Why to Start a Startup in a Bad Economy (2008)
paulgraham.com
paulgraham.com
So I think that the founder is key, indeed, and whether VCs are involved is not relevant. But of course this means that VCs will judge the founder, not just the business plan.
In an uncharitable interpretation, this is tech/VC returning to the mean -- this is the "good ol' boys club" (the sex of the person in particular is not important) that generally people talk about, and it's how society works most of the time. VC is not charity, they are incentivized to filter, and they do. That does not necessarily mean it's the same discriminatory environment but that depends on the person doing the searching and their ethics/principles/choices.
That said, YC is just about the antithesis of the aforementioned phenomenon -- they were one of if not the first to significantly drop the barriers to accessing VC. They took their program abroad and lowered barriers to entry for smaller international economies abroad. They've upped the amount given to founders and are running hot trying to accommodate huge incoming batches. They make founder school and other resources available absolutely free. YC's made it a breeze to work at any of their companies and get on the hundreds/thousands of rocketships they launch every year, VISA difficulties aside (there was also some mention of them working on a VISA "fast track"-ish path or something).
> It’s just that it feels like if you don’t have the grit etc necessary you’re just out of luck and out of this club and it’s not really something you can work on. (After all if it was something you could improve then it could be taught but PG et al seems to think - and I think they’re right - that it’s an innate thing.)
This is an extremely reasonable thing to filter for -- judging startup ideas is hard/impossible, and with lots of reflection it seems that grit is one of the things that sets founders apart (clearly ideas don't, execution usually will but maybe sometimes doesn't, etc). It makes sense for all VCs to filter for these qualities.
Now where I do agree is that people who can game the system -- but maybe grit is hard to fake. At some point you end up just... acquiring grit, because the situation is hard.
Grit and perseverance can definitely be learned. What it takes to embed it in yourself and motivations may vary from person to person, but it can definitely be acquired most of the time, I think.
[EDIT] - forgot about free founder school and stuff on YT
I donate every year to charitable causes but VC is not charity.
This thread reminds me of my softer youthful years, I can still feel the despair while standing with my back against the wall at the school dance, wondering why and noting how unfair it was that I wasn't dancing with anyone...
Early stage fundraising before SAFEs became a norm sucked. You had to deal with awful convertible note terms if you wanted a note, or deal with highly dilutive priced rounds; either way, there was so much friction on both sides. With the SAFE, you had a highly standardized instrument that both parties understood and which was very founder friendly. If investors wanted special things beyond that, they need to specifically carve it out into a side letter which spells out the special things they want. Just a different conversation.
Beyond that, it's not just that the SAFE as an instrument revolutionized early stage funding, it's that YC made it the de facto norm. This, more than anything else YC has done IMO, has permanently changed the landscape for early stage founders. I'll always be thankful to YC for that.
The startup I co-founded was funded by YC the month after this essay was published. It was the same batch as Airbnb. We didn't tick the VC boxes. PG commented later that we were "so nervous" in the interview; he had no idea how much.
It was said that all the startups in our batch were chosen because we seemed particularly resilient. It's amazing how being told that by someone like PG will make it come true.
Our startup didn't make it as a "home run" success, and we found it hard to raise VC funding, partly, I think due to not ticking VC boxes. But the company still exists in a different form. It employs over 10 people and is doing really important work to help airlines recover from the effects of the pandemic. It could yet be a huge success, thanks to the resilience and determination of the people still there (I left about 7 years ago).
Thanks in large part to the YC experience and vote of confidence, I've been undertaking a very profound journey of self-discovery and growth, and have worked on several important and successful projects. I'm now exploring multiple opportunities to start or join new startups, some related to the work we were doing in our YC-funded startup, and others completely different.
I think the last few years has been a tough time to be the kind of founder who doesn't tick VC boxes; the whole startup world has been dominated by glitz and hype.
It feels like that's changed in the past week. It seems the latest hype era is over, and we're re-entering a period where resilience, resourcefulness and determination will be in strong demand.
Please don't be discouraged. If you really want to build something important and valuable, you'll find a way to do it, and you'll get the support and funding you need when you're ready. It may take a long time, but important work always takes a long time.
I hope you find the purpose and motivation you need to have a go. It really can be the most amazing, life-changing experience. Feel free to contact me (email in bio) if you want to ask or discuss anything.
Best wishes.
The company survived by becoming commercially focused and profitable, which happened after we recruited a leader with experience/connections in the airline industry, not to investors. The products the company pivoted to were not more "VC-legible" than what we started out doing; they were just products that could generate enough short-term revenue to enable survival. The company hasn't raised funds from VCs; its funding has been from angels, airline/travel tech companies and family offices.
It has unquestionably taken a ton of resilience to get the company to where it was before the pandemic, then to survive the pandemic, and to find a way to thrive on the other side of it.
[0] https://old.reddit.com/r/travel/comments/owdpnj/it_seems_adi...
Hard times create strong people, Strong people create good times, Good times create weak people, Weak people create hard times.
What time is it?
Stress causes health issues. Particularly traumatic stress causes (wait for it) Post-Traumatic Stress Disorder. All else being equal, a person with ulcers and anxiety disorders and depression and PTSD is a less capable person than one without.
They are not talking about someone who is going to build a company with 5M in profit a year and live a balanced life. Almost by definition they are talking about an insane person.
Personally, I don't think it is a insult for someone to look at me and say. "That guy seems like he spends a lot of time with his family and traveling and staying healthy, he isn't good founder material since he is so busy with those other things"
Last time I checked the most successful companies in American corporate history are:
1) Standard Oil
2) IBM
3) Microsoft
All 3 of them managed outcompete any other company in their field and were only stopped by the U.S. Federal Government
None of them ever needed VC capital. VCs are like sirens, they are bankers in disguise.
Given all that you might as well do like the 3 aforementioned GOATs and just go to a banker if you need money.
There is nothing wrong with debt. When you have to add a liability to the balance sheet you might as well add a liability that looks and feels like a liability instead of falling for the sirens who promise to make that liability into an asset. It ain't.
Perhaps instead talk about the % of VC funded decacorns over the last 10-15 years?
Rockefeller and Gates wouldn't have wanted VCs on the cap table anyways, even if they were around back then.
That's because they knew they had the means to repay the 27%something interest rate loan that a newborn Standard Oil or Microsoft commanded.
People resort to VCs because they don't have the entrepreneurial arrogance to believe that the thing that they'll build is gonna be a hit.
Actually given that any movement is a bottom-up movement...VCs exists solely because entrepreneurs have lost their entrepreneurial arrogance.
Times have changed from when Rockefeller or Gates founded their companies. It's far riskier and harder today to build successful companies. Competition is fierce due to globalization. Increased standards means a longer road before people will pay you. The population has the same distribution of "entrepreneurial arrogance" by nature, but there's less viable options to exercise it.
Instead, people turn to VCs for a multitude of practical reasons:
- Capital to get the idea off the ground
- Networking
- Guidance of experienced people
I also don't buy the hype of Silicon Valley , from a social standpoint it seems a place full of arseholes. Zeros and ones in the bank account, however many won't compensate having to live in such environemnt
Being one of the many "millionaires next door", that is what the American dream has always been about.
Lack of grit should be more a problem for people who see startups as a job where they are team-leads and they need some level of perseverance to overcome obstacles.
Still, why shouldn't grit be trainable? It's just that VC make money by selecting founders with grit. In a sense, they corner the market by investing into the best. Why should they destroy their moat by flooding the market with viable founders?
Grit is not trainable in the sense that one can add it to a grade school curriculum and reliably graduate people with grit. Fundamentally, grit is formed by coming up against obstacles, failing, and getting back up again and perservering. No curriculum on the planet can standardize the experience of failure - even the Kobayashi Maru was beat by Kirk.
If you think Kobayashi Maru is about measuring your ability to function under pressure, loss, and failure, then you're correct. Kirk's unwillingness to face failure made him fail.
If you think Kobayashi Maru is about how the captain is supposed to react in an unwinnable scenario, then you're wrong, and you're not just wrong, Kirk is the poster-boy for exactly the correct approach. Ultimately, there are no real rules in war - only who survives. Business is different, but not that different. The annals of history are awash with the red ink of failed companies who insisted on letting the perfect be the enemy of the good.
Define "their skill level". Particularly in large classrooms with mixed skill levels.
Coming up with such challenges is more difficult than it would seem.
Yep that is one of those pesky traits...not getting discouraged from rejection.
I think everyone should at the least start their own business, even if just to become a better employee in the future through their failure and gaining perspective of how difficult starting and running one successfully is.
Before this turns into a rant about how soft the world has become and I share my unacceptable opinions, I will just say that if you allow fear of failure to keep you from making the attempt you fail by default.
> but they very much benefit from getting you to dream that you can, and your compliance
I can't see how VCs benefit from selling a dream to peasants.
Not to mention it boosts applications from the unconnected, from which you can find the most appealing diamonds in the rough - or, if you’re more underhanded, you can just pass their ideas on to someone in your network.
This is the model Ivy League schools have practiced for decades; most applicants who get marketing materials from Harvard have no chance of getting admitted, and Harvard knows this.
When I was younger I had an easier time getting meetings with partners at decent VC funds (including YC) than interviews with Google, for example. And accordingly an easier time getting seed funding than a prestigious internship.
VCs would generally look at prototypes and listen to the story, if you made the initial case concisely and it made sense, whereas other institutions would just throw my resume away with no calls because it didn't match whatever filters. I just wouldn't even get to talk to hiring managers at decent companies.
I didn't raise a really meaningful amount of money, but it seems implausible that VCs/angel investors who were willing to give me five-six figures for pre-seed wouldn't have given me six-seven in the next round if traction was there.
They said they would, and if they wouldn't, they knew the company had a runway such that it would need to raise again, so giving me anything would have been irrational. If I was going to be discriminated against for being from a working class background/not going to a good enough school/being a technical cofounder who didn't study CS, it would probably be at the very beginning.
In fact I’d say the diversity of founders seems worse than it was five years ago, back then it seemed like founders from underrepresented groups were becoming more common.
Therefore, grit can only be identified (or distinguished from irrational belief) in retrospect.
As it turned out, we started in Feb of 2020, with much of our sales pipeline (over 2mil) disappearing in a day and a half when things shut down. So we didn't mortgage our houses but we buckled in, reduced expenses, found alternative revenue streams and survived.
We are here today and executing on our original vision after going through all that. I did end up selling my house to fund my family while we navigated everything, and it was not easy.
Now our investors treat us well because we did that. If you asked me ahead of time if we had the grit to do that I would think almost certainly no. When you're in the thick of it (And especially if you PG'd something), it changes perspective.
For me, it was really a life lesson of don't raise money or take a chance unless you really believe in it and there's a fuzzy path to victory. Sales fixes everything, even if you have to temporarily pivot.
You have it in you, I promise.
Does CALPERS or the Texas Teachers Pension Fund require an Austin based VCs to mortgage their house?
Hardly.
Founders who have been around a long time know the game. Founders are disposable soldiers , VCs are Lieutenants and GPs/Asset Owners are Generals.
It's that simple. And it's okay. The BS part is when Lieutenants feel the need to conceal the truth or make motivational posts such as the OP .
The absolute worst is when a soldier manages to be decorated in battle...all the Lieutenants become absolute fangirls and ask him for autographs and pictures whereas they treat other soldiers like crap. Of course such behavior is in the hope to impress the Generals.
I do however wish the GP all the luck in the world.
The criteria isn't awful if you rationalize what the goal is: don't lose the money without a good fight in a good strategy.
Ideas don't execute themselves. Problems are everywhere and ideas are a dime a dozen. Reddit is full of armchair generals. Companies are ultimately run by people. They live and die by whether the people running the company can build a solution, sell a solution, recruit people to expand the solution, and keep the people they have come to depend upon. Everything else - even money - is secondary.
So is the local pub. Sometimes what they say is based on some inside information, a unique perspective, or otherwise makes a lot of sense. There can be actual value in those comments, even if the commenter themself doesn't recognise this or simply isn't in a favourable position to exploit it. Dismissing all that's said off-hand is rather wasteful :)
https://www.holloway.com/g/venture-capital/sections/pattern-...
But who will do the teaching and how can anyone figure out who it can be taught to?
Allowing the innate trait to emerge naturally avoids needing to solve these difficult problems.
The retail investors don’t have any desire when the stock market is tanking to buy stocks in money losing former unicorns. The investment bankers who organize the IPO also won’t see the initial “pop” that allows them to make a quick profit.
Of course the employees who sacrificed real compensation in cash or RSUs in a public company in lieu of statistically worthless “equity” come out on the short end as the companies repeatedly delay an IPO waiting for the “environment to improve”.
All this to say, if you want to be a founder, go for it. But unless the startup you are thinking about has enough funding to compensate you as an employee at market value in cash, skip it.
Yes, and the good new is these companies have been paying significantly more cash in the last few years. It may not be enough to justify moving or staying in the Bay Area, but many small companies are paying the same remote, which seems like a better deal than the big tech companies in the short term, if you're looking to cut costs while their equity is down.
There's a lot of bad jobs out there right now, but if you're not in a gambling mindset, there are some good opportunities to improve your overall financial position.
Local restaurants that survived Covid are shutting down due to cost of food. Others are adding x% to food bill to cover cost. Things are rising so fast they don’t want to keep ordering new menus.
I have to imagine consumers will become tired of the cost increases - we put up with it a few months, and decided "no".
lower tariffs, subsidize capital investment into production of lumber/housing, aggressively push and fight for higher density residential zoning, limit leverage allowed for investors of buy and hold rental properties, eliminate capital gains tax advantage for income above $1 million/year, enact temporary taxes on non essential consumption items, restart student loans (billions a month in excess spending for consumers). Etc etc
Instead they keep trying to tie BBB to inflation fighting, when its provisions are nothing of the sort.
They handed consumers far too much money, and need to suck it back up in a way that targets discretionary spending (vs essential spending). Too bad they won't...
But they are proposing BBB, not these things. Reconciliation does have limitations in that the matters must be budget related, but seems pretty easy to fit most of these under that umbrella.
They can resume student loans at the stroke of a pen
Innovation used to save our bacon, but now you have to innovate just to stay in the same place. Just pouring money on the problem doesn't work, it increasingly won't with climate change.
So we are between a rock and a hard place, inflation and recession. Choose your adventure. If the future could vote it would vote for curtailing demand across the globe.
Agreed, though that includes not just the supply of things, but the supply of money as well, which is also being reduced as the Fed raises interest rates.
An increasing and rapidly growing part of the economy is Services and Services are not that dependent on supply chains.
Also supply chains were disrupted mainly due to the world economy being overly dependent on China and China being shutdown.
In the long run this might actually be bad for China as countries pass laws to not be so dependent on China.
The financial markets are used to facilitate the operation of this economy and my argument was that it should not be seen as the economy itself.
The current inflation is because of China, Russia, the pandemic, lack of investment into the supply chain (during deflation, resilience being seen as inefficiency, preference for stock buybacks), bad investment (during the pandemic), lack of innovation and increasingly climate change. Something weird is going on with the fuel prices too.
- housing issues are reaching levels we’ve never seen. Not just buying, but renting is becoming exceedingly difficult for some. The fed raising interest rates so far has done nothing to level home prices.
- supply chains are crumbling. It’s nearly impossible to find a new vehicle. Used vehicles are selling for more than new ones. It’s yet another bubble that will burst miraculously.
- gas prices are still through the roof. It’s not uncommon to see $6/gal on the west coast (in any of the three states).
- the baby formula shortage is actually much worse than people realize. It went from hard to find to literally no one has any over the course of 7 days.
- stocks and crypto are tanking. Yes, some stocks aren’t seeing it as bad as others, but it’s not insignificant.
- food prices are increasing, and it’s very noticeable walking around a grocery store. Meat is $1-3/lb higher than it was 6 months ago. Certain produce is either not available or marked up 1.5-2x what it should be.
Now, a lot of these are going to get much much worse. The government seems content with really doing nothing other than seeding billions to countries not named the United States.
I think it’s fair for financial analysts and investors to be in full on bear mode.
They've barely raised rates! 0-1% federal funds rate is not a normal range, especially when inflation is ~10%
I think this isn't quite accurate for a variety of reasons, much of it is that the federal government actually has significantly limited control of the above + what control it does have it has to pass through a hostile senate to accomplish.
- The federal government cannot force local government to build housing to increase supply, it can only try to incentivize, and housing can't be built fast enough to offset current demand
- The federal government cannot factories, particularly overseas ones, to produce more
- The federal government can, at most, go through a faster approval process for foreign baby formula; it cannot force current domestic makers to produce formula
- The federal government literally doesn't control crypto that's what the attraction of crypto was lol; its bombing is entirely crypto's fault; and the stocks have been pushing back against government regulation for ages already
- The gov't cannot set food prices
So precisely what do you expect the government to be doing here?
Federal gov'ts could do all these things, and did, before the advent of the current neo-liberal governance in the 80s and 90s. The choice not to be able to do so, to strip governments of planning and industrial policies, was a conscious policy choice made by several consecutive administrations and governments across the whole G20 (at least).
Even more so federal governments especially did these things during war times. And we're basically in a proxy war with Russia (and IMHO, for the first time in my memory this might actually be a conflict with an actual morally justifiable cause), yet governments in the west have not put themselves on a footing yet to really weather such a war.
We should have put ourselves on that footing during COVID. Or hell, to deal with the climate crisis. And now here we are with this latest situation in Ukraine...
eeeeeeeee
> The federal government cannot factories, particularly overseas ones, to produce more
I am assuming you mean 'force'. Trump literally used the defense production act to keep hamburger patties flowing when workers were complaining about COVID.
https://thehill.com/homenews/administration/495175-trump-use...
While keeping hamburgers coming was the purpose of this EO. This act allows the president to force producers to change production to benefit the defense needs of the united states. To produce 'more' of something through retooling or other means.
https://en.wikipedia.org/wiki/Defense_Production_Act_of_1950
> - The gov't cannot set food prices
Please see a history of price controls. The article literally has a poster prohibiting charging more than govt set prices. Not saying price controls are a good idea, but do not claim something easily disproven with a google search. I learned about this in middle school.
You'd be "relieved" to know that some places in Europe saw 8$/gal in the past weeks.
https://www.youtube.com/watch?v=Q-5US4J03Wo
I'd say we're in the mid-stages of what might be called an "economic crisis"; that doesn't necessarily mean riots in the streets and stocks plummeting to zero. But it means severe transformations that will displace the way things are done.
In most crisis it's usually the working classes who suffer first and most deeply. And that's been happening for some time; long prior to COVID, probably dating back to 2008. Once the upper and uppder middle classes start saying things like what you see above, you're already in the trenches and now shit's gonna get real.
Maybe.
The people that get screwed are cash users/holders and maxed 401k holders. EG People about to hit retirement paying rent. Young people working two jobs to trying to pay bills. There will be nothing but rent hikes for years - shrinking ETFs, with tight restrictions to become debt holders. As usual the poor guy gets shafted. :(
I like the advantages pg mentions (like less competition), which are a great way to look at potential problems. There's always 2 sides.
Since I run my business (https://webtoapp.design) with relatively low monthly fixed costs (around 200€) I think I should be fine. I don't think I'll run out of money under these circumstances. So I'm already avoiding startup killer #1 according to pg, which has calmed me down :)
Plug? C'mon, let people get their work out folks...
I remember how expensive a lot of this stuff was back then too. Access to an API for fairly trivial data could have a meaningful cost to a business back then. Tying all of this together, especially with useful geographical data, would probably have been very expensive.
Aint that the truth. A PhD from 2009-13 wasn’t a bad way to spend 4 years for me, but it definitely set me back personally and financially
A PhD is basically a years-long nerd snipe
Yes, there are career paths that are only attainable by having a PhD, but those are really only for the top PhD students, so an elite group of an already elite group. The rest of us join career tracks that are accessible by lower credentialed employees by grinding out an equivalent industry experience.
Amazingly they will all have grit. They will be working full time on starting a company because it's just the day job.
will those 100 companies succeed? who knows depends on markets, products etc.
Founders are no different from early employees, so make them early employees.
As a former early employee, I was different from a founder in that I wanted to help build something, I didn't want to lead building something. Founder got more equity because of it. No problem from me.
The founders skills had to be way wider and more diverse than my own, and I got to stretch a bit, but still hone my core skill set.
Signing for a job and showing up mon-fri is not nearly the same as building a business from the ground.
A high number of the founders I know were all broke as heck to get to company success with no personal or family money.
The "problem" is to find the "right" people to give salaries to. VC theory today seems to say "the right people are so hungry / passionate / desperate that they will work for nothing to make their project succeed, therefore we don't have to pay salaries"
My conjecture is that far far more people will make good founders of good companies than the subset that will risk family ruin. So there is a real problem in that those people "should" be given a salary and told to found the company that will benefit the world. and VCs don't know how to find or find them
Just that they're quite different roles.
Entrepreneurs definitely developed (and are willing to continually develop) skills that the vast majority of employees don't. And that's fine. It's not meant that one is superior and the other inferior. Just different contributions, risks taken, etc.
Early employees go out and get a job; founders live through hell, making their lives very difficult to get to where they can hire. I know of many that went from tech salaries to living below poverty for years to make things work. [at least for those not funded in the valley]
If your product solves a real problem that is painful, there's big enough market paying for it, and you know how to reach thid market and sell, you can pay a good engineer year salary in a week of sales.
What's really hard is building a product/service that solves a big enough problem, is marketable and you can sell.
If you don't have those skills, it's quite expensive to develop them. Way more expensive than salaries, even well paid engineers.
That is the problem with the current times, people are selling off sure things like bonds and precious metals just to maintain liquidity and meet margin calls right now.
I agree now is the best time to found a company, yesterday was better and tomorrow is almost as good as today! Very much along the lines of the best time to plant a tree!
The obvious thing though is that the only really important things are: Are you reliant on discretionary consumer spending, and are you dependent on investment capital. If either of those two things are true you're going to have a tough time during a recession.
> Unless you find a way to print dollars, I don't see much option besides those two.
Selling to government, selling to business (B2B). If you're starting a company that does either of those two things, the risk is generally a lot lower because you'll have your first customer before you even start the company.
There are some informal measures that are also interesting. There is the feeling you get on any particular street, the vibe of a place, whether it seems fun or dead or boring or even dangerous.
Last week I had lunch with a friend who I had not seen since 2019 (I've been doing a lot of post-pandemic catch-up recently.)
I'm in New York City, up on 98th, UWS. I like my neighborhood but I've often thought of moving to one of the really cool neighborhoods. My friend lived down on 72nd, much closer to everything cool. I asked him if he still liked 72nd.
"Oh, I've moved back down to Chelsea," he said. "Where I lived 6 years ago."
Wow! Very cool! And how is that, I asked, full of envy.
"There are so many homeless people. The streets feel dangerous now. When I get off the subway I have to think about how to walk home, otherwise I get very aggressively asked for money."
That was a shock.
On a related note: two months ago I needed to get some writing done. I've some long-term guests at my apartment, so I can't think straight there. I decided I'd rent a hotel room, go relax, shut out the world, and focus on writing. I got a room at the Marriot down in Tribeca. This is 2 blocks away from all of the events that I described in my book "How To Destroy A Tech Startup In Three Easy Steps."
I remember this area as somewhat industrial, but also popping with startups and co-working spaces and some very cool hotels, like the Ace. And some great restaurants, kept alive in part by the startup workers and entrepreneurs. Some of that vibe probably comes through in the book.
Now it was dead. Very dead. Almost all of the restaurants were closed. The streets were shockingly empty.
Several things occurred to me:
I no longer know which neighborhoods in NYC are "cool". I no longer know where the best restaurants are, where the coolest people hang out, where the best bars are, where the most interesting people want to hang out. The whole city is alien to me.
That long decline in crime, from 1993 to 2020, is over. That automatic feeling, which lasted (in NYC) 27 years, that each year would safer than the last year, is gone. The certainty that even a rough neighborhood will be safe in a few years is gone. Just the opposite now. Some of the coolest neighborhoods are getting rough.
All of the above combines in ways that make it more difficult to network, to get a job, or to recruit people for a team, or to talk to investors, or to talk to someone who knows investors, etc. The whole chain of meetings and friendships and networking has been disrupted. It will take some time to put all of that back together. Or to put that differently, it's not just the supply chain with China or India or Mexico that is disrupted, for millions of us, it is our personal supply chain that is disrupted.
Though there’s a lot of chatter about funding the current situation, but this rodeo ain’t for the first time[1].
[0]: https://www.ycombinator.com/companies/bountii
[1]: http://bountii.com (now owned by a SEO/click farm?)
'It doesn't matter that much at which time in the economic cycle you start your startup'.
Because for most of the relevant inputs, it doesn't matter that-that much.