
Paul Graham: Why Y Combinator Replaces The Traditional Corporation - turoczy
http://www.fastcompany.com/1818523/paul-graham-why-y-combinator-replaces-the-traditional-corporation
======
rdl
Didn't Ronald Coase's theory of the firm predict this, right after the first
world war?

(As transaction costs (search costs, costs to contract, costs to outsource,
etc.) go down, optimal firm size goes down. In an efficient market for
contracting, like IT, tiny startups turn into long-term profitable small-
headcount companies (dropbox has, what, 70 people?). In inefficient markets,
you end up with huge or state-owned companies, like in natural resource
exploitation or the third world.)

~~~
pg
I've been told Coase not only foresaw the present trend towards more, smaller
companies but also figured out the underlying dynamics. But I admit I haven't
actually gotten around to reading "The Nature of the Firm."

~~~
davidw
He also predicted the first Gulf War, the election of Obama and the Great Fire
of London. Wait, wrong guy...

In all seriousness though, while the technology factors certainly enable some
'shrinkage' of the firm, human factors change less, which to me indicates that
YC like agglomerations will not replace the corporation in many circumstances.
In other words, it's easier to find people these days, but as contractors, are
they really still going to slog it out for a company day in and day out for
years? Most people out there are not like YC founders, would be my bet, and
are reasonably happy with their 9/5 jobs, and with not having to hustle to
find the next gig. On the positive side, these people will also retain the
tacit knowledge inherent in many human activities, and provide a sense of
continuity that a shifting network might have trouble fostering outside a
small core. Apple, for instance, has 60,000+ employees, according to the web
page - that's not what I'd consider a small core + network, even though they
certainly outsource a lot. So... trend, yes, but fairly slow once the low-
hanging fruit that tech can provide has been integrated.

The other big question I have in this vein is whether it will remain so cheap
to create a company, or if it's an anomaly, and in the future more capital
will be required for anything serious. My guess is that the long term _is_
towards cheaper, but who knows what may happen.

BTW, Wikipedia says it's just an article, and here's the summary for those
interested:

<http://en.wikipedia.org/wiki/The_Nature_of_the_Firm>

~~~
rdl
There are definitely arguments against "everyone an independent contractor",
but ending up with a bunch of 1-50 person sized companies instead of a much
smaller number of 50k person companies seems very likely. This is a net win
for everyone in that failure happens faster, thus allowing resources to be
allocated more efficiently -- it also allows high performing individuals and
teams to be accurately compensated for their success, vs. the strict seniority
or internal-politics systems in larger organizations.

There's an argument for internal communications costs vs. external
communications costs (Coase's thing) -- if it's more efficient to communicate
within a trusted firm vs. between firms, you end up with huge firms. Things
like tight-knit social networks outside of the firm (college alumni, things
like YC, sites like hn, various ethnic diaspora in history, ...) would create
some kind of hybrid, too, where a lot of interconnected small firms would
work, so each firm could be smaller than otherwise. This would actually be
interesting research for someone in economics or sociology -- I'd look at
formal networks like YC and informal networks like casual coworking and web
forums.)

~~~
davidw
Yes, I think it's an absolutely fascinating subject, and while I have some
instincts, who knows which way it could go.

To have some predictive value, what other industries besides web companies
that are super cheap and easy to start, might morph towards this kind of
structure? Or, here's another one: this industry has long been dominated by
giants: IBM, Microsoft, Google, and so on. Will we see the end of that?

(And just to be clear, I think what pg has done is fantastic, and he/them are
quite praiseworthy, etc... I'm just pushing back a bit on the idea. I can't
foresee doing business with PG or YC, so I have no interest in not calling it
like I see it)

~~~
jbooth
Not just our industry. You know that cornucopia of different brand names you
see at the supermarket? They're all owned by like 5 giant corps.

I agree with Coase's reasoning and I'd like to agree with his prediction, but
there are some empirical problems with it as of now.

------
ccc3
This was an interesting point in the context of comparing YC to a large
company:

 _Comparing himself to an air-traffic controller, Graham says much of his time
is spend making introductions and helping the YC community solve problems
within the network_

Most of the large companies I've worked with are missing somebody in the "air-
traffic controller" role. It can be very difficult for individual employees to
understand all the resources that are available within the company, or who
they should contact with a particular question. YC might actually have an
advantage in this area.

~~~
jpdoctor
> _Most of the large companies I've worked with are missing somebody in the
> "air-traffic controller" role._

I've worked for 3 large companies, and have had the opposite experience. The
problem is that everyone is trying to be an air-traffic controller. So much
so, that honest work is being avoided.

~~~
velshin
Deep corporate hierarchies encourage politics and associated power struggles.
Part of moving up in that environment is to have others perceive you as an
"air-traffic controller" of a segment of the company, a master of your domain.
This sometimes results in people in "manager" roles with 1 or 2 direct
reports, where the "manager" does no actual work, but spends inordinate
amounts of time coordinating with other teams or politicking. Honest work
avoided.

I'm not excusing that behaviour but if you've spent enough time at a big
company, you'll see motivations for it.

Contrast that to pg's air-traffic controller role in the YC network, providing
value to all the startup people he connects.

It will be interesting to see how well pg's positive influence scales as YC
continues to grow.

------
djnliung
YC has nothing to do with replacing the traditional corporation. To do that YC
companies would have to have sustainable business models and actually make a
profit.

How many YC companies have ever made a real profit before being bought? How is
the YC model sustainable without existing large corporations like Google or
Yahoo or Linkedin waiting to buy out the startups?

YC is about grooming startups ready to be bought out in talent acquisitions
after a period of rapid growth, not about creating sustainable businesses with
viable products.

~~~
pg
I remember people saying things like this in the first few years but it's
surprising to encounter it now.

If people who think we're in the business of grooming startups for HR
acquisitions stopped to do the math, they'd realize we'd be acting against our
own interests if we focused on that. Essentially all the returns in startup
investing (for us as for any investor) come from the big successes. Whereas we
often make zero from early acquisitions.

~~~
meanguy
Ok, I'll bite Mr. Corporation Replacer. Where does the long-term R&D
investment come from?

Microsoft Research alone outspends Y Combinator by a factor of 50,000,000. And
they're thinking 10+ years out. Money aside, their internal expertise and
contact network far exceeds "the guy who made Django."

Kudos for what you've done, but when you start talking this way I feel
obligated to point out that you're a grain of sand on the beach compared to
the Fortune 50--or even CMU/Berkeley/MIT.

You're doing something totally different. Own it. Say what you're for, not
what you're against. Say what you're building, not what you're killing.

The fact that people who interview you keep painting you into these corners
means that the general public still doesn't understand what's going on with
YC. Less hyperbole, more concise vision. Your essays often achieve this, your
PR should too.

~~~
pg
_Where does the long-term R &D investment come from?_

Mostly from the same place Microsoft's R&D budget comes from: the companies'
own revenues.

~~~
davidw
But if they're small, lean companies, is there room for people to just go off
and do random things with little eye to profits?

An example would be someone like Simon Peyton-Jones at Microsoft:

<http://research.microsoft.com/en-us/people/simonpj/>

Much of what he does may eventually filter down to the rest of the company,
but there's a real risk that some of it won't, or that it'll be picked up by
someone outside of Microsoft, etc...

How does that sort of thing work out with a number of small companies
networked together?

~~~
pg
I've seen some very small companies do things that would count as research
projects in some places. E.g. Etherpad.

~~~
jules
While Etherpad is somewhat research-y, it is a product. The difference between
Etherpad and what SPJ does is about as big as between a mathematician working
on car collision simulation and one working on abstract algebra.

------
jkeel
I'd like to add that I think and hope that the trend is for traditional
corporations to keep getting replaced by a larger number of lean companies
(where's it's possible). The larger the corporation (by total employee count)
the less nimble they become. I think companies consisting of a small number of
highly skilled individuals can focus on what they do best and work with other
small companies on the work they need.

For example, traditional corporations I've worked for have had large HR
departments. Now where I work (with 40 employees) we use another company to
handle most of the HR functions. This allows us to focus on our core business
model.

~~~
cop359
"The larger the corporation (by total employee count) the less nimble they
become."

That's because of antiquated management structures. Look at Gore and
Associates (makers of Goretex) for a modern corporate structure. Elements of a
corporation should be almost completely independent and the only reason they
are part of one entity is because of synergies and cooperation.

To give a toy example, McDonalds might grow and slaughter their own cows
because they can better place them near their distribution facilities. Buying
from a third party might create unnecessary overhead.

I'm sorta oversimplifying things, but I'd recommend reading

"Re-Creating the Corporation" by the late Russell Ackoff to appreciate why
corporations exist (and why sometimes they shouldn't)

[http://www.amazon.com/Re-Creating-Corporation-Design-
Organiz...](http://www.amazon.com/Re-Creating-Corporation-Design-
Organizations-Century/dp/0195123875/ref=sr_1_1?ie=UTF8&qid=1329944656&sr=8-1)

~~~
gregpilling
In-n-Out Burgers does run their own butcher department. The company structure
worked pretty well too, since the company did not stumble when a big chunk of
the executive team and the CEO died in a plane crash. see
[http://fora.tv/2009/07/14/In-N-
Out_Burger_Stacy_Perman#Histo...](http://fora.tv/2009/07/14/In-N-
Out_Burger_Stacy_Perman#History_of_Tragedy_Behind_Iconic_In-N-
Out_Burger_Chain)

------
Rajiv_N
"Graham is the cofounder of Y Combinator, the investment firm that plugs seed
money ($18,000 on average) into early stage startups in exchange for
mentorship and access to its ever-growing network of alumni."

Maybe I'm not understanding this right, but the phrase "in exchange for",
seems like it should have read "in addition to". Can someone please clarify?

~~~
gigantor
Maybe not the most clear sentence since it leaves out the equity part; it's
conveying that it provides seed money plus mentorship/networking in exchange
for a modest equity from the startup.

Could be better organized as: "... Y Combinator, the investment firm that
plugs seed money (~$18,800) into early stage startups and offers mentorship
and access to its ever-growing network of alumni, _in exchange_ for a modest
equity (~7%) of the startup."

~~~
Rajiv_N
Aha! Thanks for the explanation. Now I get it.

------
heyrhett
Being part of community of talented people is a great thing. In addition to
having a large pool of people to ask for help though, I think a great benefit
is that YC companies help each other out without being directly asked. For
example, other YC companies might try to make a conscious effort to use
Hipmunk to buy flights, or Airbnb.

In addition to trying to use each others' services, YC companies will probably
often give each other feedback about what could be improved about each other's
services.

Compare this to the alternative of trying to launch a new service, gain
customers, and get feedback on your own.

------
alexatkeplar
I wouldn't bet against the underlying trend (keiretsu collectives of
innovative, smaller companies outcompeting traditional corporations), but Y
Combinator is the wrong posterchild for this movement, for a couple of
reasons:

1\. Y Combinator's success criteria for its startups involves a liquidity
event - there's no mention of a company staying privately owned and profitable
as being a successful outcome (<http://ycombinator.com/about.html>). This is
unsurpising given that pg himself exited to Yahoo

2\. To date, YC liquidity events have all been sales to medium-to-large
companies (<http://yclist.com/>). There may be a couple of big IPOs on the
horizon, which is great, but the general trend is for Y Combinator-funded
startups to be acquired by big corporations, which boosts those large
companies' competitiveness and innovation capability

So I would certainly say that Y Combinator's structure is unusual and
admirable - but de facto it acts much more like a pilot fish for traditional
corporations (creating some kind of new, syncretic innovation model for them),
rather than as a replacement for them.

Do I think a r/evolution of the Y Combinator model could replace the
traditional corporation? Certainly, but this will be done by "slowcubators"
rather than by traditional incubators. A slowcubator looks like this:

1\. No expectation of a liquidity event in the child companies. It's expected
instead for the child companies to become self-sustaining, profitable
businesses a la GitHub or Plenty of Fish

2\. Significant shared tech IP - this is something a Y Combinator can't do,
because shared tech IP makes it impossible to acquire a startup. But it makes
huge sense for a slowcubator, because a) acquisitions are the exception, not
the norm, and b) there are huge cost savings to be made by sharing tech IP
across properties (think private PAAS, Chef recipes, AdWords automation tools
etc). Joltid is the posterchild of shared tech IP driving multiple successful
startups

3\. Staff incentives which are not structured around focusing 100% on one
product until it exits or dies, but instead encourage staff to rotate within
the slowcubator's companies to where they are currently needed most. It's
great that the Django creator can answer a YCfounder's questions over some
beer and pizza, but in a slowcubator he would be hands-on helping multiple
products to be as good as they can be (as DHH does at 37signals)

In the same way that the startup acquisitions of the past decade shaped the
incubator model that we see today (and is exemplified by YC), I fully expect
the bootstrapped successes that we are seeing today to give rise to a wave of
slowcubators - the best of which will indeed rival (if not replace) the big
corporation.

~~~
pg
_the general trend is for Y Combinator-funded startups to be acquired by big
corporations_

This is the mistake. It's the general trend only by number of companies, not
by valuation or number of people. Measured by valuation, the majority of our
portfolio is not interested in being acquired.

~~~
alexatkeplar
So does that mean that you've done a survey of all the companies in your
portfolio, and classified them by whether they are interested in IPO or
acquisition (or no liquidity event at all)? And then have you attached a
current valuation to each of these companies - what's that valuation based on
in the absence of a liquidity event?

Can you share the % splits? Would be a really interesting (and yet still
anonymous) snapshot of the portfolio companies' intents in the aggregate...

~~~
pg
Dropbox and Airbnb alone account for more than half the value of companies
we've funded, based on the valuations of their last rounds.

------
jacques_chester
The description given reminds me somewhat of Keiretsu, the successors of the
old Zaibatsu. The Keiretsu are families of companies interlocked through
personal relationships between executives, mutual interlocking share holdings
and secondment of workers -- tied together around a bank or finance company.

I believe KPCB were referred to as a Keiretsu for encouraging their portfolio
to buy from each other -- eg, getting Netscape to buy servers from Sun etc.

~~~
jpdoctor
> _I believe KPCB were referred to as a Keiretsu_

There was a time when it was fashionable to imitate Japanese business, so VCs
actively pursued this type of PR. So it's more likely that KPCB issued PR
about itself calling itself a Keiretsu, having the added benefit of seeming
much larger than they are. (The Keiretsu were large conglomerations.)

Now, not so much of that PR is being created.

EDIT: I thought I remembered them self-referencing keiretsu. This is from
2001, look at the bottom:

<http://web.archive.org/web/200012122131/http://www.kpcb.com/>?

Arrogance was a strong suit. Last I knew, IRRs from funds in that timeframe
were negative _and that included Google!_.

~~~
jacques_chester
Interesting point. I was a kid in the 80s, but I certainly remember the mild
hysteria about needing to be More Like The Japanese.

------
neilk
Maybe I don't know what it's like to be a YC founder, but couldn't you say the
exact same thing about just being in San Francisco?

What's more, the SF network extends to people who are not just in startups,
but also established companies, universities, and even unrelated things (like
the Because We Can people, who are making a business out of custom CNC
products.)

Or do YC people collaborate more closely than that? Give up their time more
freely to a fellow YC'er?

~~~
kapilkale
I feel a personal obligation to meet with any YC company that wants to meet
with me, the same way I would if a good friend asked me to meet with someone.
I've taken enough from that network that I want to give back.

If someone cold-emails me, or has a mutual acquantance do an introduction, I
usually don't feel as obliged.

~~~
neilk
But I'm not talking about cold-emailing -- I'm talking about personal
relationships. They just aren't defined by having the same seed funder.

When I walk down the street in SOMA or the Mission, I too am likely to run
into a developer that I know. And I'm not even a very social person. But I've
been around the Valley & SF for almost six years now.

Maybe YC gets you off the ground faster, maybe you get that in year one.
Still, I hope you are also reaching out to make connections with non-YCers.

------
jot
Coworking communities around the world are having a very similar effect.

------
praxeologist
I like the idea of replacing traditional corporations, and YC is certainly
good at what they do, but how much of this success is just a result of
internet startups having no physical products?

I'd like to see more places like Incubation Station come about -
<http://www.theincubationstation.com> \- or hear about similar incubators for
consumer products if anyone knows any.

