big companies. Which means technology will evolve
faster per company as well.  
  
Big companies are just not a good place to make things happen fast. I talked
recently to a founder whose startup had been acquired by a big company. He was
a precise sort of guy, so he'd measured their productivity before and after.
He counted lines of code, which can be a dubious measure, but in this case was
meaningful because it was the same group of programmers. He found they were
one thirteenth as productive after the acquisition.  
  
The company that bought them was not a particularly stupid one. I think what
he was measuring was mostly the cost of bigness. I experienced this myself,
and his number sounds about right. There's something about big companies that
just sucks the energy out of you.  
  
Imagine what all that energy could do if it were put to use. There is an
enormous latent capacity in the world's hackers that most people don't even
realize is there. That's the main reason we do Y Combinator: to let loose all
this energy by making it easy for hackers to start their own startups.  
  
**A Series of Tubes**  
  
The process of starting startups is currently like the plumbing in an old
house. The pipes are narrow and twisty, and there are leaks in every joint. In
the future this mess will gradually be replaced by a single, huge pipe. The
water will still have to get from A to B, but it will get there faster and
without the risk of spraying out through some random leak.  
  
This will change a lot of things for the better. In a big, straight pipe like
that, the force of being measured by one's performance will propagate back
through the whole system. Performance is always the ultimate test, but there
are so many kinks in the plumbing now that most people are insulated from it
most of the time. So you end up with a world in which high school students
think they need to get good grades to get into elite colleges, and college
students think they need to get good grades to impress employers, within which
the employees waste most of their time in political battles, and from which
consumers have to buy anyway because there are so few choices. Imagine if that
sequence became a big, straight pipe. Then the effects of being measured by
performance would propagate all the way back to high school, flushing out all
the arbitrary stuff people are measured by now. That is the future of web
startups.  
  
  
  
  
  
**Thanks** to Brian Oberkirch and Simon Willison for inviting me to speak, and
the crew at Carson Systems for making everything run smoothly.  
  
  
  
  
  
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Japanese Translation  
  
  
  
  

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