4 ms·

Take the Next Step, Paul

65 points by brlewis 19y ago

brlewis 19y ago
I found this post interesting despite errors, e.g. PG is not a venture capitalist.
- run4yourlives 19y ago
  I don't think this guy made that assertion. What he said was that PG needs to be part of the VC game in order to make money. The whole notion of YC is that they are seed funding, with the expectation that the startups they fund will be bought (or have some other favorable monetary transaction) by the big companies PG says are unnatural. The article is a nice way of calling PG a hypocrite. It's a great argument. One of the best counters I've seen to PG's essay, and an angle I didn't even think of. I really hope Paul responds to this, as I'm interested in his thoughts on the matter.
  - SwellJoe 19y ago
    Actually, he explicitly called pg a venture capitalist...specifically, he said: "He’s a venture capitalist." You can't possibly take that any other way.
    - nkohari 19y ago
      That's sort of a semantic debate, isn't it? PG might not be a traditional venture capitalist, but nevertheless, he invests money in companies in order to see a return. YC just does it on a much smaller scale than typical VC firms.
      - lisper 19y ago
        > That's sort of a semantic debate, isn't it? No. There's one very significant difference between a VC and YC. VC's invest other people's money. YC doesn't. VC's may also invest their own money, but this is incidental to their primary business, which is to assemble investment portfolios for other people to invest in. They charge a fee for this, and many VC's make most of their money from these fees, not from the returns on the investments. This has real consequences. VC's are much more risk-averse than YC, because if they have a bad year it can put them out of business. (No one will want to invest their money in a VC which lost money for their previous investors.) If YC has a bad year they can just shrug it off, learn from the experience, and try again. This dynamic also changes the VC's risk posture in another way. A VC has much more to lose from a loss than they have to gain from a really big win. If a VC has a really big win, most of the money goes to the investors, not to the VC. The VC's primary benefit from a Really Big Win will be that more people will want to participate in their next round of investments, which is nice, but that in and of itself doesn't make you a billionaire. So VC's are much more interested in avoiding loss than in going after a Really Big Win. YC, by contrast, has nothing to lose from a loss except the money they put in (which is not much), and a lot to gain from a Really Big Win (since they are the investor). This makes YC willing to take much bigger gambles than a VC would. It also aligns YC's interests with the interests of the companies they invest in, since the bigger the company wins, the bigger YC wins.
        xlnt 19y ago
        yc has time and effort to lose in addition to money. not the end of the world, but they do have a limited amount of those. i agree yc has less to lose than a big VC investing other people's money, but it does matter to them whether they are making good funding choices or not.
        lisper 19y ago
        The point is that whatever YC loses, it's theirs and not someone else's. They do not have a fiduciary duty to anyone but themselves. This significantly changes their risk posture. It's not just a semantic quibble.
        xlnt 19y ago
        Yes I agree with that, I was just pointing out that they invest more than the $15,000 per company.
        run4yourlives 19y ago
        You're confusing being a VC with the standard VC fund. You don't need to have the latter to be the former. A VC can use their own money exclusively, and do so all the time. The professional VC's that manage pooled investments of other people are only a subset of the term Venture Capitalist.
        nostrademons 19y ago
        Usually, the term "venture capitalist" refers to those people who manage other people's money by investing in startups, and the term "angel investor" refers to people who manage their own money by investing in startups.
        run4yourlives 19y ago
        Agreed, but to say PG is a VC is not technically wrong. Under the "real" definition, all Angels are VC's too. That's why I'm suggesting it's all semantics.
    - run4yourlives 19y ago
      He's using the literal definition though, which basically describes YC: http://en.wikipedia.org/wiki/Venture_capital http://en.wikipedia.org/wiki/Venture_capital From the front page of YC: "Y Combinator is a new kind of venture firm specializing in funding early stage startups." In essence he's correct, but at this point it's just semantics.
  - tonystubblebine 19y ago
    You totally got the intent even if I was wrong on the literal definition. I'm definitely not calling PG a hypocrite. YC is amazing, is a good opportunity for founders, and is definitely saving some good people from some bad years in the corporate world. I just think that after you've made one big intellectual leap (starting an amazing new genre of investing) it's easy to focus on polishing that discovery rather than realizing that there's yet another leap to make.
- tonystubblebine 19y ago
  (I wrote the original article) Ok, I'm convinced that he's not a VC for the reasons you mention and because he says in this thread that he's not a VC. On top of that the incubation support and the genuine care he gives to the founders is very non-VC. However, none of that makes me want to change my argument which is based on the exit pressures and structure by which YC recoups it's investment. That pressure is very VC.
SwellJoe 19y ago
This is something I've actually meant to ask pg about, but never seem to get around to it. There are a few companies that YC has funded that have opted to go a slow-growth, close ownership, path to small business success that the article suggests is the logical conclusion of pg's essay (though, if one takes pg's work as a whole, I wouldn't say that's his raison d'etre--helping good developers create a huge amount of value in a short period of time is more his over-arching theme, I think). Wufoo have opted not to push themselves into a giant business, but have a long-term plan for growth. My co-founder and I frequently waffle over which path to take, and so far have stayed the course of staying small with steadily increasing revenue over taking a bunch of investment and growing really fast. Both companies do have an exit plan, but it's a little further out and the intention is to make sure its on our own terms. pg has never indicated dissatisfaction with this path...even though it means the exit won't come quickly, as it did with reddit, Zenter, Parakey, etc. and thus YC won't see return on these businesses for at least a couple more years. Of course, once one has a profitable exit, and optionally vests, you're then completely free to work in any environment you want. Which means you could do what Paul Buchheit did with his Googlebucks, and start a company that does exactly the work you want to do on the terms you want to do them on (and it turns out he wants to grow really fast, since he raised 5mil for FriendFeed). Which brings me back to what I think pg's real theme and logical conclusion is. pg likes to see people make something really great, really fast, and then make a really lot of money because of it. Once you've done that, you're then freed up to do anything you want (maybe after spending some time in a cage with your lion co-founders, while vesting)--including doing it all again.
- davidw 19y ago
  Sounds about right from everything I've read. The disparity is coming from PG aiming for a system that works, but isn't really in equilibrium, and the poster's looking for a system that might be more broadly applicable on a long term basis, if not everyone can be big winners. I think one thing that makes sense about PG's general tactics is that hackers can probably figure out enough business to do a good startup, but as things drag on, and you're called on to be more of a manager, hackers are going to be at more of a disadvantage.
  - 19y ago
pg 19y ago
I replied to this a couple days ago in a comment thread: http://news.ycombinator.com/item?id=143480 http://news.ycombinator.com/item?id=143480
- startingup 19y ago
  What about the other possibility, Paul? 37Signals or Smugmug stay small & profitable, grow organically, but never straying from their true self. There is no big exit, but people (founders as well as other employees) are happy. Would that be another logical outcome of your original essay? In fact, going public introduces all manner of considerations that often inherently introduce "bossiness", so this alternative seems even more logical to me! For one, public companies have to grow, grow and grow and a lot of the bad stuff about companies you point out in your essay arises from that one source. They do bad deals, they start to think very "strategically" (ignoring the human element) and so on.
  - stcredzero 19y ago
    In E. F. Schumacher's Small is Beautiful (http://en.wikipedia.org/wiki/Small_is_Beautiful http://en.wikipedia.org/wiki/Small_is_Beautiful) there is a corporation described chartered in such a way as to not get "too large." In this case, "too large" is considered to be more than 350, which was considered by some to be the upper bound for a functional "village." But the particular value of N is not important. What is important is that this corporation was chartered to undergo mitosis and divide in half, forming two new companies with an equivalent charter. In _Small is Beautiful_ each corporation would have a relationship with one being a subsidiary, which would introduce "bossiness." Perhaps the charter could be modified so that neither spawn was subservient to the other?
  - pg 19y ago
    37Signals and Smugmug don't prove much yet because they aren't that old. I'd be willing to bet both either die, go public, or get bought within the next 10 years. It's easy to stay medium-sized if you're a consulting firm, but hard if you're a product company. As a product company you tend to either extreme: you either keep growing, or die. And if you keep growing, you'll eventually either go public or get an acquisition offer so big it's hard to turn down. I might turn out to be wrong. This world changes fast. But there aren't a lot of 20 year old 37Signalses around. Bezos seems to agree with me. He invested in 37Signals. He would not have done that if he didn't expect some form of exit. And in fact 37Signals probably had to say explicitly that they expected some form of exit in order to get his money.
startingup 19y ago
This is a great post, by far the best response to PG's post. I had much the same question, but I am not as good at formulating it the way this guy has done it. I have a feeling PG was aware of this logical implication when he wrote his essay ("if large companies constrain, err, even cage people, why put heart and soul into something just to deliver it to them?") Yeah, there is the money, but most people I know don't put heart and soul into work only for the money, and PG himself is doing Arc, YC, Hacker News etc. without any particular monetary goal. I wonder what his response would be!
menloparkbum 19y ago
What is a small business incubator? Empirically "incubators" in the silicon valley / software world have all been total failures.
- deleted 19y ago
  [deleted]
- pg 19y ago
  As far as I can tell it means an investor whose space the startups work in. We deliberately avoided that, because we feel it hurts the startups. It puts the founders in the position of employees. Plus offices are actually crappy places to start startups. Apartments are better.
- ambition 19y ago
  I've also heard of "incubators" which were really "rich guy paying others to do his ideas." I agree though, I can't think of a single example of a successful incubator that called themselves an incubator.
Spyckie 19y ago
I think we need to look at the landscape of the startup community. If you didn't have to grow to survive, then it would be fair to say that the goal is to create opportunities for people to 'live as they should'. However, the fact is that it is hard to stay afloat if you don't grow. Growth, as defined by how big your company gets and how much market share it has, is also an indication of how long the company will last. Ideally, the bigger your company is, the more it can do, and the more market share your company has, the less your competitors have. This means that you need to grow in order to survive - otherwise your competitors will take the market share from you and leave you without a business. If you manage your successful company like a startup all of its life, then you'll hit failure sooner because startups just have a higher chance of failure because of their risk taking nature. Corporate structure just carries along a lower inherent risk.

65 points by brlewis 19y ago

brlewis 19y ago

I found this post interesting despite errors, e.g. PG is not a venture capitalist.

run4yourlives 19y ago
I don't think this guy made that assertion. What he said was that PG needs to be part of the VC game in order to make money. The whole notion of YC is that they are seed funding, with the expectation that the startups they fund will be bought (or have some other favorable monetary transaction) by the big companies PG says are unnatural. The article is a nice way of calling PG a hypocrite. It's a great argument. One of the best counters I've seen to PG's essay, and an angle I didn't even think of. I really hope Paul responds to this, as I'm interested in his thoughts on the matter.
- SwellJoe 19y ago
  Actually, he explicitly called pg a venture capitalist...specifically, he said: "He’s a venture capitalist." You can't possibly take that any other way.
  - nkohari 19y ago
    That's sort of a semantic debate, isn't it? PG might not be a traditional venture capitalist, but nevertheless, he invests money in companies in order to see a return. YC just does it on a much smaller scale than typical VC firms.
    - lisper 19y ago
      > That's sort of a semantic debate, isn't it? No. There's one very significant difference between a VC and YC. VC's invest other people's money. YC doesn't. VC's may also invest their own money, but this is incidental to their primary business, which is to assemble investment portfolios for other people to invest in. They charge a fee for this, and many VC's make most of their money from these fees, not from the returns on the investments. This has real consequences. VC's are much more risk-averse than YC, because if they have a bad year it can put them out of business. (No one will want to invest their money in a VC which lost money for their previous investors.) If YC has a bad year they can just shrug it off, learn from the experience, and try again. This dynamic also changes the VC's risk posture in another way. A VC has much more to lose from a loss than they have to gain from a really big win. If a VC has a really big win, most of the money goes to the investors, not to the VC. The VC's primary benefit from a Really Big Win will be that more people will want to participate in their next round of investments, which is nice, but that in and of itself doesn't make you a billionaire. So VC's are much more interested in avoiding loss than in going after a Really Big Win. YC, by contrast, has nothing to lose from a loss except the money they put in (which is not much), and a lot to gain from a Really Big Win (since they are the investor). This makes YC willing to take much bigger gambles than a VC would. It also aligns YC's interests with the interests of the companies they invest in, since the bigger the company wins, the bigger YC wins.
      - xlnt 19y ago
        yc has time and effort to lose in addition to money. not the end of the world, but they do have a limited amount of those. i agree yc has less to lose than a big VC investing other people's money, but it does matter to them whether they are making good funding choices or not.
        lisper 19y ago
        The point is that whatever YC loses, it's theirs and not someone else's. They do not have a fiduciary duty to anyone but themselves. This significantly changes their risk posture. It's not just a semantic quibble.
        xlnt 19y ago
        Yes I agree with that, I was just pointing out that they invest more than the $15,000 per company.
      - run4yourlives 19y ago
        You're confusing being a VC with the standard VC fund. You don't need to have the latter to be the former. A VC can use their own money exclusively, and do so all the time. The professional VC's that manage pooled investments of other people are only a subset of the term Venture Capitalist.
        nostrademons 19y ago
        Usually, the term "venture capitalist" refers to those people who manage other people's money by investing in startups, and the term "angel investor" refers to people who manage their own money by investing in startups.
        run4yourlives 19y ago
        Agreed, but to say PG is a VC is not technically wrong. Under the "real" definition, all Angels are VC's too. That's why I'm suggesting it's all semantics.
  - run4yourlives 19y ago
    He's using the literal definition though, which basically describes YC: http://en.wikipedia.org/wiki/Venture_capital http://en.wikipedia.org/wiki/Venture_capital From the front page of YC: "Y Combinator is a new kind of venture firm specializing in funding early stage startups." In essence he's correct, but at this point it's just semantics.
- tonystubblebine 19y ago
  You totally got the intent even if I was wrong on the literal definition. I'm definitely not calling PG a hypocrite. YC is amazing, is a good opportunity for founders, and is definitely saving some good people from some bad years in the corporate world. I just think that after you've made one big intellectual leap (starting an amazing new genre of investing) it's easy to focus on polishing that discovery rather than realizing that there's yet another leap to make.
tonystubblebine 19y ago
(I wrote the original article) Ok, I'm convinced that he's not a VC for the reasons you mention and because he says in this thread that he's not a VC. On top of that the incubation support and the genuine care he gives to the founders is very non-VC. However, none of that makes me want to change my argument which is based on the exit pressures and structure by which YC recoups it's investment. That pressure is very VC.

SwellJoe 19y ago

This is something I've actually meant to ask pg about, but never seem to get around to it. There are a few companies that YC has funded that have opted to go a slow-growth, close ownership, path to small business success that the article suggests is the logical conclusion of pg's essay (though, if one takes pg's work as a whole, I wouldn't say that's his raison d'etre--helping good developers create a huge amount of value in a short period of time is more his over-arching theme, I think). Wufoo have opted not to push themselves into a giant business, but have a long-term plan for growth. My co-founder and I frequently waffle over which path to take, and so far have stayed the course of staying small with steadily increasing revenue over taking a bunch of investment and growing really fast. Both companies do have an exit plan, but it's a little further out and the intention is to make sure its on our own terms. pg has never indicated dissatisfaction with this path...even though it means the exit won't come quickly, as it did with reddit, Zenter, Parakey, etc. and thus YC won't see return on these businesses for at least a couple more years. Of course, once one has a profitable exit, and optionally vests, you're then completely free to work in any environment you want. Which means you could do what Paul Buchheit did with his Googlebucks, and start a company that does exactly the work you want to do on the terms you want to do them on (and it turns out he wants to grow really fast, since he raised 5mil for FriendFeed). Which brings me back to what I think pg's real theme and logical conclusion is. pg likes to see people make something really great, really fast, and then make a really lot of money because of it. Once you've done that, you're then freed up to do anything you want (maybe after spending some time in a cage with your lion co-founders, while vesting)--including doing it all again.

davidw 19y ago
Sounds about right from everything I've read. The disparity is coming from PG aiming for a system that works, but isn't really in equilibrium, and the poster's looking for a system that might be more broadly applicable on a long term basis, if not everyone can be big winners. I think one thing that makes sense about PG's general tactics is that hackers can probably figure out enough business to do a good startup, but as things drag on, and you're called on to be more of a manager, hackers are going to be at more of a disadvantage.
- 19y ago

pg 19y ago

I replied to this a couple days ago in a comment thread: http://news.ycombinator.com/item?id=143480 http://news.ycombinator.com/item?id=143480

startingup 19y ago
What about the other possibility, Paul? 37Signals or Smugmug stay small & profitable, grow organically, but never straying from their true self. There is no big exit, but people (founders as well as other employees) are happy. Would that be another logical outcome of your original essay? In fact, going public introduces all manner of considerations that often inherently introduce "bossiness", so this alternative seems even more logical to me! For one, public companies have to grow, grow and grow and a lot of the bad stuff about companies you point out in your essay arises from that one source. They do bad deals, they start to think very "strategically" (ignoring the human element) and so on.
- stcredzero 19y ago
  In E. F. Schumacher's Small is Beautiful (http://en.wikipedia.org/wiki/Small_is_Beautiful http://en.wikipedia.org/wiki/Small_is_Beautiful) there is a corporation described chartered in such a way as to not get "too large." In this case, "too large" is considered to be more than 350, which was considered by some to be the upper bound for a functional "village." But the particular value of N is not important. What is important is that this corporation was chartered to undergo mitosis and divide in half, forming two new companies with an equivalent charter. In _Small is Beautiful_ each corporation would have a relationship with one being a subsidiary, which would introduce "bossiness." Perhaps the charter could be modified so that neither spawn was subservient to the other?
- pg 19y ago
  37Signals and Smugmug don't prove much yet because they aren't that old. I'd be willing to bet both either die, go public, or get bought within the next 10 years. It's easy to stay medium-sized if you're a consulting firm, but hard if you're a product company. As a product company you tend to either extreme: you either keep growing, or die. And if you keep growing, you'll eventually either go public or get an acquisition offer so big it's hard to turn down. I might turn out to be wrong. This world changes fast. But there aren't a lot of 20 year old 37Signalses around. Bezos seems to agree with me. He invested in 37Signals. He would not have done that if he didn't expect some form of exit. And in fact 37Signals probably had to say explicitly that they expected some form of exit in order to get his money.

startingup 19y ago

This is a great post, by far the best response to PG's post. I had much the same question, but I am not as good at formulating it the way this guy has done it. I have a feeling PG was aware of this logical implication when he wrote his essay ("if large companies constrain, err, even cage people, why put heart and soul into something just to deliver it to them?") Yeah, there is the money, but most people I know don't put heart and soul into work only for the money, and PG himself is doing Arc, YC, Hacker News etc. without any particular monetary goal. I wonder what his response would be!

menloparkbum 19y ago

What is a small business incubator? Empirically "incubators" in the silicon valley / software world have all been total failures.

deleted 19y ago
[deleted]
pg 19y ago
As far as I can tell it means an investor whose space the startups work in. We deliberately avoided that, because we feel it hurts the startups. It puts the founders in the position of employees. Plus offices are actually crappy places to start startups. Apartments are better.
ambition 19y ago
I've also heard of "incubators" which were really "rich guy paying others to do his ideas." I agree though, I can't think of a single example of a successful incubator that called themselves an incubator.

Spyckie 19y ago

I think we need to look at the landscape of the startup community. If you didn't have to grow to survive, then it would be fair to say that the goal is to create opportunities for people to 'live as they should'. However, the fact is that it is hard to stay afloat if you don't grow. Growth, as defined by how big your company gets and how much market share it has, is also an indication of how long the company will last. Ideally, the bigger your company is, the more it can do, and the more market share your company has, the less your competitors have. This means that you need to grow in order to survive - otherwise your competitors will take the market share from you and leave you without a business. If you manage your successful company like a startup all of its life, then you'll hit failure sooner because startups just have a higher chance of failure because of their risk taking nature. Corporate structure just carries along a lower inherent risk.