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|  **Want to start a startup?** Get funded by Y Combinator.  
  
---  
  
May 2005  
  
 _(This essay is derived from a talk at the Berkeley CSUA.)_  
  
The three big powers on the Internet now are Yahoo, Google, and Microsoft.
Average age of their founders: 24. So it is pretty well established now that
grad students can start successful companies. And if grad students can do it,
why not undergrads?  
  
Like everything else in technology, the cost of starting a startup has
decreased dramatically. Now it's so low that it has disappeared into the
noise. The main cost of starting a Web-based startup is food and rent. Which
means it doesn't cost much more to start a company than to be a total slacker.
You can probably start a startup on ten thousand dollars of seed funding, if
you're prepared to live on ramen.  
  
The less it costs to start a company, the less you need the permission of
investors to do it. So a lot of people will be able to start companies now who
never could have before.  
  
The most interesting subset may be those in their early twenties. I'm not so
excited about founders who have everything investors want except intelligence,
or everything except energy. The most promising group to be liberated by the
new, lower threshold are those who have everything investors want except
experience.  
  
**Market Rate**  
  
I once claimed that nerds were unpopular in secondary school mainly because
they had better things to do than work full-time at being popular. Some said I
was just telling people what they wanted to hear. Well, I'm now about to do
that in a spectacular way: I think undergraduates are undervalued.  
  
Or more precisely, I think few realize the huge spread in the value of 20 year
olds. Some, it's true, are not very capable. But others are more capable than
all but a handful of 30 year olds.   
  
Till now the problem has always been that it's difficult to pick them out.
Every VC in the world, if they could go back in time, would try to invest in
Microsoft. But which would have then? How many would have understood that this
particular 19 year old was Bill Gates?  
  
It's hard to judge the young because (a) they change rapidly, (b) there is
great variation between them, and (c) they're individually inconsistent. That
last one is a big problem. When you're young, you occasionally say and do
stupid things even when you're smart. So if the algorithm is to filter out
people who say stupid things, as many investors and employers unconsciously
do, you're going to get a lot of false positives.  
  
Most organizations who hire people right out of college are only aware of the
average value of 22 year olds, which is not that high. And so the idea for
most of the twentieth century was that everyone had to begin as a trainee in
some entry-level job. Organizations realized there was a lot of variation in
the incoming stream, but instead of pursuing this thought they tended to
suppress it, in the belief that it was good for even the most promising kids
to start at the bottom, so they didn't get swelled heads.  
  
The most productive young people will _always_ be undervalued by large
organizations, because the young have no performance to measure yet, and any
error in guessing their ability will tend toward the mean.  
  
What's an especially productive 22 year old to do? One thing you can do is go
over the heads of organizations, directly to the users. Any company that hires
you is, economically, acting as a proxy for the customer. The rate at which
they value you (though they may not consciously realize it) is an attempt to
guess your value to the user. But there's a way to appeal their judgement. If
you want, you can opt to be valued directly by users, by starting your own
company.  
  
The market is a lot more discerning than any employer. And it is completely
non-discriminatory. On the Internet, nobody knows you're a dog. And more to
the point, nobody knows you're 22. All users care about is whether your site
or software gives them what they want. They don't care if the person behind it
is a high school kid.  
  
If you're really productive, why not make employers pay market rate for you?
Why go work as an ordinary employee for a big company, when you could start a
startup and make them buy it to get you?  
  
When most people hear the word "startup," they think of the famous ones that
have gone public. But most startups that succeed do it by getting bought. And
usually the acquirer doesn't just want the technology, but the people who
created it as well.  
  
Often big companies buy startups before they're profitable. Obviously in such
cases they're not after revenues. What they want is the development team and
the software they've built so far. When a startup gets bought for 2 or 3
million six months in, it's really more of a hiring bonus than an acquisition.  
  
I think this sort of thing will happen more and more, and that it will be
better for everyone. It's obviously better for the people who start the
startup, because they get a big chunk of money up front. But I think it will
be better for the acquirers too. The central problem in big companies, and the
main reason they're so much less productive than small companies, is the
difficulty of valuing each person's work. Buying larval startups solves that
problem for them: the acquirer doesn't pay till the developers have proven
themselves. Acquirers are protected on the downside, but still get most of the
upside.  
  
**Product Development**  
  
Buying startups also solves another problem afflicting big companies: they
can't do product development. Big companies are good at extracting the value
from existing products, but bad at creating new ones.  
  
Why? It's worth studying this phenomenon in detail, because this is the raison
d'etre of startups.  
  
To start with, most big companies have some kind of turf to protect, and this
tends to warp their development decisions. For example, Web-based applications
are hot now, but within Microsoft there must be a lot of ambivalence about
them, because the very idea of Web-based software threatens the desktop. So
any Web-based application that Microsoft ends up with, will probably, like
Hotmail, be something developed outside the company.  
  
Another reason big companies are bad at developing new products is that the
kind of people who do that tend not to have much power in big companies
(unless they happen to be the CEO). Disruptive technologies are developed by
disruptive people. And they either don't work for the big company, or have
been outmaneuvered by yes-men and have comparatively little influence.  
  
Big companies also lose because they usually only build one of each thing.
When you only have one Web browser, you can't do anything really risky with
it. If ten different startups design ten different Web browsers and you take
the best, you'll probably get something better.  
  
The more general version of this problem is that there are too many new ideas
for companies to explore them all. There might be 500 startups right now who
think they're making something Microsoft might buy. Even Microsoft probably
couldn't manage 500 development projects in-house.  
  
Big companies also don't pay people the right way. People developing a new
product at a big company get paid roughly the same whether it succeeds or
fails. People at a startup expect to get rich if the product succeeds, and get
nothing if it fails.  So naturally the people at the startup work a lot
harder.  
  
The mere bigness of big companies is an obstacle. In startups, developers are
often forced to talk directly to users, whether they want to or not, because
there is no one else to do sales and support. It's painful doing sales, but
you learn much more from trying to sell people something than reading what
they said in focus groups.  
  
And then of course, big companies are bad at product development because
they're bad at everything. Everything happens slower in big companies than
small ones, and product development is something that has to happen fast,
because you have to go through a lot of iterations to get something good.  
  
**Trend**  
  
I think the trend of big companies buying startups will only accelerate. One
of the biggest remaining obstacles is pride. Most companies, at least
unconsciously, feel they ought to be able to develop stuff in house, and that
buying startups is to some degree an admission of failure. And so, as people
generally do with admissions of failure, they put it off for as long as
possible. That makes the acquisition very expensive when it finally happens.  
  
What companies should do is go out and discover startups when they're young,
before VCs have puffed them up into something that costs hundreds of millions
to acquire. Much of what VCs add, the acquirer doesn't need anyway.  
  
Why don't acquirers try to predict the companies they're going to have to buy
for hundreds of millions, and grab them early for a tenth or a twentieth of
that? Because they can't predict the winners in advance? If they're only
paying a twentieth as much, they only have to predict a twentieth as well.
Surely they can manage that.  
  
I think companies that acquire technology will gradually learn to go after
earlier stage startups. They won't necessarily buy them outright. The solution
may be some hybrid of investment and acquisition: for example, to buy a chunk
of the company and get an option to buy the rest later.  
  
When companies buy startups, they're effectively fusing recruiting and product
development. And I think that's more efficient than doing the two separately,
because you always get people who are really committed to what they're working
on.  
  
Plus this method yields teams of developers who already work well together.
Any conflicts between them have been ironed out under the very hot iron of
running a startup. By the time the acquirer gets them, they're finishing one
another's sentences. That's valuable in software, because so many bugs occur
at the boundaries between different people's code.  
  
**Investors**  
  
The increasing cheapness of starting a company doesn't just give hackers more
power relative to employers. It also gives them more power relative to
investors.  
  
The conventional wisdom among VCs is that hackers shouldn't be allowed to run
their own companies. The founders are supposed to accept MBAs as their bosses,
and themselves take on some title like Chief Technical Officer. There may be
cases where this is a good idea. But I think founders will increasingly be
able to push back in the matter of control, because they just don't need the
investors' money as much as they used to.  
  
Startups are a comparatively new phenomenon. Fairchild Semiconductor is
considered the first VC-backed startup, and they were founded in 1959, less
than fifty years ago. Measured on the time scale of social change, what we
have now is pre-beta. So we shouldn't assume the way startups work now is the
way they have to work.  
  
Fairchild needed a lot of money to get started. They had to build actual
factories. What does the first round of venture funding for a Web-based
startup get spent on today? More money can't get software written faster; it
isn't needed for facilities, because those can now be quite cheap; all money
can really buy you is sales and marketing. A sales force is worth something,
I'll admit. But marketing is increasingly irrelevant. On the Internet,
anything genuinely good will spread by word of mouth.  
  
Investors' power comes from money. When startups need less money, investors
have less power over them. So future founders may not have to accept new CEOs
if they don't want them. The VCs will have to be dragged kicking and screaming
down this road, but like many things people have to be dragged kicking and
screaming toward, it may actually be good for them.  
  
Google is a sign of the way things are going. As a condition of funding, their
investors insisted they hire someone old and experienced as CEO. But from what
I've heard the founders didn't just give in and take whoever the VCs wanted.
They delayed for an entire year, and when they did finally take a CEO, they
chose a guy with a PhD in computer science.  
  
It sounds to me as if the founders are still the most powerful people in the
company, and judging by Google's performance, their youth and inexperience
doesn't seem to have hurt them. Indeed, I suspect Google has done better than
they would have if the founders had given the VCs what they wanted, when they
wanted it, and let some MBA take over as soon as they got their first round of
funding.  
  
I'm not claiming the business guys installed by VCs have no value. Certainly
they have. But they don't need to become the founders' bosses, which is what
that title CEO means. I predict that in the future the executives installed by
VCs will increasingly be COOs rather than CEOs. The founders will run
engineering directly, and the rest of the company through the COO.  
  
**The Open Cage**  
  
With both employers and investors, the balance of power is slowly shifting
towards the young. And yet they seem the last to realize it. Only the most
ambitious undergrads even consider starting their own company when they
graduate. Most just want to get a job.  
  
Maybe this is as it should be. Maybe if the idea of starting a startup is
intimidating, you filter out the uncommitted. But I suspect the filter is set
a little too high. I think there are people who could, if they tried, start
successful startups, and who instead let themselves be swept into the intake
ducts of big companies.  
  
Have you ever noticed that when animals are let out of cages, they don't
always realize at first that the door's open? Often they have to be poked with
a stick to get them out. Something similar happened with blogs. People could
have been publishing online in 1995, and yet blogging has only really taken
off in the last couple years. In 1995 we thought only professional writers
were entitled to publish their ideas, and that anyone else who did was a
crank. Now publishing online is becoming so popular that everyone wants to do
it, even print journalists. But blogging has not taken off recently because of
any technical innovation; it just took eight years for everyone to realize the
cage was open.  
  
I think most undergrads don't realize yet that the economic cage is open. A
lot have been told by their parents that the route to success is to get a good
job. This was true when their parents were in college, but it's less true now.
The route to success is to build something valuable, and you don't have to be
working for an existing company to do that. Indeed, you can often do it better
if you're not.  
  
When I talk to undergrads, what surprises me most about them is how
conservative they are. Not politically, of course. I mean they don't seem to
want to take risks. This is a mistake, because the younger you are, the more
risk you can take.  
  
**Risk**  
  
Risk and reward are always proportionate. For example, stocks are riskier than
bonds, and over time always have greater returns. So why does anyone invest in
bonds? The catch is that phrase "over time." Stocks will generate greater
returns over thirty years, but they might lose value from year to year. So
what you should invest in depends on how soon you need the money. If you're
young, you should take the riskiest investments you can find.  
  
All this talk about investing may seem very theoretical. Most undergrads
probably have more debts than assets. They may feel they have nothing to
invest. But that's not true: they have their time to invest, and the same rule
about risk applies there. Your early twenties are exactly the time to take
insane career risks.  
  
The reason risk is always proportionate to reward is that market forces make
it so. People will pay extra for stability. So if you choose stability-- by
buying bonds, or by going to work for a big company-- it's going to cost you.  
  
Riskier career moves pay better on average, because there is less demand for
them. Extreme choices like starting a startup are so frightening that most
people won't even try. So you don't end up having as much competition as you
might expect, considering the prizes at stake.  
  
The math is brutal. While perhaps 9 out of 10 startups fail, the one that
succeeds will pay the founders more than 10 times what they would have made in
an ordinary job.  That's the sense in which startups pay better "on
average."  
  
Remember that. If you start a startup, you'll probably fail. Most startups
fail. It's the nature of the business. But it's not necessarily a mistake to
try something that has a 90% chance of failing, if you can afford the risk.
Failing at 40, when you have a family to support, could be serious. But if you
fail at 22, so what? If you try to start a startup right out of college and it
tanks, you'll end up at 23 broke and a lot smarter. Which, if you think about
it, is roughly what you hope to get from a graduate program.  
  
Even if your startup does tank, you won't harm your prospects with employers.
To make sure I asked some friends who work for big companies. I asked managers
at Yahoo, Google, Amazon, Cisco and Microsoft how they'd feel about two
candidates, both 24, with equal ability, one who'd tried to start a startup
that tanked, and another who'd spent the two years since college working as a
developer at a big company. Every one responded that they'd prefer the guy
who'd tried to start his own company. Zod Nazem, who's in charge of
engineering at Yahoo, said:

> I actually put more value on the guy with the failed startup. And you can
> quote me!

So there you have it. Want to get hired by Yahoo? Start your own company.  
  
**The Man is the Customer**  
  
If even big employers think highly of young hackers who start companies, why
don't more do it? Why are undergrads so conservative? I think it's because
they've spent so much time in institutions.  
  
The first twenty years of everyone's life consists of being piped from one
institution to another. You probably didn't have much choice about the
secondary schools you went to. And after high school it was probably
understood that you were supposed to go to college. You may have had a few
different colleges to choose between, but they were probably pretty similar.
So by this point you've been riding on a subway line for twenty years, and the
next stop seems to be a job.  
  
Actually college is where the line ends. Superficially, going to work for a
company may feel like just the next in a series of institutions, but
underneath, everything is different. The end of school is the fulcrum of your
life, the point where you go from net consumer to net producer.  
  
The other big change is that now, you're steering. You can go anywhere you
want. So it may be worth standing back and understanding what's going on,
instead of just doing the default thing.  
  
All through college, and probably long before that, most undergrads have been
thinking about what employers want. But what really matters is what customers
want, because they're the ones who give employers the money to pay you.  
  
So instead of thinking about what employers want, you're probably better off
thinking directly about what users want. To the extent there's any difference
between the two, you can even use that to your advantage if you start a
company of your own. For example, big companies like docile conformists. But
this is merely an artifact of their bigness, not something customers need.  
  
**Grad School**  
  
I didn't consciously realize all this when I was graduating from college--
partly because I went straight to grad school. Grad school can be a pretty
good deal, even if you think of one day starting a startup. You can start one
when you're done, or even pull the ripcord part way through, like the founders
of Yahoo and Google.  
  
Grad school makes a good launch pad for startups, because you're collected
together with a lot of smart people, and you have bigger chunks of time to
work on your own projects than an undergrad or corporate employee would. As
long as you have a fairly tolerant advisor, you can take your time developing
an idea before turning it into a company. David Filo and Jerry Yang started
the Yahoo directory in February 1994 and were getting a million hits a day by
the fall, but they didn't actually drop out of grad school and start a company
till March 1995.  
  
You could also try the startup first, and if it doesn't work, then go to grad
school. When startups tank they usually do it fairly quickly. Within a year
you'll know if you're wasting your time.  
  
If it fails, that is. If it succeeds, you may have to delay grad school a
little longer. But you'll have a much more enjoyable life once there than you
would on a regular grad student stipend.  
  
**Experience**  
  
Another reason people in their early twenties don't start startups is that
they feel they don't have enough experience. Most investors feel the same.  
  
I remember hearing a lot of that word "experience" when I was in college. What
do people really mean by it? Obviously it's not the experience itself that's
valuable, but something it changes in your brain. What's different about your
brain after you have "experience," and can you make that change happen faster?  
  
I now have some data on this, and I can tell you what tends to be missing when
people lack experience. I've said that every startup needs three things: to
start with good people, to make something users want, and not to spend too
much money. It's the middle one you get wrong when you're inexperienced. There
are plenty of undergrads with enough technical skill to write good software,
and undergrads are not especially prone to waste money. If they get something
wrong, it's usually not realizing they have to make something people want.  
  
This is not exclusively a failing of the young. It's common for startup
founders of all ages to build things no one wants.  
  
Fortunately, this flaw should be easy to fix. If undergrads were all bad
programmers, the problem would be a lot harder. It can take years to learn how
to program. But I don't think it takes years to learn how to make things
people want. My hypothesis is that all you have to do is smack hackers on the
side of the head and tell them: Wake up. Don't sit here making up a priori
theories about what users need. Go find some users and see what they need.  
  
Most successful startups not only do something very specific, but solve a
problem people already know they have.  
  
The big change that "experience" causes in your brain is learning that you
need to solve people's problems. Once you grasp that, you advance quickly to
the next step, which is figuring out what those problems are. And that takes
some effort, because the way software actually gets used, especially by the
people who pay the most for it, is not at all what you might expect. For
example, the stated purpose of Powerpoint is to present ideas. Its real role
is to overcome people's fear of public speaking. It allows you to give an
impressive-looking talk about nothing, and it causes the audience to sit in a
dark room looking at slides, instead of a bright one looking at you.  
  
This kind of thing is out there for anyone to see. The key is to know to look
for it-- to realize that having an idea for a startup is not like having an
idea for a class project. The goal in a startup is not to write a cool piece
of software. It's to make something people want. And to do that you have to
look at users-- forget about hacking, and just look at users. This can be
quite a mental adjustment, because little if any of the software you write in
school even has users.  
  
A few steps before a Rubik's Cube is solved, it still looks like a mess. I
think there are a lot of undergrads whose brains are in a similar position:
they're only a few steps away from being able to start successful startups, if
they wanted to, but they don't realize it. They have more than enough
technical skill. They just haven't realized yet that the way to create wealth
is to make what users want, and that employers are just proxies for users in
which risk is pooled.  
  
If you're young and smart, you don't need either of those. You don't need
someone else to tell you what users want, because you can figure it out
yourself. And you don't want to pool risk, because the younger you are, the
more risk you should take.  
  
**A Public Service Message**  
  
I'd like to conclude with a joint message from me and your parents. Don't drop
out of college to start a startup. There's no rush. There will be plenty of
time to start companies after you graduate. In fact, it may be just as well to
go work for an existing company for a couple years after you graduate, to
learn how companies work.  
  
And yet, when I think about it, I can't imagine telling Bill Gates at 19 that
he should wait till he graduated to start a company. He'd have told me to get
lost. And could I have honestly claimed that he was harming his future-- that
he was learning less by working at ground zero of the microcomputer revolution
than he would have if he'd been taking classes back at Harvard? No, probably
not.  
  
And yes, while it is probably true that you'll learn some valuable things by
going to work for an existing company for a couple years before starting your
own, you'd learn a thing or two running your own company during that time too.  
  
The advice about going to work for someone else would get an even colder
reception from the 19 year old Bill Gates. So I'm supposed to finish college,
then go work for another company for two years, and then I can start my own? I
have to wait till I'm 23? That's _four years_. That's more than twenty percent
of my life so far. Plus in four years it will be way too late to make money
writing a Basic interpreter for the Altair.  
  
And he'd be right. The Apple II was launched just two years later. In fact, if
Bill had finished college and gone to work for another company as we're
suggesting, he might well have gone to work for Apple. And while that would
probably have been better for all of us, it wouldn't have been better for him.  
  
So while I stand by our responsible advice to finish college and then go work
for a while before starting a startup, I have to admit it's one of those
things the old tell the young, but don't expect them to listen to. We say this
sort of thing mainly so we can claim we warned you. So don't say I didn't warn
you.  
  
  
  
**