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October 2005  
  
The first Summer Founders Program has just finished. We were surprised how
well it went. Overall only about 10% of startups succeed, but if I had to
guess now, I'd predict three or four of the eight startups we funded will make
it.  
  
Of the startups that needed further funding, I believe all have either closed
a round or are likely to soon. Two have already turned down (lowball)
acquisition offers.  
  
We would have been happy if just one of the eight seemed promising by the end
of the summer. What's going on? Did some kind of anomaly make this summer's
applicants especially good? We worry about that, but we can't think of one.
We'll find out this winter.  
  
The whole summer was full of surprises. The best was that the hypothesis we
were testing seems to be correct. Young hackers can start viable companies.
This is good news for two reasons: (a) it's an encouraging thought, and (b) it
means that Y Combinator, which is predicated on the idea, is not hosed.  
  
**Age**  
  
More precisely, the hypothesis was that success in a startup depends mainly on
how smart and energetic you are, and much less on how old you are or how much
business experience you have. The results so far bear this out. The 2005
summer founders ranged in age from 18 to 28 (average 23), and there is no
correlation between their ages and how well they're doing.  
  
This should not really be surprising. Bill Gates and Michael Dell were both 19
when they started the companies that made them famous. Young founders are not
a new phenomenon: the trend began as soon as computers got cheap enough for
college kids to afford them.  
  
Another of our hypotheses was that you can start a startup on less money than
most people think. Other investors were surprised to hear the most we gave any
group was $20,000. But we knew it was possible to start on that little because
we started Viaweb on $10,000.  
  
And so it proved this summer. Three months' funding is enough to get into
second gear. We had a demo day for potential investors ten weeks in, and seven
of the eight groups had a prototype ready by that time. One, Reddit, had
already launched, and were able to give a demo of their live site.  
  
A researcher who studied the SFP startups said the one thing they had in
common was that they all worked ridiculously hard. People this age are
commonly seen as lazy. I think in some cases it's not so much that they lack
the appetite for work, but that the work they're offered is unappetizing.  
  
The experience of the SFP suggests that if you let motivated people do real
work, they work hard, whatever their age. As one of the founders said "I'd
read that starting a startup consumed your life, but I had no idea what that
meant until I did it."  
  
I'd feel guilty if I were a boss making people work this hard. But we're not
these people's bosses. They're working on their own projects. And what makes
them work is not us but their competitors. Like good athletes, they don't work
hard because the coach yells at them, but because they want to win.  
  
We have less power than bosses, and yet the founders work harder than
employees. It seems like a win for everyone. The only catch is that we get on
average only about 5-7% of the upside, while an employer gets nearly all of
it. (We're counting on it being 5-7% of a much larger number.)  
  
As well as working hard, the groups all turned out to be extraordinarily
responsible. I can't think of a time when one failed to do something they'd
promised to, even by being late for an appointment. This is another lesson the
world has yet to learn. One of the founders discovered that the hardest part
of arranging a meeting with executives at a big cell phone carrier was getting
a rental company to rent him a car, because he was too young.  
  
I think the problem here is much the same as with the apparent laziness of
people this age. They seem lazy because the work they're given is pointless,
and they act irresponsible because they're not given any power. Some of them,
anyway. We only have a sample size of about twenty, but it seems so far that
if you let people in their early twenties be their own bosses, they rise to
the occasion.  
  
**Morale**  
  
The summer founders were as a rule very idealistic. They also wanted very much
to get rich. These qualities might seem incompatible, but they're not. These
guys want to get rich, but they want to do it by changing the world. They
wouldn't (well, seven of the eight groups wouldn't) be interested in making
money by speculating in stocks. They want to make something people use.  
  
I think this makes them more effective as founders. As hard as people will
work for money, they'll work harder for a cause. And since success in a
startup depends so much on motivation, the paradoxical result is that the
people likely to make the most money are those who aren't in it just for the
money.  
  
The founders of Kiko, for example, are working on an Ajax calendar. They want
to get rich, but they pay more attention to design than they would if that
were their only motivation. You can tell just by looking at it.  
  
I never considered it till this summer, but this might be another reason
startups run by hackers tend to do better than those run by MBAs. Perhaps it's
not just that hackers understand technology better, but that they're driven by
more powerful motivations. Microsoft, as I've said before, is a dangerously
misleading example. Their mean corporate culture only works for monopolies.
Google is a better model.  
  
Considering that the summer founders are the sharks in this ocean, we were
surprised how frightened most of them were of competitors. But now that I
think of it, we were just as frightened when we started Viaweb. For the first
year, our initial reaction to news of a competitor was always: we're doomed.
Just as a hypochondriac magnifies his symptoms till he's convinced he has some
terrible disease, when you're not used to competitors you magnify them into
monsters.  
  
Here's a handy rule for startups: competitors are rarely as dangerous as they
seem. Most will self-destruct before you can destroy them. And it certainly
doesn't matter how many of them there are, any more than it matters to the
winner of a marathon how many runners are behind him.  
  
"It's a crowded market," I remember one founder saying worriedly.  
  
"Are you the current leader?" I asked.  
  
"Yes."  
  
"Is anyone able to develop software faster than you?"  
  
"Probably not."  
  
"Well, if you're ahead now, and you're the fastest, then you'll stay ahead.
What difference does it make how many others there are?"  
  
Another group was worried when they realized they had to rewrite their
software from scratch. I told them it would be a bad sign if they didn't. The
main function of your initial version is to be rewritten.  
  
That's why we advise groups to ignore issues like scalability,
internationalization, and heavy-duty security at first.  I can imagine an
advocate of "best practices" saying these ought to be considered from the
start. And he'd be right, except that they interfere with the primary function
of software in a startup: to be a vehicle for experimenting with its own
design. Having to retrofit internationalization or scalability is a pain,
certainly. The only bigger pain is not needing to, because your initial
version was too big and rigid to evolve into something users wanted.  
  
I suspect this is another reason startups beat big companies. Startups can be
irresponsible and release version 1s that are light enough to evolve. In big
companies, all the pressure is in the direction of over-engineering.  
  
**What Got Learned**  
  
One thing we were curious about this summer was where these groups would need
help. That turned out to vary a lot. Some we helped with technical advice--
for example, about how to set up an application to run on multiple servers.
Most we helped with strategy questions, like what to patent, and what to
charge for and what to give away. Nearly all wanted advice about dealing with
future investors: how much money should they take and what kind of terms
should they expect?  
  
However, all the groups quickly learned how to deal with stuff like patents
and investors. These problems aren't intrinsically difficult, just unfamiliar.  
  
It was surprising-- slightly frightening even-- how fast they learned. The
weekend before the demo day for investors, we had a practice session where all
the groups gave their presentations. They were all terrible. We tried to
explain how to make them better, but we didn't have much hope. So on demo day
I told the assembled angels and VCs that these guys were hackers, not MBAs,
and so while their software was good, we should not expect slick presentations
from them.  
  
The groups then proceeded to give fabulously slick presentations. Gone were
the mumbling recitations of lists of features. It was as if they'd spent the
past week at acting school. I still don't know how they did it.  
  
Perhaps watching each others' presentations helped them see what they'd been
doing wrong. Just as happens in college, the summer founders learned a lot
from one another-- maybe more than they learned from us. A lot of the problems
they face are the same, from dealing with investors to hacking Javascript.  
  
I don't want to give the impression there were no problems this summer. A lot
went wrong, as usually happens with startups. One group got an "exploding
term-sheet" from some VCs. Pretty much all the groups who had dealings with
big companies found that big companies do everything infinitely slowly. (This
is to be expected. If big companies weren't incapable, there would be no room
for startups to exist.) And of course there were the usual nightmares
associated with servers.  
  
In short, the disasters this summer were just the usual childhood diseases.
Some of this summer's eight startups will probably die eventually; it would be
extraordinary if all eight succeeded. But what kills them will not be
dramatic, external threats, but a mundane, internal one: not getting enough
done.  
  
So far, though, the news is all good. In fact, we were surprised how much fun
the summer was for us. The main reason was how much we liked the founders.
They're so earnest and hard-working. They seem to like us too. And this
illustrates another advantage of investing over hiring: our relationship with
them is way better than it would be between a boss and an employee. Y
Combinator ends up being more like an older brother than a parent.  
  
I was surprised how much time I spent making introductions. Fortunately I
discovered that when a startup needed to talk to someone, I could usually get
to the right person by at most one hop. I remember wondering, how did my
friends get to be so eminent? and a second later realizing: shit, I'm forty.  
  
Another surprise was that the three-month batch format, which we were forced
into by the constraints of the summer, turned out to be an advantage. When we
started Y Combinator, we planned to invest the way other venture firms do: as
proposals came in, we'd evaluate them and decide yes or no. The SFP was just
an experiment to get things started. But it worked so well that we plan to do
all our investing this way, one cycle in the summer and one in winter. It's
more efficient for us, and better for the startups too.  
  
Several groups said our weekly dinners saved them from a common problem
afflicting startups: working so hard that one has no social life. (I remember
that part all too well.) This way, they were guaranteed a social event at
least once a week.  
  
**Independence**  
  
I've heard Y Combinator described as an "incubator." Actually we're the
opposite: incubators exert more control than ordinary VCs, and we make a point
of exerting less. Among other things, incubators usually make you work in
their office-- that's where the word "incubator" comes from. That seems the
wrong model. If investors get too involved, they smother one of the most
powerful forces in a startup: the feeling that it's your own company.  
  
Incubators were conspicuous failures during the Bubble. There's still debate
about whether this was because of the Bubble, or because they're a bad idea.
My vote is they're a bad idea. I think they fail because they select for the
wrong people. When we were starting a startup, we would never have taken
funding from an "incubator." We can find office space, thanks; just give us
the money. And people with that attitude are the ones likely to succeed in
startups.  
  
Indeed, one quality all the founders shared this summer was a spirit of
independence. I've been wondering about that. Are some people just a lot more
independent than others, or would everyone be this way if they were allowed
to?  
  
As with most nature/nurture questions, the answer is probably: some of each.
But my main conclusion from the summer is that there's more environment in the
mix than most people realize. I could see that from how the founders'
attitudes _changed_ during the summer. Most were emerging from twenty or so
years of being told what to do. They seemed a little surprised at having total
freedom. But they grew into it really quickly; some of these guys now seem
about four inches taller (metaphorically) than they did at the beginning of
the summer.  
  
When we asked the summer founders what surprised them most about starting a
company, one said "the most shocking thing is that it worked."  
  
It will take more experience to know for sure, but my guess is that a lot of
hackers could do this-- that if you put people in a position of independence,
they develop the qualities they need. Throw them off a cliff, and most will
find on the way down that they have wings.  
  
The reason this is news to anyone is that the same forces work in the other
direction too. Most hackers are employees, and this molds you into someone to
whom starting a startup seems impossible as surely as starting a startup molds
you into someone who can handle it.  
  
If I'm right, "hacker" will mean something different in twenty years than it
does now. Increasingly it will mean the people who run the company. Y
Combinator is just accelerating a process that would have happened anyway.
Power is shifting from the people who deal with money to the people who create
technology, and if our experience this summer is any guide, this will be a
good thing.  
  
  
  
**