Jason Calacanis' Warning To Y Combinator Startups [video]
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"This is a message to YCombinator companies and hopefuls: if you tell Facebook about your startup before you reach critical mass and you get found by Facebook in any way you're an idiot. They will steal your company's ideas and try to get you to take a small price for your company and vision and take a job at Facebook. Which by the way is going to be a job that sucks. Don't do it. It's a scam. It's a trap. It's a trap. It's a trap. Insert Star Wars quip here. It's a trap. IT'S. A. TRAP. End of message."
My point is simply that there are a lot of very straightforward ideas that merit far more than a signing-bonus exit.
There are many bases of competitive advantage, but I don't have a clear picture of this one. The main customer-side advantage I see is that your product becomes identified with the idea/technology in the customer mind (perhaps of a tiny niche) - not that it's better than something else, just that it exists. But there's still a problem of getting to this state.
The most reliable source of supranormal profits is superior knowledge of one kind of customer (Way #3). Ideally this will be the kind of customer that larger companies are overlooking. The founders of SAP, for example, were employees of IBM Germany for many years and got exposed to the accounting challenges of large manufacturers. When they quit IBM, they were among the best situated programmers in the world to build an accounting system for manufacturing companies. It is not because these guys were the world's best programmers that SAP is today bringing in $10 billion per year in revenue and has a market capitalization of $60 billion. It is because these guys were the best programmers who understood the problems of their customers.
Of course, it's still problems and knowledge, and so not qualitatively different from those in a specific niche. I guess the misleading thing is that by the time a mass market is mass, they are well-known (or appear to be). As an example, Youtube was once small. And while the consumers were perhaps (?) easy to understand, the producers (who created the value), were a much smaller group, a more specific kind of person, using specific new tech (mobile phones) with specific problems. And it only later grew into a mass market (though I guess arguably the producers are still "one kind of customer".)
That a company has the money and the scale to implement anything they choose to, trivially or not does not mean they will actually succeed in the marketplace.
Small companies doing one thing have something big companies do not: relentless focus.
If Google's Sergey, Larry, or Schmidt were as ruthless as Zuckerberg, I have no doubt that Youtube would have been left to die.
I said that Google had the option of letting Youtube weaken, and buy them at a discount...or fully letting them die out and have Google Video dominate. Each decision with a different risk/reward ratio. They chose the lowest risk/reward since $1.6 billion is probably a relative drop in the bucket for them.
Things just aren't that simple.
Viacom is simply not interested in running a money losing venture, otherwise they would have bought Joost instead of partnering with them. Disney didn't need the Youtube brand when they already invested heavily in go.com back in 1998. Look what happened to Hotmail dominance after Microsoft bought it. And what is Apple's experience with web apps?
So yes, things just aren't that simple.
And I could have bought McAfee, I just lacked $7.7 billion.
What a startup can create that a large company cannot steal would loosely be defined as a social network; mind-share among people who believe that your company is the go-to place for your service.
If you have built your service on top of Facebook, it will be very difficult to build your site so that you, and not Facebook, are what your customers thinks of when they think of your product. If it's truly a killer Facebook app, they will likely even be happier with a slightly inferior but fully integrated solution. Because they control the social network, the mind-share, that fuels your app.
Relentless focus on the above factors (content, mindshare, usability) helped them win - have I missed any?
By parking it under the google brand they may have made a mistake. Another - possibly small - effect of that is that you have two steps before getting to a site, video.google.com, is less convenient than youtube.com, and much less easy to promote as a brand separate from the search portion of the site. Many people read 'video.google.com' the same way they promoted 'images.google.com', as a search engine for online videos (which it now has become, for the most part) instead of an easy way to share your videos with your buddies and the rest of the world.
I don't think it will be possible to quantify this effect, but I notice that microsoft named their search engine 'bing.com' after several tries of doing it as a subsidiary, and that google has not attempted to bring youtube.com under the google domain as the replacement for video.google.com (which still exists), it is now the 'search' arm of google for video, returning youtube.com mixed with other video results, just like what you'd expect.
Further thought: google video was 'better' in that it had higher resolution videos, and it displayed more of them on the screen at once. While youtube had one low resolution video. It was quicker to load and to run, and more suited to slower machines (perhaps especially mobile phones, whence videos oftentimes came?) Google video has always annoyed me in this sense. I note that now, they've increased youtube video resolution (it's 'better'), and also snipe: upgrade to a "modern" browser. Although understandable, it isn't the path to max adoption, and max. network effects
Ideas can never be stolen. If I have an idea and tell you about it, then you use it, I've still access to that idea and can still use it too.
Yes I worked in IP for a time. Yes I'm a pedant. But there is a very important distinction both morally and legally between theft and copying (eg tortuous IP infringement).
Yeah, I'd call that stolen (or at least 'attempted theft'), because they were about to lose their rights. Thankfully, the JMRI guys won in court, so they got their rights back.
s/you get found by Facebook/you get involved with Facebook/
I sort of watched this happen with a friend's company.
Obvious caveats apply: (a) I'm not a social networking entrepreneur and don't know the space that well, (b) you have to balance the risk --- and the opportunity cost of another business in a different market --- against the benefit of collaborating with Facebook, (c) to whatever extent Facebook benefits unreasonably from this program, YC probably suffers.
edit: sorry if i misread this part to imply it had to do with facebook: I sort of watched this happen with a friend's company.
That should at least make one skeptical about his claims. It is possible that we've done something that wasn't in our interest, but surely by default one should assume we understand and care about our interests more than Jason does.
Or to put it more briefly: this is mere linkbait.
You know Open Angel Forum has funded YC startups, as have I personally. I love TechStars and YCombinator because they produce quality startups that I can potentially invest in, partner with or have on This Week in Startups.
There is nothing competitie between YC and JMC I can think of.
But it seems kind of weird to see you warn start-ups off from sharing their stuff with facebook through their YC hookup. After all, if the plan of this 'cooperation' would be such a negative for YC funded start-ups I would think that YC would pull out of such a cooperation in a heartbeat. It's not like they're stupid.
Give them the benefit of the doubt and see how it develops.
After all the risk to the YC reputation is considerable so you can take it as read that they've thought this through.
It's really strange from what people are saying in the thread here (without speaking for anyone).
Another reason to not "see how it develops" is Zuckerberg's track record.
You absolutely have a point there.
But still, for Zuckerberg to openly screw a YC backed company would be to screw YC as well.
And I find that hard to believe.
Doesn't mean that it is impossible, just implausible.
Zuckerberg's moral compass is set on "WIN."
All the other 'zucks' notwithstanding there has yet to be a clear cut case of fraud to come out of all this and I can't imagine YC et al would stand by idly if this happened to one of their investments.
Unless it is about increasing your 'batting average' by having a series of smaller but more-or-less guaranteed exits. In that case your goals would not be aligned.
In the YC case, as a relatively small (very) early stage investor... they might very well benefit from a lot of very quick exits. Before additional investor dollars and the resulting dilution that accompanies it. It's plausible that this deal with Facebook is designed to achieve that. Essentially giving Facebook early insight into these companies and that ability to pick them up for cheap ($2M-$10M), which might actually be advantageous for YC.
I'm not saying that's what is happening here. I really have no idea. I'm merely point out that Calcanais might have a strong point.
they might very well benefit from a lot of very quick exits
I fail to see how. Before they closed their Sequoia round, you could argue that smaller exits help YC keep afloat. With millions in the bank from outside funding, YC is beyond the point of trying to keep itself afloat.
I don't know if this is what Calacanis is saying (I kind of doubt it), but the risk is that YC is acting against interests inadvertantly. And, again, probably not so much by Facebook stealing! your! ideas! so much as by creating a single locked-up railroad track for bizdev, putting FB at/near the center of a startup's solar system.
That's true, but it does increase the 'batting average', the number of 'successful' exits.
Personally I think VCs should only rate themselves by the number of companies they found that are big successes, not just the number that didn't tank.
But batting averages are used with some regularity to compare score.
> I'm pretty sure there's a better-established rating system for VC's that doesn't take any of this silliness into account.
Total return on total investments?
For founders batting average is possibly more important than for the VCs themselves.
After all, a single spectacular ROI would make a VC that lost all but one investment look pretty good on paper.
The game of building a facebook dependent start-up has many possible outcomes but we could break them down this way:
1. Destined to lose. Nobody wins, not FB, not YC, not founders. All three parties joined in making a mistake. Oops. Boring case.
1a. Destined to win barely. Maybe YC finds a break-even exit. FB is incrementally helped. Maybe the founders are happy or maybe restless. Boring case.
2. Destined to win big by unique, non-replaceable opportunity. E.g., Founders have an exclusive contract with Bob Dylan and their product is going to go big... they can stay independent. They've got an "f.u." contract with Dylan. FB wins a little on the margins of the revenues of the new firm. YC and the founders win really big. The only problem is, such unique, exclusive opportunities are rare.
3. The start-up OR AN UPSTART COMPETITOR (most often Facebook itself or a better "friend of FB") will win big and it's winner take all. This is half of the case that has Jason Calacanis' panties twisted. FB can often (we presume, act as if we knew to be true) brute force the firm out of the market by replacement or force them into an early acquisition with the threat of replacement.
There are two sub-cases:
3a) Facebook's dominance as market-maker cum market-player is hostile towards YC and the start-up. FB wins. YC and founders essentially break even or worse.
3b) Facebook is in a cooperative mode (e.g., FB invests products and services in the YC firms and then dominates by friendly acquisition or similar). FB wins big - low stakes and high return on their perceived value as market maker. YC wins non-stellar but more reliable returns: a respectable interest rate on 20K outlays. That's a sweet spot for YC (they aren't playing the lottery, they're managing a fund). Founders get, in effect, a very modest bonus and then either a (likely crappy, per Jason) job or just a nice bullet point on their C.V.
Uncompressed, Jason has a reasonable concern I think. There's a new case where founders barely win and wonder if the struggle was worth it, while YC and FB are quite happy.
And, nobody asked, but I think YC's fundamental mistake is interest in funding FB-related start-ups at all. The problematics of letting one particularly odd firm create and dominate a market like that are such that I think YC should generally shun the unfathomable risks and complexities.
I see the deal as YC submitting a bit to FB's domineering tendencies because by submitting on these terms, YC does OK and the founders aren't creamed. A better solution (in my biased view) would have been to decide just to not fund anything that cares about FB's actions at all.
4) You build a win-big type company that is outside Facebook's area-of-expertise but leverages the advantage the Facebook's platform give you.
Takes games for example. Facebook itself doesn't seem interested in writing games for it's platform. Yes, it's true they want you to use their in-game currency, but that's just a platform tax, not competition against your business.
I suspect location-based-services are similar. I doubt Facebook wants to compete with the game-based mechanics Four Square is building. There is still a question as to if Facebook will go after the coupon market, though.
There are also businesses where you may be able to build traction on the Facebook platform, and then pivot off it if required.
Assuming that your (4) really is something other than my (2) or a subset of my (2): how big do you think the opportunity of (4)s is, realistically, over the next 5-10 years, from an investor's perspective?
In any case, I think it's a mistake that you dismissed this as The only problem is, such unique, exclusive opportunities are rare. Big winning companies are always rare, and there are always a lot more ways for them to fail than them to succeed.
I think it would be a big mistake to ignore the opportunities here and shun the unfathomable risks and complexities. There are always risks and complexities, and any kind of partnership increases the complexity. That shouldn't be something people should run away from, though.
How big do I think it is over the next 5-10 years, from an investor's perspective?
I think it could be huge. Zynga seems to be doing pretty well, as do all the other social app vendors (Slide etc). But there are a lot more opportunities than Zynga have covered, both in the gaming as well as the non gaming market.
The FB/YC thing looks like a net win for YC companies, but it's just not valid to say it isn't at all fraught.
From across the pond I am willing to assume that you are all really good friends in the valley and that things work out fine. But I also have to admit that Jason might at least have the hint of a point.
Or in other words - YC is about the only entity in this whole game that I personally trust. This is simply the reputation you have built. I don't trust Facebook.
On the other hand, it probably doesn't matter to FB at what stage they see a startup's idea. They'll clone it when it is successful.
Respectfully, it is not linkbait.
This is my honest opinion based on Facebook's track record. I would give the same advice to any startup: don't trust Facebook and don't give them any access to your startup or plans.
Period. End of story.
If an entrepreneur needs any evidence of the trustworthiness of Facebook, simply talk to folks inside of Quora, FourSquare, Twitter and Zynga (among others). I'm sure you've spoken to folks inside these companies, like I have, who are infuriated with Zuckerberg's blatant stealing (without innovation).
At every chance they can get, Facebook has simply stolen. Given their scale, bringing them inside the incubators is, well, mind boggling.
If you're a startup company you should be avoiding Facebook and their staffers.
I'm sure you have great intentions PG, and you know I respect all that you've accomplished, but don't dismiss me. I really don't need press because, to a certain extent, I am press.
Add to that the fact that I'm massively overexposed (especially here on HN), and you're claim that I'm link-baiting feels disingenuous.
Like you, I love startups and entrepreneurship. I only want to see folks do well and not get ripped off by Facebook, which I consider the most unethical company in technology.
One only need to look at the mountain of lawsuits they've generated for proof of this. Facebook's long list of lawsuits are not from ambulance-chasing law firms mind you, they are by PARTNERS and FRIENDS of Zuckerberg's! Oh yeah, a lot of the lawsuits and complaints are also by privacy groups and government agencies trying to protect citizens.
If Zuckerberg has no problem screwing his friends, partners and customers, what do you think he will do to a three-person startup that might innovate its way into being competition for him?
I fear you've made a big mistake letting the fox into the henhouse.
Startups: listen to PG on everything since he's brilliant--but take my advice on this one. :-)
best jason
Why, on earth, should anyone listen to you?
Did you provide data? No. Did you provide facts? No. Do you have any kind of credibility whatsoever? No.
All you have is a pink blouse and a pathological case of Narcissistic Personality Disorder that you unfortunately feel obliged to broadcast in HD at the slightest opportunity.
And by the way, do you know what will happen when facebook/YC screws people over? The word will spread like wildfire. Because people have their own little voices around here. We don't need you and your pink blouse to save us.
Apparently the word doesn't spread to people like you, considering the long list of people Zuckerberg has screwed.
How could anyone miss that, given the steady influx of facebook stories esp. on HN?
So what did Jasons dramatic little speech add here?
Yea, fire is hot and facebook has probably no problem screwing you over when they get an opportunity. Say what, captain obvious!
If you're at critical mass, you might be able to hold your own. Foursquare and Twitter have enough users and industry clout that they can hold their own. If you're just starting on an idea, maybe you're getting a little bit of momentum, it might be tempting to talk to someone at Facebook and see if they will help you.
But… It's easier and less risky for Facebook to just implement your idea themselves. If they want a feature for their users, why depend on some little startup that may or may not fail? I don't think they're going out of their way to steal ideas. I think they are trying to maximize their own success. We could call it a lack of morals, but I think it's subjective which is why we have these debates.
Still, you probably should try to think about it from Facebook's perspective and be realistic about your position of leverage before you approach them with an idea.
Think about it. There are two possibilities:
1) Facebook is trying to ensnare startups into its web of twisted lies so it can destroy them.
2) Facebook is just trying to work out a mutually beneficial deal with startups that want to leverage their technologies.
While #1 is possible, you have to admit that #2 is the more likely situation. It's like Sagan said: "Extraordinary claims require extraordinary evidence."
I'm sure you know what you're talking about, so this should be pretty easy. Give the startup community sound logic rather than speculation.
I could see your claim if Jason was arguing up against someone with a dramatic more of an audience..however that s is not the case as both of you have about the same numbers in audience..
Not to say that you do not have some points.. just put in better form than the linkbait argument
The only question now is: what negative impact will this have on the startups? If you take a look at the recent squabble with Zynga and the introduction of credits, you'll see that Zuckerberg is bold enough demand 30% of revenue for a Paypal clone. Given Zuckerberg's history of changing policies like privacy for the worst, it wouldn't even be a surprise if he raised that to 50%. Would investing in YC startups be profitable if their valuations where cut by 50%? Would they even be worth that much knowing that Zuckerberg could clone it or demand even higher margins on a whim?
Instant personalization will likely see similar fees once YC is hooked on it. Though past performance is not an indication of future results, I have to say the future looks very bad for anyone embracing the Facebook ecosystem.
But when I heard of the YC/Facebook stuff it struck me immediately as a bad idea. It feels like a shift towards lock in. It's encouraging startups to build on a specific platform rather than supporting more open standards.
It also feels a lot like the idea that YC is aiming for the social "Facebook app" space; which, I agree, is a great (and fast) money spinner, but it's hardly revolutionary :)
Just my 2p.
In other words: It takes a rat to know one...
Facebook called in a meeting with this company, and talked to them a lot about acquiring the company for Facebook stock. They offered the staff roles within Facebook, and the negotiations were well advanced. During due diligence, one of the tech guys sat down with one of the Facebook execs/engineers and described how the system worked, how some features were implemented and ideas they had for future features.
Not long after Facebook cut off all contact, ended up developing their own solution, ended up implementing a lot of these features, and ended up shafting this company. It is a shame that Facebook is so narrow in their thinking, because the execs at this company really could have helped Facebook avoid some of the troubles they had.
From what it seemed they didn't get paid much since they were mostly after what the guys learned from the site. Meaning it sounded like they were just after talent and not technology or user base. Can't imagine that would be a multimillion dollar deal.
http://techcrunch.com/2010/04/02/facebook-buys-up-divvyshot-...
Obviously every startup needs to be mindful of the potential for competition from larger, more established companies, but avoiding all the opportunities they create is even riskier.
If you want to be really sure that nobody ever "steals" your great idea, target an obscure platform (Linux desktop?), stay in stealth mode, blackout your windows, and keep all of your computers in a faraday cage. However, if you want to to build something that matters, you're going to have to take some risks and get a little closer to the fire.
Jason could honestly feel that a company or two has received a lower valuation then they deserved, but isn't that the early stage VC game in a nutshell? Investors trade time for value - they invest early in something they think will succeed. In the end, early stage investing isn't a bad route for people to take. Sometimes, it's the best (or the only) way for a product to get off of the ground.
However, one of his core strengths is talking. He knows what to say and when to say it and how in order to attract people. He is using this issue as a platform to reach his existing audience while attracting new people.
I'm not saying that he's right OR wrong about the issue itself. What I'm saying is that he uses topics like this as a platform to further his own influence. The proof is in the pudding... this is a hot story on HN and hundreds of new potential viewers have checked out the clip and likely the entire show.
Ofcourse, once you make that first sale and have the FU money to fall back on, it makes gambling (i.e. growing to IPO) much easier.
I am a little skeptical of Zuck too though.
Yes, it's still a lot and there are ways to sell the stock but that's assuming they even get $20 million.
If you are earning $40k - $60k/year - which many young founders were likely earning before joining YC - even if after multiple dilutive rounds of financing you end up with 10% of the company, in a $20M exit....that's still $2M.
Sure, you can't buy Fiji....but you are literally going from a bank account with a few hundred/thousand/tens of thousands, to literally hundreds of thousands/millions.
That is VERY major the first time it happens.
I guess the point I am making is, the jump from having $10K in the bank to $1M in the bank, is SOOOO much bigger than from $1M to $100M - because it impacts your life much more.
Jason makes some good (if generic) points about any industry where large incumbents will try to absorb or nullify innovative competitors or startups.
Microsoft did it in the 90s and 2000s as well..
But we all know how much Jason hates Facebook, so he's using them as the bogeyman in this example, because, well, he hates Facebook!
Mapquest learned this the hard way when they got stomped by Google Maps.. If your product doesn't have built-in "hard to replicate" or proprietary features (or data), then a better-funded competitor can just buy their way past you by using more resources to replicate what you have.
This allows Google to do whatever they like with the data, including offering turn by turn directions on Android.
What precedent does Facebook have to support the 3rd party developer ecosystem on apps.facebook? /me points at http://developers.facebook.com/docs/api*.
I'd be really interested to see what other HNers have to say about what I think is the main issue: given you don't think becoming a facebook fte is your desired exit strategy, what would you do to protect your IP from Facebook?
This way if the relationship remains good you can continue to reap the benefits, if it goes sour you have your own userbase with some separation from facebook.
It depends though, plenty of developers are happy to put all their eggs in the Apple app store basket because the benefit now outweighs to potential downside later. This would be the same here.
(I for one would much rather be stolen by Facebook than Mahalo.)
And as part of the execution you guard against being locked in to a specific platform.
"Reaching critical mass" [so customers identify you with the technology/idea] is one way to avoid this.
Sorry, don't remember the name of the podcast.