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Do other folks agree with PG that the economy is a rounding error compared to the quality of the founders? To me, it sounds like a hammer saying all that matte

Do other folks agree with PG that the economy is a rounding error compared to the quality of the founders? To me, it sounds like a hammer saying all that matters is the nail, not the substrate you're attempting to pierce. I think it's his job to believe in the "great man" theory, and to not credit circumstances, luck, etc. PG is in YC and their whole raison d'etre is attempting to choose great founders. Is there a statistical analysis of YC and PG which shows they choose effectively?

austincheney 6y ago
Some food for thought is that it takes time for a new business to achieve market penetration and that span of time is irrespective of and orthogonal to economic health.
- an_opabinia 6y ago
  If you're making software, you can achieve market penetration in an afternoon by signing a deal to bundle your app on a phone or social media platform.
  - alisonkisk 6y ago
    For almost everyome, that's not an option.
  - ako 6y ago
    That signature usually takes years of preparation and negotiation...
  - SpicyLemonZest 6y ago
    This is relevant to only a small segment of the market. A substantial majority of software development, even VC-funded software development, isn't something that can meaningfully be sold as a consumer-facing phone app.
tomhoward 6y ago
> Do other folks agree with PG that the economy is a rounding error compared to the quality of the founders? When I was in YC (in 2009, a few months after this essay was published), I remember PG saying that plenty of VCs, (specifically Marc Andreessen, as an example), pay just as much/more attention to market/macro conditions as they do to founder talent, but added that this is a luxury Andreessen has when all the very best companies want to be funded by Andreessen, so he can pick companies that have both great founders and favourable market conditions. > I think it's his job to believe in the "great man" theory, and to not credit circumstances, luck, etc PG acknowledges often that luck plays a critical role in success. But the point is that weak founders with all the luck in the world won't achieve much, whereas great founders with only a little bit of luck can be hugely successful. He also points out that it's a long journey, much longer than a downturn will last, so better to start now when you're inspired, especially when the downturn can bring favourable conditions (like cheaper talent, rent, services, etc). YC is also quite happy to back founders a second time. Off the top of my head, Stripe, Twitch and Cruise were all founded by 2nd or 3rd-time founders. So YC's approach is to find founders with potential, get them into their network, then support them for as long as they need to find success. > Is there a statistical analysis of YC and PG which shows they choose effectively? Some people have tried to evaluate this quantitively or qualitatively, but most miss the point, or can't evaluate it correctly without knowing YC's financials, which nobody outside YC management and their investors knows. YC's approach isn't to try to "choose" only the good founders. Their approach is to cast a very wide net, to invest in a huge number of companies including some very crazy-looking ones, knowing that only a handful will win big but that will yield big enough returns to more than pay for all the losses. So the question is not whether they chose good founders and rejected bad ones, but whether they backed a big enough and broad enough pool of companies to get a significant number of huge winners - like, say, Dropbox, Airbnb, Twitch, Segment, Cruise, Coinbase, Instacart, Flexport, Brex. Answer: yes, evidently.
- jt2190 6y ago
  > ...weak founders with all the luck in the world won't achieve much, whereas great founders with only a little bit of luck can be hugely successful. To clarify a bit here, it’s very hard to know in advance that a founder will be “great”, so I suspect that there are some rough proxies that investors use, and what you or I think of as “great” may not be what the marketplace of investors values when “shopping” for “great” founders to back. For example, academic achievement. Is that something that makes a founder great? What about social connections? What about dogged determination? Each investor will have a theory, and one or two might even be right. Probably the only thing that really matters is “the founder actually got the company to a point where it can generate revenue”, and the rest is wait and see. Which leads back to your excellent summation: > So the question is not whether they chose good founders and rejected bad ones, but whether they backed a big enough and broad enough pool of companies to get a significant number of huge winners...
peterwoerner 6y ago
You can also argue that a recession is a better time than usual to start a company. Your opportunity cost is a little bit less (due to the job market), customers are a looking to save money are, perhaps, more willing to take on risk to reduce expenses, and finally there is more likely to be talent available at a cost you can pay due to layoffs and a slowdown in hiring among established businesses. Anecdotally there are lots of companies which got started in a recession, FedEx + the tech ones written in a sister comment.
- rixrax 6y ago
  Totally agree. And many bigger projects get canned or put on hold. Potentially making up room for smaller projects to implement a more compact product from a start up ( to get some quick wins ).
- papito 6y ago
  This is why investing in small cap stocks/funds always pays off in a recession. They take off like wildfire during the recovery.
  - moneywoes 6y ago
    Do you have any ETfs you like?
    - icedchai 6y ago
      VBK (Vanguard Small Cap Growth ETF) has done well for me.
    - papito 6y ago
      I would not dare give that advice. You take that risk :) Go with vanilla small cap low cost funds offered by, say, Fidelity or Vanguard.
  - deleted 6y ago
    [deleted]
- bnonhacker 6y ago
deleted 6y ago
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dredmorbius 6y ago
Bill Gross (Idealab) feels it's timing that's the most significant factor: https://medium.com/fwiw-for-what-its-worth/why-timing-matters-in-startups-5164cb6e715e https://medium.com/fwiw-for-what-its-worth/why-timing-matter... Vs. team, idea, or funding. https://www.youtube.com/watch?v=mGY_9sFg2qM https://www.youtube.com/watch?v=mGY_9sFg2qM
dustingetz 6y ago
Is there a tipping point at which capital is sufficiently concentrated that the capital advantage outweighs the leverage of a four-sigma founder (.99994)? I don't know, maybe, but the capital can certainly make a two-sigma (.95) founder competitive, and a three-sigma (.997) founder without capital is probably f'ed. Or maybe a two-sigma founder with access to capital is the definition of a four-sigma founder, because how could you be recognized as that without having the capital.
deleted 6y ago
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Existenceblinks 6y ago
He might not even believe in that great man theory. Just let them fight, I'll pick the winner. Without the push, there's not enough predators to hunt for him since chance for success for a founder is pretty low, he needs more numbers of them.
lazyjones 6y ago
The economy in general, with the variability we've seen in our lifetimes so far: yes. But specific opportunities come and go, the current situation can certainly make some ideas sufficiently profitable to succeed in the long run when they otherwise wouldn't be.
inglor_cz 6y ago
I sorta kinda think that bad economy could actually help some startups grow. In bad economy, businesses are looking to cut costs and optimize their processes. So do people. If you can come up with something that saves people money or hassle, the rate of adoption may be sky-high. If we take AirBNB as an example, it helps both travellers save their money, as the lodgings are usually cheaper than classical hotels, and helps people with unused rooms make some money on them. Ofc AirBNB evolved into a megabusiness in the meantime, and you will rarely meet your host in person, but the gist of the idea is clear.
deleted 6y ago
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danbmil99 6y ago
In my opinion, the thing pg & YC understood better than anyone before them is that Venture investing statistically has a very very long tail pay-off. By micro investing in hundreds (by now thousands) of companies at the earliest possible stage (where they could fairly ask for a reasonable percentage at a very low dollar cost), they vastly reduced the risk of coming up with no big wins. This is all basic betting strategy for professional gamblers. You also have to know the odds, so I'm not downplaying the importance of evaluating founders and business plans. That's like the Blackjack equivalent of basic strategy and counting the deck. Without a betting strategy that reflects the statistics of the game you're playing, the likelihood is you will bottom out before you succeed.

austincheney 6y ago

Some food for thought is that it takes time for a new business to achieve market penetration and that span of time is irrespective of and orthogonal to economic health.

an_opabinia 6y ago
If you're making software, you can achieve market penetration in an afternoon by signing a deal to bundle your app on a phone or social media platform.
- alisonkisk 6y ago
  For almost everyome, that's not an option.
- ako 6y ago
  That signature usually takes years of preparation and negotiation...
- SpicyLemonZest 6y ago
  This is relevant to only a small segment of the market. A substantial majority of software development, even VC-funded software development, isn't something that can meaningfully be sold as a consumer-facing phone app.

tomhoward 6y ago

> Do other folks agree with PG that the economy is a rounding error compared to the quality of the founders? When I was in YC (in 2009, a few months after this essay was published), I remember PG saying that plenty of VCs, (specifically Marc Andreessen, as an example), pay just as much/more attention to market/macro conditions as they do to founder talent, but added that this is a luxury Andreessen has when all the very best companies want to be funded by Andreessen, so he can pick companies that have both great founders and favourable market conditions. > I think it's his job to believe in the "great man" theory, and to not credit circumstances, luck, etc PG acknowledges often that luck plays a critical role in success. But the point is that weak founders with all the luck in the world won't achieve much, whereas great founders with only a little bit of luck can be hugely successful. He also points out that it's a long journey, much longer than a downturn will last, so better to start now when you're inspired, especially when the downturn can bring favourable conditions (like cheaper talent, rent, services, etc). YC is also quite happy to back founders a second time. Off the top of my head, Stripe, Twitch and Cruise were all founded by 2nd or 3rd-time founders. So YC's approach is to find founders with potential, get them into their network, then support them for as long as they need to find success. > Is there a statistical analysis of YC and PG which shows they choose effectively? Some people have tried to evaluate this quantitively or qualitatively, but most miss the point, or can't evaluate it correctly without knowing YC's financials, which nobody outside YC management and their investors knows. YC's approach isn't to try to "choose" only the good founders. Their approach is to cast a very wide net, to invest in a huge number of companies including some very crazy-looking ones, knowing that only a handful will win big but that will yield big enough returns to more than pay for all the losses. So the question is not whether they chose good founders and rejected bad ones, but whether they backed a big enough and broad enough pool of companies to get a significant number of huge winners - like, say, Dropbox, Airbnb, Twitch, Segment, Cruise, Coinbase, Instacart, Flexport, Brex. Answer: yes, evidently.

jt2190 6y ago
> ...weak founders with all the luck in the world won't achieve much, whereas great founders with only a little bit of luck can be hugely successful. To clarify a bit here, it’s very hard to know in advance that a founder will be “great”, so I suspect that there are some rough proxies that investors use, and what you or I think of as “great” may not be what the marketplace of investors values when “shopping” for “great” founders to back. For example, academic achievement. Is that something that makes a founder great? What about social connections? What about dogged determination? Each investor will have a theory, and one or two might even be right. Probably the only thing that really matters is “the founder actually got the company to a point where it can generate revenue”, and the rest is wait and see. Which leads back to your excellent summation: > So the question is not whether they chose good founders and rejected bad ones, but whether they backed a big enough and broad enough pool of companies to get a significant number of huge winners...

peterwoerner 6y ago

You can also argue that a recession is a better time than usual to start a company. Your opportunity cost is a little bit less (due to the job market), customers are a looking to save money are, perhaps, more willing to take on risk to reduce expenses, and finally there is more likely to be talent available at a cost you can pay due to layoffs and a slowdown in hiring among established businesses. Anecdotally there are lots of companies which got started in a recession, FedEx + the tech ones written in a sister comment.

rixrax 6y ago
Totally agree. And many bigger projects get canned or put on hold. Potentially making up room for smaller projects to implement a more compact product from a start up ( to get some quick wins ).
papito 6y ago
This is why investing in small cap stocks/funds always pays off in a recession. They take off like wildfire during the recovery.
- moneywoes 6y ago
  Do you have any ETfs you like?
  - icedchai 6y ago
    VBK (Vanguard Small Cap Growth ETF) has done well for me.
  - papito 6y ago
    I would not dare give that advice. You take that risk :) Go with vanilla small cap low cost funds offered by, say, Fidelity or Vanguard.
- deleted 6y ago
  [deleted]
bnonhacker 6y ago

deleted 6y ago

[deleted]

dredmorbius 6y ago

Bill Gross (Idealab) feels it's timing that's the most significant factor: https://medium.com/fwiw-for-what-its-worth/why-timing-matters-in-startups-5164cb6e715e https://medium.com/fwiw-for-what-its-worth/why-timing-matter... Vs. team, idea, or funding. https://www.youtube.com/watch?v=mGY_9sFg2qM https://www.youtube.com/watch?v=mGY_9sFg2qM

dustingetz 6y ago

Is there a tipping point at which capital is sufficiently concentrated that the capital advantage outweighs the leverage of a four-sigma founder (.99994)? I don't know, maybe, but the capital can certainly make a two-sigma (.95) founder competitive, and a three-sigma (.997) founder without capital is probably f'ed. Or maybe a two-sigma founder with access to capital is the definition of a four-sigma founder, because how could you be recognized as that without having the capital.

deleted 6y ago

[deleted]

Existenceblinks 6y ago

He might not even believe in that great man theory. Just let them fight, I'll pick the winner. Without the push, there's not enough predators to hunt for him since chance for success for a founder is pretty low, he needs more numbers of them.

lazyjones 6y ago

The economy in general, with the variability we've seen in our lifetimes so far: yes. But specific opportunities come and go, the current situation can certainly make some ideas sufficiently profitable to succeed in the long run when they otherwise wouldn't be.

inglor_cz 6y ago

I sorta kinda think that bad economy could actually help some startups grow. In bad economy, businesses are looking to cut costs and optimize their processes. So do people. If you can come up with something that saves people money or hassle, the rate of adoption may be sky-high. If we take AirBNB as an example, it helps both travellers save their money, as the lodgings are usually cheaper than classical hotels, and helps people with unused rooms make some money on them. Ofc AirBNB evolved into a megabusiness in the meantime, and you will rarely meet your host in person, but the gist of the idea is clear.

deleted 6y ago

[deleted]

danbmil99 6y ago

In my opinion, the thing pg & YC understood better than anyone before them is that Venture investing statistically has a very very long tail pay-off. By micro investing in hundreds (by now thousands) of companies at the earliest possible stage (where they could fairly ask for a reasonable percentage at a very low dollar cost), they vastly reduced the risk of coming up with no big wins. This is all basic betting strategy for professional gamblers. You also have to know the odds, so I'm not downplaying the importance of evaluating founders and business plans. That's like the Blackjack equivalent of basic strategy and counting the deck. Without a betting strategy that reflects the statistics of the game you're playing, the likelihood is you will bottom out before you succeed.