Default Alive or Default Dead?
paulgraham.com
paulgraham.com
It takes a lot of thought and planning to make sure you're 'default alive' in all circumstances. It slows you down, and it requires you to think through the implications of every decision, big and small.
This sounds like a fairly similar notion...
Imagine you had 100 people do a "rope rescue race". Half of them used all the safety mechanisms (they would pass the "whistle test"). The other half didn't use any safety/redundancy (they would fail the "whistle test"), but instead relied on their skill. In the end, it's likely that a few of the high-risk ones would die. But it's also likely that many of the high-risk ones would survive, and also that they would be the winners of the race. The safer, lower risk ones would eventually get there, but far behind the high risk ones.
Startups are the high-risk ones.
I don't rope rescue, but I sure do rock climb. You can rock climb with ropes or without. Ropes = a large safety margin, and the majority of people who climb, utilize them, as part of their safety system. Unless you're pushing your own grade level, the actual safety system isn't actuated - you're just using it "just in case" (like, "just in case you fall from a cliff, 500 feet up - gee it's nice I'm tied to something).
There are also those who climb without ropes. Perhaps you've heard of some of them [0], and most likely, because they actually climb without a rope. High Risk. Your idea of startups, let's say.
But that's just what the public sees. The free soloist has to be absolutely comfortable to go without the safety margin of a rope. Because of that, the majority of their climbing is done, still with a rope. When they go ropeless, the climbs they do are much, much easier. Yes, the risk is there, but also there is the understanding, clearly, what the risk is really about.
The death rate of climbers that are unwilling to ever use a rope, because they find that high risk = high reward would be close to 100%. But those who do survive are not going to be doing too well - they're never going to progress.
So, perhaps startups have this illusion of high risk, but maybe also they're also kidding themselves. They're burning through their lives, and offloading the real risk onto their safety systems - whoever is putting up the money. And they can do that (the investors), as they've diversified their portfolio enough that risk is spread around.
The strategy widens the bell curve and lowers it, whereas the rock-climbers try very hard to narrow it to where there are no outliers and everybody makes it to safety.
Imagine a strategy where every start-up would survive in the long term, there would be very few outliers in such a situation and that's why start-ups that are comfortable with some risks at the expense of safety but a huge increase in productivity will be more likely to be amongst the winners than those that play it safe all the time.
I don't think this is a huge problem anyway because very few people doing start-ups are risk averse.
https://www.youtube.com/watch?v=KXxw-zXRqOs
The rope makes you weak!
So I'm not sure if this is a pro- or anti-rope statement :)
Perhaps: don't think there's a rope backing you up if it isn't there.
If you use the metaphor of rock climbing, you'd actually rehearse your route with ropes/safety system, before you would ever try the route without. When the stakes are so high that it's you're life you're gambling with, is it really worth it for most to go so blind out there?
It's either that, or you go without a rope, when the difficulty is far below your limit (in other words, you have amassed a lot of experience)
For software, the rope is the engineering. Whenever I need to move fast in a production environment I make damm sure my software is as good as I can make it because I know something will come and bite me in the ass otherwise. I know patience and carefull design makes me fast in the long run. I've done projects in short span and they were successfull precisely because of the quality I put in the code, and aggressive application of YAGNI.
Note: good here means understandable and simple, not some god awful super-elegant object abstraction scheme.
It might seem people with cowboy coding skills do well but it's only an illusion - they have faced as many bugs but they just code around them or do a quick fix.
The result from the latter is unmaintainable spaghetti.
I disagree that the problem is cowboy coding. I'd identify the rope as carefully understanding the actual goals of the software and the way it functions in the world. Good engineering teams going "ropeless" rarely fuck up in a technical sense. I've been writing software long enough that my engineering judgement is usually pretty solid. Where they fuck up is building tons of extraneous functionality with the extra capacity, losing touch with what their software actually does in the world.
If you are betting on the outcome, then put your money on a smallish group, call it 10, of the ropeless competitors.
If you are competing, make sure you have a rope, because coming 20th or 30th is a much better personal outcome than possibly dying.
If your company is 'default dead' as it were, a schedule slip (a slip past the end of your runway, that is) means, at best, bankruptcy and starting over.
And really, you want some safety built into that too- if you screw up your taxes, or screw up your corporation badly enough, failure can mean personal bankruptcy, or if it is a tax matter, something much worse than personal bankruptcy.
And of course, that's what makes them better on average for investors (who spread risk across their portfolio) than for founders, who have all their eggs in one basket.
As pg says here, as a founder, you want to survive.
If failing at a startup means you'll never have another chance to succeed, I bet the norms for risk tolerance would be entirely different than what's in the landscape today.
Facebook was founded in 2004 and didn't start showing ads until 2012[1]. Until then they were making losses (default dead).
Google is more complicated, but they were so desperate for money at one point they tried to sell to Lycos.
[1] http://www.thewire.com/technology/2012/12/2012-year-facebook...
Was it 'worthy competition'? Hard to say without hindsight bias (only the winners 10 years later were 'worthy'), but I doubt Mark Zuckerberg or the Google founders felt there was no worthy competition. It seems fairly clear to me that Facebook (and Google) succeeded because they made better decisions (on average) at a gazillion small decision points, not because they had some great idea that no-one else had thought of.
Friendster and Myspace were the big players for Facebook, Lycos, AltaVista, and HotBot were competitors for Google. A new social network or search engine didn't get noticed back then.
Isn't that already mostly true (with a few outlier counter-examples)?
It is much harder for working-class folks (no savings, no college degree, no unique skills) to make the jump.
This idea is really interesting to me, but I'm not sure why.
In other cases, it's a question of how you set up things like descenders[2]. The same basic principle applies though. You need to be actively holding it open in order for the rope to move through it. There are a few exceptions to this (things like figure-8 descenders[3]), but in those cases, they are being used by a single operator to control their own descent.
The most common situations where this goes wrong are during transitions. The system used to lower someone over the edge is different from the system used to haul them back up. This exercise is fairly simple, but it requires a great deal of attention to detail, and the steps have to be done in the proper order to ensure there are no 'gaps'.
The number of people who would fall would depend completely on the operation. Generally speaking you have a single medic over the edge, who may have the victim clipped in to them if they're on the way back up. In some cases, you may have one or more additional rescuers.
[1] https://en.wikipedia.org/wiki/Prusik [2] http://www.petzl.com/en/Professional/Descenders/RIG [3] http://www.cmcrescue.com/equipment/rescue-8/
The links are amazing. I just spent a bit of time looking through most items and figuring out how they are used. I guess I like this kind of stuff.
some of us think it should support neither (because _emphasis_ is only slightly less legible than emphasis whereas erroneous use of asterisks is very much less legible than uses of asterisks would be if asterisks were not interpreted -- and because erroneous use of asterisks is fairly common).
But _if_ the present situation continues in which asterisks (or asterisks and underscores) are interpreted, at least the interface should provide a link next to the "ago", "parent", and "flag" links that show the raw, uninterpreted comment the way the user entered it.
Edit: That test failed, nothing to see here...
This accurately reflects my own experience. Most common pitfall: converting VC capital to users at a rate that will not sustain the company once the VC capital runs out. So many companies fall into this particular trap that it should have a name of its own.
Bought growth is only worth it if the users remain long enough to make back the money you pumped into them at the time of acquisition in net profits otherwise you might as well do without them.
I'm not sure if the reference to airbnb helps, whatever they did, they're an outlier and simply doing what they did without carefully evaluating your reasons is going to work about as well as any other cargo-cult strategy to success, it would be (a lot) more useful to see this point expressed in an alternate form, start-ups funded by YC in cohorts of months from when they started hiring besides the founders compared to their survival rate.
I'd lay heavy odd the subconscious thought process goes along the lines of "If I'm default dead I have no idea how to fix it and so I feel powerless about it and that terrifies me and so I don't want to think about it and so I don't know the answer."
Not that that's exactly a successful strategy, but people don't always lock on successful strategies.
If your default alive then you should consider being somewhat conservative. But, if your default dead then you need to risk something because your already losing.
So by improving the rest of the gate functions the importance of the luck element goes up because it may be at some point the only item between you and success and then if it swings your way you're suddenly doing very well.
See also: the myth of the overnight success. All that is is a ton of preparatory work and one opportunity properly seized.
Not to mention other big levers like working capital (and potentially running a business with negative WC and generating cash, a la Amazon). It's funny to be running a start-up in SF and still feel a world apart from a lot of the ecosystem.
Gross profits is net revenue minus cost of goods sold. Cost of goods sold is only the direct cost of goods, and does not include any operating expenses.
Net revenue is Gross revenues minus discounts, returns and allowances.
Perhaps the most important underlying point in the article.
It's easy to think that more people will make the company grow faster. Adding people actually makes it harder to tune a product's direction (and thus growth rate). Great to see another dense and on-point post from pg. Every sentence is worth several reads.
There are a ton of highly profitable, relatively low margin businesses (at least compared to internet services), like consulting or something with high sales effort, like enterprise products. In those cases, you can easily imagine your growth limited by, and accelerated by, your ability to hire and grow the right talent.
You're right that consulting companies can be great businesses. A friend of mine sold a 5 year old consulting company for a good tens of millions last year. That's a stellar result for the founders. But few consulting companies are within a VC's "strike zone".
Or you could reconsider the size of your total addressable market (hint: it's probably a lot smaller than what's in your pitch deck) and give weight to building a smaller company that's sustainably profitable.
Note that I'm not suggesting growth isn't important. What I am suggesting is that a lot of founders seek "Silicon Valley growth" without considering the possibility that they have an opportunity to build a lasting business that doesn't need hundreds of employees, tens of millions of dollars in funding, hundreds of millions in revenue and billions in enterprise value to succeed.
There are lots of bigger ones, like imgur, Github, Atlassian (I think), 37signals, Fog Creek, etc.
Pretty sure Fog Creek has never raised either, while having 50-100 employees.
The overall point is that you don't have to be a one-person business to grow at a slower but "healthy" rate.
And even more, when growing the business, are you growing costs faster than profits? Yes, this employee is necessary. But will they add more profit than they cost, at this stage in the business; or should we hire this person in a few months?
This is because many founders get used to being able to go back and ask for more money if things aren't going well...right up until they get turned down. I'm being unfair, but it's always seemed like investors play a parent, and the founder plays a child, and it's just a child asking their parent for more money. And I honestly believe this level of entitlement is necessary to be a successful founder.
The first two questions are considerably more important than the third. That many founders do not know answers to the first two is less excusable than knowing a fairly specific accounting metric.
What we're essentially talking about then is a specific breed of startup (a popular breed, but still a specific breed):
- Pure software / probably SaaS or a website.
- Margin close to 100%.
- Essentially no R&D component, i.e. just wiring together existing technologies.
- Perfect product distribution infrastructure, i.e. internet or mobile app company.
And that early growth isn't the only metric that makes a startup attractive. Growth a powerful one that eventually will be more important than everything else, but there are other things -- such as strong core IP or having early product in a small but growing market -- that make startups interesting.
Then there's startups that require literally tens of millions of dollars of up-front investment and years of R&D before there even is a product. Are those all doomed? I guess not. Given the right execution and strategy and patient investors these companies can also be extraordinarily valuable. They are just a different kind though.
This is a bit like in the early stages of a poker tournament, where you might fold even quite strong starting hands to all-in bets where your expected value is positive - because you're not just betting the number of chips in your stack, you're betting the entire remainder of your tournament.
I'd say three of his last four posts are more negative than he has been historically. I've also observed an increasing number of articles about properly calculating financials, unit economics, and hiring "killer sales teams." I don't know that it means anything, but there does seem to more of that kind of chatter - and not from the buzzfeed "Bubble!!!!!!" kind of sources that its been pouring from for years.
For a private company, it's much harder to tell from the outside. Any CEO who doesn't know how many months (days?) of cash they have left is hopeless.
That's how I run my company. Complacency kills, and prevents being able to be proactive in an ever changing market.
It's alive until the founder realizes he will never raise a round capable of building an airplane, and pivots and does something cheap and easy online instead.
To make this alarm explicit: if you were that investor, would you save the company? I wouldn't.