Take the Next Step, Paul
stubbleblog.com
stubbleblog.com
There are a few companies that YC has funded that have opted to go a slow-growth, close ownership, path to small business success that the article suggests is the logical conclusion of pg's essay (though, if one takes pg's work as a whole, I wouldn't say that's his raison d'etre--helping good developers create a huge amount of value in a short period of time is more his over-arching theme, I think).
Wufoo have opted not to push themselves into a giant business, but have a long-term plan for growth. My co-founder and I frequently waffle over which path to take, and so far have stayed the course of staying small with steadily increasing revenue over taking a bunch of investment and growing really fast. Both companies do have an exit plan, but it's a little further out and the intention is to make sure its on our own terms. pg has never indicated dissatisfaction with this path...even though it means the exit won't come quickly, as it did with reddit, Zenter, Parakey, etc. and thus YC won't see return on these businesses for at least a couple more years.
Of course, once one has a profitable exit, and optionally vests, you're then completely free to work in any environment you want. Which means you could do what Paul Buchheit did with his Googlebucks, and start a company that does exactly the work you want to do on the terms you want to do them on (and it turns out he wants to grow really fast, since he raised 5mil for FriendFeed). Which brings me back to what I think pg's real theme and logical conclusion is. pg likes to see people make something really great, really fast, and then make a really lot of money because of it. Once you've done that, you're then freed up to do anything you want (maybe after spending some time in a cage with your lion co-founders, while vesting)--including doing it all again.
I think one thing that makes sense about PG's general tactics is that hackers can probably figure out enough business to do a good startup, but as things drag on, and you're called on to be more of a manager, hackers are going to be at more of a disadvantage.
Of course, now that I think of it more, loopt didn't go the fast acquisition path (and though Sam raised 5mil, he's still taking a long view of his business and building it the old-fashioned way without aggressively pursuing a fast exit of any sort, or ramping up head count faster than necessary), and I believe pg still considers loopt the biggest success story out of YC, so far. So, perhaps we already know where pg stands on the issue.
In fact, going public introduces all manner of considerations that often inherently introduce "bossiness", so this alternative seems even more logical to me! For one, public companies have to grow, grow and grow and a lot of the bad stuff about companies you point out in your essay arises from that one source. They do bad deals, they start to think very "strategically" (ignoring the human element) and so on.
It's easy to stay medium-sized if you're a consulting firm, but hard if you're a product company. As a product company you tend to either extreme: you either keep growing, or die. And if you keep growing, you'll eventually either go public or get an acquisition offer so big it's hard to turn down.
I might turn out to be wrong. This world changes fast. But there aren't a lot of 20 year old 37Signalses around.
Bezos seems to agree with me. He invested in 37Signals. He would not have done that if he didn't expect some form of exit. And in fact 37Signals probably had to say explicitly that they expected some form of exit in order to get his money.
I would modify the "grow or die" to "adapt or die" because it is really lack of adaptation that seems to kill, and lack of growth may be a manifestation of lack of adaptation. I am not sure size is actually a benefit or hindrance to adaptation (it may be neither). It is theoretically possible for a small company around in 1985 to have adapted itself successfully through waves of change. But alas the only company I can think of that has come anywhere close to adapting through waves of change is Microsoft (and even it hasn't adapted that well).
An example of botched adaptation is the Altavista search engine from Digital. I remember the time it was the most advanced search engine (at a time when Gates didn't think search even mattered). The parent company entirely missed their value.
It does look like the presence of large acquisition-minded companies means that no matter how you push the YC companies, to work toward acquisition, toward a next round of funding, or even toward small business--if they are successful someone will make them an offer.
It was interesting to hear from the people here who were taking so many different routes with their companies. Kudos.
I have a feeling PG was aware of this logical implication when he wrote his essay ("if large companies constrain, err, even cage people, why put heart and soul into something just to deliver it to them?") Yeah, there is the money, but most people I know don't put heart and soul into work only for the money, and PG himself is doing Arc, YC, Hacker News etc. without any particular monetary goal. I wonder what his response would be!
The whole notion of YC is that they are seed funding, with the expectation that the startups they fund will be bought (or have some other favorable monetary transaction) by the big companies PG says are unnatural. The article is a nice way of calling PG a hypocrite.
It's a great argument. One of the best counters I've seen to PG's essay, and an angle I didn't even think of. I really hope Paul responds to this, as I'm interested in his thoughts on the matter.
"He’s a venture capitalist."
You can't possibly take that any other way.
No.
There's one very significant difference between a VC and YC. VC's invest other people's money. YC doesn't. VC's may also invest their own money, but this is incidental to their primary business, which is to assemble investment portfolios for other people to invest in. They charge a fee for this, and many VC's make most of their money from these fees, not from the returns on the investments.
This has real consequences. VC's are much more risk-averse than YC, because if they have a bad year it can put them out of business. (No one will want to invest their money in a VC which lost money for their previous investors.) If YC has a bad year they can just shrug it off, learn from the experience, and try again.
This dynamic also changes the VC's risk posture in another way. A VC has much more to lose from a loss than they have to gain from a really big win. If a VC has a really big win, most of the money goes to the investors, not to the VC. The VC's primary benefit from a Really Big Win will be that more people will want to participate in their next round of investments, which is nice, but that in and of itself doesn't make you a billionaire. So VC's are much more interested in avoiding loss than in going after a Really Big Win. YC, by contrast, has nothing to lose from a loss except the money they put in (which is not much), and a lot to gain from a Really Big Win (since they are the investor). This makes YC willing to take much bigger gambles than a VC would. It also aligns YC's interests with the interests of the companies they invest in, since the bigger the company wins, the bigger YC wins.
You don't need to have the latter to be the former. A VC can use their own money exclusively, and do so all the time. The professional VC's that manage pooled investments of other people are only a subset of the term Venture Capitalist.
That's why I'm suggesting it's all semantics.
Not really... http://www.bandangels.com/ What's the difference between YC and these guys? Maybe in the amounts invested.
Q: What does the Band look for in their initial review?
As with most venture funds, the Band seeks to invest in companies with a strong management team, unique technology and a large potential market.
From the front page of YC: "Y Combinator is a new kind of venture firm specializing in funding early stage startups."
In essence he's correct, but at this point it's just semantics.
I'm definitely not calling PG a hypocrite. YC is amazing, is a good opportunity for founders, and is definitely saving some good people from some bad years in the corporate world. I just think that after you've made one big intellectual leap (starting an amazing new genre of investing) it's easy to focus on polishing that discovery rather than realizing that there's yet another leap to make.
However, none of that makes me want to change my argument which is based on the exit pressures and structure by which YC recoups it's investment. That pressure is very VC.
If you manage your successful company like a startup all of its life, then you'll hit failure sooner because startups just have a higher chance of failure because of their risk taking nature. Corporate structure just carries along a lower inherent risk.
Plus offices are actually crappy places to start startups. Apartments are better.
I agree though, I can't think of a single example of a successful incubator that called themselves an incubator.