8 ms·

The Pooled-Risk Company Management Company

107 points by mqt 18y ago

hualibaobao 18y ago
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bootload 18y ago
"... They're like property management companies run by madmen. Or more precisely, by Benjamin Graham's Mr. Market ..." No references. More on Mr. Market here: http://en.wikipedia.org/wiki/Benjamin_Graham http://en.wikipedia.org/wiki/Benjamin_Graham
ljw1001 18y ago
Maybe you should have entitled this one "What's wrong with this country and how can I convince people it's a good thing?" Some founders seemed to like running their companies and did OK while they were at it: There's Bill and Steve, of course. And Michael Dell. And Larry Ellison. And Jeff Bezos. And they guys from Sun and Ken Olsen at DEC, and Bill and Dave over at HP - yeah, almost every company that's really mattered in the IT world. If DHH want's to run with that crowd, or just run a good, healthy little business, then good for him. On the other hand,"pump and dump" mentality you seem to favor is exactly the mindset of the multi-millionaires on wall street and in Detroit today who continue to line their pockets while their companies fail or go on the dole. Really Paul, I know you VC guys have a short attention span (ugh, i mean, investment horizon), but it seems like you're starting to believe that what puts money in your pocket is by definition an absolute good.
ph0rque 18y ago
Often, the problem with public companies is that they try to remake the startups they buy in their image, instead of just managing the company.
- pg 18y ago
  There's no question acquisitions are often botched. But you're protected against the consequences of this if the acquirer is a public co. I wouldn't advocate being acquired by a private co except in exceptional circumstances.
  - pchristensen 18y ago
    Really? What about brlewis's statement: "You may want the co managed to maximize customer satisfaction for long-term stability (ala Craigslist), but a public acquirer will likely manage to maximize quarterly revenue"?
    - run4yourlives 18y ago
      If you're being acquired, you're walking away. You should understand that the company as you know it is already dead. The goal becomes to make it to the walkaway date with as little trouble as possible. To continue to manage "your baby" post acquisition is futile. Hence, even managed quarterly, public co. is a better option for you.
  - jkent 18y ago
    This is a very good point - acquisitions are a messy business. Can you give us an example - under what circumstances would selling to a private company be a smart move?
    - omakase 18y ago
      One example would be if you were selling stock for cash. Although I don't know how often this happens.
    - pg 18y ago
chris_l 18y ago
I'm normally a fan of Paul's essays, but this one felt a little forced. Maybe not enough "essayer", too much agenda?
- pchristensen 18y ago
  I can't wait for DHH's re-rebuttal on SvN on Friday. :) If 37s has doubled revenue for the last 4 or 5 years while hiring 2-3 extra people, I'm pretty sure they're not far from walking away whenever they want. Or they could just work 4 days a week and have the company pay for their cooking and Tai Chi classes while still retaining full control. That still sounds like a better deal to me.
  - jkent 18y ago
    I don't understand why expansion equals freedom - can you explain your logic? If they can walk away that easily (i.e. they are replacable), do the founders add value anyway?
    - pchristensen 18y ago
      This is for swombat too - if revenue has grown 15-30 times since '04 as DHH said at Startup School, and headcount went up by 30%, then that's still 10-20x the revenue per employee. Costs: Can't be too much more, certainly not nearly matching the revenue growth. They do their own advertising and marketing so that's free. Infrastructure costs are higher because of more accounts, so let's count that as the cost of 7 employees, giving them double the costs. And with extra benefits for employees, put it up to 2.5x of 2004 expenses. total. The profit picture gets even more ridiculous. If they had 5% margins in 2004, their costs go up by 2.5 and revenues go up by 15, then their profit is over 250x over 2004. Divide that by 3(?) founders/principals and you get a lot per year. Heck, it's still a lot if you divide it by all 12 employees. 37s is probably making more profit annually than most startup founders will ever sell a company for. If they pocket a part of that a year, then they have the equivalent cash to a liquidity event plus they still have the company. Granted, they're exceptionally successful, but hopefully these numbers will open some eyes for people that look down on lifestyle businesses.
brlewis 18y ago
Hire property mgmt and you're the customer. They should do what you want. Get acquired and they're the customer. They'll manage the co as they please. You may want the co managed to maximize customer satisfaction for long-term stability (ala Craigslist), but a public acquirer will likely manage to maximize quarterly revenue.
- pg 18y ago
  They'll manage the co as they please. Sure, but they guarantee your returns in advance.
jkent 18y ago
I don't think the decision is as simple as "I run it, or I sell out." Private companies hire CEOs fairly often. If you could get a professional manager in to help run your company, you would still have control and could fire/replace him. Richard Branson does not run his 250 or so companies simultaneously - he uses professional managers. He pools risk but the firms remain private. If you sell out, you lose control of your business. That can be a good or a bad thing. (But you can only really get out if you lose control of the business.) As my dad tells me, "If you sell out, get out." It's wise advice.
- ideas101 18y ago
  Google, Ambani, Tata are other good examples who have tons of companies/product run by good managers/CEOs
ericb 18y ago
>> And as anyone who runs their own business can tell you, that requires your complete attention. I had a shareware business that footed the bills and this was not true in my case. There was a large number of people in the Association of Shareware Professionals trade group that were in a similar position. I'm not sure it's true of web apps either. I had tons of time to develop or twiddle my thumbs. I had freedom. Security is tougher though, as I did eventually get squashed by Google/MS.
- reeses 18y ago
  Apologies in advance for the snark but let me paraphrase: "It's not necessary to give your startup your complete attention to run it. I treated my shareware business as a part time job. Mind you, other companies that could focus attention on their competing products drove me out of business." Did I get that right?
  - ericb 18y ago
    When MS and firefox built pop up blockers into their browsers it became very hard to sell a pop up blocker. I'd be interested to see you move into this line of business now and explain why your efforts are best spent swimming upstream. To paraphrase you: apologies for being a tool, but I can't help it. I bet you "know how to make Twitter scale," too. I love uninformed monday morning quarterbacks.
    - jedberg 18y ago
      Actually, scaling twitter is a solved problem. There is a company in India called SMS GupShup that does the same thing as twitter, except they have 3 times the number of users and more SMS users. And they don't have downtime. http://anand.typepad.com/datawocky/2008/06/indias-sms-gupshup-has-3x-the-usage-of-twitter-and-no-downtime.html http://anand.typepad.com/datawocky/2008/06/indias-sms-gupshu...
      - swombat 18y ago
        sigh not again.. SMS GupShup's business and technology are very different from Twitter's. SMS GS is geared towards distributing SMS's, not displaying them on pages/open API's. That makes a huge difference.
tx 18y ago
I have to disagree: founders of the most successful and admired companies stick around for long, long time. Neither of Brin, Page, Gates, Moore or Yang think there are more interesting activities than running their companies. Maybe that's why there aren't many new googles around: entrepreneurs have "more interesting" activities in mind they need to make a quick $5M for.
- pg 18y ago
  I didn't say it was impossible that one's interests would coincide exactly with customers' demands, just unlikely. Of course it will happen occasionally, and those founders are obviously going to do particularly well. Incidentally, though, Gates did just find that there was something more interesting to do.
dpapathanasiou 18y ago
"David isn't mistaken in saying you should start a company to live off its revenues. The mistake is thinking this is somehow opposed to starting a company and selling it. In fact, for most people the latter is merely the optimal case of the former." Right, they're not mutually exclusive. But the old school way of thinking simply says that achieving the former will lead to the latter. I.e., there is such a thing as trying to sell too early. Building revenue-less companies to flip may have yielded some spectacular successes in the past (e.g. YouTube), but modeling yourself on rare, black-swan events is not a recipe for success.
BerislavLopac 18y ago
I'm getting a bit bored by this perceived dichotomy of funded vs. bootstrapped startups. They are simply two different kinds of companies, and they can perfectly well coexist in an industry. Some startups can be profitable almost from day one, and need very little cash to get there; others need to do experiments for a much longer time, and could end-up having a useful technology but no revenue model. In the latter case it's only natural that someone will come along who could make use of the technology and simply acquire the company instead of spending even more money developing their own solution. In many cases the companies in the latter group never have any significant chances of making a lot of money, and acquisition is really the only way for the founders to monetize on their work. Similarly, the companies in the former group could simply never grow enough to be interesting for acquisition -- we call them lifestyle businesses. 37signals and Carsonified are great examples of lifestyle businesses; Digg, Twitter, Zemanta, and even Google, are companies which would never happen if they have tried to bootstrap.
condor 18y ago
I'm sure there are many 'ways' to start a company and live off the net income, and there may even be an optimal way. Historically the way a lot of business owners have achieved freedom and security is 1) love what they do, so that the work isn't a chore (their work is what they would do if they could do anything in the world, which is one definition of freedom) and 2) spend/live within the constraints of the net income generated. Seems pretty simple to me since both can be chosen. This also solves the main disadvantage of you 'hav[ing] to keep running it', because you actually want to keep it running.
- 13ren 18y ago
  I agree. I think PG addresses that issue when he says it's difficult for the market's and the founder's needs to coincide. That is, to find something that (A) you love to do, that (B) a market also loves. It's hard enough to find something you love; or to find something the market loves - to find both is not just twice, but squared as hard. It's easier to find those two things independently: find something the market loves, get rich; and then find something you love. But if you can find both (and people have), it's GREAT.
  - condor 18y ago
    I hear you and do understand pg's point. While the first part 'doing what you love' is really easy to do, one simply chooses it, the second part 'finding something the market loves' (which is the 'security' point of pg's essay) is basically out of your control. The only thing you can do to be happy about that 'market love' is decide what your reaction is, keep your expectations completely elastic and be able/willing to live within the constraints of 'the market' reaction. The problem comes when there are preconceived expectations of what the market should return, or a sense of being entitled to a level of success (that the market may not grace you with) which leads to unhappiness on that second point. But there is a solution, since you set your response to the market, its easy to reset, simply chose to be happy with what the return the market is giving you (ie. support your life with in those means, though it can be more difficult if you're supporting a family), and scale appropriately.
henning 18y ago
What a luxury and a pleasure it would be to have to decide, given a profitable web operation, whether to keep running it like a traditional small business or to get acquired for several hundred thousand dollars. What a pleasure to have such a problem.
HeyLaughingBoy 18y ago
I guess the headscratcher for me is that I can't understand why someone would start a company if they didn't think they'd enjoy running it. The odds of growing to the point where someone will buy your business for a substantial amount (read: order of magnitude greater than a year's sales) is much less than being able to grow it yourself and live off the revenues. I guess that's why I don't play the lottery.
- ideas101 18y ago
  some are good initiator but not the operator for the rest of the life ... also people who have tons of ideas are driven by bringing does ideas in to reality ... they love being a king-maker rather than being a king for only one kingdom and run the show (thats boring for them) - they like to have more than one kingdom and then find someone to run with it.... i think pg himself is the right example for this.
- pg 18y ago
  I can't understand why someone would start a company if they didn't think they'd enjoy running it. I'm not proposing that. As I said in the essay, running Viaweb was the most interesting job I'd had. It just wasn't the most interesting thing I could imagine doing. That's the question you have to answer, if you're ambitious: not just "do I like what I'm doing?" but "do I like what I'm doing more than anything else I could be doing?"
joseakle 18y ago
What about sharing risks between startups? You could set up a startup shares pool, in which a group of companies trade some of their stock for a share of the pool, so if some companies go under they could still receive some income from the pool. Maybe something similar to this Artist Pension Trust. http://www.guardian.co.uk/money/2007/aug/12/4 http://www.guardian.co.uk/money/2007/aug/12/4 I think this would be similar to what VCs do, invest in 20 startups and hope for one big hit or a couple of good hits.
startingup 18y ago
Companies are not apartments or houses, companies are people. You don't have to worry about motivation, energy levels when you are dealing with houses. You cannot "optimize" people - even talking about what is optimal is meaningless when you deal in collections of people. This is the fundamental libertarian assumption, which is why libertarians are for free market capitalism. Not because it maximizes wealth, but because it let's people simply be. I am afraid this essay is a perfect distillation of the flip-it model, just as the model is going out of fashion.
- pg 18y ago
  It sounds like you're disagreeing with something you think I said, but I can't figure out what. Can you give me an example of a specific sentence or paragraph I wrote that you disagree with?
  - anewaccountname 18y ago
    Preferably as a block quote? =P
  - prospero 18y ago
    I think what he was trying to say was that selling your startup to a large company is only a no-brainer if you have significant equity in the company. If you don't, selling to another company isn't an exit strategy, it's just a transition to a different, and quite possibly worse, work environment. I don't know if this is really a valid criticism, since most YC startups don't seem to expand that far past the founding team, but I'm pretty sure that was his point.
  - startingup 18y ago
    Sorry I was out all day, so couldn't respond. I was reacting to the comparison of property management company to your putative "company management company" (which eventually gets revealed as a typical public company in your essay). That was the context in which I said companies have people, and people are not housing, and your objective of an "optimal" strategy doesn't hold water. My broader point is that companies/people (including founders) have goals, dreams, aspirations ... maximizing return on investment may not even be the biggest goal. It is a late 20th century Milton Friedmanite doctrine (which classical libertarians actually disagree with) that the only purpose of a company ought to be to maximize shareholder wealth. I mention this because you refer to "optimal" strategy, but in this case, there is no such optimal strategy, because the goals are so extremely diverse and often mutually contradictory. Interestingly, shareholder wealth maximization (which academics are so fond of) is a proposition most real world capitalists don't actually subscribe to - witness the resistance of Jerry Yang to being absorbed. It has little do with long term shareholder wealth maximization (though he has to pretend that it is, in order to keep the lawyers at bay), and everything to do with preserving what he perceives as a unique Yahoo culture from being decimated (somewhat justified, in my opinion), even at the cost of losing substantial value as a shareholder himself. There is no right or wrong in this (I think his cause is hopeless myself), just that this is how Jerry Yang, the capitalist part owner of Yahoo, operates. What is the goal of a company? It ultimately boils down to a religious question of "Who am I? What do I want?" which each founder (and each employee) has to ask himself/herself. DHH laid out his answer, and I bet an awful lot of founders identify with it. You have your school of thought on this, which I bet a lot of founders identify with too. But yours is not any kind of optimal extreme of DHH.
edw519 18y ago
They want enough money that (a) they don't have to worry about running out of money and (b) they can spend their time how they want. Running your own business offers neither. In this thread: http://news.ycombinator.com/item?id=79057 http://news.ycombinator.com/item?id=79057 pg has answered the question, "What would you do if you were a billionaire?" with "Day to day? Much the same thing, actually." Perhaps doing a startup is "spending our time how we want". Right now, it's hard for me to imagine myself doing anything else. Maybe I'll feel differently later.
sofal 18y ago
"The main economic motives of startup founders seem to be freedom and security." I would say that these are the economic motives for just about every human being. Economic "freedom" and "security" are often euphemisms for living a carefree life of luxury. Who wouldn't want that? Add "power" and you've got the economic motives for every money-grubbing scoundrel that ever existed. Everyone would love to get rich quick, it's just that startup founders looking to flip fast are willing to take more risks and sacrifices to attempt it. A founder motive that I can appreciate is the desire to create great and interesting things that improve others' lives.
mpc 18y ago
I understand the point that PG is making here. But I think DHH might argue that it's possible to create a business that doesn't require an unreasonable amount of work and attention. The work could even be enjoyable and interesting long term and business could still manage to be a success. Edit: I guess 37 signals is a good case study of this. They work 4 days a week and have had tremendous success. I have 0 experience running a real "business", but I have a hunch that you could build a successful one that doesn't require the amount of attention and work that PG is talking about.
steveplace 18y ago
The referenced lecture: http://omnisio.com/startupschool08/david-heinemeier-hansson-at-startup-school-08 http://omnisio.com/startupschool08/david-heinemeier-hansson-...
- 13ren 18y ago
  I get "This video is not available".
staticshock 18y ago
i would rather have a different way to point out this typo, but, alas, i could not locate your email, pg. "to good to be true" -> "too good to be true"
- pg 18y ago
  Thanks, fixed. (There's an email link on the front page of my site.)
jmj 18y ago
Selling also lets you diversify. That is highly relevant to anyone's peace of mind.
tristian 18y ago
My take: If you are starting a business which will make a profit from the outset, in which you have complete control: - After a while you may want to do something else other than run the business. + A good way of doing this is to sell the business to a public company. - It may take some time to do this depending on the market and size of the business. During which you may not want to be there. + Since the business is making money you don't need to rush the sale. That all sounds pretty good to me. Beyond the mentioned freedom and security, a lot of people start business so that they can be more in control of their own lives. If you start a business with the intention of keeping full control, then you're going to be responsible for the continued control of it.
hs 18y ago
Would IPO path be more optimal for Viaweb?
akkartik 18y ago
Look at it from the perspective of the customer rather than the owner. When my apartment switches managers I see no difference. I am not forced to move to a different location, nor do I have people reordering my furniture or changing my lease agreement. When Viaweb became yahoo store it's possible it got a lot more users, but I'd bet existing users weren't as happy anymore. They got shitty yahoo service. Perhaps in this industry management companies just haven't gotten very good yet. More likely, the difference in scale breaks the analogy from the user's point of view.
connellybarnes 18y ago
With a typical salary at a typical programmer job, you can make enough money in every year to take several years time off. But meanwhile, taking time off tends to cause isolation, depression, and other problems, since modern social interactions are based around work. Making enough money to retire upfront seems needlessly suboptimal, as it makes it more difficult to do things, if you choose to avoid jobs thereafter. If you choose to work at jobs afterward, then making the money upfront simply isn't necessary. Of course in Ancient Greece it would be optimal to not have a job, but in America it's a liability. I don't understand the get-rich-quick mentality for making startups. It's illogical. Making a startup to accomplish a meaningful goal is interesting, but money per se isn't. Making lots of money to "be free" reduces to non-meaningful goals, no-goals centered around the rejection of much of what is worthwhile in life. It's better for people to have real, tangible goals and pursue them, which nearly always leads to work, even if said people already have "enough money." If one needs time to contemplate, sure, take a few years off. But normally during such years, people who are healthy and challenging themselves will automatically start doing things interesting enough that they can convince someone to pay them for it. If you can't do this, then you've essentially proved the irrelevance of your work (or that you need to go into academia, if your work is too theoretical to earn money in the "normal" world.) A strong argument for making a startup is when you want to accomplish something so ambitious that no job would let you tackle that task, simply because jobs have smaller scope. Maybe there are other good arguments for startups, but people are very unclear when they throw a bunch of confusing messages about money out there, because increasing income doesn't make people much happier [1], and it's easy for people who live in their means to take years off from jobs, if that's the issue at hand. Even if you want to never work again, there's a greater probability of success in taking a high paying, dull job and working hard for several years, than working on a startup. But many ambitious people would have a lot less pride in doing this, despite the higher probability of success. Again this indicates that startups are really about pride of ownership, pride of tackling new ideas, changing the world, etc, than money. [1]. http://www.princeton.edu/main/news/archive/S15/15/09S18/index.xml?section=topstories http://www.princeton.edu/main/news/archive/S15/15/09S18/inde...
axe_fx 18y ago
Running a company and living off it's profits is not the same as selling a company to a bigger player. The latter is a one time payment.
lurker 18y ago
"One disadvantage of living off the revenues of your company is that you have to keep running it." that's an odd "disadvantage", Paul. It implies that running my company is something I don't want to do. Don't know about you, but I LOVE running my company.
PeeDee 18y ago
Second prize is selling for enough that the interest funds a comfortable lifestyle, whether or not you want to continue to work. First prize is being able to hang onto control so that you can use what you've built as a base to do still more.

107 points by mqt 18y ago

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bootload 18y ago

"... They're like property management companies run by madmen. Or more precisely, by Benjamin Graham's Mr. Market ..." No references. More on Mr. Market here: http://en.wikipedia.org/wiki/Benjamin_Graham http://en.wikipedia.org/wiki/Benjamin_Graham

ljw1001 18y ago

Maybe you should have entitled this one "What's wrong with this country and how can I convince people it's a good thing?" Some founders seemed to like running their companies and did OK while they were at it: There's Bill and Steve, of course. And Michael Dell. And Larry Ellison. And Jeff Bezos. And they guys from Sun and Ken Olsen at DEC, and Bill and Dave over at HP - yeah, almost every company that's really mattered in the IT world. If DHH want's to run with that crowd, or just run a good, healthy little business, then good for him. On the other hand,"pump and dump" mentality you seem to favor is exactly the mindset of the multi-millionaires on wall street and in Detroit today who continue to line their pockets while their companies fail or go on the dole. Really Paul, I know you VC guys have a short attention span (ugh, i mean, investment horizon), but it seems like you're starting to believe that what puts money in your pocket is by definition an absolute good.

ph0rque 18y ago

Often, the problem with public companies is that they try to remake the startups they buy in their image, instead of just managing the company.

pg 18y ago
There's no question acquisitions are often botched. But you're protected against the consequences of this if the acquirer is a public co. I wouldn't advocate being acquired by a private co except in exceptional circumstances.
- pchristensen 18y ago
  Really? What about brlewis's statement: "You may want the co managed to maximize customer satisfaction for long-term stability (ala Craigslist), but a public acquirer will likely manage to maximize quarterly revenue"?
  - run4yourlives 18y ago
    If you're being acquired, you're walking away. You should understand that the company as you know it is already dead. The goal becomes to make it to the walkaway date with as little trouble as possible. To continue to manage "your baby" post acquisition is futile. Hence, even managed quarterly, public co. is a better option for you.
- jkent 18y ago
  This is a very good point - acquisitions are a messy business. Can you give us an example - under what circumstances would selling to a private company be a smart move?
  - omakase 18y ago
    One example would be if you were selling stock for cash. Although I don't know how often this happens.
  - pg 18y ago

chris_l 18y ago

I'm normally a fan of Paul's essays, but this one felt a little forced. Maybe not enough "essayer", too much agenda?

pchristensen 18y ago
I can't wait for DHH's re-rebuttal on SvN on Friday. :) If 37s has doubled revenue for the last 4 or 5 years while hiring 2-3 extra people, I'm pretty sure they're not far from walking away whenever they want. Or they could just work 4 days a week and have the company pay for their cooking and Tai Chi classes while still retaining full control. That still sounds like a better deal to me.
- jkent 18y ago
  I don't understand why expansion equals freedom - can you explain your logic? If they can walk away that easily (i.e. they are replacable), do the founders add value anyway?
  - pchristensen 18y ago
    This is for swombat too - if revenue has grown 15-30 times since '04 as DHH said at Startup School, and headcount went up by 30%, then that's still 10-20x the revenue per employee. Costs: Can't be too much more, certainly not nearly matching the revenue growth. They do their own advertising and marketing so that's free. Infrastructure costs are higher because of more accounts, so let's count that as the cost of 7 employees, giving them double the costs. And with extra benefits for employees, put it up to 2.5x of 2004 expenses. total. The profit picture gets even more ridiculous. If they had 5% margins in 2004, their costs go up by 2.5 and revenues go up by 15, then their profit is over 250x over 2004. Divide that by 3(?) founders/principals and you get a lot per year. Heck, it's still a lot if you divide it by all 12 employees. 37s is probably making more profit annually than most startup founders will ever sell a company for. If they pocket a part of that a year, then they have the equivalent cash to a liquidity event plus they still have the company. Granted, they're exceptionally successful, but hopefully these numbers will open some eyes for people that look down on lifestyle businesses.

brlewis 18y ago

Hire property mgmt and you're the customer. They should do what you want. Get acquired and they're the customer. They'll manage the co as they please. You may want the co managed to maximize customer satisfaction for long-term stability (ala Craigslist), but a public acquirer will likely manage to maximize quarterly revenue.

pg 18y ago
They'll manage the co as they please. Sure, but they guarantee your returns in advance.

jkent 18y ago

I don't think the decision is as simple as "I run it, or I sell out." Private companies hire CEOs fairly often. If you could get a professional manager in to help run your company, you would still have control and could fire/replace him. Richard Branson does not run his 250 or so companies simultaneously - he uses professional managers. He pools risk but the firms remain private. If you sell out, you lose control of your business. That can be a good or a bad thing. (But you can only really get out if you lose control of the business.) As my dad tells me, "If you sell out, get out." It's wise advice.

ideas101 18y ago
Google, Ambani, Tata are other good examples who have tons of companies/product run by good managers/CEOs

ericb 18y ago

>> And as anyone who runs their own business can tell you, that requires your complete attention. I had a shareware business that footed the bills and this was not true in my case. There was a large number of people in the Association of Shareware Professionals trade group that were in a similar position. I'm not sure it's true of web apps either. I had tons of time to develop or twiddle my thumbs. I had freedom. Security is tougher though, as I did eventually get squashed by Google/MS.

reeses 18y ago
Apologies in advance for the snark but let me paraphrase: "It's not necessary to give your startup your complete attention to run it. I treated my shareware business as a part time job. Mind you, other companies that could focus attention on their competing products drove me out of business." Did I get that right?
- ericb 18y ago
  When MS and firefox built pop up blockers into their browsers it became very hard to sell a pop up blocker. I'd be interested to see you move into this line of business now and explain why your efforts are best spent swimming upstream. To paraphrase you: apologies for being a tool, but I can't help it. I bet you "know how to make Twitter scale," too. I love uninformed monday morning quarterbacks.
  - jedberg 18y ago
    Actually, scaling twitter is a solved problem. There is a company in India called SMS GupShup that does the same thing as twitter, except they have 3 times the number of users and more SMS users. And they don't have downtime. http://anand.typepad.com/datawocky/2008/06/indias-sms-gupshup-has-3x-the-usage-of-twitter-and-no-downtime.html http://anand.typepad.com/datawocky/2008/06/indias-sms-gupshu...
    - swombat 18y ago
      sigh not again.. SMS GupShup's business and technology are very different from Twitter's. SMS GS is geared towards distributing SMS's, not displaying them on pages/open API's. That makes a huge difference.

tx 18y ago

I have to disagree: founders of the most successful and admired companies stick around for long, long time. Neither of Brin, Page, Gates, Moore or Yang think there are more interesting activities than running their companies. Maybe that's why there aren't many new googles around: entrepreneurs have "more interesting" activities in mind they need to make a quick $5M for.

pg 18y ago
I didn't say it was impossible that one's interests would coincide exactly with customers' demands, just unlikely. Of course it will happen occasionally, and those founders are obviously going to do particularly well. Incidentally, though, Gates did just find that there was something more interesting to do.

dpapathanasiou 18y ago

"David isn't mistaken in saying you should start a company to live off its revenues. The mistake is thinking this is somehow opposed to starting a company and selling it. In fact, for most people the latter is merely the optimal case of the former." Right, they're not mutually exclusive. But the old school way of thinking simply says that achieving the former will lead to the latter. I.e., there is such a thing as trying to sell too early. Building revenue-less companies to flip may have yielded some spectacular successes in the past (e.g. YouTube), but modeling yourself on rare, black-swan events is not a recipe for success.

BerislavLopac 18y ago

I'm getting a bit bored by this perceived dichotomy of funded vs. bootstrapped startups. They are simply two different kinds of companies, and they can perfectly well coexist in an industry. Some startups can be profitable almost from day one, and need very little cash to get there; others need to do experiments for a much longer time, and could end-up having a useful technology but no revenue model. In the latter case it's only natural that someone will come along who could make use of the technology and simply acquire the company instead of spending even more money developing their own solution. In many cases the companies in the latter group never have any significant chances of making a lot of money, and acquisition is really the only way for the founders to monetize on their work. Similarly, the companies in the former group could simply never grow enough to be interesting for acquisition -- we call them lifestyle businesses. 37signals and Carsonified are great examples of lifestyle businesses; Digg, Twitter, Zemanta, and even Google, are companies which would never happen if they have tried to bootstrap.

condor 18y ago

I'm sure there are many 'ways' to start a company and live off the net income, and there may even be an optimal way. Historically the way a lot of business owners have achieved freedom and security is 1) love what they do, so that the work isn't a chore (their work is what they would do if they could do anything in the world, which is one definition of freedom) and 2) spend/live within the constraints of the net income generated. Seems pretty simple to me since both can be chosen. This also solves the main disadvantage of you 'hav[ing] to keep running it', because you actually want to keep it running.

13ren 18y ago
I agree. I think PG addresses that issue when he says it's difficult for the market's and the founder's needs to coincide. That is, to find something that (A) you love to do, that (B) a market also loves. It's hard enough to find something you love; or to find something the market loves - to find both is not just twice, but squared as hard. It's easier to find those two things independently: find something the market loves, get rich; and then find something you love. But if you can find both (and people have), it's GREAT.
- condor 18y ago
  I hear you and do understand pg's point. While the first part 'doing what you love' is really easy to do, one simply chooses it, the second part 'finding something the market loves' (which is the 'security' point of pg's essay) is basically out of your control. The only thing you can do to be happy about that 'market love' is decide what your reaction is, keep your expectations completely elastic and be able/willing to live within the constraints of 'the market' reaction. The problem comes when there are preconceived expectations of what the market should return, or a sense of being entitled to a level of success (that the market may not grace you with) which leads to unhappiness on that second point. But there is a solution, since you set your response to the market, its easy to reset, simply chose to be happy with what the return the market is giving you (ie. support your life with in those means, though it can be more difficult if you're supporting a family), and scale appropriately.

henning 18y ago

What a luxury and a pleasure it would be to have to decide, given a profitable web operation, whether to keep running it like a traditional small business or to get acquired for several hundred thousand dollars. What a pleasure to have such a problem.

HeyLaughingBoy 18y ago

I guess the headscratcher for me is that I can't understand why someone would start a company if they didn't think they'd enjoy running it. The odds of growing to the point where someone will buy your business for a substantial amount (read: order of magnitude greater than a year's sales) is much less than being able to grow it yourself and live off the revenues. I guess that's why I don't play the lottery.

ideas101 18y ago
some are good initiator but not the operator for the rest of the life ... also people who have tons of ideas are driven by bringing does ideas in to reality ... they love being a king-maker rather than being a king for only one kingdom and run the show (thats boring for them) - they like to have more than one kingdom and then find someone to run with it.... i think pg himself is the right example for this.
pg 18y ago
I can't understand why someone would start a company if they didn't think they'd enjoy running it. I'm not proposing that. As I said in the essay, running Viaweb was the most interesting job I'd had. It just wasn't the most interesting thing I could imagine doing. That's the question you have to answer, if you're ambitious: not just "do I like what I'm doing?" but "do I like what I'm doing more than anything else I could be doing?"

joseakle 18y ago

What about sharing risks between startups? You could set up a startup shares pool, in which a group of companies trade some of their stock for a share of the pool, so if some companies go under they could still receive some income from the pool. Maybe something similar to this Artist Pension Trust. http://www.guardian.co.uk/money/2007/aug/12/4 http://www.guardian.co.uk/money/2007/aug/12/4 I think this would be similar to what VCs do, invest in 20 startups and hope for one big hit or a couple of good hits.

startingup 18y ago

Companies are not apartments or houses, companies are people. You don't have to worry about motivation, energy levels when you are dealing with houses. You cannot "optimize" people - even talking about what is optimal is meaningless when you deal in collections of people. This is the fundamental libertarian assumption, which is why libertarians are for free market capitalism. Not because it maximizes wealth, but because it let's people simply be. I am afraid this essay is a perfect distillation of the flip-it model, just as the model is going out of fashion.

pg 18y ago
It sounds like you're disagreeing with something you think I said, but I can't figure out what. Can you give me an example of a specific sentence or paragraph I wrote that you disagree with?
- anewaccountname 18y ago
  Preferably as a block quote? =P
- prospero 18y ago
  I think what he was trying to say was that selling your startup to a large company is only a no-brainer if you have significant equity in the company. If you don't, selling to another company isn't an exit strategy, it's just a transition to a different, and quite possibly worse, work environment. I don't know if this is really a valid criticism, since most YC startups don't seem to expand that far past the founding team, but I'm pretty sure that was his point.
- startingup 18y ago
  Sorry I was out all day, so couldn't respond. I was reacting to the comparison of property management company to your putative "company management company" (which eventually gets revealed as a typical public company in your essay). That was the context in which I said companies have people, and people are not housing, and your objective of an "optimal" strategy doesn't hold water. My broader point is that companies/people (including founders) have goals, dreams, aspirations ... maximizing return on investment may not even be the biggest goal. It is a late 20th century Milton Friedmanite doctrine (which classical libertarians actually disagree with) that the only purpose of a company ought to be to maximize shareholder wealth. I mention this because you refer to "optimal" strategy, but in this case, there is no such optimal strategy, because the goals are so extremely diverse and often mutually contradictory. Interestingly, shareholder wealth maximization (which academics are so fond of) is a proposition most real world capitalists don't actually subscribe to - witness the resistance of Jerry Yang to being absorbed. It has little do with long term shareholder wealth maximization (though he has to pretend that it is, in order to keep the lawyers at bay), and everything to do with preserving what he perceives as a unique Yahoo culture from being decimated (somewhat justified, in my opinion), even at the cost of losing substantial value as a shareholder himself. There is no right or wrong in this (I think his cause is hopeless myself), just that this is how Jerry Yang, the capitalist part owner of Yahoo, operates. What is the goal of a company? It ultimately boils down to a religious question of "Who am I? What do I want?" which each founder (and each employee) has to ask himself/herself. DHH laid out his answer, and I bet an awful lot of founders identify with it. You have your school of thought on this, which I bet a lot of founders identify with too. But yours is not any kind of optimal extreme of DHH.

edw519 18y ago

They want enough money that (a) they don't have to worry about running out of money and (b) they can spend their time how they want. Running your own business offers neither. In this thread: http://news.ycombinator.com/item?id=79057 http://news.ycombinator.com/item?id=79057 pg has answered the question, "What would you do if you were a billionaire?" with "Day to day? Much the same thing, actually." Perhaps doing a startup is "spending our time how we want". Right now, it's hard for me to imagine myself doing anything else. Maybe I'll feel differently later.

sofal 18y ago

"The main economic motives of startup founders seem to be freedom and security." I would say that these are the economic motives for just about every human being. Economic "freedom" and "security" are often euphemisms for living a carefree life of luxury. Who wouldn't want that? Add "power" and you've got the economic motives for every money-grubbing scoundrel that ever existed. Everyone would love to get rich quick, it's just that startup founders looking to flip fast are willing to take more risks and sacrifices to attempt it. A founder motive that I can appreciate is the desire to create great and interesting things that improve others' lives.

mpc 18y ago

I understand the point that PG is making here. But I think DHH might argue that it's possible to create a business that doesn't require an unreasonable amount of work and attention. The work could even be enjoyable and interesting long term and business could still manage to be a success. Edit: I guess 37 signals is a good case study of this. They work 4 days a week and have had tremendous success. I have 0 experience running a real "business", but I have a hunch that you could build a successful one that doesn't require the amount of attention and work that PG is talking about.

steveplace 18y ago

The referenced lecture: http://omnisio.com/startupschool08/david-heinemeier-hansson-at-startup-school-08 http://omnisio.com/startupschool08/david-heinemeier-hansson-...

13ren 18y ago
I get "This video is not available".

staticshock 18y ago

i would rather have a different way to point out this typo, but, alas, i could not locate your email, pg. "to good to be true" -> "too good to be true"

pg 18y ago
Thanks, fixed. (There's an email link on the front page of my site.)

jmj 18y ago

Selling also lets you diversify. That is highly relevant to anyone's peace of mind.

tristian 18y ago

My take: If you are starting a business which will make a profit from the outset, in which you have complete control: - After a while you may want to do something else other than run the business. + A good way of doing this is to sell the business to a public company. - It may take some time to do this depending on the market and size of the business. During which you may not want to be there. + Since the business is making money you don't need to rush the sale. That all sounds pretty good to me. Beyond the mentioned freedom and security, a lot of people start business so that they can be more in control of their own lives. If you start a business with the intention of keeping full control, then you're going to be responsible for the continued control of it.

hs 18y ago

Would IPO path be more optimal for Viaweb?

akkartik 18y ago

Look at it from the perspective of the customer rather than the owner. When my apartment switches managers I see no difference. I am not forced to move to a different location, nor do I have people reordering my furniture or changing my lease agreement. When Viaweb became yahoo store it's possible it got a lot more users, but I'd bet existing users weren't as happy anymore. They got shitty yahoo service. Perhaps in this industry management companies just haven't gotten very good yet. More likely, the difference in scale breaks the analogy from the user's point of view.

connellybarnes 18y ago

With a typical salary at a typical programmer job, you can make enough money in every year to take several years time off. But meanwhile, taking time off tends to cause isolation, depression, and other problems, since modern social interactions are based around work. Making enough money to retire upfront seems needlessly suboptimal, as it makes it more difficult to do things, if you choose to avoid jobs thereafter. If you choose to work at jobs afterward, then making the money upfront simply isn't necessary. Of course in Ancient Greece it would be optimal to not have a job, but in America it's a liability. I don't understand the get-rich-quick mentality for making startups. It's illogical. Making a startup to accomplish a meaningful goal is interesting, but money per se isn't. Making lots of money to "be free" reduces to non-meaningful goals, no-goals centered around the rejection of much of what is worthwhile in life. It's better for people to have real, tangible goals and pursue them, which nearly always leads to work, even if said people already have "enough money." If one needs time to contemplate, sure, take a few years off. But normally during such years, people who are healthy and challenging themselves will automatically start doing things interesting enough that they can convince someone to pay them for it. If you can't do this, then you've essentially proved the irrelevance of your work (or that you need to go into academia, if your work is too theoretical to earn money in the "normal" world.) A strong argument for making a startup is when you want to accomplish something so ambitious that no job would let you tackle that task, simply because jobs have smaller scope. Maybe there are other good arguments for startups, but people are very unclear when they throw a bunch of confusing messages about money out there, because increasing income doesn't make people much happier [1], and it's easy for people who live in their means to take years off from jobs, if that's the issue at hand. Even if you want to never work again, there's a greater probability of success in taking a high paying, dull job and working hard for several years, than working on a startup. But many ambitious people would have a lot less pride in doing this, despite the higher probability of success. Again this indicates that startups are really about pride of ownership, pride of tackling new ideas, changing the world, etc, than money. [1]. http://www.princeton.edu/main/news/archive/S15/15/09S18/index.xml?section=topstories http://www.princeton.edu/main/news/archive/S15/15/09S18/inde...

axe_fx 18y ago

Running a company and living off it's profits is not the same as selling a company to a bigger player. The latter is a one time payment.

lurker 18y ago

"One disadvantage of living off the revenues of your company is that you have to keep running it." that's an odd "disadvantage", Paul. It implies that running my company is something I don't want to do. Don't know about you, but I LOVE running my company.

PeeDee 18y ago

Second prize is selling for enough that the interest funds a comfortable lifestyle, whether or not you want to continue to work. First prize is being able to hang onto control so that you can use what you've built as a base to do still more.