sgoel9/sam_altman_essays huggingface dataset:
What to do if a bubble is starting
2013-09-24

Maybe now we’re actually in the early stages of a startup bubble. Valuations are trending up again. And no one is talking about a bubble anymore, so it could be happening.

Many companies still feel reasonably priced. Yes, Facebook is up 70% in the last six months, but I think it’s likely still undervalued. Lots of companies raising B rounds are doing it with large profits and at reasonable multiples.

But the very early stage feels somewhat out of whack. Companies raising money at $15MM+ plus valuations with no traction and no real vision beyond starting a startup still strikes me as unsustainable (not to mention bad for the companies).

Lots of other signs point to a bubble—founders of Series A stage companies being angel investors, a significant uptick in the number of parties, soaring rents, soaring salaries, lots of new investors coming to valley, and MBAs starting companies as the fashionable thing to do again.

Even if this is the beginning of a bubble, it will likely go on for awhile longer—at least as long as the Fed keeps the stimulus going, and likely longer. Maybe it goes on for another couple of years.

We can debate whether or not companies are overpriced, but it is an absolute certainty that at the first sign of real trouble, most investors will overreact and invest much less precisely at the time they should be investing more.

So the question is, if you believe that this may be the beginning of a bubble, what should you do now?

Fortunately, the answers are things you should be doing anyway.

First, you should not be too afraid. The only thing that is cheap during a startup bubble is capital. Everything else is relatively more expensive. If you’re a real company, a downturn that you’re prepared for can be beneficial. Good companies can make incredible strides during a bust.

Make sure you have enough money in the bank, and treat this money as the last money you’ll ever raise—at the very least, have a plan B to get to profitability without raising any additional capital. If you need to raise more, this is a good time to do it.

Focus on a path to profitability. Remember that, if your customers are mostly startups, revenue can dry up fast.

Resist the urge to ramp up to a crazy burn rate. Be especially fearful of long-term commitments like expensive leases and people. Don’t hire unnecessary people. Stay as lean as you can. Establish a culture of frugality.

Bubbles bursting also require startups to focus, which is a good thing to be doing in any case. Cut products and features that are not working. Focus relentlessly.

Of course, people are terrible at predicting bubbles and busts, so I’m likely wrong. Luckily, I really do believe these are good things to do anyway.
Electrons and Atoms
2013-08-28

A friend recently asked me for my list of current breakout companies. I made it, and noticed that all of them had only one thing in common. I then went back through the last three YC batches and looked at our top-ranked companies (although we get it wrong plenty of times, it’s reasonably predictive). These companies had the same trait.

This shared trait is a connection between the online and the physical worlds. There are two main models for this—the Uber model, where you push a button on a website/app and something happens in the real world, and the Airbnb model, where you use a service to do something in the real world that would be possible but extremely inefficient. In both cases, the key thing is enabling users to do things they do in real life much more easily—yes, you could have called a cab company, but it took a long time, the cab didn’t always come, you didn’t know when it was near, you had to have cash or get a nasty look from the cabbie, etc.

Even Facebook is a lightweight version of this—with Facebook, you bring your real world online so you can interface with it more often, more easily, and from anywhere. Facebook has obviously been much more successful than services like SecondLife, which were entirely virtual, and services MySpace, which were less about real identity and real friends. Amazon was perhaps the original example of bridging these two worlds.

As a corollary, new companies that exist only in the real or online world do not seem to do as well as companies that connect them. This happens more often on the online side than the physical side, both because we generally don’t think of things like barbershops as startups and because most people don’t expect pure hardware companies without a strong Internet component to do very well. And this bridge is often a matter of degree—many, if not most, online companies touch the real world in some way. But the ones that do it the most seem to be doing better.

In many ways, this is a version of Marc Andreessen’s “software is eating the world”. To eat the world, you have to operate in the world. I think two big reasons it’s happening so much now are 1) smartphones are in everyone’s hands and 2) there is a level of personal comfort with putting real life on the internet that seems to have tipped about two years ago.

There are probably a lot of areas where this doesn’t apply—enterprise software and developer tools, for instance—and there are clear counterexamples like Google. But as a general rule, it seems to be worth considering when thinking about new businesses.
Premature optimization
2013-06-06

Startups talk a lot about optimization—A/B testing, product enhancements, conversion funnels, email campaigns, etc. These sorts of things can often produce 10% gains, and much more if you can compound several together.

This is great, but only if the business is already working. If no users love your product, you’re wasting your time working on anything but that. It’s always painful to sit in a board meeting and listen to a company miss the forest for the trees—i.e., even if they make all these incremental improvements that the entire company is focused on, they’re going to end up at 2X, and they need to get to 100X.

It’s dangerous to spend all your mental energy on incremental improvements when what you really need is a step change.

It’s a useful exercise to think about whether or not all the optimization work (or ad buying, for that matter) you’re doing is worth it, even if it all works. It is usually not until you’re already quite successful. Until then, you should focus relentlessly on making a product your users love (and making sure you're going after a large enough market).

Startups often ask me how to grow faster. I usually say “build a great product, and you will be able to make it grow”. The most sustainable (and cheapest) kind of growth is word-of-mouth growth.
Party rounds
2013-06-05

There is a recent trend in Silicon Valley towards party rounds—in early financing rounds, instead of raising large amounts of money from a few large investors, companies are instead raising small amounts of money from many small investors. The number of investors in such a round is commonly between 10 and 20, but I’ve seen rounds with over 50 investors.

I think the rising popularity of party rounds is bad for companies.

Ask some startups how useful their investors are, and you’ll get a variety of responses, but some commonalities emerge. It turns out that investors are generally about as involved as they are invested. Having at least one investor very focused on your company is valuable, even if the investor is not very good. The cadence and rhythm of meeting with someone every month to review progress and goals turns out to be an important focusing function [1].

In a typical party round, no single investor cares enough to think about the company multiple times a day. Each investor assumes that at least 1 of the N other investors will be closely involved, but in fact no one is, and the companies sometimes wander off into a very unfocused wilderness.

While it’s true that many investors are bad, I have found wonderful exceptions. Good investors stay out of the way when you don’t need them and help you a lot when you do. This is really valuable—it turns out that most of the great companies end up having great investors.

Additionally, a closely involved investor will help coordinate your next round, and can bridge the company if necessary (things often take longer than founders plan). I’ve noticed that companies that raise party rounds seem to have a harder time raising their next round compared to companies that raised their first big round from a VC.

Perhaps another reason that party round companies have a harder time raising capital is that worse companies get funded this way—everyone seems less disciplined in deciding to invest. Social proof plays a large role, and because the amounts are smaller people don’t think as hard about the quality of the business.

I’m all for seeing founders have more power and more ownership, and I’m all for VCs being forced to evolve, but I don’t think that having party rounds replace what used to be an A round is the answer.

[1] There is a version of this that makes Y Combinator work—the deadline of Demo Day is extremely good at focusing companies on the right things.
Rickover
2013-06-04

Man has a large capacity for effort. In fact it is so much greater than we think it is that few ever reach this capacity. We should value the faculty of knowing what we ought to do and having the will to do it. Knowing is easy; it is the doing that is difficult. The critical issue is not what we know but what we do with what we know. The great end of life is not knowledge, but action. I believe that it is the duty of each of us to act as if the fate of the world depended on him ... we must live for the future, not for our own comfort or success.

--Admiral Rickover
A founder-friendly term sheet
2013-06-21

When I invest (outside of YC) I make offers with the following term sheet. I’ve tried to make the terms reflect what I wanted when I was a founder. A few people have asked me if I’d share it, so here it is. I think it’s pretty founder-friendly.

If you believe the upside risk theory, then it makes sense to offer compelling terms and forgo some downside protection to get the best companies to want to work with you.

What’s most important is what’s not in it:

*No option pool. Taking the option pool out of the pre-money valuation (ie, diluting only founders and not investors for future hires) is just a way to artificially manipulate valuation. New hires benefit everyone and should dilute everyone.

*The company doesn’t have to pay any of my legal fees. Requiring the company to pay investors’ legal fees always struck me as particularly egregious—the company can probably make better use of the money than investors can, so I’ll pay my own legal fees for the round (in a simple deal with no back and forth they always end up super low anyway).

*No expiration. I got burned once by an exploding offer and haven’t forgotten it; the founders can take as much time as they want to think about it. In practice, people usually decide pretty quickly.

*No confidentiality. Founder/investor relationships are long and important. The founders should talk to whomever they want, and if they want to tell people what I offered them, I don’t really care. Investors certainly tell each other what they offer companies. (Once we shake hands on a deal, of course, I expect the founders to honor it.)

*No participating preferred, non-standard liquidation preference, etc. There is a 1x liquidation preference, but I’m willing to forgo even that and buy common shares (and sometimes do, although it has implications on the strike price for employee options so most founders don’t want it). In early-stage investing, you should not focus on downside protection.

I have an allergic reaction to complex deal structures, as they invariably end up with all sorts of unintended consequences. Also, getting this right in early rounds is important—future rounds tend to do whatever the previous rounds did.

(What I do care about is ownership percentage and pro rata rights to maintain that ownership percentage in future rounds. Most of the rest I don’t care about, but it’s never contentious anyway.)

Download term_sheet.pdf
By endurance we conquer
2013-03-28

I'm reading The Endurance and "by endurance we conquer" (Ernest Shackleton's family motto) struck me as a great piece of startup wisdom.

Everyone knows that you need a great team, great execution, and a great idea. Less obvious is that you have to have great endurance. It's very tough to keep going when everyone tells you your idea sucks and it will never work (especially when things are plainly not working). It's tough to keep going when everything goes wrong, which it almost certainly will. And it's tough to keep working when you're really tired, but very often that extra 5% at a critical point is how you beat out a competitor for a critical deal and then they disappear in the rearview mirror.

Most startups don't die at the hands of a competitor. It's more often something like an internal implosion, the founders giving up, or not building something people want (and failing to remedy that situation). You can win by endurance.
Upside risk
2013-03-25

Everyone claims that they understand the power law in angel investing, but very few people practice it. I think this is because it’s hard to conceptualize the difference between a 3x and a 300x (or 3000x) return.

It’s common to make more money from your single best angel investment than all the rest put together. The consequence of this is that the real risk is missing out on that outstanding investment, and not failing to get your money back (or, as some people ask for, a guaranteed 2x) on all of your other companies.

And yet angel investors continue to ask for onerous terms to mitigate their “downside risk”. All this does is piss founders off, misalign incentives, and harm the investors’ chance of getting to invest in the best deals, because those are usually hotly pursued and good founders check references. An angel investor is much better off focusing on investing at a reasonable price [1] and not trying to “win” on any other terms.

Instead of downside risk [2], more investors should think about upside risk—not getting to invest in the company that will provide the return everyone is looking for.

[1] Speaking of price, the mistake that founders make (corresponding to investors focusing too much on downside terms) is focusing too much on getting a high price. I have seen many founders price out good investors and put the company in a bad situation facing a down round a year later, all because they were obsessed with getting a high sticker price for their company. I think it’s because it gives founders something quantitative to compete on.

[2] As a side note, I think most people have terrible intuition about investment risk/reward tradeoffs in general—this is not limited to private companies. It feels like every time I turn on CNBC (which is thankfully very infrequently) they’re talking about an impending total collapse. The end of the world only happens once; it’s very unlikely to be Monday morning. But we seem hardwired to focus on downside risk. The CNBC watchers would be better off keeping a cushion in cash and not selling their stocks after every panic.
Software to avoid the software people
2013-03-18

A few years ago, many of the Y Combinator B2B startups wrote tools for the developers in other companies--metrics software, deployment software, monitoring software, build software, development frameworks, etc. The startups would want to meet with the technology people at companies to sell their service.

There's been a significant shift--lots of the YC B2B startups are now building software to help non-technical people in companies (usually large ones with a primary business that is not writing software) avoid their internal IT department when they need software to help them get something done. It's faster and easier. So now the startups are trying to avoid the developers at the other company (so they don't get blocked) and sell to the person who is waiting in the internal development queue.

It will be interesting to see how far this trend goes, and something to keep in mind if you’re starting a new company.
More interesting dinner conversations
2013-07-01

When seated at a table with people you don't know, ask "what are you interested in?" or "what have you been thinking about lately?" instead of "what do you do?".

(Surprisingly often you get a look of utter confusion, followed by fifteen seconds of hemming and hawing, and then a version of "man, i really need to take some time off".)
Aliens
2013-07-01

I don't believe that any of the blurry UFO photos are real, for a very simple reason--they all resemble a slightly more advanced version of the the then-current technology and style. It seem very unlikely a spacecraft would fit the gestalt of the decade during which it crashed into earth.

There is a version of this to keep in mind when listening to startups make certain types of extraordinary claims.

(As a random aside, I went back and looked at some old photos of purported UFOs and real aircraft. A hat-tip to the designers of the SR-71 for creating the only aircraft that still manages to look super-futuristic 50 years later.)
Successful people
2013-07-18

"Successful people create companies. More successful people create countries. The most successful people create religions."

I heard this from Qi Lu; I'm not sure what the source is. It got me thinking, though--the most successful founders do not set out to create companies. They are on a mission to create something closer to a religion, and at some point it turns out that forming a company is the easiest way to do so.

In general, the big companies don't come from pivots, and I think this is most of the reason why.