6 ms·

I would like to believe Paul's thesis, but in the back of my mind, why do I get the feeling "He is trying to scare investors into putting money"?! Seriously, I

I would like to believe Paul's thesis, but in the back of my mind, why do I get the feeling "He is trying to scare investors into putting money"?! Seriously, I think over-supply of start-ups will crash prices. Yes, there is no limit to wealth creation, but even so, it is easy to upper-bound wealth creation over, say, the next 5 years. We can say with confidence there won't be more than, say, $10 billion worth of web start-up acquisitions over the next 5 years (in total, not per year) - that was about the total in the last 5 I would estimate and I think I am being fairly optimistic here. Even that $10 billion would be parceled out in the 80-20 rule - a couple of YouTube home runs, a few singles and doubles, and the remaining mass of start-ups have to fight over a fairly small pot of gold. My objection is consistent with economic theory: over-supply leads to serious price crashes, even when you make the favorable assumption (which is not exactly true in the start-up case) that in the long run, the over-supply can be absorbed.

pg 18y ago
If I were motivated only by self-interest, I should want later stage investors to drop out. That would leave seed stage investors like YC as the only game in town. And incidentally, I don't see why it's easy to upper bound wealth creation over any time period. If everyone woke up tomorrow and started working twice as hard, what would limit their output?
- calambrac 18y ago
  Why would you want later stage investors to drop out? You have early, cheap equity; don't later stage investors reset the valuation and give you a shot at cashing out if you want? (I really don't know, I'm actually asking).
  - pg 18y ago
    The valuation goes up between us and a series A round, but in a successful startup it should go up much more afterward.
    - calambrac 18y ago
      How many companies that get a series A round end up being successful? It seems like having that opportunity to decide if you agree that the company will keep growing or that you've made enough and would rather reinvest in the next round of startups would be nice to have.
      - pg 18y ago
        It wouldn't be nice to the startups to do that, because it would send an alarming signal to the series A investors that would drive down the valuation and maybe even prevent the round from closing.
- drwh0 18y ago
  If everyone woke up tomorrow and started working twice as hard, what would limit their output? demand and supply, as always it is trivial for some hypothetical foobar corp to spit out twice as many widgets as they do now. but why would they? without viable demand, they indeed show a loss for their effort-spurt. as you heard the CEO of ford say today, oversupply was a major problem for the automakers. working twice as hard will kill you if you don't have twice the demand the better question is how currency growth can be employed to stimulate demand over a period of time. growth comes from healthy inflation (3-5%). inflation is always a monetary phenomenon. this is why you will often hear opponents of "secured" currencies (gold etc) tell you that you can't get growth in an economy in the mid term unless you have a fiat currency.
  - pg 18y ago
    What limits demand for cars is that people can't afford them, not that they don't want them. But since by my assumption everyone is working twice as hard, including the buyers, there should be demand to match the supply.
    - drwh0 18y ago
      no, the demand does not manifest itself spontaneously. people just don't decide to wake up and work twice as hard, there has to be legit economic growth. there is a monetary role. its no coincidence that "healthy" economic growth conforms to healthy monetary growth. this directly addresses your point of people wanting cars but not being able to afford them. this demand could be trivially induced artificially by monetary means, but it would lead to unhealthy inflation monetary cycles typically manifest over an eighteen month period. i.e. the increase or decrease in Fed policy would impact demand directly likely no less than a year. the only way to dramatically alter this...i.e. to actually get people to wake up and work twice as hard takes drastic currency action. this is all undergrad economics
    - deleted 18y ago
      [deleted]
    - jimbokun 18y ago
      "What limits demand for cars is that people can't afford them, not that they don't want them." Or that they already have them? In the U.S., isn't the ratio of eligible driving population to drivable autos approaching 1? So, twice as many cars would likely not find buyers and drive down prices a lot. Sorry if I'm missing the bigger picture stuck on this specific detail.
- sielskr 18y ago
  Is it not the case that like a VC, a seed-stage investor maximizes his income when the startup he funds tries to hit a home-run? And are not home-runs much more likely if a VC invests in the startup?
  - pg 18y ago
    Home-runs are more likely if VCs invest, but it is hard to say whether this is because VCs select the companies most likely to be big successes, or because their participation makes companies big successes. So it is very hard to predict what would happen if startups stopped taking VC.
- dpapathanasiou 18y ago
  "If I were motivated only by self-interest, I should want later stage investors to drop out. That would leave seed stage investors like YC as the only game in town." But isn't the entire YC experience designed to get angels and VCs at demo day to make an investment in each company?
  - pg 18y ago
    No, the main focus is on whatever the startup is building. Toward the end of each YC cycle we switch to talking about how to pitch to investors. But even there the way to be convincing is to be working on something genuinely great, and just tell the truth about it.
paul 18y ago
Why are you focusing on acquisitions? There are profitable companies that remain private, like 37signals (plus ones you never hear about because there's no point in talking about how much money you make) and also IPO, which is rare but potentially huge. Google alone is worth $86B, at that IPO was only 4 years ago, so your "$10B in the past 5 years" number is clearly incomplete.
- netcan 18y ago
  If your thesis is correct, then these are really the ones that need focusing on. If the world is about to be be bombarded with startups, they can't all be bought or go to IPO. The remaining startups will need to find a middle ground of some sort.
  - pg 18y ago
    I don't think there's any limit to the number that could get bought. The upside that founders are willing to trade in exchange for safety is an opportunity that would call acquirers into being if they didn't already exist. And why couldn't there be 100 or 1000 times as many public companies? Stranger things have happened in history.
    - netcan 18y ago
      "And why couldn't there be 100 or 1000 times as many public companies? Stranger things have happened in history." They would need to be smaller or the economy would need to be bigger. Ties in with your other essay.
    - sielskr 18y ago
      There could be 100 times as many U.S. public companies while Sarbanes-Oxley remains in effect?
      - marvin 18y ago
        Obviously not, but that wasn't the point.
gruseom 18y ago
If there's any truth to pg's claim that the paradigm is shifting and that talented people are increasingly likely to start their own thing than go work for a boss (and personally, I believe there is), then one would expect just the opposite of what you assume: more wealth should be created this way in the next 5 years than in the previous 5, because more value will be. And the productivity delta between startups and large companies will grow even faster, since the latter will be increasingly starved for new talent. Edit: one might also expect current economic conditions to accelerate this process, since downturns are harder on inefficient players than efficient ones. It occurred to me the other day that for this reason, downturns are a healthy part of the economic system, kind of like forest fires in ecosystems.
- drwh0 18y ago
  If there's any truth to pg's claim that the paradigm is shifting and that talented people are increasingly likely to start their own thing than go work for a boss (and personally, I believe there is) no there isn't. come back in five years, the top ten internet companies will control 95% of all traffic and 99% of all revenues. this market has almost zero friction...how is it that google has already sewn up over 80% of ad revenues on the web? where are all the mom-and-pop ad networks? they're on deaths door by the same token anyone can build a PC...so what happened to the 10,000 little PC makers that used to be in every strip mall? today we have basically three pc makers....hp, dell, apple. so much for "low barrier to entry = high res"
  - gruseom 18y ago
    I don't get this argument. Assign the top ten companies as high a percentage of whatever as you like: it won't prevent people from seizing opportunity to create value at a higher rate than large organizations are able to do. The point is that the two barriers that largely prevented talented people from doing so in the past - cost of entry and cultural beliefs - don't hold sway anymore. The fact that some markets have matured and been commoditized hardly implies that there is no new value to be created.
    - 18y ago
tlb 18y ago
There might be a limit, but it's much bigger than $10B in 5 years. Just in 2007, I counted up $29B of publicly announced web startup acquisitions. That easily justifies thousands of startups trying for a piece of that pie. A good list (including more than web) is at http://startup.partnerup.com/2008/01/02/2007-acquisitions-web-internet-technology/ http://startup.partnerup.com/2008/01/02/2007-acquisitions-we...

pg 18y ago

If I were motivated only by self-interest, I should want later stage investors to drop out. That would leave seed stage investors like YC as the only game in town. And incidentally, I don't see why it's easy to upper bound wealth creation over any time period. If everyone woke up tomorrow and started working twice as hard, what would limit their output?

calambrac 18y ago
Why would you want later stage investors to drop out? You have early, cheap equity; don't later stage investors reset the valuation and give you a shot at cashing out if you want? (I really don't know, I'm actually asking).
- pg 18y ago
  The valuation goes up between us and a series A round, but in a successful startup it should go up much more afterward.
  - calambrac 18y ago
    How many companies that get a series A round end up being successful? It seems like having that opportunity to decide if you agree that the company will keep growing or that you've made enough and would rather reinvest in the next round of startups would be nice to have.
    - pg 18y ago
      It wouldn't be nice to the startups to do that, because it would send an alarming signal to the series A investors that would drive down the valuation and maybe even prevent the round from closing.
drwh0 18y ago
If everyone woke up tomorrow and started working twice as hard, what would limit their output? demand and supply, as always it is trivial for some hypothetical foobar corp to spit out twice as many widgets as they do now. but why would they? without viable demand, they indeed show a loss for their effort-spurt. as you heard the CEO of ford say today, oversupply was a major problem for the automakers. working twice as hard will kill you if you don't have twice the demand the better question is how currency growth can be employed to stimulate demand over a period of time. growth comes from healthy inflation (3-5%). inflation is always a monetary phenomenon. this is why you will often hear opponents of "secured" currencies (gold etc) tell you that you can't get growth in an economy in the mid term unless you have a fiat currency.
- pg 18y ago
  What limits demand for cars is that people can't afford them, not that they don't want them. But since by my assumption everyone is working twice as hard, including the buyers, there should be demand to match the supply.
  - drwh0 18y ago
    no, the demand does not manifest itself spontaneously. people just don't decide to wake up and work twice as hard, there has to be legit economic growth. there is a monetary role. its no coincidence that "healthy" economic growth conforms to healthy monetary growth. this directly addresses your point of people wanting cars but not being able to afford them. this demand could be trivially induced artificially by monetary means, but it would lead to unhealthy inflation monetary cycles typically manifest over an eighteen month period. i.e. the increase or decrease in Fed policy would impact demand directly likely no less than a year. the only way to dramatically alter this...i.e. to actually get people to wake up and work twice as hard takes drastic currency action. this is all undergrad economics
  - deleted 18y ago
    [deleted]
  - jimbokun 18y ago
    "What limits demand for cars is that people can't afford them, not that they don't want them." Or that they already have them? In the U.S., isn't the ratio of eligible driving population to drivable autos approaching 1? So, twice as many cars would likely not find buyers and drive down prices a lot. Sorry if I'm missing the bigger picture stuck on this specific detail.
sielskr 18y ago
Is it not the case that like a VC, a seed-stage investor maximizes his income when the startup he funds tries to hit a home-run? And are not home-runs much more likely if a VC invests in the startup?
- pg 18y ago
  Home-runs are more likely if VCs invest, but it is hard to say whether this is because VCs select the companies most likely to be big successes, or because their participation makes companies big successes. So it is very hard to predict what would happen if startups stopped taking VC.
dpapathanasiou 18y ago
"If I were motivated only by self-interest, I should want later stage investors to drop out. That would leave seed stage investors like YC as the only game in town." But isn't the entire YC experience designed to get angels and VCs at demo day to make an investment in each company?
- pg 18y ago
  No, the main focus is on whatever the startup is building. Toward the end of each YC cycle we switch to talking about how to pitch to investors. But even there the way to be convincing is to be working on something genuinely great, and just tell the truth about it.

paul 18y ago

Why are you focusing on acquisitions? There are profitable companies that remain private, like 37signals (plus ones you never hear about because there's no point in talking about how much money you make) and also IPO, which is rare but potentially huge. Google alone is worth $86B, at that IPO was only 4 years ago, so your "$10B in the past 5 years" number is clearly incomplete.

netcan 18y ago
If your thesis is correct, then these are really the ones that need focusing on. If the world is about to be be bombarded with startups, they can't all be bought or go to IPO. The remaining startups will need to find a middle ground of some sort.
- pg 18y ago
  I don't think there's any limit to the number that could get bought. The upside that founders are willing to trade in exchange for safety is an opportunity that would call acquirers into being if they didn't already exist. And why couldn't there be 100 or 1000 times as many public companies? Stranger things have happened in history.
  - netcan 18y ago
    "And why couldn't there be 100 or 1000 times as many public companies? Stranger things have happened in history." They would need to be smaller or the economy would need to be bigger. Ties in with your other essay.
  - sielskr 18y ago
    There could be 100 times as many U.S. public companies while Sarbanes-Oxley remains in effect?
    - marvin 18y ago
      Obviously not, but that wasn't the point.

gruseom 18y ago

If there's any truth to pg's claim that the paradigm is shifting and that talented people are increasingly likely to start their own thing than go work for a boss (and personally, I believe there is), then one would expect just the opposite of what you assume: more wealth should be created this way in the next 5 years than in the previous 5, because more value will be. And the productivity delta between startups and large companies will grow even faster, since the latter will be increasingly starved for new talent. Edit: one might also expect current economic conditions to accelerate this process, since downturns are harder on inefficient players than efficient ones. It occurred to me the other day that for this reason, downturns are a healthy part of the economic system, kind of like forest fires in ecosystems.

drwh0 18y ago
If there's any truth to pg's claim that the paradigm is shifting and that talented people are increasingly likely to start their own thing than go work for a boss (and personally, I believe there is) no there isn't. come back in five years, the top ten internet companies will control 95% of all traffic and 99% of all revenues. this market has almost zero friction...how is it that google has already sewn up over 80% of ad revenues on the web? where are all the mom-and-pop ad networks? they're on deaths door by the same token anyone can build a PC...so what happened to the 10,000 little PC makers that used to be in every strip mall? today we have basically three pc makers....hp, dell, apple. so much for "low barrier to entry = high res"
- gruseom 18y ago
  I don't get this argument. Assign the top ten companies as high a percentage of whatever as you like: it won't prevent people from seizing opportunity to create value at a higher rate than large organizations are able to do. The point is that the two barriers that largely prevented talented people from doing so in the past - cost of entry and cultural beliefs - don't hold sway anymore. The fact that some markets have matured and been commoditized hardly implies that there is no new value to be created.
  - 18y ago

tlb 18y ago

There might be a limit, but it's much bigger than $10B in 5 years. Just in 2007, I counted up $29B of publicly announced web startup acquisitions. That easily justifies thousands of startups trying for a piece of that pie. A good list (including more than web) is at http://startup.partnerup.com/2008/01/02/2007-acquisitions-web-internet-technology/ http://startup.partnerup.com/2008/01/02/2007-acquisitions-we...