

The Pooled-Risk Company Management Company - mqt
http://www.paulgraham.com/prcmc.html

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

I guess that's why I don't play the lottery.

~~~
pg
_I can't understand why someone would start a company if they didn't think
they'd enjoy running it._

I'm not proposing that. As I said in the essay, running Viaweb was the most
interesting job I'd had. It just wasn't _the_ most interesting thing I could
imagine doing.

That's the question you have to answer, if you're ambitious: not just "do I
like what I'm doing?" but "do I like what I'm doing more than anything else I
could be doing?"

------
dpapathanasiou
" _David isn't mistaken in saying you should start a company to live off its
revenues. The mistake is thinking this is somehow opposed to starting a
company and selling it. In fact, for most people the latter is merely the
optimal case of the former._ "

Right, they're not mutually exclusive.

But the old school way of thinking simply says that achieving the former will
lead to the latter.

I.e., there is such a thing as trying to sell too early.

Building revenue-less companies to flip may have yielded some spectacular
successes in the past (e.g. YouTube), but modeling yourself on rare, black-
swan events is not a recipe for success.

------
brlewis
Hire property mgmt and you're the customer. They should do what you want. Get
acquired and they're the customer. They'll manage the co as they please.

You may want the co managed to maximize customer satisfaction for long-term
stability (ala Craigslist), but a public acquirer will likely manage to
maximize quarterly revenue.

~~~
pg
_They'll manage the co as they please._

Sure, but they guarantee your returns in advance.

------
jkent
I don't think the decision is as simple as "I run it, or I sell out." Private
companies hire CEOs fairly often.

If you could get a professional manager in to help run your company, you would
still have control and could fire/replace him. Richard Branson does not run
his 250 or so companies simultaneously - he uses professional managers. He
pools risk but the firms remain private.

If you sell out, you lose control of your business. That can be a good or a
bad thing. (But you can only really get out if you lose control of the
business.)

As my dad tells me, "If you sell out, get out." It's wise advice.

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

------
startingup
Companies are not apartments or houses, companies are _people_. You don't have
to worry about motivation, energy levels when you are dealing with houses.

You cannot "optimize" people - even talking about what is optimal is
meaningless when you deal in collections of people. This is the fundamental
libertarian assumption, which is why libertarians are for free market
capitalism. Not because it maximizes wealth, but because it let's people
simply be.

I am afraid this essay is a perfect distillation of the flip-it model, just as
the model is going out of fashion.

~~~
pg
It sounds like you're disagreeing with something you think I said, but I can't
figure out what. Can you give me an example of a specific sentence or
paragraph I wrote that you disagree with?

~~~
startingup
Sorry I was out all day, so couldn't respond. I was reacting to the comparison
of property management company to your putative "company management company"
(which eventually gets revealed as a typical public company in your essay).
That was the context in which I said companies have people, and people are not
housing, and your objective of an "optimal" strategy doesn't hold water.

My broader point is that companies/people (including founders) have goals,
dreams, aspirations ... maximizing return on investment may not even be the
biggest goal. It is a late 20th century Milton Friedmanite doctrine (which
classical libertarians actually disagree with) that the only purpose of a
company ought to be to maximize shareholder wealth. I mention this because you
refer to "optimal" strategy, but in this case, there is no such optimal
strategy, because the goals are so extremely diverse and often mutually
contradictory.

Interestingly, shareholder wealth maximization (which academics are so fond
of) is a proposition most real world capitalists don't actually subscribe to -
witness the resistance of Jerry Yang to being absorbed. It has little do with
long term shareholder wealth maximization (though he has to pretend that it
is, in order to keep the lawyers at bay), and everything to do with preserving
what he perceives as a unique Yahoo culture from being decimated (somewhat
justified, in my opinion), even at the cost of losing substantial value as a
shareholder himself. There is no right or wrong in this (I think his cause is
hopeless myself), just that this is how Jerry Yang, the capitalist part owner
of Yahoo, operates.

What is the goal of a company? It ultimately boils down to a religious
question of "Who am I? What do I want?" which each founder (and each employee)
has to ask himself/herself. DHH laid out his answer, and I bet an awful lot of
founders identify with it. You have your school of thought on this, which I
bet a lot of founders identify with too. But yours is not any kind of optimal
extreme of DHH.

~~~
pg
It seems to me that you're refuting things you imagine I said, but that I
didn't actually say. I certainly wouldn't claim that my "school of thought"
was an optimal extreme of DHH's. (In fact, I can't even imagine what it would
mean for that to be true.)

I mean what I said, and no more. So please, if you think you disagree with me,
find the actual sentence or sentences in the essay that you believe are false.

~~~
staticshock
I'm going to venture a guess that the statement under attack is most probably
this one: _The best case, for most people, would be if you could hire someone
to manage the company for you once you'd grown it to a certain size._

startingup is making the assumption that the goal of hiring this manager is to
maximize the startup's ROI with minimum attention from the founders. However,
I believe pg's original point was not that anything can be maximized, but that
things can more or less _stay in check_ without the founder looking, which is
a far weaker claim. This isn't about profit, but about giving the founders the
opportunity to do something more interesting, _if such a thing were to exist_.
The essay is cautions enough not to make any grandiose claims. Imho, you've
got a straw man on your hands, startingup.

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

~~~
swombat
Absolutely. Particularly strained bits:

 _Sounds like a good plan. Let's think about the optimal way to do this._

Disagreeing by agreeing is a powerful technique. But it's pretty obvious in
this case. I prefer disagreeing head on, if I have a solid argument.

 _They want enough money that (a) they don't have to worry about running out
of money and (b) they can spend their time how they want. Running your own
business offers neither._

I have a friend who "ran his own business" for 4 years while doing his medical
degree, and accumulated over a million dollars in the process. That's not
enough to change your lifestyle to be like the mega-rich, but it's certainly
enough to gain the freedom to spend your time the way you want it. Think of it
this way: $1m gives you at least enough money to spend 10 comfortable years
doing other stuff and figuring out what else you really want to do.

 _And as anyone who runs their own business can tell you, that requires your
complete attention._

That's not true for all businesses. I have a business that I haven't paid
attention to for over 9 months and it's _still_ generating revenues (couple of
thousand dollars a month). Sure, revenues go down, but even with minimal
maintenance you can keep them dropping reasonably slowly.

 _There will of course be some founders who wouldn't like that idea: the ones
who like running their company so much that there's nothing else they'd rather
do. _But this group must be small_._

Why must it be small? Maybe this group is much larger than the other. Where's
the evidence, or even argument, that it must be small? It seems to me there
are far more people running IT businesses than people starting up in the
valley. I would think actually the number of people who enjoy running an
online business must be large.

I could go on, but this comment will turn into a rant. I'm quite disappointed
in this one. When DHH gave his presentation I thought it was quite interesting
that Startup School was hosting a talk that went directly against their
principles ("make something ppl want and don't worry about the money", for
example), and I was curious what pg's answer would be. I'm not convinced by
this answer. It seems weak and somewhat dishonest.

~~~
13ren
_When DHH gave his presentation I thought it was quite interesting that
Startup School was hosting a talk that went directly against their principles_

I get "This video is not available" for DHH's presentation:
[http://omnisio.com/startupschool08/david-heinemeier-
hansson-...](http://omnisio.com/startupschool08/david-heinemeier-hansson-at-
startup-school-08)

~~~
swombat
Weird, works fine here...

~~~
13ren
It's working for me now, too.

------
ericb
>> And as anyone who runs their own business can tell you, that requires your
complete attention.

I had a shareware business that footed the bills and this was not true in my
case. There was a large number of people in the Association of Shareware
Professionals trade group that were in a similar position. I'm not sure it's
true of web apps either. I had tons of time to develop or twiddle my thumbs.

I had freedom. Security is tougher though, as I did eventually get squashed by
Google/MS.

~~~
reeses
Apologies in advance for the snark but let me paraphrase:

"It's not necessary to give your startup your complete attention to run it. I
treated my shareware business as a part time job. Mind you, other companies
that could focus attention on their competing products drove me out of
business."

Did I get that right?

~~~
ericb
When MS and firefox built pop up blockers into their browsers it became very
hard to sell a pop up blocker. I'd be interested to see you move into this
line of business now and explain why your efforts are best spent swimming
upstream.

To paraphrase you: apologies for being a tool, but I can't help it. I bet you
"know how to make Twitter scale," too. I love uninformed monday morning
quarterbacks.

~~~
reeses
Specifics make this discussion a lot easier.

A full-time company would probably handle that scenario by evaluating the
market and seeing how to leverage their investment. For example, if your pop-
up blocker had any intelligence to it, one approach might involve building the
equivalent of adblock for IE, which I suspect would sell about as well as a
popup blocker pre-builtin. Then again, I'm not sure how much of a company one
could expect to build around a simple pop-up blocker, so calling yourself a
company is a bit of a stretch -- it's really just a hobby.

No need to apologize for being a tool, this is the Internet and it is assumed.

~~~
ericb
This "hobby" paid significantly more than my previous salary. I was full time
and incorporated--so no, not a stretch to call it a company.

Anyhow, arguing with a troll is not a good use of my time, so I'm cutting this
off now.

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

~~~
13ren
I agree. I think PG addresses that issue when he says it's difficult for the
market's and the founder's needs to coincide. That is, to find something that
(A) you love to do, that (B) a market also loves. It's hard enough to find
something you love; or to find something the market loves - to find both is
not just twice, but _squared_ as hard. It's easier to find those two things
independently: find something the market loves, get rich; and then find
something you love.

But if you can find both (and people have), it's _GREAT_.

~~~
condor
I hear you and do understand pg's point. While the first part 'doing what you
love' is really easy to do, one simply chooses it, the second part 'finding
something the market loves' (which is the 'security' point of pg's essay) is
basically out of your control. The only thing you can do to be happy about
that 'market love' is decide what your reaction is, keep your expectations
completely elastic and be able/willing to live within the constraints of 'the
market' reaction. The problem comes when there are preconceived expectations
of what the market should return, or a sense of being entitled to a level of
success (that the market may not grace you with) which leads to unhappiness on
that second point. But there is a solution, since you set your response to the
market, its easy to reset, simply chose to be happy with what the return the
market is giving you (ie. support your life with in those means, though it can
be more difficult if you're supporting a family), and scale appropriately.

~~~
13ren
I like your model. You're seeing the 'doing love' as input, and the 'market
love' as output from a function you can't control. I agree that "entitlement"
can create unhappiness with that output.

Getting away from PG's essay, there could be options other than to accept that
output - we could change the input, and not necessarily selling out our 'doing
love' for 'market love'.

The 'doing love' could be a set (not a single thing). Some members of the set
just being tweaks on a theme, others being entirely dissimilar themes. By
experimenting with our set of 'doing loves', we might stumble on the one that
also gives 'market love' - without compromise. Like a breakout novel, giving
overnight success, overdecades.

------
sofal
" _The main economic motives of startup founders seem to be freedom and
security._ "

I would say that these are the economic motives for just about every human
being. Economic "freedom" and "security" are often euphemisms for living a
carefree life of luxury. Who wouldn't want that? Add "power" and you've got
the economic motives for every money-grubbing scoundrel that ever existed.
Everyone would love to get rich quick, it's just that startup founders looking
to flip fast are willing to take more risks and sacrifices to attempt it.

A founder motive that I can appreciate is the desire to create great and
interesting things that improve others' lives.

------
BerislavLopac
I'm getting a bit bored by this perceived dichotomy of funded vs. bootstrapped
startups. They are simply two different kinds of companies, and they can
perfectly well coexist in an industry.

Some startups can be profitable almost from day one, and need very little cash
to get there; others need to do experiments for a much longer time, and could
end-up having a useful technology but no revenue model. In the latter case
it's only natural that someone will come along who could make use of the
technology and simply acquire the company instead of spending even more money
developing their own solution.

In many cases the companies in the latter group never have any significant
chances of making a lot of money, and acquisition is really the only way for
the founders to monetize on their work. Similarly, the companies in the former
group could simply never grow enough to be interesting for acquisition -- we
call them lifestyle businesses.

37signals and Carsonified are great examples of lifestyle businesses; Digg,
Twitter, Zemanta, and even Google, are companies which would never happen if
they have tried to bootstrap.

------
ph0rque
Often, the problem with public companies is that they try to remake the
startups they buy in their image, instead of just managing the company.

~~~
pg
There's no question acquisitions are often botched. But you're protected
against the consequences of this if the acquirer is a public co. I wouldn't
advocate being acquired by a private co except in exceptional circumstances.

~~~
jkent
This is a very good point - acquisitions are a messy business.

Can you give us an example - under what circumstances would selling to a
private company be a smart move?

~~~
pg
For cash, or if the company's stock seemed a very good bet, and you were young
(or rich) enough that you were willing to risk having no diversification.

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

What a pleasure to have such a problem.

------
tx
I have to disagree: founders of the most successful and admired companies
stick around for long, long time. Neither of Brin, Page, Gates, Moore or Yang
think there are more interesting activities than running their companies.

Maybe that's why there aren't many new googles around: entrepreneurs have
"more interesting" activities in mind they need to make a quick $5M for.

~~~
pg
I didn't say it was impossible that one's interests would coincide exactly
with customers' demands, just unlikely. Of course it will happen occasionally,
and those founders are obviously going to do particularly well.

Incidentally, though, Gates did just find that there was something more
interesting to do.

------
connellybarnes
With a typical salary at a typical programmer job, you can make enough money
in every year to take several years time off. But meanwhile, taking time off
tends to cause isolation, depression, and other problems, since modern social
interactions are based around work. Making enough money to retire upfront
seems needlessly suboptimal, as it makes it more difficult to do things, if
you choose to avoid jobs thereafter. If you choose to work at jobs afterward,
then making the money upfront simply isn't necessary.

Of course in Ancient Greece it would be optimal to not have a job, but in
America it's a liability.

I don't understand the get-rich-quick mentality for making startups. It's
illogical. Making a startup to accomplish a meaningful goal is interesting,
but money per se isn't. Making lots of money to "be free" reduces to non-
meaningful goals, no-goals centered around the rejection of much of what is
worthwhile in life. It's better for people to have real, tangible goals and
pursue them, which nearly always leads to work, even if said people already
have "enough money."

If one needs time to contemplate, sure, take a few years off. But normally
during such years, people who are healthy and challenging themselves will
automatically start doing things interesting enough that they can convince
someone to pay them for it. If you can't do this, then you've essentially
proved the irrelevance of your work (or that you need to go into academia, if
your work is too theoretical to earn money in the "normal" world.)

A strong argument for making a startup is when you want to accomplish
something so ambitious that no job would let you tackle that task, simply
because jobs have smaller scope.

Maybe there are other good arguments for startups, but people are very unclear
when they throw a bunch of confusing messages about money out there, because
increasing income doesn't make people much happier [1], and it's easy for
people who live in their means to take years off from jobs, if that's the
issue at hand.

Even if you want to never work again, there's a greater probability of success
in taking a high paying, dull job and working hard for several years, than
working on a startup. But many ambitious people would have a lot less pride in
doing this, despite the higher probability of success. Again this indicates
that startups are really about pride of ownership, pride of tackling new
ideas, changing the world, etc, than money.

[1].
[http://www.princeton.edu/main/news/archive/S15/15/09S18/inde...](http://www.princeton.edu/main/news/archive/S15/15/09S18/index.xml?section=topstories)

------
mpc
I understand the point that PG is making here. But I think DHH might argue
that it's possible to create a business that doesn't require an unreasonable
amount of work and attention. The work could even be enjoyable and interesting
long term and business could still manage to be a success.

Edit: I guess 37 signals is a good case study of this. They work 4 days a week
and have had tremendous success. I have 0 experience running a real
"business", but I have a hunch that you could build a successful one that
doesn't require the amount of attention and work that PG is talking about.

------
akkartik
Look at it from the perspective of the customer rather than the owner. When my
apartment switches managers I see no difference. I am not forced to move to a
different location, nor do I have people reordering my furniture or changing
my lease agreement.

When Viaweb became yahoo store it's possible it got a lot more users, but I'd
bet existing users weren't as happy anymore. They got shitty yahoo service.

Perhaps in this industry management companies just haven't gotten very good
yet. More likely, the difference in scale breaks the analogy from the user's
point of view.

------
steveplace
The referenced lecture:

[http://omnisio.com/startupschool08/david-heinemeier-
hansson-...](http://omnisio.com/startupschool08/david-heinemeier-hansson-at-
startup-school-08)

~~~
13ren
I get "This video is not available".

------
ljw1001
Maybe you should have entitled this one "What's wrong with this country and
how can I convince people it's a good thing?"

Some founders seemed to like running their companies and did OK while they
were at it: There's Bill and Steve, of course. And Michael Dell. And Larry
Ellison. And Jeff Bezos. And they guys from Sun and Ken Olsen at DEC, and Bill
and Dave over at HP - yeah, almost every company that's really mattered in the
IT world. If DHH want's to run with that crowd, or just run a good, healthy
little business, then good for him.

On the other hand,"pump and dump" mentality you seem to favor is exactly the
mindset of the multi-millionaires on wall street and in Detroit today who
continue to line their pockets while their companies fail or go on the dole.

Really Paul, I know you VC guys have a short attention span (ugh, i mean,
investment horizon), but it seems like you're starting to believe that what
puts money in your pocket is by definition an absolute good.

------
tristian
My take:

If you are starting a business which will make a profit from the outset, in
which you have complete control:

\- After a while you may want to do something else other than run the
business.

\+ A good way of doing this is to sell the business to a public company.

\- It may take some time to do this depending on the market and size of the
business. During which you may not want to be there.

\+ Since the business is making money you don't need to rush the sale.

That all sounds pretty good to me.

Beyond the mentioned freedom and security, a lot of people start business so
that they can be more in control of their own lives.

If you start a business with the intention of keeping full control, then
you're going to be responsible for the continued control of it.

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

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

------
joseakle
What about sharing risks between startups? You could set up a startup shares
pool, in which a group of companies trade some of their stock for a share of
the pool, so if some companies go under they could still receive some income
from the pool.

Maybe something similar to this Artist Pension Trust.
<http://www.guardian.co.uk/money/2007/aug/12/4>

I think this would be similar to what VCs do, invest in 20 startups and hope
for one big hit or a couple of good hits.

------
bootload
_"... They're like property management companies run by madmen. Or more
precisely, by Benjamin Graham's Mr. Market ..."_

No references. More on Mr. Market here:
<http://en.wikipedia.org/wiki/Benjamin_Graham>

------
lurker
"One disadvantage of living off the revenues of your company is that you have
to keep running it."

that's an odd "disadvantage", Paul. It implies that running my company is
something I don't want to do. Don't know about you, but I LOVE running my
company.

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

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

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

------
hs
Would IPO path be more optimal for Viaweb?

------
edw519
_They want enough money that (a) they don't have to worry about running out of
money and (b) they can spend their time how they want. Running your own
business offers neither._

In this thread:

<http://news.ycombinator.com/item?id=79057>

pg has answered the question, "What would you do if you were a billionaire?"
with "Day to day? Much the same thing, actually."

Perhaps doing a startup _is_ "spending our time how we want".

Right now, it's hard for me to imagine myself doing anything else. Maybe I'll
feel differently later.

