
Paul Buchheit on Lessons Learned from Investing in 200 Startups - darwhy
https://blog.ycombinator.com/paul-buchheit-on-lessons-learned-from-investing-in-200-startups/
======
6stringmerc
Some genuinely encouraging thoughts here - very interesting to my relationship
with Inventions vs. Long-Form Writing:

> _Paul : The biggest one is made-up ideas. The best startups come from
> personal experience. It was something you or someone you know needed.
> Occasionally, I’ll ask a company, “Why do you think is a good idea?” And
> they’ll say, “Oh, I read an article in TechCrunch.” You have to understand
> it at a deep level. It can’t just be something you read.

I also like people who get things done. If you’ve been working on your startup
for two years and have nothing to show, that’s a pretty bad sign. I’ve
discovered that most people are really good at finding obstacles. I don’t fund
these people._

One thing I've learned, over five years plus of developing Inventions,
Pitches, and the occasional Prototype, is that there's a really big
realization that Angel Investors / PE-type Investors don't want small
businesses to figure out:

If your idea is good, you can obtain a patent, and afford to take a loan
<$50,000 to go from "Prototype-to-Trade Show Ready" then you don't need
Investors. You don't need "wisdom and guidance" aiming for a quick ramp-up and
exit. You don't need to think in Quarterly Capitalism terms. And, most
importantly, you don't need to dilute your control whatsoever[1].

For a while I've caught some whiffs that the Investing Realm is quite a bit
more "Me Too" risk averse than often portrayed. Very similar to the Music
Industry. Labels don't want interesting life story pieces, they want bubblegum
they can market to kids with some discretionary money to burn. Thus, I take a
lot of the recent "Start Up" culture with a grain of salt, because the time,
effort, and study it takes to create a genuinely valuable idea basically
points to starting a "Traditional Small Business" moreso than any super-duper-
evolution-in-funding-or-growth. YMMV of course.

[1] It does help to study both success stories, failures, and Public Slap
Fights (Cruise, Otto); while I've solicited in the past, I've cooled to the
idea and instead plan to go my own Patent-Prototype-Promote business model.

~~~
GFischer
I disagree about the amount of money needed to bootstrap (for the kind of
ideas VCs invest on, not for niche products or lifestyle businesses I mean).

Patents aren't worth the paper they're printed on unless you have money to
defend them, and are very likely to be overturned in court without that (OTOH
there are some ridiculous patents that the patent-holders have enough money to
make them stick).

Going with your hypothetical model, once you've burned out your 50.000 ramp,
then what?

I'm trying to build my own product, and without outside investment it's
freaking hard.

~~~
rebootthesystem
> Patents aren't worth the paper they're printed on unless you have money to
> defend them

Exactly. This is something I think most don't understand. Patents give you the
right to sue. That's it. They don't provide any "protection" beyond that.

It's like freedom of speech. You have the freedom to say whatever you want but
the first amendment does not offer any protection from the consequences of
your speech. In other words, say the wrong thing at the wrong time in the
wrong place and you might just get beaten into a pulp. You had the absolute
right to say whatever you wanted but no protections beyond that.

~~~
cma
>Exactly. This is something I think most don't understand. Patents give you
the right to sue. That's it. They don't provide any "protection" beyond that.

They give you the ability to credibly threaten to sue as well and reach a big
settlement without a lot of expenditure. You can also sell a patent to a
competitor who needs it.

~~~
rebootthesystem
I have a feeling you've never spent a significant amount of time dealing with
IP and patent attorneys.

You can't threaten to sue. That can backfire in a major way, having lawsuits
filed against you.

The idea of reaching big settlements with minimal expenditure's does not align
with reality. This simply don't work that way, particularly if you are up
against a large or well-funded company.

The first thing an attorney is going to ask for is a retainer somewhere in the
range of $100K to $250K to get started. Whatever they ask for, they are likely
to tell you they will not move forward unless you can commit to $250K at a
minimum to pursue a case.

They don't do this because they are greedy, they do it because this is
expensive and they don't want you to burn through $100K and then discover
you'll need more, don't have it and you got nothing for your $100K.

Selling IP is an entirely different conversation. Yes, patents can be worth
millions, tens of millions, even without a real product behind them.

------
rabidrat
> For example, Facebook had an offer from Yahoo for a billion dollars, which
> everyone told Zuck to take. Fortunately, he said no. Had he said yes, it
> would have been another failed Yahoo acquisition and Facebook would not have
> nearly as much impact.

It seems to me that the world would be overall a better place if FB had sold
to Yahoo. Yahoo would have screwed it up (like AOL with Myspace) and there
would be more competition in the space all around. Monopolies are good for the
investors, not for the customers.

~~~
mandeepj
Zuck dropped the offer because Yahoo lower the price to ~$700 million. He has
famously said he would have sold FB if yahoo kept the $1 billion tag.

Buying companies for billions and billions of dollars is a skill in itself and
requires a vision also which is not very common. I mean to say only people
like Zuck can do it

Edit - Added some more meat

~~~
coderholic
I heard Zuck give a talk where this came up. If I remember correctly, his
board said he should take the money. He replied that all he'd want to do after
selling FB would be to start another social network, so why not just keep
working on the one he'd already got?

It wasn't amount the money.

~~~
shirian
Would the contract not define a non-compete clause, though? I mean, much less
reason to buy it if the ones buying it from just do the same thing again,
under a new name.

------
7cupsoftea
PB was the first investor in 7 Cups. I'm thankful for all of the ways that he
helped us. He is very good at motivating founders. I can't all the way
understand how he does it, but it is remarkable. I think a big part of it is
helping people face reality directly. i.e., he alludes to this in the
interview when he says most people are good at finding obstacles (i.e.,
excuses) and that he doesn't fund them. He is good at keeping you honest so
that you do not delude yourself into making fake progress or going down wrong
turns. Another way of saying this is that he helps you minimize denial. Quick
story:

I had been working on 7 Cups for about a month prior to getting to YC. I had a
home page up, which I was pretty excited about. The core idea of the
chat/voice support wasn't yet live. I showed him the website and wanted to
show him some of the segments we wanted to focus on (parents of children with
disabilities, veterans etc.). He quickly asked - have you got the actual
product in front of users yet? I tried to dodge the question, talk more about
the site etc. He repeated the question. I had to honestly answer that no we
hadn't yet released it. He was like, okay go do that and report back next
week. I was stalling because, on some level, I was afraid that it wouldn't
work as well as I hoped. We pushed through, launched it, and learned a ton in
that next week. For example, we learned that voice was too intimate and people
preferred messaging.

And that basic cycle happened over and over again. Like there might be things
that sound right or are even partially right, but if they are not the most
direct thing that is going to help you learn and make a product people want,
then it is probably not a good use of your time.

------
F_J_H
Love this:

 _> >Larry Page assigned the project to me. He said, “Build some kind of email
something” and chose me because I had an interest in email._

This is how you know you've found an awesome developer - someone who only
needs to be given only a high-level vision of what is needed, and who can then
run with it, fill in the details, and deliver something more awesome than you
thought possible.

Reminds me of the famous "Message to Garcia" essay from way back in 1899:
([http://www.benning.army.mil/infantry/199th/ocs/content/pdf/m...](http://www.benning.army.mil/infantry/199th/ocs/content/pdf/message%20to%20garcia.pdf))

Or, a more current parable found in a post by Benjamin Hardy(1):

 _A certain farmer had become old and ready to pass his farm down to one of
his two sons. When he brought his sons together to speak about it, he told
them: The farm will go to the younger son.

The older son was furious! “What are you talking about?!” he fumed.

The father sat patiently, thinking.

“Okay,” the father said, “I need you to do something for me. We need more
stocks. Will you go to Cibi’s farm and see if he has any cows for sale?”

The older son shortly returned and reported, “Father, Cibi has 6 cows for
sale.”

The father graciously thanked the older son for his work. He then turned to
the younger son and said, “I need you to do something for me. We need more
stocks. Will you go to Cibi’s farm and see if he has any cows for sale?”

The younger son did as he was asked. A short while later, he returned and
reported, “Father, Cibi has 6 cows for sale. Each cow will cost 2,000 rupees.
If we are thinking about buying more than 6 cows, Cibi said he would be
willing to reduce the price 100 rupees. Cibi also said they are getting
special jersey cows next week if we aren’t in a hurry, it may be good to wait.
However, if we need the cows urgently, Cibi said he could deliver the cows
tomorrow.”

The father graciously thanked the younger son for his work. He then turned to
the older son and said, “That’s why your younger brother is getting the
farm.”_

1 [https://benjaminhardy.com/one-behavior-separates-
successful-...](https://benjaminhardy.com/one-behavior-separates-successful-
average/)

~~~
gregpilling
The "Message to Garcia" is great, thank you for that. I love that while it was
written in 1899 it still seems to be true; will likely be still true in 100
years I think.

------
hn_throwaway_99
> My favorite anti-portfolio example is Airbnb. Michael Siebel (Y Combinator
> Core CEO) emailed me their deck before they joined Y Combinator and I
> couldn’t help but think “Wow, air mattress rental? That’s a terrible idea!”

I've heard this sentiment repeated a lot ("Everyone thought AirBnB was a
horrible idea"), but I honestly can't imagine why, and it makes me think
AirBnB must have just had a bad initial pitch deck. At the time AirBnB was
founded, Couchsurfing was already really popular, and HomeAway had received
some gargantuan investment rounds. Is it really that much of a stretch to say
people would want a safe, secure way to rent out private accommodations?

~~~
sirspacey
The reason AirBnB was so tough to fund, at least from Fred's post, is because
it represented a change in cultural norms. Investors are very resistant to
ideas that change people's behavior - particularly if the investor can't
picture making that change in their own lives.

~~~
shanev
Also the website back then was airbedandbreakfast.com, way too long and
complex of a domain. Couchsurfing was huge, and I guess investors didn't think
a paid version of it would take off if a free version existed. At least that's
how I thought about it when I rejected Joe's offer to work on the site in
2008.

------
sharemywin
Jasper : Sam Altman has said that the only criterion Y Combinator uses to
evaluate applying companies is, “Can this be a $10 billion plus company?” like
Airbnb and Dropbox. While this model works great for a fund, there is an Early
Exits movement that suggests individual entrepreneurs have a much higher
likelihood of success when they raise less capital and target exits in the $20
million range. What do you think this view?

Paul : The math does not support this strategy but if other investors want to
try it that’s fine. Also, it is not just returns we are looking for but really
impactful companies. When you sell too early you don’t realize the full
potential.

~~~
hn_throwaway_99
> The math does not support this strategy but if other investors want to try
> it that’s fine.

I think Jasper and Paul are talking past each other here. The math doesn't
support the strategy of small exits _if you are an investor in a large fund_.
If you are an individual starting a company, though, I've seen a lot of math
that says you have a much better chance at success if you swing for a "$20
million niche" than a $10 billion company.

~~~
kmonsen
Does it really make financial sense though? If there are two founders, some
outside equity and a few employees I'm not sure $20 million is better than
working in a big company and the risk is surely larger. It might be a lot more
fun though, and you will learn a lot so if they payoff is comparable I would
say go for the startup if you can afford it.

~~~
AznHisoka
$20 million is $5 million if you just own 25%. thats almost 40 years of
working at a dayjob.

~~~
eloff
Except after taxes and expenses you're lucky if you're saving $1000/month at
that day job. After 40 years, assuming 5% annual compounding on your
investment, which requires to be almost entirely in risky investments like
stocks, you could end up with 1.5 million. On the other hand, 3 million after
taxes out of the initial windfall of 5 million, at 5% return would let you pay
the exact same expenses while still growing by over $5000/month. You'd end up
with $30 million at the end of 40 years. Huge difference.

~~~
zimzam
Your numbers are way off.

In the US a young, single developer who follows a budget should be able to
save at least $2k/month.

$80k/year income less 25% for payroll & income taxes leaves $60k/year.
$1.5k/month in housing & $1.5k/month in food/utilities/cell phone/clothes/etc.
is $36k/year in spending, leaving $24k for savings. (This also ignores the tax
advantages of retirement accounts, which allow for more room to save or spend)

The average nominal returns of the stock market are over 10% per year: a very
simple & conservative investment portfolio of 60% S&P 500 index fund & 40% US
Treasury bonds yields about 8.7%/year. If we assume 2.7% inflation we get 6%
real return/year.

~~~
SirLJ
add a few kids and you'll end up with debt instead of savings...

------
stevenj
Paul's thoughts after his first three years angel investing (2011):
[http://paulbuchheit.blogspot.com/2011/01/angel-investing-
my-...](http://paulbuchheit.blogspot.com/2011/01/angel-investing-my-first-
three-years.html?m=1)

------
theprop
Great way of putting things: "I’ve discovered that most people are really good
at finding obstacles."

------
rattray
> I wrote the first version of Gmail in a day!

I hadn't heard that before; does anyone know of sources with more on this
story?

~~~
romanhn
From the man himself -
[http://paulbuchheit.blogspot.com/2009/01/communicating-
with-...](http://paulbuchheit.blogspot.com/2009/01/communicating-with-
code.html)

------
a_imho
Was Google cooperating with the Chinese government that controversial?
Cooperating with the NSA seemed to make bigger waves.

~~~
prodmerc
Yeah it was widely discussed at the time, what with Google censoring results
and whatnot.

------
tkt
> _Paul: The best startups come from personal experience. It was something you
> or someone you know needed._

I've seen this comment before. It emphasizes the need for more founders with
diverse backgrounds. More types of problems solved and more opportunities to
reach new markets.

------
MarkMc
Great advice:

"If you’ve been working on your startup for two years and have nothing to
show, that’s a pretty bad sign."

"Just get started and deliver now. You should have a long term vision but must
also act right now, have near term deliverables and be in contact with the
customer."

------
baxtr
_> For example, Facebook had an offer from Yahoo for a billion dollars, which
everyone told Zuck to take. Fortunately, he said no. Had he said yes, it would
have been another failed Yahoo acquisition and Facebook would not have nearly
as much impact._

Really? How can you know what the path of Facebook would have been with a
yahoo acquisition? That's like predicting the future.

Besides, what is the real "impact" of Facebook? Which impact are we talking
about? To the shareholder? To society? If he refers to the latter, I can think
of no way to measure the "impact".

~~~
neilk
Yahoo screwed up literally every acquisition in the social space that they
made.

After Google spanked them in search, generally they had ideas of somehow
pivoting to social media, but they never executed. They had all the good
fledgling social products, but wanted them to operate like media aggregation
portals (the strategy that had always worked for them). Some people within
Yahoo did see the shift that was coming, but their plans all got lost in
corporate politics and architecture astronautery.

Source: worked for acquired social startups within Yahoo around the same time.

------
SirLJ
I truly believe in small life style business is much better than "pie in the
sky" 10B startup that will happened once every 10 years and 99% will fail
hurting employees, owners and small investors...

------
ndr
Best quote:

> Just get started and deliver now. [...] Don’t disappear for years working on
> this thing, completely disconnected from the world. An extreme example of
> this is, I wrote the the first version of Gmail in a day!

------
graycat
Paul has some good observations, but IMHO what he has so far has just been
lucky due to the general potential of Moore's law and the Internet. IMHO, with
the astoundingly high growth rates of Moore's law and the Internet over, his
ideas won't work now.

E.g., he wrote the first version of G-mail in a day. Okay. We can't expect
more Googles from such efforts.

Paul, YC, and Silicon Valley have been taken in from their successes, their
Sand Hill Road echo chamber, and their own Kool-Aid.

Instead of such influences, we have some much better examples of doing big
things from the all-time, unique, world-class, grand champion of really big
successes from really big technology, the US DoD, with high irony, what got
Silicon Valley going, along with Dean Terman. For runner up, we have Bell Labs
with the transistor, solid state lasers, and optical fibers. These successes
were not done in a day. And with high irony, they were not risky, that is, the
batting average was really high, much higher than VCs in Silicon Valley.

Paul is making another big, fundamental mistake, really implicit in the
subject and title of the interview, what can be learned from 200 investments:
He does have some good lessons, but broadly what he explains is very much the
wrong approach.

Why? Because for his $20 billion criterion, necessarily he is looking for
really exceptional, rare events. There's no hope at good lessons for such
successes, such rare events, except just to count on luck, when looking at 200
projects where all or nearly all were just mediocre.

Yes, these events are so rare and difficult to do that maybe most of them,
that is, the Googles, Facebooks, etc., were more likely from luck, Moore's
law, and the Internet than sufficiently good work with little or no good luck.
He's just not looking at approaches that are good at detecting the desired
rare events.

Instead, it really is possible to conceive of, plan, and execute really big,
earth changing work, with quite high reliability. E.g., did I mention the US
DoD and Bell Labs? Uh, there's no way to see from Paul's lessons from the 200
startups just how the US DoD and Bell Labs were so successful. E.g., those
organizations didn't need 200 rolls of the dice to get the Manhattan Project,
GPS, stealth and the F-117, the SR-71, Keyhole (the DoD's Hubble, aimed at the
earth instead of space), the transistor, solid state lasers, or optical
fibers. And now we can include RSA, WMAP, LIGO, LHC, etc. -- no 199 failures
to get one big success. Indeed, in all that work, nearly no failures. Also
include the Human Genome project and the work of Craig Venter -- worked great,
right away.

But the conception, planning, and execution of such low risk, high payoff
projects are not illustrated by Paul's, YC's, or Silicon Valley's investment
or project evaluation approaches.

Uh, hint: What Paul is describing is available to middle school students. So,
we can set aside all education and research past middle school?

SMTP, HotMail, Gmail -- those were simple projects, flashes in the pan from
luck and the rapid growth of Moore's law and the Internet, and do not
illustrate the approach to $20 billion for the future.

Uh, early in e-mail, the software I had put one icon on my desktop for each
e-mail message sent or received. I could wait for minutes for a single e-mail
message to appear on my desktop. Total brain dead bummer. So, I got out the
SMTP RFCs, read a little, use the interpretive language Rexx that had the
TCP/IP calls, to write my own e-mail. For reading, writing e-mail, I used just
my still favorite text editor -- KEdit. For converting to/from base 64 for the
MIME attachments, I wrote some code in Rexx. My e-mail had a file that
permitted nicknames and groups. It worked great. It put all the e-mail I
sent/received, just as it was sent/received, exactly, in a file -- appended to
the file with a delimiter line after each e-mail message. When the file got
over 10 MB, I started another one. I still have all the files, and finding
messages in the files is easy. I wrote all of it in just one afternoon except
did the base 64 stuff in another afternoon. My e-mail set up was good enough
that I had a cute feature: In files of other work, I'd put just the date line
from an e-mail message as a link to that message, and one keystroke in KEdit
would cause KEdit to get and display that e-mail message. Sure, the date lines
do not have to be distinct, but I never found a duplicate! I was not lucky
enough to get rich from it, but I used it for about 10 years, until I got a
copy of Outlook 2003. I still wish I knew the syntax of the Outlook PST files
or whatever they are called so that I could implement links to those. So,
really in some ways, my little one afternoon project remains better than
Outlook 2003. Writing basic client side e-mail is dirt simple and no big
accomplishment in any sense.

We don't want to be duped into believing that the last $100 million lottery
winner has some really great ideas!

In comparison with the DoD, etc. work, the work of Paul, YC, SV, etc. is,
really, brain-dead. For more, Paul's approaches are not what got us to 14 nm
and won't get us to 10 or 7 nm.

Uh, NASA and, IIRC, JPL, launched some equipment into space and eventually
sent back some astounding pictures of -- sit down for this one -- Pluto. Up
close. First time. No 200 failures for the one success.

But, wait, there's more: With the current power and prices of computing and
the Internet, there is a very special case of information technology. There we
take in bits, manipulate them, and put out bits. The goal is to have the
output bits be darned valuable, well over the $20 billion criterion.

Then, what is the key to evaluating such work? The team? Personal need? The
attitude? The determination? Their desire to get the main work done in a day?
Their grit? Their novelty? Their interview impression? Other imponderables and
tea-leaf reading? Hand shake style? Eye contact? "Taking the measure" of the
person? And may I have the envelope please? [Drum roll}. And the winner is
....

I'll keep that a secret (hint: None of the above.).

~~~
rubberstamp
Also those big projects might not have made billions for those who invented
it, but it did enable many others make billions standing on shoulder of those
giants. They created trillion dollar computing and associated software market.

~~~
graycat
Yes, the Bell Labs transistors gave us cheap digital computing, and the Bell
Labs work on solid state lasers to light optical fibers gave us cheap data
communications of the Internet. I'm still not fully clear on what gave us the
much higher disk recording densities, but IBM's _giant magneto-resistive_ disk
heads may be all or nearly all of it.

But, now, with cheap, powerful digital hardware, lots of powerful software,
from BIOS booting to operating systems, relational database and much more,
e.g., mobile, the cloud, maybe IOT, there should be some really good
opportunities for solid, low risk, high value projects from small teams, even
solo, sole founder-developers.

------
pdog
_> I was interested in making [Gmail] freely available and came up with the
ads system._

This decision set a terrible precedent.

It made it acceptable for a company to deliver "tailored advertising" by
reading all your emails.

But I guess there are few alternatives to the ad-supported business model on
the web facilitated by the vast collection of personal data.

Still kind of sucks, though.

~~~
hodgesrm
I don't see how you avoid some company reading your email and still have
automatically indexed, infinitely scalable email in-boxes. Gmail is still the
best game in town for this reason. The AI features are getting increasingly
good--Gmail automatically creates calendar entries based on email content
which is a pretty nice feature.

More generally most cloud services are going to have the same properties. It
would be more useful to define clear bounds of what companies can _do_ with
your data and back them up with workable legal protections.

~~~
beat
I welcome our new robot overlords.

The data mining and the ads are the price I pay for such incredibly _useful_
services, that don't cost me anything but a small bit of attention. And even
the ads are good, because they're so nicely targeted.

------
sirspacey
Great insights, better said than most, but nothing new here. Definitely not
unique insights from investing in 200+ startups vs 20 or 2.

------
jonbarker
PB says the math doesnt support the early exit strategy. What math? Not
trolling just would love to see more details.

~~~
sfifs
For him as an investor it doesn't.

------
jondubois
>> My favorite anti-portfolio example is Airbnb. Michael Siebel (Y Combinator
Core CEO) emailed me their deck before they joined Y Combinator and I couldn’t
help but think “Wow, air mattress rental? That’s a terrible idea!”

What's baffling is how people who can come up with such a silly idea can also
come up with such a great idea as AirBnb. Without the immense help from YC,
I'm sure they wouldn't have gone anywhere.

~~~
seppin
Renting out your own apartments to strangers was arguably a "worse" idea than
some airbed concept. The whole point is you never know, no one knows what
catches until it happens.

------
dlo
> The biggest one is made-up ideas. The best startups come from personal
> experience. It was something you or someone you know needed.

My cofounder and I chose our idea as a result of reading research papers. We
were so prescient with our analysis that we found many people within our
circles who needed what we built. I became a user myself -- it ended up saving
me!

Guess I'll have to pass on getting funding from pb. :-)

------
dzonga
I wrote the first version of Gmail in a day!! #damn

------
dilap
AMP is pretty evil.

