13 ms·

Startup = Growth

• sandee 14y ago
  "We usually advise startups to pick a growth rate they think they can hit, and then just try to hit it every week. The key word here is "just." If they decide to grow at 7% a week and they hit that number, they're successful for that week. There's nothing more they need to do. But if they don't hit it, they've failed in the only thing that mattered, and should be correspondingly alarmed." This is the gem.
  • dave1619 14y ago
    I'm curious if PG encourages a "discovery" stage where they don't have growth targets but rather are learning about the market/customer and building a product? And if so, how long of a "discovery" stage is encouraged?
    • wging 14y ago
      The sixth footnote appears to address this a bit. You of course need to have something that could possibly grow before you can hope to achieve growth. During Y Combinator we measure growth rate per week, partly because there is so little time before Demo Day, and partly because startups early on need frequent feedback from their users to tweak what they're doing. [6] ... [6] This is, obviously, only for startups that have already launched or can launch during YC. A startup building a new database will probably not do that. On the other hand, launching something small and then using growth rate as evolutionary pressure is such a valuable technique that any company that could start this way probably should. In other words, if a startup hasn't launched yet they quite sensibly don't measure growth rate--but it's a good idea to launch early so you can measure growth and optimize for it.
      • dave1619 14y ago
        Another option is if you need time to build your product, you can launch another "something"... like the legendary mvp video from Dropbox or the finance blog from Mint.com they used to draw in signups several months before launching.
• paulsutter 14y ago
  I gotta say, "a company designed to grow fast" is not only more concise, but broader and more on point than Steve Blanks' definition ("an organization formed to search for a repeatable and scalable business model"[1]) An epic essay with tremendous depth. Love the ending: "A startup founder is in effect an economic research scientist. Most don't discover anything that remarkable, but some discover relativity." [1] http://steveblank.com/2010/01/25/whats-a-startup-first-principles/ http://steveblank.com/2010/01/25/whats-a-startup-first-princ...
  • friendstock 14y ago
    I love this essay... but I'm concerned that the emphasis on growth so early on will cause some new startup founders to put their focus on vanity metrics, as opposed to spending time to talk with users and build a product that has true product-market fit and organic growth.
    • zackyap 14y ago
      PG did state what are good metrics to focus on: "The best thing to measure the growth rate of is revenue. The next best, for startups that aren't charging initially, is active users. That's a reasonable proxy for revenue growth because whenever the startup does start trying to make money, their revenues will probably be a constant multiple of active users."
  • filip01 14y ago
    While the definition "a company designed to grow fast" makes his point clear, it's not as accurate as Blank's. There are lots of companies "designed to grow fast" that are not at all startups. The "search for a business model" is essential to the definition of a startup.
    • emmett 14y ago
      Which companies designed to grow very fast are not startups?
  • adrianhoward 14y ago
• kemiller 14y ago
  I think seeing it put so clearly, it's convinced me that I don't even want to found a startup. I'd like to own a business, but that's different, and I should behave accordingly. That might make it the most useful thing I've read in years.
  • thejteam 14y ago
    Makes me consider opening a barbershop.
• smalter 14y ago
  Question: w.r.t. weekly revenue growth, are we talking about growth rate of monthly revenue run rate (assuming billing happens monthly) or something else? For instance, something like this: new signup revenue in the current week x historical conversion to paid divided by revenue of paying customers + sum of estimated revenue of recent previous weeks who haven't yet hit the date of conversion? (if that makes sense) I'd love to hear thoughts on how to calculate the referenced number.
  • shimon 14y ago
    Ask yourself: what's the most important thing a user of this product can do? Pick one thing. It might be "sign up", or it might something way more specific like "run a report" or "receive a fax". Drive growth in that thing.
  • deleted 14y ago
    [deleted]
• deleted 14y ago
  [deleted]
• photon137 14y ago
  "For a company to grow really big, it must (a) make something lots of people want, and (b) reach and serve all those people" Very valuable insight. However, (b) in its own right, can serve as a fast growth business model - where the delivery or "clearing" of value between those who demand and those who supply is the value proposition itself - because everyone wants delivery (making it, by default, a big market). Most banks work on this principle, in an abstract sense. A business like FedEx or UPS is a more physical example of this. Online takeout-ordering services are examples of this - the customer wants the food and the "online ordering website" startup does not produce food - but what it produces is "clearing" ie matching demand to supply. This - as an idea, in my experience, always scales and grows fast as well while falling into the category (b) that pg mentions.
• nreece 14y ago
  If you write software to teach Tibetan to Hungarian speakers, you'll be able to reach most of the people who want it, but there won't be many of them. It may not scale, but the chances of it making (any/more) money are much higher ("riches are in the niches") than a "fast startup" as it's very rare for a startup to grow fast and monetize quickly at the same time, because most people just won't buy immediately, sometimes even if it solves a problem for them. For example, I've been using Evernote and Dropbox for years, but haven't had the need to buy a premium account. I believe there are many others like me who are happy with the free (or open source) software that does solve an itch. Are these "fast startups"? Is their business model (freemium) scalable?
  • icandoitbetter 14y ago
    It may not scale, but the chances of it making (any/more) money are much higher ("riches are in the niches") than a "fast startup" as it's very rare for a startup to grow fast and monetize quickly at the same time, because most people just won't buy immediately, sometimes even if it solves a problem for them. That is the exact point of the essay. An average niche business makes more money than an average startup, but a successful startup makes many orders of magnitude more money than a successful niche business.
    • d0mine 14y ago
      You might mean: a median niche business makes more money than a median startup. Average is much higher than a median for startups because it includes the most successful startups which are by definition have a high growth rate over an extended period of time so they are very big. Niche businesses in this context have a low growth so their average is closer to the median. The growth is constrained at the top in absolute terms (otherwise it would be a startup) so the average is lower than the one for startups.
• lifeisstillgood 14y ago
  So, is "b) reaching all the people in the Market" a function of converting a decentralised market to a centralised model? Facebook is a successful startup because it took a decentralised model (talking to your friends) and centralised it. Barbers are decentralised - but after I build a robo-barber for every home, then suddenly one company can cut everyones hair. So is it possible that growing a startup fast is about increasing the slope between a decentralised (diffuse players, low margins) and a centralised model. I suspect there are good counter examples but really startups that grow fast seem to optimise for one central point for doing what they do - dropbox, airbnb readthedocs
• quasistar 14y ago
  Indeed, this cogent essay has been a long time coming and should be a pre-requisite for anyone thinking of getting in the game. "A barbershop isn't designed to grow fast. Whereas a search engine, for example, is." Brilliant.
• pixelmonkey 14y ago
  One of my favorite pg essays of all time. Loved this: "Almost every company needs some amount of funding to get started. But startups often raise money even when they are or could be profitable. It might seem foolish to sell stock in a profitable company for less than you think it will later be worth, but it's no more foolish than buying insurance. Fundamentally that's how the most successful startups view fundraising. They could grow the company on its own revenues, but the extra money and help supplied by VCs will let them grow even faster." Took me awhile to realize this as a founder. Profitability is a great goal (and makes the business very "real" by cutting away vanity metrics), but self-funding growth from profitability pretty much guarantees you are locked into a relatively slow growth rate. pg's simple charts show why being locked into a lower growth rate could mean being blown away by your competitors.
  • FredBrach 14y ago
    One of my favorite pg essays of all time. Same here. I figured out that one can turn into an optimization problem her user satisfaction and that it was key to get a successful product and then key for the company, but it's even funnier: can be turned into an optimization problem the whole process of founding a company. Definitely awesome.
  • bavidar 14y ago
    This is a tough sell to young entrepreneurs. Its hard for them to understand that buy giving away some portion now will make their equity more valuable when they are able to scale to mass market.
    • zachalexander 14y ago
      It is, but I am being sold. Until this past week or so I've been highly skeptical of VC funding and much more inclined towards bootstrapping. I love that DHH video someone else posted in this thread. I think it's silly to focus on users and vanity metrics if you don't have a clear business model (even if it's not implemented immediately). But this essay makes an amazing case for why outside funding is helpful, even crucial. And it's encouraging that he's emphasizing revenues, not just users. I'm also encouraged because I was at the YC event at MIT this Wednesday, and didn't hear anything (even when I asked directly) about investor drama.
• dave1619 14y ago
  For a startup measuring users (not revenue), what's the right thing to measure to know your growth rate? Is is DAUs, MAUs, daily sessions, length of session, total signups?
  • pmarca 14y ago
    The typical metrics are DAUs and MAUs, with attention paid to DAU:MAU ratio, and then some gauge of activity within each session. For some companies that means length of session, but for other companies you'd want something else (e.g. services that actually want users to leave, like search engines). One of the things that impresses us in pitches is when the entrepreneur has really thought through what the best metrics are for that particular service.
  • DanielRibeiro 14y ago
    From the three engines of growth[1]: - virality index - retention rate - customer lifetime value / customer aquisition cost Having more than one is hard, so optmizing for one is much simpler (don't kid yourself, it is hard on any of them, and not all business can pick all of them). [1] http://www.deviantbits.com/blog/engines-of-growth.html http://www.deviantbits.com/blog/engines-of-growth.html
• gfodor 14y ago
  This essay highlighted something for me, you actually end up having a 2x2 matrix for "work for" vs "invest in" and "startup" vs "non-startup." For example, a certain person may try increasing their wealth by investing in startups, but prefer working in a non-startup. Or another person may prefer investing in non-startups (safe, dividend paying stocks or bonds), but try increasing their wealth by working for startups. For people with talent in creating products, best to focus their investing in safe, low maintenance non-startup investments and their wealth creation in working for startups. For people who have access to capital and a knack for choosing winners, they should work for non-startups (or philanthropy, or whatever, since they are probably already fairly wealthy) and invest in startups they think can win. For the really talented, who both know a thing or two about building products, and also can pick winners, then you should work for a startup that invests in startups. See: pg.
  • nodemaker 14y ago
    Yes. Every startup guy must save and invest in traditional stocks to mitigate risk. One other investment that a startup guy should consider is investing time into building good a freelancing business as a side business from their startup.
  • dchichkov 14y ago
    Your math is looking wrong. Because working in a startup is an investment.
    • gfodor 14y ago
      Obviously I meant investment in the traditional sense, the deployment of capital with the expectation of yield and preservation of principal. Working for a startup is an "investment" in the figurative sense, since you are trading your time for equity instead of cash, but what I meant here was literally putting money into some asset or security to increase your wealth or income.
      • dchichkov 14y ago
        What I meant is that there is no 2x2 matrix like this. You can: work for/be a founder. And you can invest. There are no 'figurative sense investments'. You can't 'invest time'. Nobody cares about your time. You can only invest money [or hours * your market rate, which is money].
• tlogan 14y ago
  The part "and how to reach those people" should be written in bold. It seems like the difference between lifestyle business and startup is sometimes (or in majority of cases?) just in figuring out scalable way to acquire new customers.
• deleted 14y ago
  [deleted]
• batgaijin 14y ago
  I think it's missing the idea of bootstrapping. I think it makes a much rougher environment for fledgling startups, but I think it should be considered more like a hot forge. The more the odds are stacked against you, the better you get. I guess people sometimes miss that when they are aiming for Twitter/Facebook level revenue accountability.
  • pmarca 14y ago
    That's a little bit like saying the optimal strategy for running the Boston Marathon is to start running naked from the Arctic Circle three weeks prior.
    • staunch 14y ago
      Training in harsher conditions than you'll compete in works extremely well. I suspect Github would have done worse if they had taken early funding. There should probably be more businesses built following their model.
• wamatt 14y ago
  Not a fan of praise for the sake of it either, but having said that, this is one of the most succinct and focused essays I've read on startups, in a long time, and hard to fault it's fundamental message. As founders it's easy to do things other than push every day to get customers and/or active users. Some founders are so focused on other less stressful activities, that they outsource the entire function to a 'growth hacker'. Let someone else deal with it... Yikes! Grow is core to the startup's success, and happy to be reminded of it.
• mmmmax 14y ago
  If this essay had an abstract, this would be it: "If you want to understand startups, understand growth. Growth drives everything in this world. Growth is why startups usually work on technology—because ideas for fast growing companies are so rare that the best way to find new ones is to discover those recently made viable by change, and technology is the best source of rapid change. Growth is why it's a rational choice economically for so many founders to try starting a startup: growth makes the successful companies so valuable that the expected value is high even though the risk is too. Growth is why VCs want to invest in startups: not just because the returns are high but also because generating returns from capital gains is easier to manage than generating returns from dividends. Growth explains why the most successful startups take VC money even if they don't need to: it lets them choose their growth rate. And growth explains why successful startups almost invariably get acquisition offers. To acquirers a fast-growing company is not merely valuable but dangerous too."
• bdr 14y ago
  I don't understand this part: "For founders who are younger or more ambitious the utility function is flatter." Does flat mean O(1) or O($)? I'd guess the former, but the latter seems to fit more with the conclusion.
  • aston 14y ago
    I think the intended idea is U($) = k*$, a linear relationship between dollars earned and utility, or (its derivative) a horizontal line on marginal utility. Typical economically rational adults have utility curves that eventually flatten out, with the marginal utility falling to zero.
• geuis 14y ago
  What about in my case, where I run a free service that currently has served over 9.3 million requests in the last month? (That service is http://jsonip.com http://jsonip.com) Its a utility service that a lot of people are finding useful and has a lot of traction, but no way that I can see to monetize it. Not even sure I have a desire to try and monetize it, since it costs me almost nothing to run. I would love to be able to build that resource into something more, but I'm not even sure where to start. It has a lot of usage and growth, but its not something I would remotely call a startup. I made a short post a few hours ago about the current state: http://news.ycombinator.com/edit?id=4556711 http://news.ycombinator.com/edit?id=4556711
  • abozi 14y ago
    Serving 9.3M requests is impressive and if you are looking to build it into something more, have you tried getting some feedback from users? What is the reason they are using your service? I think in general, one of many ways the growth can be actualized is via feedback from those who is actually using the product/service.
  • ericflo 14y ago
    How fast is it growing, week over week?
• tstyle 14y ago
  "It's the same with other high-beta vocations, like being an actor or a novelist. I've long since gotten used to it. But it seems to bother a lot of people, particularly those who've started ordinary businesses. Many are annoyed that these so-called startups get all the attention, when hardly any of them will amount to anything." I see so many comments on HN poking fun at VC backed startups with underdeveloped business models. Sure, a lot of the criticisms are well deserved, but I wonder if a part of it is because people are bothered by the power law phenomenon.
  • pmarca 14y ago
    I think that's true. I also think that the cliche of the venture-backed entrepreneur who goes for growth yet has no idea how the company will generate revenue is mostly false. Most of the smart entrepreneurs I know who are apparently pursuing that strategy actually know exactly how they're going to make money, they just don't say much about it up front.
  • deleted 14y ago
    [deleted]
• 001sky 14y ago
  But at the moment when successful startups get started, much of the innovation is unconscious. -- This is an interesting bit. The notion of what is intelligence. At any given time, there are 1001 questions that may be [intelligent]. But ask right question, and the answer is often [easy] to see. So Framing. Observation. Caring. Passion. Perserverence. Non-ovious. Yet invaluable. Forms of intelligence.
• mcartyem 14y ago
  "the same thing that makes" -> "the same thing makes"
• willrobinson 14y ago
  spellcheck: abolute My favorites were the last paragraph and the last footnote. How did those Russians get on anyway? The only other thing I would add is that these high growth companies, so-called startups, are all utilizing the web. They are relying on what it provides. I guess that's implicit, maybe it need not be stated, but historically could older forms of media have supported the type of growth rates discussed? How popular was the term "startup" before the web? And did it mean the same thing? The startup: 1. Trying to solve a harder problem than existing businesses are willing to take on. 2. Being equipped for rapid growth. 3. Utilizing the web.
• seunosewa 14y ago
  A 'startup' is simply a new business. That's what the word means. You can't just take a word that has an existing meaning and say it means something else.
• ef4 14y ago
  pg makes his point clearly at the cost of oversimplifying his definition. Scalability is a continuum. There is a continuum between barbershop and search engine. VCs have every incentive to hit the far high end of the continuum. But a young, hungry entrepreneur probably gets higher expected value by not straying quite so far out.
  • oinksoft 14y ago
    There is no continuum. The point is that the startup values growth over all else, really limitless growth if possible. A "barbershop" is some business comfortable plateauing at a certain point, or confining itself in other ways (these being business for which growth is not the foremost goal). A barbershop could be a small chain of barbershops in a metro area, the analogy holds.
    • ef4 14y ago
      But limitless growth is never possible. Eventually you bump up against the limits of your market. If a business is aggressively trying to grow in a $100 million market instead of a $100 billion market, they are "limiting themselves". But they're still functionally a startup. Keep taking it down a notch. At what market size do they stop being a startup? It's fuzzy. As your target market goes from "everyone" to "doctors" to "radiologists" to "radiologists at research hospitals", you may be intelligently trading off market size for lower competition, lower marketing costs, and better product/market fit. What if you had a brilliant idea for a piece of software that would help discover oil deposits? I contend that you have all the ingredients of a technology startup, but it will be impossible to measure your business in the simplistic way the essay describes. There may be only a dozen customers in the world who are positioned to pay you what you're worth, and your growth is likely to be an impulse function: until the moment you get bought by an oil major, there's no growth to measure. His ultimate distinction is fundamentally fuzzy. Eventually, every business stops growing explosively. It's only a question of at which size it happens. And that size is necessarily a continuum.
  • pmarca 14y ago
    There really isn't a continuum in most technology markets. Startups that constrain their growth tend to get pounded into the ground by startups that don't. Try being a small search engine competing with Google.
• vegashacker 14y ago
  Question about measuring weekly growth rate: A lot of YC startups are centered around an iPhone app. If it rides up the charts, it will likely get a huge bump in whatever metric you are trying to measure. But the bump's very often temporary, since more than likely the app will slide back down the charts in a week. How do you measure growth when this happens?
  • pmarca 14y ago
    That is a great point, and one of the things VCs see a lot are startups that perform all kinds of contortions to boost their app store chart rankings right before they raise money. Because there are not very many ways to boost your rankings legitimately aside from true organic growth, sometimes this means paying for sketchy marketing techniques that can actually result in Apple banning your app when they find out. I think the honest thing to do is probably to measure actual user engagement in the app. The high quality app startups that pitch us use something like Mixpanel (disclosure: one of our investments itself) to do this -- in fact, this is one of the reasons we invested in Mixpanel.
• timpeterson 14y ago
  more blah, blah on what made google, fb, etc. great, what's the point?
  • timpeterson 14y ago
    seriously why is everyone masturbating to PG's post so much? its totally pointless
• cperciva 14y ago
  A good growth rate during YC is 5-7% a week. If you can hit 10% a week you're doing exceptionally well. If you can only manage 1%, it's a sign you haven't yet figured out what you're doing. This is, to me, the most interesting thing here: I've seen lots of people talk about "traction", but this is the first time I've seen someone in the startup world give hard numbers for what a "good growth rate" is. Another way to look at these numbers: A good growth rate during YC means that you're doubling every 10-14 weeks. An exceptional growth rate is doubling every 7 weeks, and if your doubling time is more than a year, it's a sign you haven't yet figured out what you're doing. This fits pretty well with the rather imprecise commentary that "a startup measures the time to double in size in months, except for wildly successful ones, which measure it in weeks".
  • DanielRibeiro 14y ago
    To me, the cautionary warning (echoing Andrew Chen's[1]) for consumer startups was key: Beware too of the edge case where something spreads rapidly but the churn is high too, so that you have good net growth till you run through all the potential users, at which point it suddenly stops Sean Ellis[2] has a similar test for product market fit (the 40% rule): I ask existing users of a product how they would feel if they could no longer use the product. In my experience, achieving product/market fit requires at least 40% of users saying they would be “very disappointed” without your product. [1] http://andrewchen.co/2012/06/20/quora-when-does-high-growth-not-imply-productmarket-fit/ http://andrewchen.co/2012/06/20/quora-when-does-high-growth-... [2] http://startup-marketing.com/the-startup-pyramid/ http://startup-marketing.com/the-startup-pyramid/
• hasenj 14y ago
  So basically a startup is a company whose goal is not to create a profitable business, but a company whose goal is to grow a large userbase rapidly and lure VCs to pump more money into it, because VCs just dream about finding the next google or apple and funding it in an early stage. This just emphasizes why I do not want to be a part of this scene. As DHH says: fuck doing a startup. http://vimeo.com/3899696#t=1290 http://vimeo.com/3899696#t=1290
  • pmarca 14y ago
    I won't argue against you selecting yourself out, but your argument is incorrect. Google and Apple are insanely profitable.
    • hasenj 14y ago
      Yes, that's why VCs are hoping for. I doubt that a free photo-sharing app is going to be as profitable as Apple, for example.
      • daniel_levine 14y ago
        just because something starts as a free photosharing app doesn't mean it stays that way. One of pg's main points is that entrepreneurs see a way in that is often undervalued by others for a variety of reasons. When MSFT came along people underestimated the value of the OS, for Apple it was the PC, in Intel's second coming (first being memory) it was the microprocessor which even Intel itself underestimated for a while. Before Apple's rebirth phones and music players were seen as a small, relatively commoditized business. I dare say that a large part of FB is a free photo sharing app...
        • hasenj 14y ago
          PG's essay makes it perfectly clear: it's not about creating technology, it's about user acquisition. Read my original reply again. The startup's goal is to acquire users fast. Why? To lure VCs. I don't want to be a part of that. I want to create a business, not a startup (in the sense defined by PG's essay).
• tristan_juricek 14y ago
  This article might just be my point of reference whenever I get a bit too much "valley hate". Like, when I start reading a bunch of the ideas coming out of the blog from 37 Signals. I still think that for every serious genius, there are a lot of copycats. These copycats create this gigantic echo chamber of ideas. It's a ton of noise from a lot of likely failures. That noise can feel dishonest. After reading this essay, I'm left with a sense that startup land is probably the best, dare I say more honest way, of turning investment money into new technology and jobs. I'm actually left wondering about the relationship between "normal small businesses" and bankers. It feels adversarial in comparison.
• nwenzel 14y ago
  Based on required growth rates and measurement intervals (5-10% per week), there would seem to be a pretty heavy bias towards the consumer space. B2B or so-called Enterprise Companies, especially industry-specific new companies, would have a hard time qualifying on several fronts (market size, growth rate, growth interval). I am particularly interested in the B2B style of startup because I run an Enterprise Startu-er... Enterprise New Company focused on serving the insurance industry. A B2B Startup, it would seem, would have to link customer charges to something that can grow without a new sales contract. I guess, the trick to achieving high growth rates is to create viral growth inside an existing account. Growth in the B2B space will be large jumps (with a new contract) followed by organic growth or not (within the bounds of the existing sales contract). It seems to follow then that since the purchase agreement is the painful and tough and slow part, a B2B Startup would want to have a Freemium or some other type of contract with low/no startup costs and higher per user/GB/account/server/unit costs. Gives me some new direction on pricing. On an unrelated note, I'll disagree with other comments of "favorite pg essays" and say that "Wealth" was the best by an order of magnitude. http://paulgraham.com/wealth.html http://paulgraham.com/wealth.html
  • dirtyaura 14y ago
    Selling expensive enterprise products does have a longer sales cycle than cheaper consumer products, and increments to your revenue come in more discrete blocks. But that doesn't invalidate pg's argument about growth: you just have to use other proxies to estimate your trajectory. For example, instead of active users you track a number of leads and how interested they are. Even without a single closed deal, you can measure your sales pipeline. It is an imperfect proxy for potential revenue growth, but so is daily active users for consumer internet startups. Thus, if you are planning to sell an enterprise solution costing $100000, and you think you are going to make these kind of deals a few times a year in the beginning, then you use your sales pipeline measurements to estimate your growth with a finer granularity than a big sale now and then.
    • pbharrin 14y ago
      An estimate of your sales pipeline isn't proof you have traction, it's an estimate: not worth very much.
• carsongross 14y ago
  OK. But remember the old Paul Graham, who talked about things like this: http://www.avc.com/a_vc/2012/03/the-startup-curve.html http://www.avc.com/a_vc/2012/03/the-startup-curve.html Seems like there's a lot of non-startup in that startup curve, if we are using the new Paul Graham's definitions.
  • gruseom 14y ago
    But doesn't that picture track the current essay rather well? Apart from a false start that turns out to be noise, it shows a series of experiments that don't go anywhere for a while but eventually produce a repeatable growth rate. If the diagram were data, the essay would explain it.
    • carsongross 14y ago
      Not at all. Notice that Paul says you should be alarmed if you are not hitting 5/7% growth per week. That kind of growth only makes up a tiny fraction of "the process" and, in my opinion, is the easy part to deal with. The hard part, where VC/gurus can add value is the vast gut-it-out parts, but this essay hurts more than it helps on that axis. I think this is an essay more about "startups y combinator can flip to VCs" than startups.
      • tptacek 14y ago
        I found this essay exasperating, but YC doesn't "flip startups to VC". That's not how it works.
        • pw 14y ago
          Why'd you find it exasperating?
          • tptacek 14y ago
            Rather not talk about it on this thread.
• Choppen5 14y ago
  Seminal article - fantastic. I immediately calculated growth rate for Mightbuy.it - posted them here: http://blog.mightbuy.it/2012/09/22/user-growth/ http://blog.mightbuy.it/2012/09/22/user-growth/ The total #s are pretty embarrassing but the growth rate actually looks good, at around 10% currently - except the rate of growth of the growth is decreasing.. how meaningful is growth rate for such short time periods? In my case I'm closer to the first stage of just making a product people want, but seems useful to keep track of this rate already. PS - please sign up and help a brother out.
• kaiwen1 14y ago
  This is probably the most insightful article on startups ever written. I was blind, and now I see. Thank you, Paul.
• philwelch 14y ago
  > But the two connections are distinct and in principle one could start a startup that was neither driven by technological change, nor whose product consisted of technology except in the broader sense. Arguably Netflix was one of these. DVD's may have been the "technological change" driving the company, but in principle you possibly could have done the same thing with VHS. Most logistics-based big companies, like Fedex, Walmart, or even Costco, could be cited as examples. Jetliners predated Fedex by decades, for instance. Aside from the novelty of selling PC's, Dell was a similar instance. This indicates that, just as in war, solving logistical problems often provides the biggest wins in business as well. Combining innovation and logistics was powerful enough to make humble Apple erupt into the world's most valuable business. In fact, Apple's growth rate during Jobs' tenure as CEO was ultimately exponential despite the company's age--does Jobs-era Apple somehow qualify as a startup due to this? > I once explained this to some founders who had recently arrived from Russia. They found it novel that if you threatened a company they'd pay a premium for you. "In Russia they just kill you," they said, and they were only partly joking. I remember that in the 90's, many of Microsoft's acquisitions had this same sinister undertone to it. I'm reminded of a Simpsons episode where Microsoft "buys out" Homer's startup, but all that happens is a bunch of goons smash up the house while Bill Gates quips, "I don't get rich by writing a lot of checks."
• shashashasha 14y ago
  It's a little Pop Science, but as Geoffrey West notes, other things that follow an S-curve growth are people. We start small and weak, at some point start rapidly growing, and as we reach a certain age we level off. West then extends this to the inevitable deaths of corporations: http://www.ted.com/talks/geoffrey_west_the_surprising_math_of_cities_and_corporations.html http://www.ted.com/talks/geoffrey_west_the_surprising_math_o...
• gojomo 14y ago
  Some community-oriented/UGC startups nowadays seem to prefer modest growth, at least for a while, to make sure the right standards/user-expectations can be maintained. (Hypergrowth can mean a change in community makeup faster than desireable norms can be maintained, which can spoil the dynamics in a way that's hard to un-spoil.) Compare HN's own revealed preference for limiting certain surges of new users. (Corollary: HN is not a 'startup'.) In a way, even Facebook's initial campus limitations served this purpose, getting certain mechanics (and corporate practices right) before facing the challenges of a larger userbase. I wonder: have YC companies had to face an explicit decision: grow faster or defend/consolidate the culture of the existing userbase, and if so what advice would PG and the other partners be likely to give?
• deleted 14y ago
  [deleted]
• asknemo 14y ago
  Am I the only one who think pg's view points appear to be getting more and more extreme, in some sense rather biased compared to his previous essays? Zynga is definitely all about growth. It is fiercely focused on metrics, fiercely focused on growth. But as someone from game industry, we cannot agree that this model is THE model that gives the world and everyone value. If the game industry worked like the way pg describes in the essay decades ago, we would never have Diablo, Baldur's Gate, Grim Fandango or Minecraft. We would all be left with choices like Farmville, Monsterville, Mineville, forever and ever. "Growth drives everything in this world."? Does it? All fads grow like wildfire too, but does it drive everything in world? Or a better question would be: should we allow it to?
  • chmike 14y ago
    Growth is for startups. This determines the value of startups. Startups are only a minority but they get alot of attention. This is logical since to achieve the growth goal they need the publicity. People have different understanding of success. Make your pick and don't care of the others. Some people get confused one their goal or success target.
  • chubot 14y ago
    I don't think he's trying to make any moral judgements. He's just making observations about what actually works within the context of our capitalist system. Capitalism has produced this period of explosive growth centered around technology in the USA and Silicon Valley in particular. And if you are trying to participate in that ecosystem, then you should understand what he says (IMO). There wasn't any part of the essay which says you should start a startup, or that it is a morally valuable thing to do. I somewhat agree with you that capitalism doesn't produce optimum value for society. Zynga's maybe an example of that -- I'm sure the are worse ones. But as the saying going, we have the worst system except for all the other ones that have been tried. For all the Zyngas there are some pretty good companies too. Also, I think your question is essentially hypothetical or philosophical: "should be allow it to?" Who's we? Short of an overthrow of the US government, I think this segment of the economy will exist for a long time. If you want to have an interesting reflection on capitalism, read "The Idea Factory", about Bell Labs. That is the other end of a spectrum -- a single company holding a monopoly for 50+ years. But it actually produced immeasurable value. It's interesting to think on which model produces more value -- a monopoly where people are free from competitive pressures, or an intensely competitive market.
• nadam 14y ago
  I did not think about the definition of a startup too much but in fact I always thought about it as 'product business' as opposed to 'service business'. Given this definition of a startup I don't want to start a startup anymore. My aim is a product business. I am into products which make me money when I sleep. Even if the income rate stops growing at $100.000 per year because of the relatively small market.
• ChrisNorstrom 14y ago
  - Venture Capital pouring millions into untried businesses. - The crazy valuations. - The recent complains of VCs that "Entrepreneurs aren't working on enough big ideas". It all actually makes sense now. It's all in the name of Big Risk = Big Reward style ventures. Especially after defining a "startup" as a company meant to grow rapidly and to massive proportions. Not necessarily a tech business. Not an online store for your company. But instead an extreme-expantion-potential style company. I wish Startups were defined like this from the beginning. It also further pushes me away from the whole Startup / Silicon Valley thing. Growing that fast means a lot can go wrong and there's very little time to learn from mistakes. I'm a slower thinker, I like to analyze and enjoy, learn and understand, build and live, not sacrifice my life and grow my company like a lunatic. Thank you Paul. You've actually freed me from a dream that I now realize will never make me happy. I can finally let go of my plan to abandon my family, move to the bay area, drain my life savings, live in a shoebox, stumble from one conference and event to the next hoping to network and find my messiah & co-founder, try to get funded, grow my business to someone else's expectations, all for a tiny fraction of a chance to succeed and be either a slave to my own company or lose control of my baby and walk away with diluted equity. I think I'll stay here in St. Louis with my aging family and build my businesses slowly and calmly. You freed me Paul. You gave me back my life, my real one.
  • deleted 14y ago
    [deleted]
  • ozataman 14y ago
    Yeah, there is something about this startup model I don't quite like. To be upfront, I am not arguing what the word startup means - the society is free to assign to it any meaning it wants and what Paul describes here is a clear, specific meaning that's as good as any. What makes me uneasy is the model itself and what it implies for the entrepreneur. To me, it makes the most sense for the VCs and other investors who manage a portfolio and can accept to fail in 90%+ of their decisions while still getting massive returns from the remaining 10% that succeed (Maybe I'm even understating the split here). But it's awful for the entrepreneur. They manage portfolios of one and surely, nobody sets out to fail! It's an awful feeling and no matter how much you say "I've learned a ton!", you still waste a big part of your life while also surviving under intense stress. There is no one model, no clear right/wrong here and clearly Paul's model does work over large numbers of cases, judging from the Googles, Apples, Dropboxes of the world. I personally favor a more grounded approach where you start with a strong industry background/knowledge or at least a set of skills that make you and your team special. The more diverse your team, the better, as you'll make connections between possible/untapped solutions and your domain's problems. Then you set out to solve a problem you've noticed (with a clear business model and path to initial traction based on your industry intuition and upfront customer discussions) and seek customer interaction as early as possible. If you're in IT, you're in luck as you can often get to your MVP early and you should try to get customers FAST. Doing this with limited exposure to the VC game, in my mind, teaches your company to live within constraints and minimize your burn rate while making the most out of every member of your team. You can also take a little more time evolving your product, devoting your energy to the science (as opposed to fund-raising, etc.) and discovering unique value propositions. You also have the freedom to pivot as you need and perhaps even spend lots of time with your initial clients (and maybe be a consulting firm for a while) to learn. There may then be a point where you are much better informed about your business and want to go the VC route to transition to Paul's growth mindset. Apple started in a garage with family loans (if memory serves right) and got funded after it was already selling its prototypes and had traction. This formula, of course, would never work for a crappy team, but then no formula does. Now if you happen to be working on the next Google, then it really is moot trying to achieve a disciplined organization upfront or taking it slow or spending time with initial clients or [fill in the blanks here]. You've found a gold mine and you're essentially pillaging it - who cares if you're inefficient. But less than 1% of smart entrepreneurs out there will end up finding that gold mine and somehow I would hate to be in the 99%. I would prefer a strategy that increases my chances of initial traction, possibly slows me down a litte, but gives me the mental leeway to discover a true niche and possibly a scalable product later on. The book "Nail It then Scale It" comes to mind. Maybe this is what Paul means all along, but I can't help thinking that the "weekly growth targets" would paralyze many of the newcomer entrepreneurs out there with its singular mindset and make them blind to the intricacies of the problem they are actually trying to solve.
• nemesisj 14y ago
  Recently there was an article floating around where a VC asked why there aren't more B2B startups. This mindset is why - there's simply no way you can grow at these rates in the early days with most B2B products, particularly the ones in very hard to solve areas like ERP or the like. Anything with a longer sales cycles seems to be instantly disqualified by this definition, which is why we're relegated to so many photo apps and twitter thingies.
  • jeremyjh 14y ago
    Your longer sales cycle should bring in a lot more revenue for each deal you finally do close. Growth is about revenues not just # of customers.
• staunch 14y ago
  > And the probability of a group of sufficiently smart and determined founders succeeding on that scale might be significantly over 1%. For the right people—e.g. the young Bill Gates—the probability might be 20% or even 50%. So it's not surprising that so many want to take a shot at it. Which means that even Bill Gates may have failed repeatedly at creating a successful startup. Just as in poker even great players will lose if it's not in the cards and even the mediocre player can win big on occasion. The lesson is that even a founder as good as Bill Gates can only expect to succeed if she is willing to make multiple attempts.
  • nostrademons 14y ago
    Microsoft was Bill Gates's 4th venture. His first was consulting for CCC, finding bugs in their software in exchange for free computer time. His second was a payroll program in COBOL for Information Sciences. His third was Traf-O-Data, a startup with Paul Allen to make traffic counters. He'd already been programming for 6 years by the time he started Microsoft. Similarly, Facebook was Mark Zuckerburg's 3rd startup, and Apple was Steve & Steve's 2nd.
    • staunch 14y ago
      I think you're stretching a bit. Traffic-O-Data was Gates' first company and Apple was Steve's.
• eyoel 14y ago
  I've read most of the points made here in an essay Joel Spolsky wrote a while back: http://www.joelonsoftware.com/articles/fog0000000056.html http://www.joelonsoftware.com/articles/fog0000000056.html It was very insightful at the time I read it.
• davidw 14y ago
  Excellent piece. A few comments: > The constraints that limit ordinary companies also protect them. That's the tradeoff. If you start a barbershop, you only have to compete with other local barbers. If you start a search engine you have to compete with the whole world. This is one of the reasons why 37 Signals' "small Italian restaurant" is not pertinent to many web businesses. On PG's concept of startup, which I feel is spot on: At this stage in my life, I'm more interested in... the "stay small" type of business, ala Rob Walling or patio11's bingo card thing. I think there's something to be said for a niche that's small enough that it's not interesting to larger companies, but can be served with a business that's mostly automated enough to mostly run itself. Perhaps you won't make zillions of dollars, but if it works, it's a good path to more freedom, which for some of is, is what it's about.
• scribu 14y ago
  This is a foundational essay. It's hard to believe the whole Y Combinator ecosystem has gone on for so long without it.
• d4nt 14y ago
  "The best thing to measure the growth rate of is revenue. The next best, for startups that aren't charging initially, is active users. That's a reasonable proxy for revenue growth because whenever the startup does start trying to make money, their revenues will probably be a constant multiple of active users" This, for me, is the weak point in an otherwise excellent article. A lot of investments, valuations and jobs rest on this assumption. Facebook's PE ratio is currently 127, this assumption is the reason that it isn't around the same level as other entertainment companies like, say, Disney (17) or News Corp (56). And when Facebook's valuation rises like that and people invest at that level then there's a whole lot of money for paying engineers >$100k salaries and buying up pre-revenue businesses like Instagram. So, even if you're Google and you're bringing in real money, the application of this assumption to a few big cases permeates through the whole system and means that you too have to pay engineers >$100k and you too have to pay more to get hold of someone like Nik (makers of Snapseed). PG logic appears flawless, but as a seed fund manager in the middle of this ecosystem, he's working several layers of abstraction up from some big applications of this assumption. So much so that it probably doesn't feel like an assumption to him. After all, he didn't value Facebook[1] at that level. I genuinely hope this assumption is correct, because a lot of people and livelihoods are depending on it. [1] I'm using Facebook here as an exemplar, I'm sure there are lots of other companies out there with valuations that are due in part to the assumption that users = revenue. My argument is that when someone sets a valuation based on this assumption it has a knock on effect to the whole ecosystem.
• sreitshamer 14y ago
  I thought 'startup' was defined as a business-like organization in search of a business model. Once it finds/chooses one, it becomes a business. The essay seems to define 'venture-backed startup'.
  • loumf 14y ago
    That's the Steve Blank definition. In the end of this essay, it seems to come around to that point of view. You're committing to search for one of the rare ideas that generates rapid growth. Because these ideas are so valuable, finding one is hard. The startup is the embodiment of your discoveries so far. Starting a startup is thus very much like deciding to be a research scientist: you're not committing to solve any specific problem; you don't know for sure which problems are soluble; but you're committing to try to discover something no one knew before. A startup founder is in effect an economic research scientist. Most don't discover anything that remarkable, but some discover relativity. Not exactly the same, but has the searching element.
• deleted 14y ago
  [deleted]
• rsheridan6 14y ago
  I don't understand why he chose restaurants and barbershops as examples of non-startups. Both make things lots of people want, and some of them are big chains that have wide reach, so they fulfill criteria a and b. Either these are startups, or there are more criteria pg didn't include, such as rate of growth - even the most successful chains usually have 10 years or so from the opening of the first store to becoming huge (inter)national chains.
  • krrrh 14y ago
    I think it's implied that there's a difference between a taco stand that is just running in a local geography and not really innovating, and a company like Chipotle which spent a lot of time and effort optimizing their business model to make it replicable while taking large investments to pursue fast growth. He's not referring to Chipotle in the essay. It's why says "restaurants" and not restaurant chains.
• ekm2 14y ago
  pg listed writing novels and tech startups as "high-beta" occupations.What are other high beta and high alpha occupations?
  • emmett 14y ago
    Anything where the best practitioners are famous. Sports player. Politician. Artist. You can complete the list.
• nreece 14y ago
  Lot of insight, but I'd rather breath outside the bubble and build a slow company, and I'll still call it a startup - http://www.fastcompany.com/3000852/37signals-earns-millions-each-year-its-ceo%E2%80%99s-model-his-cleaning-lady http://www.fastcompany.com/3000852/37signals-earns-millions-...
• tubelite 14y ago
  Consider an alternate universe with far worse odds: 1 startup in a field of 100,000 makes $100 billion, the rest make zero. Expected value is $1 million. Should you be one of the 100,000 founders who "rationally" choose to buy a startup lottery ticket for $100b? Well of course! If you could live for long enough to run through thousands of iterations of the startup game, that is. In the real world, - Founders are typically limited to 1 startup at a time - It takes time - years perhaps - for a startup to fail - Founders can do only a few startups in their lifetimes Given low odds like 1%, with < 10 iterations per lifetime, expected value is the wrong metric. From a purely financial POV then, it appears only rational to do growth startups - If you are on the investing side (a "parallel" entrepreneur, running tens or hundreds of iterations in your lifetime) - You are a founder (a "serial" entrepreneur) with reasonable financial security and none of your life goals would be irrevocably damaged by the most likely outcome - a string of failures. (There are of course several non-financial reasons and payoffs. For instance, an Idea takes demonic possession of you, and the only way to exorcise from your tortured brain is to do a startup..)
• Tycho 14y ago
  I'd be interested to know the volatility of these growth rates. PG talked as if the might be fairly constant over the course of one or two years, but my gut feeling is that they'd be anything but.
• nhangen 14y ago
  I'll admit that I was a little bummed after reading this article. Every single PG essay I've read left me feeling stoked, lit on fire like I could take on the world. I felt I could identify with the man, and like I belonged here. This essay, on the other hand, left me feeling like I don't belong here. I feel as if the YC philosophy has evolved into something different than it was, or perhaps, that this is more honesty than we've ever seen before. Either way, I couldn't be happier to use revenue as my measuring tool, and not free users. Racing to give my product away at a rate of 5-7% weekly growth would require me to completely change my product development philosophy. I build what I build because I see something missing, not because I hope to flip it in a year.
• happypeter 14y ago
  I learned a lot, thx pg!
• eranation 14y ago
  I don't think good ideas are ideas that are overlooked. I think we saw many times that being second is better. Google vs Altavista, Facebook vs Myspace, Github vs SourceForge, Google maps vs Mapquest, Foursquare vs Yelp, Stackoverflow vs ExpertsExchange, and the list goes on. I think the ideas are overrated, what matters is the small twist in the idea that makes you better than the competition, and most importantly, execution. Once you are out with your product, getting the right talent, getting the right design, getting features out there faster than your competition (like your own company in the past based on one of your posts) is what matters. I think there are not that many ideas that are overlooked, just people that don't think they can do something with them. the chance that an idea was not thought by someone else, that reads the same blogs, have a similar lifestyle, and is a smart person like you, is very low (or the problem you are trying to solve is not a real problem), but the chances of that person to have the courage, time, effort and perhaps money to start a business, and find good co-founders, (and willing to risk his marriage and apply to YC) is what's a bit more rare in my opinion. On the other hand, I have zero experience relative to you, and it's a little weird for me to disagree with one of the biggest startup mentors of our time, but still, this is just my opinion.
• smoyer 14y ago
  Isn't a start-up that's bootstrapped and designed with a clear path to monetization desirable anymore? You can obviously design something to grow quickly, but doesn't that also increase the risk of it being a flash-in-the-pan?
• monty_singh 14y ago
  Fred Wilson's followup on PG's growth essay: http://www.avc.com/a_vc/2012/09/growth.html http://www.avc.com/a_vc/2012/09/growth.html
• rdudekul 14y ago
  Paul Graham is a hero all technology startup founders need to look up to. Who else can say "the constraint of growing at a certain rate can help define a startup", so well? It is rare to find a blog post that has so much insight that you will need to read it slowly and then read it again even more slowly.
• c3d 14y ago
  Illustrated over nearly 75 years of growth for Hewlett-Packard here: http://www.youtube.com/watch?v=FCOt03Y_0SM http://www.youtube.com/watch?v=FCOt03Y_0SM.
• ryanwaggoner 14y ago
  The discussion of expected return sounds good from an investors perspective, but founders have no diversification, so a 1% chance of $100m or 99% chance of wasting five years sounds pretty lousy. This is my biggest issue with the VC world from a founder's standpoint. The situation gets even worse once you throw the decreasing marginal utility of money into the mix, because now the expected value of $100m is not worth 10x as much to me as $10m. In terms of ability to change my life, $10m provides probably 50-70% of the value that $100m provides. So if my odds of succeeding with a $10m payout from a bootstrapped business are 10%, and my odds of succeeding with a $100m payout from a VC business are 1%, those expected returns are equal in math terms, but not utility terms, and I'd be crazy to raise money.
  • andrew_null 14y ago
    The whole 1% of $100M versus 10% of $10M calculation vastly oversimplifies the outcome of these companies as binary. This is totally wrong. In my experience in silicon valley, people start with building something small/simple (but in a big market), get little drips of funding from investors as they show progress. If they fail at any point along the way, there's value in what they've created, and they exit for whatever they get. The later you exit, typically the further along you get, and the bigger the exit. That's why the diversity of outcomes in the valley are everything from zero to billions, and companies raise anywhere from zero to a dozen rounds of funding. At any inflection point in the business, you have lots of options: you can sell, raise more money, raise more and cash out some shares, you can quit, you can make yourself chairman and have your cofoudner run it, you can do nothing and grow it organically, etc., etc. Each one of the choices above are part of your arsenal of options at almost any point. The people who choose to raise tons of money, not cash out at all, and then who fail- well, they made a series of active decisions to do all of that. They're big boys. My point is, when you're building a company you can make a lot of choices along the way, and it's not just setting out for a suicide run of either 1% of $100M or 10% of $10M. Choosing to raise outside financing is sort of like deciding whether or not you want a cofounder (or 2, or 3) - it just another form of business partner. You get less %, but hopefully they add to the business in a meaningful way that leaves you better off.
    • 14y ago
• allenbrunson 14y ago
  minor corrections: "What matters is not the abolute number of new customers ..." should be "absolute" in footnote 13: "Though nominally acquisitions and sometimes on a scale …" should be "acquisitions ARE sometimes" I guess?
• plinkplonk 14y ago
  pg, just out of curiosity what was the (approximate) weekly growth rate of Viaweb ? Did you focus on this metric when you were building Viaweb? Just curious if you were aware of this factor when building Viaweb.
• outside1234 14y ago
  PG's definition of startup is self selecting. Increasingly, startups do not need VCs nor Angels as the cloud (Azure, outsourcing what used to be IT for pennies, etc.) quashes the cost curve of startups. This is pushing angels, seed round, and VCs farther and farther up the enterprise growth curve where costs become something that the founders can't bootstrap. For virtual enterprises, this is leaving them with a smaller and smaller set of companies as software eats all of the historical infrastructure costs. Basically, he is defining startup in a way that YC is a necessary component - but increasingly, it isn't.
• edanm 14y ago
  This article is, for me, more proof of a general phenomenon that's happening recently - startups are no longer considered the best vehicle for hackers to become wealthy. Maybe it's just my own history and confirmation bias speaking here (recently switched from startups to a Consulting business). But lately, the whole "bootstrap" movement is getting much more popular around here. More and more, I'm seeing articles and comments from tptacek, patio11, and others talking about how programmers could make vastly more money, especially by doing freelancing. I think the message is starting to sink in - the kind of people who read this site can start very profitable businesses, make loads of cash, and do this without the high risk of startups. No chance of a working 5 years and then striking a goldmine of an exit, but much higher chance of working 5 years and putting aside large amounts of money. This pg article is a great one, and a very honest one too. To me it reflects the changing times, and the changing understanding of what a startup means. No longer, like in previous articles on wealth, is pg very clearly advocating that all hackers should be starting startups. This essay, to me, reads as a much more precise explanation of what someone can expect if they start a startup. And it makes it much clearer when people should not start a startup.
  • simonb 14y ago
    It would be very interesting to see a breakdown of people (diss)agreeing with pg's thesis by hacker/maker vs. business person.
  • sayemm 14y ago
    I agree, and it's also a direction that I'm personally headed (currently focused on freelancing/bootstrapping), but I also think it has more to do with the current recession more than anything. It's a really tough environment now and I think a lot of the innovation over the next few years is actually going to come from the big tech companies. Some of the best startup advice you'll ever get is by @yegg in "Paths to $5M for a startup founder": http://gabrielweinberg.com/blog/2010/06/paths-to-5m-for-a-startup-founder.html http://gabrielweinberg.com/blog/2010/06/paths-to-5m-for-a-st... No one ever becomes a great entrepreneur overnight and it's a fallacy to think that you could do a high-growth startup only when you're young and in your 20s (Jeff Bezos, Larry Ellison, Jim Clark, Mike Bloomberg all started their big companies in their 30s; Mark Cuban and Mark Pincus started their billion-dollar co's in their early 40s). I think it's wise to maintain a very long-term view of the startup game, and to take bigger risks gradually as you develop into a stronger entrepreneur. So, I think it's smart to prove yourself as a bootstrapped entrepreneur and make your first few million and be financially independent, and then be in a position to take big risks to work on a high-growth startup. Jim Clark, the greatest serial tech entrepreneur to date, started SGI when he was 37 and Netscape when he was 50. This is a long-term game.
• Munksgaard 14y ago
  Flattr?
• josephlord 14y ago
  It may be sacrilege round here to disagree with pg but I dislike the appropriation of the word startup for this niche of companies. I think of all new businesses as startups for the first couple of years. I think a better name for speculative high growth companies would be 'venture companies' which could have venture founders to go with the VCs that may fund them. That way the term would make sense for older companies if they hit a high growth phase.
• ChuckMcM 14y ago
  One of the things we don't see often, and I wonder about are situations where the Angel funds 40% of the company at a seed round at one valuation, and then contributes half their interest in exchange for cash in the series A. From a practical standpoint this means that the company needs to raise n + A where the "+ A" part pays back a return to the angel. But it allows the Angels to shoulder risk early to weed out the non-viable players and still make money at it. So imagine this scenario. Alice wants to start Woohoo and Bob funds 40% at a $250K valuation (since Alice is the only person so far, that is $100K invested. Alice works hard and gets out an MVP and goes for a Series A where she wants to raise $1.5M at a post raise valuation of $5M. Bob sells into the round half his shares (its taking money off the table for him) with a contractual net return of xx% (probably anywhere from 20 - 100, that being the negotiating rub) and does not participate in future rounds, he retains y% at the end of the series A (optionally converted to Common stock) and dilutes going forward. (remember he's got 'free' stock at this point, he's made his bit with the angel round) The two negotiation points on Bobs term sheet are the net return and the retained interest portion. The people coming in after Bob are Ok with it because Bob is out now and paid his 'finders fee' or however ever you want to describe his return. The net return will affect the series A amount needed by the founder, the retained interest would be a function of how many rounds the founders think they will need to exit. Given the seed to series A or bust cycle is usually at most 24months, Bob has a good idea of his risk profile, and by stepping out from an equity point at the Series A he's not an obstruction to new partners coming in, more of an adviser at that point.
• grellas 14y ago
  A few thoughts: 1. This is a superb essay delineating the attributes of a fast-growth, all-or-nothing type of startup. No surprise here. Who besides pg has had the depth and breadth of quality first-hand experience with such ventures over such a sustained period and in such an explosive context as that of recent years? He has here given us a classic analysis of the prototypical, Google-style startup. 2. I think the idea of a startup should not be so narrowly defined, however, and the big reason is this: many founders set out to build ventures that are tech-based, innovative, aimed at winning key niches via hoped-for rapid growth and scaling, positioned for outside funding as suited to their needs, and aimed at liquidity via capital gains as the primary ROI for their efforts . . . but who also place a huge premium on minimizing dilution and maximizing founder control. These are the independents. The ones who, by design, want to defer or even avoid VC funding so as to build their ventures on their own timing and on their own terms. Now this is not the Google startup model. It is, in a sense, its opposite. But it is not the model of a small business either. It is just a different type of startup. 3. The trend over this past decade has moved decidedly toward greater founder independence in the startup world. Back in the bubble days, as a founder, you had very little information available to learn how startups worked, you often had heavy capital needs (e.g., $2M to $4M) right up front to do such things as build your own server banks, and you would almost certainly have little leverage by which to minimize dilution or loss of control at the time of first funding. Today, this has completely flipped. Vast resources are extant teaching founders how startups work. Initial capital needs are often minimal. And it is relatively easy to get reasonable funding on founder-friendly terms. What this means is that, today more than ever, the independent-style startup is more open to founders than ever before. 4. Given the above, it seems to me that this is not the time to say that the only style of startup worthy of the name is that of the super-rapid-growth type. The rapid-growth type may be more glamorous by far but it really defines only the tip of the startup world. Beneath it is a vast world offering incredible opportunities to founders who want more control over the timing, scale, and management of their ventures and who seek to realize gains and manage risks accordingly.
  • ryanwaggoner 14y ago
    I strongly agree with your #2. PG's essay makes it sound like you're only a startup if nothing else matters but growth. But if all you care about is growth, does that make it acceptable to exploit your users Zynga-style? Obviously not to all startups, so even for many startups that are heavily growth-oriented, they are still constrained by other priorities. So why would balancing lifestyle, minimizing dilution, and maximizing founder control not qualify as valid constraints for a "startup" on the principle of growth as a priority? After all, no startup, ever, has grown as fast as they could have if nothing else truly mattered. EDIT: removed a reference to criminal activity deemed to be a strawman
• jusben1369 14y ago
  The problem is a barber shop can be a startup. It can have fierce local competition and global aspirations (Supercuts anyone?) It feels like a brave attempt to solve the question that regularly to torments these boards but I don't feel any closer.
• jusben1369 14y ago
  What defines a startup for me is utilizing technology with a very good chance it will be a spectacular failure. You have a great feeling that you'll have users but there's a very real chance that you'll get none to 10 and go down in tremendous flames. You're swinging for the fences. That's because you're doing something that no one has done or your entering a market with huge dominant players whom you hope to usurp. It's either very audacious or insane. Your 10 professional friends split down the middle when asked. You know if you open a barber shop you will get people come in off the street to cut their hair. You just worry you'll have enough over time to sustain it. If you start a consulting business you know you'll get clients (at least I assume you do) as your skills are in demand. You probably got commitments from at least 3 before you made the plunge. It's just whether you'll get enough and a steady flow to go with. If you're bootstrapping a lifestyle tech company it's probably because you know exactly what the market needs and have your first 5 customers from your previous gig so you know you can get through the first year. All of these still have a large amount of risk but they're not really true startups to me. It's true it's very hard to have a startup without (rapid) growth as the central tenant . And you can have many businesses that are not startups that aren't focused on growth over anything else. However, you can have many businesses that are not startups hyper focused on growth (SuperCuts, Pappa Johns) to make the definition in this essay too weak for me.
• timlindinct 14y ago
  follow up articles: http://www.bothsidesofthetable.com/2012/09/22/is-going-for-rapid-growth-always-good-arent-startups-so-much-more/ http://www.bothsidesofthetable.com/2012/09/22/is-going-for-r... Any others?