
Startup = Growth - moeffju
http://paulgraham.com/growth.html
======
ChrisNorstrom
\- 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.

~~~
apinstein
We need a "slow startup" movement.

pg's definition of a startup is just one kind of startup. I like to call it
the VC startup. It's an organization whose goal is to succeed big or fail, and
fast. This "charter" is driven by the needs of investors, and I get that. It
makes perfect sense, and from where pg's sitting, it's the attitude he needs
to have to successfully manage his portfolio. But it's not the only way to
grow a startup, and I think it unfairly marginalizes non-VC startups as non-
startups.

pg probably wouldn't consider my company a startup, but I think he'd be wrong.

We're 4 years old, have 4 employees, profitable, and grow at a pokey 100% YoY.
The pace of work is enjoyable. We build things for the long-term. We have time
to help our customers. We get to see our friends and family. A lot. The
principals own 100% of the equity.

But in our minds we aren't building just a tech business, we are building a
startup. A slow startup. We picked a huge market (photography). We started by
marketing to a small niche where we could be profitable while building the
infrastructure required to scale to a larger horizontal market.

If we'd been VC funded, we might be in the same position for growth; finally
finding traction after years and several expensive, painful pivots. In this
alternate startup universe we'd own practically none of the company at that
point, and we'd have wasted a lot more money.

I "grew up" in the 90s dot-com era reading Geoffrey Moore. We feel like we're
executing that strategy and doing it well. We're poised for overnight success
in a larger market, and on our own terms. I don't feel like any less of a
startup than the multiple VC-backed startups I have worked for previously. I
do feel a lot less stress.

So, if you want to enjoy life, build great things, and potentially make a ton
of money, don't think it's not possible. Find or found a slow startup and
change the world!

~~~
photon137
Couldn't agree more - let the entrepreneurs define and _live_ the term
"startup" - not the VCs.

(PS: After sleeping over pg's essay, I found it much less convincing the next
day - implicitly, he's mixing up price with value, ignoring the temporal
nature of markets and of opportunities - Google couldn't have been a startup
in 1989 and Ford was a startup in the 1910s - and disregarding multi-product
and B2B startups (premium Tibetan to Hungarian services) altogether. The
clincher from yesterday - weekly growth of 7% - sounds like utter BS today.)

EDIT: Not sure why I'm being downvoted. I'm just pointing out that this
article only and only defines a startup in terms of its worthiness to
investors. It's as misleading as any other single-formula characterization of
a complex multi-agent system. Startups != Growth, period.

~~~
garry
7% weekly growth may seem like BS, but it happens. The arbiter of this growth
rate is a function of need and reach as PG said. To say it is BS while there
is evidence the phenomenon is possible (having experienced it first hand and
seeing friends achieve it for long periods of time) and that we even know the
factors in it -- that is a self limiting belief indeed.

~~~
photon137
I am not terming that as BS because it's impossible - it's not. I'm saying
it's not suitable for all businesses (it might be downright hara-kiri for some
of them) - that alone should not disqualify them from being known or viewed as
startups.

~~~
PeterisP
Why not? Words and terms are useful only if they mean something. It is not
useful to mix "high growth startups" and "slow growth startups" in a single
word meaning/term, as the practical difference is actually bigger than what
they have in common. So PG is saying that "startup" means "growth startup",
and young enterprises without the goal of explosive growth should be called
something else, as they are significantly different.

------
grellas
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
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

~~~
zachalexander
Please don't spoil the parent comment's excellent arguments by introducing a
strawman.

Most organizations have goals - be it growth, profit, advancing a nonprofit
mission, or whatever - and in all cases, the rider "Oh, and of course we mean
to pursue this end by legal means" is so obvious that, unless we're talking
about a criminal organization, it doesn't even need to be stated.

~~~
ryanwaggoner
Meh, perhaps my example was too over the top, but my point is that all
startups, regardless of how growth-oriented they are, still consider other
goals to be constraints on what they're willing to do in order to grow as
quickly as possible. And it seems odd to exclude things like lifestyle and
control from the list of valid things.

------
cperciva
_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
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-...](http://andrewchen.co/2012/06/20/quora-when-does-high-growth-not-
imply-productmarket-fit/)

[2] <http://startup-marketing.com/the-startup-pyramid/>

------
asknemo
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?

~~~
chubot
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.

~~~
asknemo
You made great points, but I disagree about the morality part.

Wall Street had also produced explosive growth in our economy. It was also a
ingenious system with participation of lots of hackers and talents. But I
think most will agree now, that when Wall Street operates without considering
its own morality, it is by itself, immoral.

In other words, I believe the essay's lack of reflection on the morality
issue, which is definitely not a small one (e.g. the Zynga example), is what
makes it biased, and partly, immoral.

~~~
chubot
OK, but you're making an observation without a solution... that kind of thing
is pretty much irrelevant to people like Paul Graham and CEOs of startups, who
have to make decisions about what things to do. You can call people immoral
from the sidelines but it will have zero effect.

My opinion is that corporations are essentially "amoral" -- not immoral.
Morality simply doesn't enter into any substantive decision. Google's founders
often invoke the self-interest argument: "people don't have to trust us to be
moral, because if we acted against our users, they would leave us, and we
wouldn't make any money". This is what I call an amoral argument -- with no
negative connotation to "amoral". PG almost invoked a version of this in
footnote 8.

You might think that being amoral is equivalent to being immoral, but morality
isn't as well-formed a concept as people think it is. Namely, the most common
use of the concept of immorality is to label "stuff I don't like". I mean,
what's wrong with millions of people playing Zynga games all day? Would people
be curing cancer if they weren't playing Zynga games?

Another issue is that a person isn't moral or immoral; it's well known that
the same person will act moral or immoral according to their environment. Paul
Graham even said that about HN (in terms of trollish behavior). (See
<http://en.wikipedia.org/wiki/Fundamental_attribution_error>)

In the case of Wall St, there's no possibility of it "considering its own
morality". No amount of goading or convincing will make an ounce of
difference. The only way I can think of is for voters to make it clear to
elected officials that they won't tolerate the status quo, but so far that
hasn't happened. Even after the 2009 crash.

(And btw I didn't make any assertion about morality in my original message,
other than to say "I somewhat agree" about Zynga, so not sure what you are
disagreeing with.)

~~~
asknemo
I appreciate your response, and I fully understand the realistic angle that
you have provided.

But I have to clarify that I am not calling pg immoral. I am suggesting the
essay could be. People outside the game industry may not get the Zynga
problem, but you can also look at, say, Groupon's controversies. "Immoral"
could indeed be too strong a word, but I believe few will disagree that
aggressive growth strategies has some inevitable side effects, and for this no
amount of footnotes is sufficient.

But again, call me naive, "people like Paul Graham and CEOs of startups"
should, contrary to what you claim, should care MORE about these problems,
because they can certainly afford to, and when they do, it will matter. :)

~~~
chubot
OK... well I think your point is that PG's essay is "amoral", which is true.
It doesn't say anything about whether hyper-growth is a thing we should value
(as human beings, not as money making machines).

Actually ALL his essays are amoral. PG is very precise. He doesn't advocate
specific things; he lays out a set of deductions. You will come to the same
conclusions IF you have the values he supposes. IF you value this, then you
should believe that. Which is a true statement regardless of what you believe.

My point is that amoral != immoral. But I think you are saying they're the
same -- that all decisions must have a moral component or they are immoral.

I agree that hyper aggressive growth doesn't always produce the kinds of
companies that society "should" want... but sometimes it does! It's probably
impossible to separate the two, not least because everyone has different
opinions on what's valuable.

~~~
mattmanser
You're reading too much of your own POV into another person.

Compare this essay with a random earlier one I selected (I just scrolled down
and clicked a title that would seem ripe to disprove you)

<http://paulgraham.com/opensource.html>

Morality is rife within it, justice, monopolies, boss-employee relations.

He may have changed but _all_ of his essays aren't amoral.

~~~
chubot
I don't read that essay as having much morality. I think YOU are reading your
POV into it.

There is an assumption that a monopoly by MS would be dangerous. That's not a
particularly judgmental stance. I could imagine someone having a different
belief system about monopolies, but it hardly seems like a moral claim.

Then he is saying that he prefers to work with an economic partner rather than
under the employer-employee system. He doesn't say it is morally right. He
says that business can learn from this, because it would make the business
more productive. That's an amoral argument. He's invoking economics to justify
a way that people should interact.

It's basically a libertarian argument, and in general this type of argument is
agnostic about morals.

------
ryanwaggoner
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.

~~~
tlb
Yes, if you value money at log($) like microeconomics says you should, then
you should start something less risky than a startup.

As Charlie Stross's essay ([http://www.antipope.org/charlie/blog-
static/2012/09/on-the-d...](http://www.antipope.org/charlie/blog-
static/2012/09/on-the-diminishing-marginal-ut.html)) points out, there's
another level. Elon Musk might get to retire on Mars. Bill Gates will probably
cure malaria and several other big world problems.

So if your goal in life is not just having enough food & toys but changing the
world, the big money comes in handy.

~~~
ryanwaggoner
Do it on your second venture, especially since now you're talking about levels
of wealth that offer odds of first-time-founder success far, far below 1%.

------
edanm
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.

~~~
nostrademons
Interesting observation, but I'd extend it to posit that maybe there is no
"best" vehicle for hackers to become wealthy. It depends on the particular
options available to you, and your "best" strategy is simply to consider all
the options and pick the ones that seem most promising.

In an efficient market, eventually you'd expect that you'd be paid the same
amount for equal amounts of value created. In today's low-capital, target-rich
hacker environment, it seems like good hackers would eventually become
indifferent to the particular corporate structure used, and would instead
choose whatever corporate structure lets them work on the highest-impact
problems. Sometimes that'll be a startup, sometimes it'll be a consulting
firm, and sometimes it'll be employment at a large tech company.

Personally, I'm a plain old employee of a large tech firm. I see some of the
financials that patio11 posts, and I'm making significantly more than that
(we're the same age). I'm not nearly as well-off as tptacek, thanks to
Matasano's acquisition, but I have a few years to catch up. I see rumors
posted to HN about engineers at large tech companies making outlandish amounts
of money, and I'm making more than that, and yet the comments are all "Wow.
This seems unbelievable, it can't be true." I also know coworkers that are
rumored to have those multi-million-$ retention grants; I'm fairly certain
they exist.

~~~
edanm
(You work at Google if I remember correctly, right?)

Your situation with your employer might be more uncommon throughout the rest
of the world as you think. Silicon Valley has a huge shortage of good hackers,
but the rest of the world isn't _quite_ as programmer friendly as all that.
It's still very good for programmers, but not as good as some posts would have
you believe.

In any case, you are of course correct that there is no single "best" vehicle
for hackers to become wealthy. But 5 years ago, starting a startup was the
only way I knew about or considered seriously. The same is true of some
friends today. I'm just happy the word is out that: a) startups fail, a LOT,
and b) there are other ways of making large sums of money, including just
being a highly-compensated employee.

~~~
nostrademons
I suspect that that's because startups are the mostly highly-visible and well-
publicized path to riches. The other ones are private, and usually if people
don't have to reveal their wealth, they don't.

I also think that this phenomena of people making a lot of money through non-
startup means isn't new, it's that _publicity_ of it is. I have a friend whose
dad worked for Wells Fargo in the 70s and then struck off as an independent
computer consultant for big enterprises in the 80s and 90s. I asked her how
much she thought he made when she was growing up, and she was like "Somewhere
between $300-500K/year." And now that all eyes are on Wall Street, people are
realizing that fund managers have made multi-millions a year since at least
the 1980s. In hindsight, I also think about some of my family friends who
owned local businesses - muffler shops, auto-body repair - and they had nice
houses and vacation cottages and boats and expensive cars too, so I wouldn't
be surprised if they were making in the multi-hundred-K to few millions per
year. It just takes _The Millionaire Next Door_ for people to realize that.

(Yes, I work at Google. My path is perhaps uncommon, but still very achievable
for a lot of people, and I don't think that refutes my overall point.)

------
pixelmonkey
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.

~~~
erichocean
_self-funding growth from profitability pretty much guarantees you are locked
into a relatively slow growth rate_

That's an unwarranted assumption. Part of designing a startup business model
is organizing growth so that you are unconstrained, so that more input
produces greater output, earlier -- whether it's capital, users, employees, or
support. All it takes is for one component of your business to not scale and
you won't hit your growth numbers despite the brilliance of every other part.

Capital is just one of the areas you have to look at. Amazon is a decent
example. Bezos chose books because it was (a) accessible (catalogs existed),
and (b) he got 6 months to pay back booksellers, which meant he could afford
to grow the more he sold, by using the money owed to the booksellers as float.

Startups would do well to evaluate all possible constraints on growth, capital
and otherwise. Many times small tweaks to how you sell your product (or what
product you sell) can produce large variations in the amount and timing of
capital needed.

Here's an example: do you have customers pay for the first 30 days up front,
with an option to cancel within that time? Or do you charge your customers
_after_ the first 30 days are up?

Now, you'd think the latter would always be better for "growth", because it
involves a weaker commitment -- no money changes hands early.

But it also has a huge capital cost differential, if the service costs a
substantial amount of money to deliver. In order to grow the latter model,
you'll have to obtain more and more capital over time as you grow.

But if you do the former, you can "fund" your company's growth _off of_ its
earlier growth. Although this might impact growth negatively, by turning away
customers that "won't pay" for the first 30 days up front, but who would have
become customers the other way.

So which is better? It really depends. If your growth rate is already 7% with
the pay-up-front model, that's better IMO than getting, say, an 8% growth rate
with the pay-after model. The latter will require raising increasingly greater
amounts of capital, despite the fact that it's growing "faster" initially,
ultimately _hurting_ your growth or wiping out your equity, or both.

Both approaches will still have their "S" curves end up at the same place (the
market size doesn't change), but let's be blunt here: no company can catches
up to 7% growth, so wasting your equity on 8% growth just makes you poorer,
and the VCs richer.

Sustainable growth is just as important, and treating capital as something you
"have to" raise is exactly what VCs want you to think, since, hey, that's what
they sell. Venture capital is a financial _tool_ , not the only (real) way to
capitalize a startup during and after growth.

~~~
pmarca
Amazon of course not only raise venture capital but also raised an enormous
amount of money after that. They didn't get to where they are today by
constraining their access to capital to their float.

~~~
philwelch
They also reinvested their revenues _very_ aggressively. It was years after
IPO before they became profitable, and even now they're remarkably low-margin.

------
paulsutter
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-
princ...](http://steveblank.com/2010/01/25/whats-a-startup-first-principles/)

~~~
filip01
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
Which companies designed to grow very fast are not startups?

------
nwenzel
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>

~~~
dirtyaura
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.

~~~
nwenzel
From my experience selling services and products to large companies for the
past 10 years, "interest" doesn't mean much. Everyone is interested. You don't
have anything until you see the signature. And I don't mean the signature on
the contract. I mean the signature on the check.

I agree with you that pg's point about startup growth is not invalidated by
the realities of enterprise selling. But I think te way past those realities
is to change the rules of the game. The "sale" should be a low-friction
agreement to do business at some cost per unit/user/GB/etc. Growth is the. The
ability of the product to go viral within the account. Essentially, it becomes
the same process as a consumer sale with the one additional step of getting
approved to sell into that batch of consumers.

While that might seem to be a big negative against starting an enterprise
business, the advantage is that you're then convincing people to spend someone
else's money which is easier than convincing them to spend their own. How else
could a $.99 app look, feel, perform better than a $100,000 peice of
enterprise software.

------
kemiller
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
Makes me consider opening a barbershop.

------
nhangen
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.

------
nemesisj
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
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.

------
tubelite
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..)

------
gfodor
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.

~~~
pcwalton
Most people can't just invest in startups. You need to be an accredited
investor, which rules out most people who haven't had a liquidity event or are
independently wealthy. The restrictions on what your net worth needs to be are
here: [http://startuplawyer.com/startup-law-glossary/accredited-
inv...](http://startuplawyer.com/startup-law-glossary/accredited-investor)

~~~
gfodor
Right, I specified that when I said they were already likely wealthy. The
point being however that even once you have had a liquidity event, it might
not make sense to invest in startups, it might make sense to build wealth via
_another_ startup, but reserve your capital for less risky investments. I
think there's a tendency for founders who have had an exit to immediately
transform into angel investors. But, this only makes sense if you have a knack
for picking winning ideas and identifying founder talent, which is probably
only somewhat correlated with, if at all, with what is necessary to be
successful at building a startup yourself.

------
sandee
"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
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
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
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.

------
d4nt
_"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.

------
lifeisstillgood
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

------
outside1234
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.

------
wamatt
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.

------
hasenj
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>

~~~
pmarca
I won't argue against you selecting yourself out, but your argument is
incorrect. Google and Apple are insanely profitable.

~~~
hasenj
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
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
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).

~~~
gojomo
No, PG states a preference for revenue growth... with user growth being an
acceptable stand-in, contingent on the usual assumption that users will
convert to revenues.

And the VCs in his model are not the end goal, but only a middle stage, to
accelerate growth and thus dominate a market, creating an enterprise that will
be valuable to others on some combination of traditional factors (such as
discounted expected profits or synergistic/strategic value when combined with
an existing business).

I think you're trying so hard to see what you already believe you're missing
parts of the PG argument.

------
davidw
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.

------
photon137
"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.

------
eranation
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.

------
geuis
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>)

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>

~~~
abozi
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.

------
carsongross
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>

Seems like there's a lot of non-startup in that startup curve, if we are using
the new Paul Graham's definitions.

~~~
gruseom
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
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
I found this essay exasperating, but YC doesn't "flip startups to VC". That's
not how it works.

~~~
pw
Why'd you find it exasperating?

~~~
tptacek
Rather not talk about it on this thread.

------
Choppen5
Seminal article - fantastic. I immediately calculated growth rate for
Mightbuy.it - posted them here: <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.

------
josephlord
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.

------
nadam
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.

------
ef4
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.

~~~
pmarca
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.

~~~
drewrv
Duck duck go is doing just fine.

~~~
staunch
Judged by growth rate it's not doing very well:
<https://duckduckgo.com/traffic.html>

~~~
nostrademons
Isn't that circular reasoning:

"Startups that constrain their growth..."

If it's cited as an example of a startup that constrains its growth, of course
its growth rate is going to be low. The real question is whether it stays in
business and is a worthwhile investment for its founder.

~~~
staunch
And they took VC actually so it's a muddy example.

------
staunch
> _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
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
I think you're stretching a bit. Traffic-O-Data was Gates' first company and
Apple was Steve's.

------
seunosewa
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.

------
tstyle
"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
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.

------
philwelch
> 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."

------
scribu
This is a foundational essay. It's hard to believe the whole Y Combinator
ecosystem has gone on for so long without it.

------
mmmmax
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."

------
plinkplonk
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.

------
nreece
_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

        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
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.

------
eyoel
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>

It was very insightful at the time I read it.

------
ChuckMcM
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.

------
tristan_juricek
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.

------
jusben1369
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.

------
sreitshamer
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
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.

------
smalter
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
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.

------
shashashasha
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_o...](http://www.ted.com/talks/geoffrey_west_the_surprising_math_of_cities_and_corporations.html)

------
monty_singh
Fred Wilson's followup on PG's growth essay:
<http://www.avc.com/a_vc/2012/09/growth.html>

------
dave1619
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
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.

------
vegashacker
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
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.

------
batgaijin
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
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
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.

------
nreece
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-...](http://www.fastcompany.com/3000852/37signals-earns-millions-
each-year-its-ceo%E2%80%99s-model-his-cleaning-lady)

------
gojomo
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?

------
rdudekul
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.

------
jusben1369
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.

------
willrobinson
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.

------
bdr
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
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.

------
Tycho
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.

------
rsheridan6
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
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.

------
001sky
_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.

------
kaiwen1
This is probably the most insightful article on startups ever written. I was
blind, and now I see. Thank you, Paul.

------
tlogan
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.

------
smoyer
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?

------
quasistar
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.

------
c3d
Illustrated over nearly 75 years of growth for Hewlett-Packard here:
<http://www.youtube.com/watch?v=FCOt03Y_0SM>.

------
ekm2
pg listed writing novels and tech startups as "high-beta" occupations.What are
other high beta and high alpha occupations?

~~~
emmett
Anything where the best practitioners are famous.

Sports player.

Politician.

Artist.

You can complete the list.

------
timlindinct
follow up articles:

[http://www.bothsidesofthetable.com/2012/09/22/is-going-
for-r...](http://www.bothsidesofthetable.com/2012/09/22/is-going-for-rapid-
growth-always-good-arent-startups-so-much-more/)

Any others?

------
allenbrunson
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?

------
happypeter
I learned a lot, thx pg!

------
Munksgaard
Flattr?

------
timpeterson
more blah, blah on what made google, fb, etc. great,

what's the point?

------
mcartyem
"the same thing that makes" -> "the same thing makes"

