

Take the Next Step, Paul - brlewis
http://www.stubbleblog.com/index.php/2008/03/take-the-next-step-paul/

======
SwellJoe
This is something I've actually meant to ask pg about, but never seem to get
around to it.

There are a few companies that YC has funded that have opted to go a slow-
growth, close ownership, path to small business success that the article
suggests is the logical conclusion of pg's essay (though, if one takes pg's
work as a whole, I wouldn't say that's his raison d'etre--helping good
developers create a huge amount of value in a short period of time is more his
over-arching theme, I think).

Wufoo have opted not to push themselves into a giant business, but have a
long-term plan for growth. My co-founder and I frequently waffle over which
path to take, and so far have stayed the course of staying small with steadily
increasing revenue over taking a bunch of investment and growing really fast.
Both companies do have an exit plan, but it's a little further out and the
intention is to make sure its on our own terms. pg has never indicated
dissatisfaction with this path...even though it means the exit won't come
quickly, as it did with reddit, Zenter, Parakey, etc. and thus YC won't see
return on these businesses for at least a couple more years.

Of course, once one has a profitable exit, and optionally vests, you're then
completely free to work in any environment you want. Which means you could do
what Paul Buchheit did with his Googlebucks, and start a company that does
exactly the work you want to do on the terms you want to do them on (and it
turns out he wants to grow really fast, since he raised 5mil for FriendFeed).
Which brings me back to what I think pg's real theme and logical conclusion
is. pg likes to see people make something really great, really fast, and then
make a really lot of money because of it. Once you've done that, you're then
freed up to do anything you want (maybe after spending some time in a cage
with your lion co-founders, while vesting)--including doing it all again.

~~~
pg
Wufoo is going to surprise everyone.

~~~
ovi256
Did Google not ate their lunch when it introduced forms in Google Doc's
Spreadsheet? That basically took away their raison d'etre.

~~~
pg
They said it had no effect at all on their growth. They did not seem impressed
with what Google has so far.

------
pg
I replied to this a couple days ago in a comment thread:

<http://news.ycombinator.com/item?id=143480>

~~~
startingup
What about the other possibility, Paul? 37Signals or Smugmug stay small &
profitable, grow organically, but never straying from their true self. There
is no big exit, but people (founders as well as other employees) are happy.
Would that be another logical outcome of your original essay?

In fact, going public introduces all manner of considerations that often
inherently introduce "bossiness", so this alternative seems even more logical
to me! For one, public companies have to grow, grow and grow and a lot of the
bad stuff about companies you point out in your essay arises from that one
source. They do bad deals, they start to think very "strategically" (ignoring
the human element) and so on.

~~~
pg
37Signals and Smugmug don't prove much yet because they aren't that old. I'd
be willing to bet both either die, go public, or get bought within the next 10
years.

It's easy to stay medium-sized if you're a consulting firm, but hard if you're
a product company. As a product company you tend to either extreme: you either
keep growing, or die. And if you keep growing, you'll eventually either go
public or get an acquisition offer so big it's hard to turn down.

I might turn out to be wrong. This world changes fast. But there aren't a lot
of 20 year old 37Signalses around.

Bezos seems to agree with me. He invested in 37Signals. He would not have done
that if he didn't expect some form of exit. And in fact 37Signals probably had
to say explicitly that they expected some form of exit in order to get his
money.

~~~
startingup
I grant that they are not that old yet. One counter-example of a software
company that has kept growing organically is SAS Institute (now $2+ billion
and counting). Don't know anything about their internal culture - they say
attrition rate is very low.

I would modify the "grow or die" to "adapt or die" because it is really lack
of adaptation that seems to kill, and lack of growth may be a manifestation of
lack of adaptation. I am not sure size is actually a benefit or hindrance to
adaptation (it may be neither). It is theoretically possible for a small
company around in 1985 to have adapted itself successfully through waves of
change. But alas the only company I can think of that has come anywhere close
to adapting through waves of change is Microsoft (and even it hasn't adapted
that well).

An example of botched adaptation is the Altavista search engine from Digital.
I remember the time it was the most advanced search engine (at a time when
Gates didn't think search even mattered). The parent company entirely missed
their value.

------
startingup
This is a great post, by far the best response to PG's post. I had much the
same question, but I am not as good at formulating it the way this guy has
done it.

I have a feeling PG was aware of this logical implication when he wrote his
essay ("if large companies constrain, err, even cage people, why put heart and
soul into something just to deliver it to them?") Yeah, there is the money,
but most people I know don't put heart and soul into work _only_ for the
money, and PG himself is doing Arc, YC, Hacker News etc. without any
particular monetary goal. I wonder what his response would be!

------
brlewis
I found this post interesting despite errors, e.g. PG is _not_ a venture
capitalist.

~~~
run4yourlives
I don't think this guy made that assertion. What he said was that PG needs to
be part of the VC game in order to make money.

The whole notion of YC is that they are seed funding, with the expectation
that the startups they fund will be bought (or have some other favorable
monetary transaction) by the big companies PG says are unnatural. The article
is a nice way of calling PG a hypocrite.

It's a great argument. One of the best counters I've seen to PG's essay, and
an angle I didn't even think of. I really hope Paul responds to this, as I'm
interested in his thoughts on the matter.

~~~
SwellJoe
Actually, he explicitly called pg a venture capitalist...specifically, he
said:

"He’s a venture capitalist."

You can't possibly take that any other way.

~~~
nkohari
That's sort of a semantic debate, isn't it? PG might not be a traditional
venture capitalist, but nevertheless, he invests money in companies in order
to see a return. YC just does it on a much smaller scale than typical VC
firms.

~~~
lisper
> That's sort of a semantic debate, isn't it?

No.

There's one very significant difference between a VC and YC. VC's invest other
people's money. YC doesn't. VC's may also invest their own money, but this is
incidental to their primary business, which is to assemble investment
portfolios for other people to invest in. They charge a fee for this, and many
VC's make most of their money from these fees, not from the returns on the
investments.

This has real consequences. VC's are much more risk-averse than YC, because if
they have a bad year it can put them out of business. (No one will want to
invest their money in a VC which lost money for their previous investors.) If
YC has a bad year they can just shrug it off, learn from the experience, and
try again.

This dynamic also changes the VC's risk posture in another way. A VC has much
more to lose from a loss than they have to gain from a really big win. If a VC
has a really big win, most of the money goes to the investors, not to the VC.
The VC's primary benefit from a Really Big Win will be that more people will
want to participate in their next round of investments, which is nice, but
that in and of itself doesn't make you a billionaire. So VC's are much more
interested in avoiding loss than in going after a Really Big Win. YC, by
contrast, has nothing to lose from a loss except the money they put in (which
is not much), and a lot to gain from a Really Big Win (since they are the
investor). This makes YC willing to take much bigger gambles than a VC would.
It also aligns YC's interests with the interests of the companies they invest
in, since the bigger the company wins, the bigger YC wins.

~~~
run4yourlives
You're confusing being a VC with the standard VC fund.

You don't need to have the latter to be the former. A VC can use their own
money exclusively, and do so all the time. The professional VC's that manage
pooled investments of other people are only a subset of the term Venture
Capitalist.

~~~
pg
In the industry, the term "VC" is used exclusively for people who manage
venture capital firms. I'm not considered a VC. Closer to an angel. But that
usually implies an individual person. There's no name yet for the kind of
thing YC is.

~~~
electric
"But that usually implies an individual person"

Not really... <http://www.bandangels.com/> What's the difference between YC
and these guys? Maybe in the amounts invested.

~~~
pg
These angel groups usually have a different structure. You go and present to
them and the angels individually decide whether they want to invest. Whereas
YC itself is the investor in the startups we fund, as with a VC firm.

~~~
electric
Ok and I guess this is a lot different too... (the mgmt team bit)

Q: What does the Band look for in their initial review?

As with most venture funds, the Band seeks to invest in companies with a
strong management team, unique technology and a large potential market.

------
Spyckie
I think we need to look at the landscape of the startup community. If you
didn't have to grow to survive, then it would be fair to say that the goal is
to create opportunities for people to 'live as they should'. However, the fact
is that it is hard to stay afloat if you don't grow. Growth, as defined by how
big your company gets and how much market share it has, is also an indication
of how long the company will last. Ideally, the bigger your company is, the
more it can do, and the more market share your company has, the less your
competitors have. This means that you need to grow in order to survive -
otherwise your competitors will take the market share from you and leave you
without a business.

If you manage your successful company like a startup all of its life, then
you'll hit failure sooner because startups just have a higher chance of
failure because of their risk taking nature. Corporate structure just carries
along a lower inherent risk.

------
menloparkbum
What is a small business incubator? Empirically "incubators" in the silicon
valley / software world have all been total failures.

~~~
pg
As far as I can tell it means an investor whose space the startups work in. We
deliberately avoided that, because we feel it hurts the startups. It puts the
founders in the position of employees.

Plus offices are actually crappy places to start startups. Apartments are
better.

