Startup = Growth
paulgraham.com
paulgraham.com
- The crazy valuations.
- The recent complains of VCs that "Entrepreneurs aren't working on enough big ideas".
It all actually makes sense now. It's all in the name of Big Risk = Big Reward style ventures. Especially after defining a "startup" as a company meant to grow rapidly and to massive proportions. Not necessarily a tech business. Not an online store for your company. But instead an extreme-expantion-potential style company. I wish Startups were defined like this from the beginning.
It also further pushes me away from the whole Startup / Silicon Valley thing. Growing that fast means a lot can go wrong and there's very little time to learn from mistakes. I'm a slower thinker, I like to analyze and enjoy, learn and understand, build and live, not sacrifice my life and grow my company like a lunatic.
Thank you Paul. You've actually freed me from a dream that I now realize will never make me happy. I can finally let go of my plan to abandon my family, move to the bay area, drain my life savings, live in a shoebox, stumble from one conference and event to the next hoping to network and find my messiah & co-founder, try to get funded, grow my business to someone else's expectations, all for a tiny fraction of a chance to succeed and be either a slave to my own company or lose control of my baby and walk away with diluted equity. I think I'll stay here in St. Louis with my aging family and build my businesses slowly and calmly.
You freed me Paul. You gave me back my life, my real one.
What makes me uneasy is the model itself and what it implies for the entrepreneur. To me, it makes the most sense for the VCs and other investors who manage a portfolio and can accept to fail in 90%+ of their decisions while still getting massive returns from the remaining 10% that succeed (Maybe I'm even understating the split here). But it's awful for the entrepreneur. They manage portfolios of one and surely, nobody sets out to fail! It's an awful feeling and no matter how much you say "I've learned a ton!", you still waste a big part of your life while also surviving under intense stress.
There is no one model, no clear right/wrong here and clearly Paul's model does work over large numbers of cases, judging from the Googles, Apples, Dropboxes of the world.
I personally favor a more grounded approach where you start with a strong industry background/knowledge or at least a set of skills that make you and your team special. The more diverse your team, the better, as you'll make connections between possible/untapped solutions and your domain's problems. Then you set out to solve a problem you've noticed (with a clear business model and path to initial traction based on your industry intuition and upfront customer discussions) and seek customer interaction as early as possible. If you're in IT, you're in luck as you can often get to your MVP early and you should try to get customers FAST.
Doing this with limited exposure to the VC game, in my mind, teaches your company to live within constraints and minimize your burn rate while making the most out of every member of your team. You can also take a little more time evolving your product, devoting your energy to the science (as opposed to fund-raising, etc.) and discovering unique value propositions. You also have the freedom to pivot as you need and perhaps even spend lots of time with your initial clients (and maybe be a consulting firm for a while) to learn. There may then be a point where you are much better informed about your business and want to go the VC route to transition to Paul's growth mindset. Apple started in a garage with family loans (if memory serves right) and got funded after it was already selling its prototypes and had traction. This formula, of course, would never work for a crappy team, but then no formula does.
Now if you happen to be working on the next Google, then it really is moot trying to achieve a disciplined organization upfront or taking it slow or spending time with initial clients or [fill in the blanks here]. You've found a gold mine and you're essentially pillaging it - who cares if you're inefficient. But less than 1% of smart entrepreneurs out there will end up finding that gold mine and somehow I would hate to be in the 99%. I would prefer a strategy that increases my chances of initial traction, possibly slows me down a litte, but gives me the mental leeway to discover a true niche and possibly a scalable product later on. The book "Nail It then Scale It" comes to mind.
Maybe this is what Paul means all along, but I can't help thinking that the "weekly growth targets" would paralyze many of the newcomer entrepreneurs out there with its singular mindset and make them blind to the intricacies of the problem they are actually trying to solve.
I don't want anything to do with this life style.
I posted this in another reply but I'll post it again because I think it's so relevant.
DHH talking about startups
It pretty much describes with different terms what pg here described as a "startup". I think startups have always had that definition (at least since the late 90s) but folks came along and started calling every little thing they own (i.e. their blog, non-profit, life-style business) a startup.
Obviously, a lot of that had to do with how the tech media also entertained that liberal definition of a startup -- and everyone and their mom started jumping on that wagon because it was considered cool.
I think articles like this should be a must-read for anyone wanting to get in the game, seriously.
pg's definition of a startup is just one kind of startup. I like to call it the VC startup. It's an organization whose goal is to succeed big or fail, and fast. This "charter" is driven by the needs of investors, and I get that. It makes perfect sense, and from where pg's sitting, it's the attitude he needs to have to successfully manage his portfolio. But it's not the only way to grow a startup, and I think it unfairly marginalizes non-VC startups as non-startups.
pg probably wouldn't consider my company a startup, but I think he'd be wrong.
We're 4 years old, have 4 employees, profitable, and grow at a pokey 100% YoY. The pace of work is enjoyable. We build things for the long-term. We have time to help our customers. We get to see our friends and family. A lot. The principals own 100% of the equity.
But in our minds we aren't building just a tech business, we are building a startup. A slow startup. We picked a huge market (photography). We started by marketing to a small niche where we could be profitable while building the infrastructure required to scale to a larger horizontal market.
If we'd been VC funded, we might be in the same position for growth; finally finding traction after years and several expensive, painful pivots. In this alternate startup universe we'd own practically none of the company at that point, and we'd have wasted a lot more money.
I "grew up" in the 90s dot-com era reading Geoffrey Moore. We feel like we're executing that strategy and doing it well. We're poised for overnight success in a larger market, and on our own terms. I don't feel like any less of a startup than the multiple VC-backed startups I have worked for previously. I do feel a lot less stress.
So, if you want to enjoy life, build great things, and potentially make a ton of money, don't think it's not possible. Find or found a slow startup and change the world!
Joel Spolsky wrote a great article about this in 2009 that also had an active discussion here.
http://news.ycombinator.com/item?id=920668
http://www.inc.com/magazine/20091101/does-slow-growth-equal-...
One of the most important things about Crossing the Chasm/Inside the Tornado is knowing where your company and your market are in the TALC. At first blush it'd seem like you always have to hurry to grow or else you end up crossing the chasm too late and are relegated to monkey status forever. However, when you mix in some insight from Innovator's Dilemma, you see that you get a new market TALC curve whenever the market's primary feature requirement changes. So for a "mature market" like photography, we are trying to figure out what the next shift in feature needs will be, and hopefully pivot and cross the chasm to catch that wave.
I'm on the slow startup train and I'm never going back.
It's really tough to find the right middle point, and it's probably different for every business.
(PS: After sleeping over pg's essay, I found it much less convincing the next day - implicitly, he's mixing up price with value, ignoring the temporal nature of markets and of opportunities - Google couldn't have been a startup in 1989 and Ford was a startup in the 1910s - and disregarding multi-product and B2B startups (premium Tibetan to Hungarian services) altogether. The clincher from yesterday - weekly growth of 7% - sounds like utter BS today.)
EDIT: Not sure why I'm being downvoted. I'm just pointing out that this article only and only defines a startup in terms of its worthiness to investors. It's as misleading as any other single-formula characterization of a complex multi-agent system. Startups != Growth, period.
(Maybe this is just something that irritates me, But I am sure others get a bad impression from saying Period like that)
Most important is that PG's definition of a startup (or Fred Wilson's or Steve Blanks or pmarcas or Doug McClure's etc.) is to serve a purpose of what is good for them in their business model which is to make money off of people who take chances with their time hoping for a certain outcome.
It's not about what is good for any particular person or for society. Guess what? That's not what business is about either. And YC is a business. It's not on a mission to help the world although that could be a by product of a successful investment.
That's fine as we all tend to do what is in our best interest (in varying degrees of course), but it needs to be recognized and considered when one makes a decision to go down that path of which the person taking the journey is the one who has something to loose (time or impact on family).
Possibly the parent poster is jesting or perhaps they didn't realize this before, but it is quite obvious that what people write is self serving in so many ways. PG is no different.
Notice also that PG didn't exactly do anything "ambitious" with his time. He choose a path of certainty (Harvard and YC was certainly not "bet the ranch" in any way it's an excellent idea that in retrospect anyone can see had an excellent chance of working with a smallish downside). Viaweb was not "ambitious" either. I was around when that was founded and it was fairly obvious small business needed online stores and there were multiple companies doing the same thing.
Before you downvote, this is not in any way to rain on Paul's parade or take away any of his achievements at all. Or to try and make a point that there is anything wrong with what he is saying vs. what he has done.
There are always the "to be sure phrases" sprinkled about. PG does this quite early (in the fourth paragraph) by stating "because most startups fail." which of course is slipped in there the same way financial firms say "past performance is no guarantee of future gains" in their advertising (while taking out expensive full page ads in order to tout their past performance - at least they did back in the day..)
So no, rapid growth isn't just something investors like. If your product helps people, you want it to help the most people possible as soon as possible.
That is not true (and is more relevant to manufacturing than to tech companies). Look at ARM, for example, it never needed to grow rapidly and it doesn't actually produce stuff - it just licenses intellectual property - but the existence of ARM benefits millions. Would this fledgling firm in the early 90s Cambridge not be called a startup (was Apple dumb to fund it as a joint venture?) - would VCs not have liked to have a piece of it in the early 90s?
EDIT: Same goes for id, Valve and other game studios - you see sometimes it's better to have the best engineers and researchers take their time, let them develop and mature the technology they're working on and build something long-lasting that affects millions of people.
"EDIT: Same goes for id, Valve and other game studios - you see sometimes it's better to have the best engineers and researchers take their time, let them develop and mature the technology they're working on and build something long-lasting that affects millions of people."
Game studios take time because game releases used to be all or nothing. There were no second chances.
I can't comment on id, but the entire reason Valve built Steam was to speed up distribution and release updates incrementally (the previous patching system sucked). It went from idea to inception in about a year. It was also buggy as hell when it was first released. Now developers can easily release additional content and make game play changes after a game is initially launched.
As I understand it, the whole reason Valve built Steam was to cut the publisher out of the value chain (who, to be honest, had too much power and added little value for the customer).
Incremental patching and DLCs are (extremely beneficial) side-effects.
1. The first phase is figuring our scalable business model. That includes product, customer acquisition, etc. For this phase the best is that you are bootstrapped or having just small investment. At the end of this phase, you should be profitable or your natural/viral growth should be like Facebook in early days.
2. The second phase is growth. For this phase, you might need VC money since during growth profit might not be enough. Or you might decide that this is "lifestyle" business.
3. The third phase is optimization.
Now, the problem with some startups is that they jump onto phase 2 too early. And I have feeling that some SV startups (not all - but one pumped via techrunch and similar) jump to second phase too early. I think it is ok if phase one is extended by 6 months or even one year - that is just a rounding error if you are going to be big. No need to rush.
Fingers crossed for you
1. This is a superb essay delineating the attributes of a fast-growth, all-or-nothing type of startup. No surprise here. Who besides pg has had the depth and breadth of quality first-hand experience with such ventures over such a sustained period and in such an explosive context as that of recent years? He has here given us a classic analysis of the prototypical, Google-style startup.
2. I think the idea of a startup should not be so narrowly defined, however, and the big reason is this: many founders set out to build ventures that are tech-based, innovative, aimed at winning key niches via hoped-for rapid growth and scaling, positioned for outside funding as suited to their needs, and aimed at liquidity via capital gains as the primary ROI for their efforts . . . but who also place a huge premium on minimizing dilution and maximizing founder control. These are the independents. The ones who, by design, want to defer or even avoid VC funding so as to build their ventures on their own timing and on their own terms. Now this is not the Google startup model. It is, in a sense, its opposite. But it is not the model of a small business either. It is just a different type of startup.
3. The trend over this past decade has moved decidedly toward greater founder independence in the startup world. Back in the bubble days, as a founder, you had very little information available to learn how startups worked, you often had heavy capital needs (e.g., $2M to $4M) right up front to do such things as build your own server banks, and you would almost certainly have little leverage by which to minimize dilution or loss of control at the time of first funding. Today, this has completely flipped. Vast resources are extant teaching founders how startups work. Initial capital needs are often minimal. And it is relatively easy to get reasonable funding on founder-friendly terms. What this means is that, today more than ever, the independent-style startup is more open to founders than ever before.
4. Given the above, it seems to me that this is not the time to say that the only style of startup worthy of the name is that of the super-rapid-growth type. The rapid-growth type may be more glamorous by far but it really defines only the tip of the startup world. Beneath it is a vast world offering incredible opportunities to founders who want more control over the timing, scale, and management of their ventures and who seek to realize gains and manage risks accordingly.
So why would balancing lifestyle, minimizing dilution, and maximizing founder control not qualify as valid constraints for a "startup" on the principle of growth as a priority? After all, no startup, ever, has grown as fast as they could have if nothing else truly mattered.
EDIT: removed a reference to criminal activity deemed to be a strawman
Most organizations have goals - be it growth, profit, advancing a nonprofit mission, or whatever - and in all cases, the rider "Oh, and of course we mean to pursue this end by legal means" is so obvious that, unless we're talking about a criminal organization, it doesn't even need to be stated.
Same about remaining within the legal field: it is true only as long as overwhelming majority of the competition also does so. Otherwise you become a criminal, or go out of business, that simple (not related to startups at all, but common for general businesses in many countries). This point is just to explain that the constraints you have are seldomly morally defined, they are set by the environment you operate in (unless you are a total outlier - the idea is exceptionally brilliant, or you have some kind of other competitive advantage which puts you in a totally different league from others).
I find the entire discussion about "terms" and getting the best deal for startup founders laughable.
While there are certainly people who are truly unique and doing truly unique things (just like there are people in high school who are so "hot" they can choose which quarterback or cheerleader to date and still get dates no matter how they treat people or people who can go to Harvard, Yale, Princeton or Stanford with fully paid scholarships) I believe most likely the majority of people would be glad to just get funded and would take any reasonable terms to get an investment. By the way, if you, mr/ms founder, are such hot shit there is nothing to prevent you from renegotiating your value or terms later either (celebrities and sports stars do this when they are exceptional, right?)
Getting funded on any terms and having success of course will allow you to move to something else in the future because you will have made contacts and have your ticket punched. If you succeed as we often see even if you fail.
Participants on Shark Tank on TV exhibit this behavior as well. You have a chance to get an investment and advice of, for example, Mark Cuban for your crappy little company with a marginal "maybe" idea that you haven't been able to do by yourself. And you're going to kill a deal with him because you want to only give up 15% vs. the 20% he is asking.
It's interesting how the startup world is always complaining about how they get taken advantage of by VC's, angels etc. and trying not to get "screwed" and playing games. I think they actually are giving the funding sources a run for their money in many cases. Nobody wants to loose out on the next big thing and since they are expecting failure it's not as if they can easily corelate when they impulsively get manipulated and give founders to good of a deal.
This is, to me, the most interesting thing here: I've seen lots of people talk about "traction", but this is the first time I've seen someone in the startup world give hard numbers for what a "good growth rate" is.
Another way to look at these numbers: A good growth rate during YC means that you're doubling every 10-14 weeks. An exceptional growth rate is doubling every 7 weeks, and if your doubling time is more than a year, it's a sign you haven't yet figured out what you're doing.
This fits pretty well with the rather imprecise commentary that "a startup measures the time to double in size in months, except for wildly successful ones, which measure it in weeks".
Beware too of the edge case where something spreads rapidly but the churn is high too, so that you have good net growth till you run through all the potential users, at which point it suddenly stops
Sean Ellis[2] has a similar test for product market fit (the 40% rule):
I ask existing users of a product how they would feel if they could no longer use the product. In my experience, achieving product/market fit requires at least 40% of users saying they would be “very disappointed” without your product.
[1] http://andrewchen.co/2012/06/20/quora-when-does-high-growth-...
Zynga is definitely all about growth. It is fiercely focused on metrics, fiercely focused on growth. But as someone from game industry, we cannot agree that this model is THE model that gives the world and everyone value. If the game industry worked like the way pg describes in the essay decades ago, we would never have Diablo, Baldur's Gate, Grim Fandango or Minecraft. We would all be left with choices like Farmville, Monsterville, Mineville, forever and ever.
"Growth drives everything in this world."? Does it? All fads grow like wildfire too, but does it drive everything in world? Or a better question would be: should we allow it to?
People have different understanding of success. Make your pick and don't care of the others.
Some people get confused one their goal or success target.
There wasn't any part of the essay which says you should start a startup, or that it is a morally valuable thing to do.
I somewhat agree with you that capitalism doesn't produce optimum value for society. Zynga's maybe an example of that -- I'm sure the are worse ones. But as the saying going, we have the worst system except for all the other ones that have been tried. For all the Zyngas there are some pretty good companies too.
Also, I think your question is essentially hypothetical or philosophical: "should be allow it to?" Who's we? Short of an overthrow of the US government, I think this segment of the economy will exist for a long time.
If you want to have an interesting reflection on capitalism, read "The Idea Factory", about Bell Labs. That is the other end of a spectrum -- a single company holding a monopoly for 50+ years. But it actually produced immeasurable value. It's interesting to think on which model produces more value -- a monopoly where people are free from competitive pressures, or an intensely competitive market.
Wall Street had also produced explosive growth in our economy. It was also a ingenious system with participation of lots of hackers and talents. But I think most will agree now, that when Wall Street operates without considering its own morality, it is by itself, immoral.
In other words, I believe the essay's lack of reflection on the morality issue, which is definitely not a small one (e.g. the Zynga example), is what makes it biased, and partly, immoral.
My opinion is that corporations are essentially "amoral" -- not immoral. Morality simply doesn't enter into any substantive decision. Google's founders often invoke the self-interest argument: "people don't have to trust us to be moral, because if we acted against our users, they would leave us, and we wouldn't make any money". This is what I call an amoral argument -- with no negative connotation to "amoral". PG almost invoked a version of this in footnote 8.
You might think that being amoral is equivalent to being immoral, but morality isn't as well-formed a concept as people think it is. Namely, the most common use of the concept of immorality is to label "stuff I don't like". I mean, what's wrong with millions of people playing Zynga games all day? Would people be curing cancer if they weren't playing Zynga games?
Another issue is that a person isn't moral or immoral; it's well known that the same person will act moral or immoral according to their environment. Paul Graham even said that about HN (in terms of trollish behavior). (See http://en.wikipedia.org/wiki/Fundamental_attribution_error)
In the case of Wall St, there's no possibility of it "considering its own morality". No amount of goading or convincing will make an ounce of difference. The only way I can think of is for voters to make it clear to elected officials that they won't tolerate the status quo, but so far that hasn't happened. Even after the 2009 crash.
(And btw I didn't make any assertion about morality in my original message, other than to say "I somewhat agree" about Zynga, so not sure what you are disagreeing with.)
But I have to clarify that I am not calling pg immoral. I am suggesting the essay could be. People outside the game industry may not get the Zynga problem, but you can also look at, say, Groupon's controversies. "Immoral" could indeed be too strong a word, but I believe few will disagree that aggressive growth strategies has some inevitable side effects, and for this no amount of footnotes is sufficient.
But again, call me naive, "people like Paul Graham and CEOs of startups" should, contrary to what you claim, should care MORE about these problems, because they can certainly afford to, and when they do, it will matter. :)
Actually ALL his essays are amoral. PG is very precise. He doesn't advocate specific things; he lays out a set of deductions. You will come to the same conclusions IF you have the values he supposes. IF you value this, then you should believe that. Which is a true statement regardless of what you believe.
My point is that amoral != immoral. But I think you are saying they're the same -- that all decisions must have a moral component or they are immoral.
I agree that hyper aggressive growth doesn't always produce the kinds of companies that society "should" want... but sometimes it does! It's probably impossible to separate the two, not least because everyone has different opinions on what's valuable.
Compare this essay with a random earlier one I selected (I just scrolled down and clicked a title that would seem ripe to disprove you)
http://paulgraham.com/opensource.html
Morality is rife within it, justice, monopolies, boss-employee relations.
He may have changed but all of his essays aren't amoral.
There is an assumption that a monopoly by MS would be dangerous. That's not a particularly judgmental stance. I could imagine someone having a different belief system about monopolies, but it hardly seems like a moral claim.
Then he is saying that he prefers to work with an economic partner rather than under the employer-employee system. He doesn't say it is morally right. He says that business can learn from this, because it would make the business more productive. That's an amoral argument. He's invoking economics to justify a way that people should interact.
It's basically a libertarian argument, and in general this type of argument is agnostic about morals.
Silicon Valley = makers
Wall Street = takers (sometimes enablers or rewarders for the makers)
And PG even explicitly said that not all companies should be startups. You are reading things into this essay that aren't there.
Minecraft was one guy (probably) enjoying himself while putting together something creative. It then exploded. Did he really target 10% growth per week?
Diablo, BG, etc. were all calculated bets by people with lots of experience in the industry. They weren't building a business model, a new organization, etc. They were doing "projects" they felt would promise high returns. That's it.
Games like Diablo and BG are actually run in a fashion closer to movies than startups. A game publisher finances games that it expects will succeed. The publisher's competitive advantage comes largely from brand equity and high capital cost of creating a new game. Thanks to brand equity, they are primarily expanding or upselling into a market where they already have a lot of reach. Of course, there is some risk of failure in each project, but it's closer to that of making a blockbuster sequel than that of solving a novel problem with technology.
I'm sure even Blizzard and Steam teams are very focused on growth as a metric. It's just that unlike Zynga, they believe that creating fun mechanics in their games and improving on them through patches make for a great way to move their needle. Therein lies the difference. I guess the focus shouldn't just be growth at all cost, but sustainable growth.
I think you're choosing one single sentence and taking it out of context, in other words, misunderstanding. By "this world", I took pg to mean the high-tech area of economic activity, with silicon valley serving as a figurative stand-in. I don't think pg means that every single thing in the world is driven by growth. The essay is about what makes a company a startup, and how a startup can be successful. The essay is not about what is most important in the world.
So if my odds of succeeding with a $10m payout from a bootstrapped business are 10%, and my odds of succeeding with a $100m payout from a VC business are 1%, those expected returns are equal in math terms, but not utility terms, and I'd be crazy to raise money.
In my experience in silicon valley, people start with building something small/simple (but in a big market), get little drips of funding from investors as they show progress. If they fail at any point along the way, there's value in what they've created, and they exit for whatever they get. The later you exit, typically the further along you get, and the bigger the exit. That's why the diversity of outcomes in the valley are everything from zero to billions, and companies raise anywhere from zero to a dozen rounds of funding.
At any inflection point in the business, you have lots of options: you can sell, raise more money, raise more and cash out some shares, you can quit, you can make yourself chairman and have your cofoudner run it, you can do nothing and grow it organically, etc., etc.
Each one of the choices above are part of your arsenal of options at almost any point. The people who choose to raise tons of money, not cash out at all, and then who fail- well, they made a series of active decisions to do all of that. They're big boys.
My point is, when you're building a company you can make a lot of choices along the way, and it's not just setting out for a suicide run of either 1% of $100M or 10% of $10M. Choosing to raise outside financing is sort of like deciding whether or not you want a cofounder (or 2, or 3) - it just another form of business partner. You get less %, but hopefully they add to the business in a meaningful way that leaves you better off.
Ah, but this is only true for bootstrapped companies or very early stage companies with little funding. Once you raise a Series A or B, your options are basically to grow as fast as possible or get fired and replaced by someone who will.
And this narrowing of options and loss of control is another thing I dislike. A successful bootstrapped company can always go raise money at great terms. But once you do, you can't go back.
To be clear, I'm not blaming investors or saying anyone is being cheated. But I do think that many young, naive, overly-optimistic people end up taking a path they wouldn't take if they saw the world a little more realistically. It's the same situation with early startup employees, who almost always get shafted.
As Charlie Stross's essay (http://www.antipope.org/charlie/blog-static/2012/09/on-the-d...) points out, there's another level. Elon Musk might get to retire on Mars. Bill Gates will probably cure malaria and several other big world problems.
So if your goal in life is not just having enough food & toys but changing the world, the big money comes in handy.
The most prominent is the trend towards allowing founders to cash out in a portion of their ownership as part of the deal. Another is the trend towards smaller rounds where the founder gives up less control and fewer liquidation preferences.
Maybe it's just my own history and confirmation bias speaking here (recently switched from startups to a Consulting business). But lately, the whole "bootstrap" movement is getting much more popular around here. More and more, I'm seeing articles and comments from tptacek, patio11, and others talking about how programmers could make vastly more money, especially by doing freelancing. I think the message is starting to sink in - the kind of people who read this site can start very profitable businesses, make loads of cash, and do this without the high risk of startups. No chance of a working 5 years and then striking a goldmine of an exit, but much higher chance of working 5 years and putting aside large amounts of money.
This pg article is a great one, and a very honest one too. To me it reflects the changing times, and the changing understanding of what a startup means. No longer, like in previous articles on wealth, is pg very clearly advocating that all hackers should be starting startups. This essay, to me, reads as a much more precise explanation of what someone can expect if they start a startup. And it makes it much clearer when people should not start a startup.
Some of the best startup advice you'll ever get is by @yegg in "Paths to $5M for a startup founder": http://gabrielweinberg.com/blog/2010/06/paths-to-5m-for-a-st...
No one ever becomes a great entrepreneur overnight and it's a fallacy to think that you could do a high-growth startup only when you're young and in your 20s (Jeff Bezos, Larry Ellison, Jim Clark, Mike Bloomberg all started their big companies in their 30s; Mark Cuban and Mark Pincus started their billion-dollar co's in their early 40s).
I think it's wise to maintain a very long-term view of the startup game, and to take bigger risks gradually as you develop into a stronger entrepreneur. So, I think it's smart to prove yourself as a bootstrapped entrepreneur and make your first few million and be financially independent, and then be in a position to take big risks to work on a high-growth startup.
Jim Clark, the greatest serial tech entrepreneur to date, started SGI when he was 37 and Netscape when he was 50. This is a long-term game.
In an efficient market, eventually you'd expect that you'd be paid the same amount for equal amounts of value created. In today's low-capital, target-rich hacker environment, it seems like good hackers would eventually become indifferent to the particular corporate structure used, and would instead choose whatever corporate structure lets them work on the highest-impact problems. Sometimes that'll be a startup, sometimes it'll be a consulting firm, and sometimes it'll be employment at a large tech company.
Personally, I'm a plain old employee of a large tech firm. I see some of the financials that patio11 posts, and I'm making significantly more than that (we're the same age). I'm not nearly as well-off as tptacek, thanks to Matasano's acquisition, but I have a few years to catch up. I see rumors posted to HN about engineers at large tech companies making outlandish amounts of money, and I'm making more than that, and yet the comments are all "Wow. This seems unbelievable, it can't be true." I also know coworkers that are rumored to have those multi-million-$ retention grants; I'm fairly certain they exist.
Your situation with your employer might be more uncommon throughout the rest of the world as you think. Silicon Valley has a huge shortage of good hackers, but the rest of the world isn't quite as programmer friendly as all that. It's still very good for programmers, but not as good as some posts would have you believe.
In any case, you are of course correct that there is no single "best" vehicle for hackers to become wealthy. But 5 years ago, starting a startup was the only way I knew about or considered seriously. The same is true of some friends today. I'm just happy the word is out that: a) startups fail, a LOT, and b) there are other ways of making large sums of money, including just being a highly-compensated employee.
I also think that this phenomena of people making a lot of money through non-startup means isn't new, it's that publicity of it is. I have a friend whose dad worked for Wells Fargo in the 70s and then struck off as an independent computer consultant for big enterprises in the 80s and 90s. I asked her how much she thought he made when she was growing up, and she was like "Somewhere between $300-500K/year." And now that all eyes are on Wall Street, people are realizing that fund managers have made multi-millions a year since at least the 1980s. In hindsight, I also think about some of my family friends who owned local businesses - muffler shops, auto-body repair - and they had nice houses and vacation cottages and boats and expensive cars too, so I wouldn't be surprised if they were making in the multi-hundred-K to few millions per year. It just takes The Millionaire Next Door for people to realize that.
(Yes, I work at Google. My path is perhaps uncommon, but still very achievable for a lot of people, and I don't think that refutes my overall point.)
"Almost every company needs some amount of funding to get started. But startups often raise money even when they are or could be profitable. It might seem foolish to sell stock in a profitable company for less than you think it will later be worth, but it's no more foolish than buying insurance. Fundamentally that's how the most successful startups view fundraising. They could grow the company on its own revenues, but the extra money and help supplied by VCs will let them grow even faster."
Took me awhile to realize this as a founder.
Profitability is a great goal (and makes the business very "real" by cutting away vanity metrics), but self-funding growth from profitability pretty much guarantees you are locked into a relatively slow growth rate. pg's simple charts show why being locked into a lower growth rate could mean being blown away by your competitors.
Same here. I figured out that one can turn into an optimization problem her user satisfaction and that it was key to get a successful product and then key for the company, but it's even funnier: can be turned into an optimization problem the whole process of founding a company.
Definitely awesome.
Until this past week or so I've been highly skeptical of VC funding and much more inclined towards bootstrapping. I love that DHH video someone else posted in this thread. I think it's silly to focus on users and vanity metrics if you don't have a clear business model (even if it's not implemented immediately).
But this essay makes an amazing case for why outside funding is helpful, even crucial. And it's encouraging that he's emphasizing revenues, not just users.
I'm also encouraged because I was at the YC event at MIT this Wednesday, and didn't hear anything (even when I asked directly) about investor drama.
That's an unwarranted assumption. Part of designing a startup business model is organizing growth so that you are unconstrained, so that more input produces greater output, earlier -- whether it's capital, users, employees, or support. All it takes is for one component of your business to not scale and you won't hit your growth numbers despite the brilliance of every other part.
Capital is just one of the areas you have to look at. Amazon is a decent example. Bezos chose books because it was (a) accessible (catalogs existed), and (b) he got 6 months to pay back booksellers, which meant he could afford to grow the more he sold, by using the money owed to the booksellers as float.
Startups would do well to evaluate all possible constraints on growth, capital and otherwise. Many times small tweaks to how you sell your product (or what product you sell) can produce large variations in the amount and timing of capital needed.
Here's an example: do you have customers pay for the first 30 days up front, with an option to cancel within that time? Or do you charge your customers after the first 30 days are up?
Now, you'd think the latter would always be better for "growth", because it involves a weaker commitment -- no money changes hands early.
But it also has a huge capital cost differential, if the service costs a substantial amount of money to deliver. In order to grow the latter model, you'll have to obtain more and more capital over time as you grow.
But if you do the former, you can "fund" your company's growth off of its earlier growth. Although this might impact growth negatively, by turning away customers that "won't pay" for the first 30 days up front, but who would have become customers the other way.
So which is better? It really depends. If your growth rate is already 7% with the pay-up-front model, that's better IMO than getting, say, an 8% growth rate with the pay-after model. The latter will require raising increasingly greater amounts of capital, despite the fact that it's growing "faster" initially, ultimately hurting your growth or wiping out your equity, or both.
Both approaches will still have their "S" curves end up at the same place (the market size doesn't change), but let's be blunt here: no company can catches up to 7% growth, so wasting your equity on 8% growth just makes you poorer, and the VCs richer.
Sustainable growth is just as important, and treating capital as something you "have to" raise is exactly what VCs want you to think, since, hey, that's what they sell. Venture capital is a financial tool, not the only (real) way to capitalize a startup during and after growth.
Books are fantastic for other reasons: easy to ship, relatively non-perishable, mass-produced, and even affordable. Webvan, for instance, would always have a harder time because groceries fail at least three out of these four criteria (as well as the two you cited).
Amazon is trying its hand at groceries now, of course, but even they're having a hard time at it.
I suspect that most of what people want to eat is in local stores only because their wants are constrained by what's available. Typically, people don't continue to want what they can't have for long periods of time, because it just makes them unhappy. I suspect that if you solved the perishability problem, there'd be a huge untapped market for long-tail foods.
That 1% difference per week makes a huge difference in a year. A startup growing at 7% a week it is 34x bigger at the end of the year, but at 8% it is 55x - or 62% bigger. And at 10% it is 142x - or over 4 times larger than the 7% growth rate.
>> no company can catches up to 7% growth, so wasting your equity on 8% growth just makes you poorer, and the VCs richer.
Not true, since a company takes the VC money to achieve the higher growth rate, will catch up precisely because of the exponential impact of that 1%. With a 10% growth rate they will be far ahead of you, and capture a bigger slice of the market, even after starting later than you.
QTF. Reading this article made me smile.
An epic essay with tremendous depth. Love the ending:
"A startup founder is in effect an economic research scientist. Most don't discover anything that remarkable, but some discover relativity."
[1] http://steveblank.com/2010/01/25/whats-a-startup-first-princ...
I would prefer just to say that the definitions are "different" :-)
Blank's focus is on startups that are discovering their business model. PG's focus is on startups that are designed to grow fast. Those two groups of organisation overlap, but are not identical.
Though I highly doubt PG would in fact define "startup" as "a company designed to grow fast". Pretty sure he would agree there's also a "search for a business model" aspect to it.
Unless he's changed his tune in the latest book (The Startup Manual is still in my to read pile) then under his definition the company stops being a startup once you have achieved the "repeatable and scalable" bit. Then it's just "a company" :-)
For Blank Startup == being in Customer Discover/Validation phase. Once you're out of there and in Customer Creation & Company Building you're no longer "a startup" - you've found your business model and are busy applying the heck out of it.
Under pg's definition the bit that defines the startup is the "Customer Creation" stage when you've found your business model and and are growing fast (to quote "Together these three phases produce an S-curve. The phase whose growth defines the startup is the second one, the ascent.").
Under Blank's definition you've stopped being a startup at this point - you've found your scalable business model. Under pg's definition you would still be a "startup" in the Customer Creation & Company Building stages as long as you're growing and haven't hit internal/market boundaries that slow your growth.
Also PG's focus on fast growth doesn't seem to be present in Blank's work.
I'm think Blank would be happy to call the early days of a new retail organisation like Ulta Salon a "startup" (they found a new repeatable and scalable business model for retail, taking the beauty counters out of the larger stores and sticking 'em as stand alone stores on cheaper real estate).
I get the impression that their very impressive growth (for retail) of 92% since 2006 wouldn't count as "startup" under PG's definition... or maybe not.... I don't know.
B2B or so-called Enterprise Companies, especially industry-specific new companies, would have a hard time qualifying on several fronts (market size, growth rate, growth interval). I am particularly interested in the B2B style of startup because I run an Enterprise Startu-er... Enterprise New Company focused on serving the insurance industry. A B2B Startup, it would seem, would have to link customer charges to something that can grow without a new sales contract. I guess, the trick to achieving high growth rates is to create viral growth inside an existing account. Growth in the B2B space will be large jumps (with a new contract) followed by organic growth or not (within the bounds of the existing sales contract). It seems to follow then that since the purchase agreement is the painful and tough and slow part, a B2B Startup would want to have a Freemium or some other type of contract with low/no startup costs and higher per user/GB/account/server/unit costs.
Gives me some new direction on pricing.
On an unrelated note, I'll disagree with other comments of "favorite pg essays" and say that "Wealth" was the best by an order of magnitude. http://paulgraham.com/wealth.html
For example, instead of active users you track a number of leads and how interested they are. Even without a single closed deal, you can measure your sales pipeline. It is an imperfect proxy for potential revenue growth, but so is daily active users for consumer internet startups.
Thus, if you are planning to sell an enterprise solution costing $100000, and you think you are going to make these kind of deals a few times a year in the beginning, then you use your sales pipeline measurements to estimate your growth with a finer granularity than a big sale now and then.
I agree with you that pg's point about startup growth is not invalidated by the realities of enterprise selling. But I think te way past those realities is to change the rules of the game. The "sale" should be a low-friction agreement to do business at some cost per unit/user/GB/etc. Growth is the. The ability of the product to go viral within the account. Essentially, it becomes the same process as a consumer sale with the one additional step of getting approved to sell into that batch of consumers.
While that might seem to be a big negative against starting an enterprise business, the advantage is that you're then convincing people to spend someone else's money which is easier than convincing them to spend their own. How else could a $.99 app look, feel, perform better than a $100,000 peice of enterprise software.
This essay, on the other hand, left me feeling like I don't belong here. I feel as if the YC philosophy has evolved into something different than it was, or perhaps, that this is more honesty than we've ever seen before.
Either way, I couldn't be happier to use revenue as my measuring tool, and not free users. Racing to give my product away at a rate of 5-7% weekly growth would require me to completely change my product development philosophy. I build what I build because I see something missing, not because I hope to flip it in a year.
Should you be one of the 100,000 founders who "rationally" choose to buy a startup lottery ticket for $100b?
Well of course! If you could live for long enough to run through thousands of iterations of the startup game, that is.
In the real world, - Founders are typically limited to 1 startup at a time - It takes time - years perhaps - for a startup to fail - Founders can do only a few startups in their lifetimes
Given low odds like 1%, with < 10 iterations per lifetime, expected value is the wrong metric. From a purely financial POV then, it appears only rational to do growth startups - If you are on the investing side (a "parallel" entrepreneur, running tens or hundreds of iterations in your lifetime) - You are a founder (a "serial" entrepreneur) with reasonable financial security and none of your life goals would be irrevocably damaged by the most likely outcome - a string of failures.
(There are of course several non-financial reasons and payoffs. For instance, an Idea takes demonic possession of you, and the only way to exorcise from your tortured brain is to do a startup..)
For example, a certain person may try increasing their wealth by investing in startups, but prefer working in a non-startup. Or another person may prefer investing in non-startups (safe, dividend paying stocks or bonds), but try increasing their wealth by working for startups.
For people with talent in creating products, best to focus their investing in safe, low maintenance non-startup investments and their wealth creation in working for startups. For people who have access to capital and a knack for choosing winners, they should work for non-startups (or philanthropy, or whatever, since they are probably already fairly wealthy) and invest in startups they think can win.
For the really talented, who both know a thing or two about building products, and also can pick winners, then you should work for a startup that invests in startups. See: pg.
One other investment that a startup guy should consider is investing time into building good a freelancing business as a side business from their startup.
There are no 'figurative sense investments'. You can't 'invest time'. Nobody cares about your time. You can only invest money [or hours * your market rate, which is money].
True, one can be not-a-founder and work for startup. But this person would be just working for salary, and hopefully at market rate. So it is irrelevant to the investment risk/return equation.
Now if one is not working at MARKET RATE - here we have some muddy waters. Because this person would be essentially making a monthly investment. This investment would likely go towards COMMON [not restricted] stocks, WITH vesting/cliff, with NO CAP. If this is the case, one can just assume that startup would have an angel investor doing a monthly investment on these terms. This would go into risk/return equation. Again fact that somebody is working is irrelevant to risk/return.
That's why I've said that your 2x2 matrix doesn't make sense. Now, you can replace 'work for' with 'founder' and it would make sense.
And by the way, if you read the original pg article, he doesn't mention people who 'work for' startups at all. He is talking about founders and VCs.
This is the gem.
During Y Combinator we measure growth rate per week, partly because there is so little time before Demo Day, and partly because startups early on need frequent feedback from their users to tweak what they're doing. [6]
...
[6] This is, obviously, only for startups that have already launched or can launch during YC. A startup building a new database will probably not do that. On the other hand, launching something small and then using growth rate as evolutionary pressure is such a valuable technique that any company that could start this way probably should.
In other words, if a startup hasn't launched yet they quite sensibly don't measure growth rate--but it's a good idea to launch early so you can measure growth and optimize for it.
This, for me, is the weak point in an otherwise excellent article. A lot of investments, valuations and jobs rest on this assumption. Facebook's PE ratio is currently 127, this assumption is the reason that it isn't around the same level as other entertainment companies like, say, Disney (17) or News Corp (56). And when Facebook's valuation rises like that and people invest at that level then there's a whole lot of money for paying engineers >$100k salaries and buying up pre-revenue businesses like Instagram. So, even if you're Google and you're bringing in real money, the application of this assumption to a few big cases permeates through the whole system and means that you too have to pay engineers >$100k and you too have to pay more to get hold of someone like Nik (makers of Snapseed).
PG logic appears flawless, but as a seed fund manager in the middle of this ecosystem, he's working several layers of abstraction up from some big applications of this assumption. So much so that it probably doesn't feel like an assumption to him. After all, he didn't value Facebook[1] at that level.
I genuinely hope this assumption is correct, because a lot of people and livelihoods are depending on it.
[1] I'm using Facebook here as an exemplar, I'm sure there are lots of other companies out there with valuations that are due in part to the assumption that users = revenue. My argument is that when someone sets a valuation based on this assumption it has a knock on effect to the whole ecosystem.
Facebook is a successful startup because it took a decentralised model (talking to your friends) and centralised it.
Barbers are decentralised - but after I build a robo-barber for every home, then suddenly one company can cut everyones hair.
So is it possible that growing a startup fast is about increasing the slope between a decentralised (diffuse players, low margins) and a centralised model.
I suspect there are good counter examples but really startups that grow fast seem to optimise for one central point for doing what they do - dropbox, airbnb readthedocs
This is pushing angels, seed round, and VCs farther and farther up the enterprise growth curve where costs become something that the founders can't bootstrap. For virtual enterprises, this is leaving them with a smaller and smaller set of companies as software eats all of the historical infrastructure costs.
Basically, he is defining startup in a way that YC is a necessary component - but increasingly, it isn't.
As founders it's easy to do things other than push every day to get customers and/or active users. Some founders are so focused on other less stressful activities, that they outsource the entire function to a 'growth hacker'. Let someone else deal with it... Yikes!
Grow is core to the startup's success, and happy to be reminded of it.
This just emphasizes why I do not want to be a part of this scene.
As DHH says: fuck doing a startup.
I doubt that a free photo-sharing app is going to be as profitable as Apple, for example.
Read my original reply again.
The startup's goal is to acquire users fast. Why? To lure VCs.
I don't want to be a part of that.
I want to create a business, not a startup (in the sense defined by PG's essay).
And the VCs in his model are not the end goal, but only a middle stage, to accelerate growth and thus dominate a market, creating an enterprise that will be valuable to others on some combination of traditional factors (such as discounted expected profits or synergistic/strategic value when combined with an existing business).
I think you're trying so hard to see what you already believe you're missing parts of the PG argument.
First, let's accept that freemium is a good honest business model that by its nature is a good fit for many Internet services. If you build freemium model similar to DropBox, conversion to paid users is typically around 1-10% from the active users. Thus, it doesn't necessarily make sense to introduce a paid plan and implement integration to payment systems (a task which was PITA before Stripe) until you have a way over 10k active users. Furthermore, something like 30k active users might mean that you need over 300k signups, which will take a while if you don't have explosive takeoff. Thus it makes sense to approximate potential revenue by measuring active users, when your actual revenue stream is still not fully in action.
As I said in another comment, the same approximation philosophy works in enterprise sales too. You measure the performance of your sales pipeline, which works as a proxy for revenue even before you close your first $100k deal.
> The constraints that limit ordinary companies also protect them. That's the tradeoff. If you start a barbershop, you only have to compete with other local barbers. If you start a search engine you have to compete with the whole world.
This is one of the reasons why 37 Signals' "small Italian restaurant" is not pertinent to many web businesses.
On PG's concept of startup, which I feel is spot on:
At this stage in my life, I'm more interested in... the "stay small" type of business, ala Rob Walling or patio11's bingo card thing. I think there's something to be said for a niche that's small enough that it's not interesting to larger companies, but can be served with a business that's mostly automated enough to mostly run itself. Perhaps you won't make zillions of dollars, but if it works, it's a good path to more freedom, which for some of is, is what it's about.
Very valuable insight.
However, (b) in its own right, can serve as a fast growth business model - where the delivery or "clearing" of value between those who demand and those who supply is the value proposition itself - because everyone wants delivery (making it, by default, a big market).
Most banks work on this principle, in an abstract sense. A business like FedEx or UPS is a more physical example of this.
Online takeout-ordering services are examples of this - the customer wants the food and the "online ordering website" startup does not produce food - but what it produces is "clearing" ie matching demand to supply.
This - as an idea, in my experience, always scales and grows fast as well while falling into the category (b) that pg mentions.
I think the ideas are overrated, what matters is the small twist in the idea that makes you better than the competition, and most importantly, execution. Once you are out with your product, getting the right talent, getting the right design, getting features out there faster than your competition (like your own company in the past based on one of your posts) is what matters.
I think there are not that many ideas that are overlooked, just people that don't think they can do something with them. the chance that an idea was not thought by someone else, that reads the same blogs, have a similar lifestyle, and is a smart person like you, is very low (or the problem you are trying to solve is not a real problem), but the chances of that person to have the courage, time, effort and perhaps money to start a business, and find good co-founders, (and willing to risk his marriage and apply to YC) is what's a bit more rare in my opinion.
On the other hand, I have zero experience relative to you, and it's a little weird for me to disagree with one of the biggest startup mentors of our time, but still, this is just my opinion.
Its a utility service that a lot of people are finding useful and has a lot of traction, but no way that I can see to monetize it. Not even sure I have a desire to try and monetize it, since it costs me almost nothing to run.
I would love to be able to build that resource into something more, but I'm not even sure where to start. It has a lot of usage and growth, but its not something I would remotely call a startup.
I made a short post a few hours ago about the current state: http://news.ycombinator.com/edit?id=4556711
http://www.avc.com/a_vc/2012/03/the-startup-curve.html
Seems like there's a lot of non-startup in that startup curve, if we are using the new Paul Graham's definitions.
If the diagram were data, the essay would explain it.
I think this is an essay more about "startups y combinator can flip to VCs" than startups.
The total #s are pretty embarrassing but the growth rate actually looks good, at around 10% currently - except the rate of growth of the growth is decreasing.. how meaningful is growth rate for such short time periods?
In my case I'm closer to the first stage of just making a product people want, but seems useful to keep track of this rate already.
PS - please sign up and help a brother out.
That way the term would make sense for older companies if they hit a high growth phase.
Given this definition of a startup I don't want to start a startup anymore. My aim is a product business. I am into products which make me money when I sleep. Even if the income rate stops growing at $100.000 per year because of the relatively small market.
VCs have every incentive to hit the far high end of the continuum. But a young, hungry entrepreneur probably gets higher expected value by not straying quite so far out.
If a business is aggressively trying to grow in a $100 million market instead of a $100 billion market, they are "limiting themselves". But they're still functionally a startup.
Keep taking it down a notch. At what market size do they stop being a startup? It's fuzzy.
As your target market goes from "everyone" to "doctors" to "radiologists" to "radiologists at research hospitals", you may be intelligently trading off market size for lower competition, lower marketing costs, and better product/market fit.
What if you had a brilliant idea for a piece of software that would help discover oil deposits? I contend that you have all the ingredients of a technology startup, but it will be impossible to measure your business in the simplistic way the essay describes. There may be only a dozen customers in the world who are positioned to pay you what you're worth, and your growth is likely to be an impulse function: until the moment you get bought by an oil major, there's no growth to measure.
His ultimate distinction is fundamentally fuzzy. Eventually, every business stops growing explosively. It's only a question of at which size it happens. And that size is necessarily a continuum.
"Startups that constrain their growth..."
If it's cited as an example of a startup that constrains its growth, of course its growth rate is going to be low. The real question is whether it stays in business and is a worthwhile investment for its founder.
If we start travelling down the continuum, next you'd hit something like "an app that makes lawyers more effective", then further than that "an app that makes patent lawyers more effective", etc. At each increment, you trade off market size and ultimate growth potential for less competition and lower marketing costs. Each of these niches can still be extremely lucrative (from the perspective of the entrepreneur, possibly less from the perspective of a VC who wants to make 100x).
What's more, individual businesses leap up the continuum all the time. The first McDonalds was a barbershop-like business.
Which means that even Bill Gates may have failed repeatedly at creating a successful startup.
Just as in poker even great players will lose if it's not in the cards and even the mediocre player can win big on occasion.
The lesson is that even a founder as good as Bill Gates can only expect to succeed if she is willing to make multiple attempts.
Similarly, Facebook was Mark Zuckerburg's 3rd startup, and Apple was Steve & Steve's 2nd.
I see so many comments on HN poking fun at VC backed startups with underdeveloped business models. Sure, a lot of the criticisms are well deserved, but I wonder if a part of it is because people are bothered by the power law phenomenon.
Arguably Netflix was one of these. DVD's may have been the "technological change" driving the company, but in principle you possibly could have done the same thing with VHS.
Most logistics-based big companies, like Fedex, Walmart, or even Costco, could be cited as examples. Jetliners predated Fedex by decades, for instance. Aside from the novelty of selling PC's, Dell was a similar instance.
This indicates that, just as in war, solving logistical problems often provides the biggest wins in business as well.
Combining innovation and logistics was powerful enough to make humble Apple erupt into the world's most valuable business. In fact, Apple's growth rate during Jobs' tenure as CEO was ultimately exponential despite the company's age--does Jobs-era Apple somehow qualify as a startup due to this?
> I once explained this to some founders who had recently arrived from Russia. They found it novel that if you threatened a company they'd pay a premium for you. "In Russia they just kill you," they said, and they were only partly joking.
I remember that in the 90's, many of Microsoft's acquisitions had this same sinister undertone to it. I'm reminded of a Simpsons episode where Microsoft "buys out" Homer's startup, but all that happens is a bunch of goons smash up the house while Bill Gates quips, "I don't get rich by writing a lot of checks."
"If you want to understand startups, understand growth. Growth drives everything in this world. Growth is why startups usually work on technology—because ideas for fast growing companies are so rare that the best way to find new ones is to discover those recently made viable by change, and technology is the best source of rapid change. Growth is why it's a rational choice economically for so many founders to try starting a startup: growth makes the successful companies so valuable that the expected value is high even though the risk is too. Growth is why VCs want to invest in startups: not just because the returns are high but also because generating returns from capital gains is easier to manage than generating returns from dividends. Growth explains why the most successful startups take VC money even if they don't need to: it lets them choose their growth rate. And growth explains why successful startups almost invariably get acquisition offers. To acquirers a fast-growing company is not merely valuable but dangerous too."
Just curious if you were aware of this factor when building Viaweb.
It may not scale, but the chances of it making (any/more) money are much higher ("riches are in the niches") than a "fast startup" as it's very rare for a startup to grow fast and monetize quickly at the same time, because most people just won't buy immediately, sometimes even if it solves a problem for them.
For example, I've been using Evernote and Dropbox for years, but haven't had the need to buy a premium account. I believe there are many others like me who are happy with the free (or open source) software that does solve an itch. Are these "fast startups"? Is their business model (freemium) scalable?
It may not scale, but the chances of it making (any/more) money are much higher ("riches are in the niches") than a "fast startup" as it's very rare for a startup to grow fast and monetize quickly at the same time, because most people just won't buy immediately, sometimes even if it solves a problem for them.
Average is much higher than a median for startups because it includes the most successful startups which are by definition have a high growth rate over an extended period of time so they are very big.
Niche businesses in this context have a low growth so their average is closer to the median. The growth is constrained at the top in absolute terms (otherwise it would be a startup) so the average is lower than the one for startups.
It was very insightful at the time I read it.
From a practical standpoint this means that the company needs to raise n + A where the "+ A" part pays back a return to the angel. But it allows the Angels to shoulder risk early to weed out the non-viable players and still make money at it.
So imagine this scenario. Alice wants to start Woohoo and Bob funds 40% at a $250K valuation (since Alice is the only person so far, that is $100K invested. Alice works hard and gets out an MVP and goes for a Series A where she wants to raise $1.5M at a post raise valuation of $5M. Bob sells into the round half his shares (its taking money off the table for him) with a contractual net return of xx% (probably anywhere from 20 - 100, that being the negotiating rub) and does not participate in future rounds, he retains y% at the end of the series A (optionally converted to Common stock) and dilutes going forward. (remember he's got 'free' stock at this point, he's made his bit with the angel round)
The two negotiation points on Bobs term sheet are the net return and the retained interest portion. The people coming in after Bob are Ok with it because Bob is out now and paid his 'finders fee' or however ever you want to describe his return. The net return will affect the series A amount needed by the founder, the retained interest would be a function of how many rounds the founders think they will need to exit.
Given the seed to series A or bust cycle is usually at most 24months, Bob has a good idea of his risk profile, and by stepping out from an equity point at the Series A he's not an obstruction to new partners coming in, more of an adviser at that point.
I still think that for every serious genius, there are a lot of copycats. These copycats create this gigantic echo chamber of ideas. It's a ton of noise from a lot of likely failures. That noise can feel dishonest.
After reading this essay, I'm left with a sense that startup land is probably the best, dare I say more honest way, of turning investment money into new technology and jobs.
I'm actually left wondering about the relationship between "normal small businesses" and bankers. It feels adversarial in comparison.
You know if you open a barber shop you will get people come in off the street to cut their hair. You just worry you'll have enough over time to sustain it. If you start a consulting business you know you'll get clients (at least I assume you do) as your skills are in demand. You probably got commitments from at least 3 before you made the plunge. It's just whether you'll get enough and a steady flow to go with. If you're bootstrapping a lifestyle tech company it's probably because you know exactly what the market needs and have your first 5 customers from your previous gig so you know you can get through the first year. All of these still have a large amount of risk but they're not really true startups to me.
It's true it's very hard to have a startup without (rapid) growth as the central tenant . And you can have many businesses that are not startups that aren't focused on growth over anything else. However, you can have many businesses that are not startups hyper focused on growth (SuperCuts, Pappa Johns) to make the definition in this essay too weak for me.
The essay seems to define 'venture-backed startup'.
You're committing to search for one of the rare ideas that generates rapid growth. Because these ideas are so valuable, finding one is hard. The startup is the embodiment of your discoveries so far. Starting a startup is thus very much like deciding to be a research scientist: you're not committing to solve any specific problem; you don't know for sure which problems are soluble; but you're committing to try to discover something no one knew before. A startup founder is in effect an economic research scientist. Most don't discover anything that remarkable, but some discover relativity.
Not exactly the same, but has the searching element.
I'd love to hear thoughts on how to calculate the referenced number.
http://www.ted.com/talks/geoffrey_west_the_surprising_math_o...
Is is DAUs, MAUs, daily sessions, length of session, total signups?
One of the things that impresses us in pitches is when the entrepreneur has really thought through what the best metrics are for that particular service.
- virality index
- retention rate
- customer lifetime value / customer aquisition cost
Having more than one is hard, so optmizing for one is much simpler (don't kid yourself, it is hard on any of them, and not all business can pick all of them).
Because there are not very many ways to boost your rankings legitimately aside from true organic growth, sometimes this means paying for sketchy marketing techniques that can actually result in Apple banning your app when they find out.
I think the honest thing to do is probably to measure actual user engagement in the app. The high quality app startups that pitch us use something like Mixpanel (disclosure: one of our investments itself) to do this -- in fact, this is one of the reasons we invested in Mixpanel.
I suspect Github would have done worse if they had taken early funding. There should probably be more businesses built following their model.
Compare HN's own revealed preference for limiting certain surges of new users. (Corollary: HN is not a 'startup'.) In a way, even Facebook's initial campus limitations served this purpose, getting certain mechanics (and corporate practices right) before facing the challenges of a larger userbase.
I wonder: have YC companies had to face an explicit decision: grow faster or defend/consolidate the culture of the existing userbase, and if so what advice would PG and the other partners be likely to give?
It is rare to find a blog post that has so much insight that you will need to read it slowly and then read it again even more slowly.
My favorites were the last paragraph and the last footnote.
How did those Russians get on anyway?
The only other thing I would add is that these high growth companies, so-called startups, are all utilizing the web. They are relying on what it provides. I guess that's implicit, maybe it need not be stated, but historically could older forms of media have supported the type of growth rates discussed? How popular was the term "startup" before the web? And did it mean the same thing?
The startup: 1. Trying to solve a harder problem than existing businesses are willing to take on. 2. Being equipped for rapid growth. 3. Utilizing the web.
-- This is an interesting bit. The notion of what is intelligence.
At any given time, there are 1001 questions that may be [intelligent]. But ask right question, and the answer is often [easy] to see. So Framing. Observation. Caring. Passion. Perserverence. Non-ovious. Yet invaluable. Forms of intelligence.
Sports player.
Politician.
Artist.
You can complete the list.
http://www.bothsidesofthetable.com/2012/09/22/is-going-for-r...
Any others?
"What matters is not the abolute number of new customers ..." should be "absolute"
in footnote 13:
"Though nominally acquisitions and sometimes on a scale …" should be "acquisitions ARE sometimes" I guess?
what's the point?