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A New Venture Animal (paulgraham.com)
106 points by mqt on Mar 10, 2008 | hide | past | web | favorite | 58 comments

Very early stage startups are insanely risky.

I hear this almost as much as the "90% of startups fail" piece of wisdom, and I was a little surprised to see it in a PG essay. I'm not saying it's necessarily wrong, just that I don't totally understand it.

Risk is "the possibility of suffering harm or loss; danger." So what's risky about a startup? If you are paying for it yourself, maxing out credit cards, etc, then the startup is indeed likely to be harmful to you.

But, if you get YC funding, and are the under 30 crowd that PG refers to with low living expenses, then it's pretty unlikely that you're taking that approach. Instead, you're simply not saving any money for awhile. So there is opportunity cost lost, since surely most of the YC founders could make a nice chunk of change working for the man. But is this really the harm that's implied by the reference to risk? Especially when you factor in the experience you gain from a failed startup, it seems pretty questionable to say that serious harm will likely befall you. It's more like, less savings and a great experience will likely befall you.

So I wonder if the sentiment is just referring to the harm that may happen to the startup itself. As in, it's quite likely -- 90% likely! ;) -- that the startup you create will die. But isn't that kind of like saying it's risky to scratch off a lotto ticket that someone gives you? It's "risky" for the lotto ticket I suppose, but not really for you.

I simply mean there is a high risk of failure.

The risk is that if your startup fails, you've traded what probably would have been a great salary at a larger company, so essentially you gave up that guaranteed income for the more risky startup.

I'll try to answer my own question. I think it's about riskiness from the point of view of investors. The thing is, I think the wisdom is oft repeated as risky for the founders (though perhaps not in this essay), which is what I'm objecting to.

It's risky in the sense that you might fail, and not get paid (enough) for your efforts. I calculated my last startup to have paid me about $3/hour (not discounting the time factor) after all was said and done.

How much did your school pay your for your efforts there?

My grad school pays $25 per hour. I paid nothing for undergrad. This isn't atypical.

Not atypical but also not the majority. I don't think it's a stretch to say most people pay for grad school.

It depends whether you're counting law school, business school, medical school, pharmacy school, nursing school, etc. as grad school. Among Hackers grad school is far more likely to be of the type "studying fractal patterns in African architecture while teaching two sections of introductory socio-cultural anthropology" Generally you pay through the nose for the first kind and they pay you (a little) to do the second kind.

It's amazing how few people know that if your PhD doesn't cost -$12,000 a year or less you really are not doing something right.

I'm not sure how many hackers could physically work in [law|business|medical|pharmacy|nursing].

My point was that because school systems are hackable, sometimes hackers will have hacked the signs of the costs involved. For example, my graduate school costs less than -$12,000 a year, but some peoples' schools may cost more than $12,000 a year (so they're not "doing something right?"). Big deal. In the long run, education wins financially and in terms of helping people accomplish their goals.

One can easily make the argument that startups are education, but obviously this consists of more than "Web 2.0" and a few other buzzwords thrown together at random. (I'm not criticizing Paul here, but I am criticizing the lunatic fringe that seems to grow around Paul.)

I don't think he meant the question literally.

I propose "venture catapult" as a generic term for what YC does.

That is a great name, but alas there is already a venturecatapult.com.

See if they still really exist. They haven't updated their website in a year.

startup trebuchet

startup blowdart

A few puffs of air in the right direction?

Venture musket: The aim isn't perfect, but it launches a significant projectile in roughly the right direction, at a substantial velocity.

As long as we're listing weapons, the ideal choice is "startup tactical nuke".

It's the model that has been woefully overlooked for 50 years.

Possible, but that would pretty much involve funding the hell out of everyone in a several mile radius, with long-term funding for people fortunate enough to be down-wind . . .

As long as we're naming things:

Y Combinator acts as a startup hearth — just a little bit of support from money, but included is an environment which promotes growth.

I'd say Shootapult but if it sucks you risk being called Shitapult.

Y Combinator is a...

-- Startapult?

-- Startup-apult?

-- Startup-buchet?

-- Startupifier?

How about "Startup Catalyst" You don't provide the raw starting materials but you help them to combine more rapidly and more effectively. Dictionary definition: "A substance, usually used in small amounts relative to the reactants, that modifies and increases the rate of a reaction without being consumed in the process."


But all it would have taken in the beginning would have been for two Google employees to focus on the wrong things for six months, and the company could have died.

Actually, it's even more interesting than that. Prior to AdWords (and, more importantly, the acquisition of Applied Semantics that gave them AdSense), Google did not have a real source of revenue. At all. Google Appliances were cute but negligible.

After AdWords and AdSense, they began to replace magazines, the yellow pages, and 411.

It is difficult to underestimate how important Ad(Words|Sense) has been to Google's success. And it was the idea of an intern.

What was the idea of an intern? Ads were part of the plan from very early on. Also, AdSense predates the Applied Semantics aquisition.

AdSense predates the Applied Semantics acquisition

That's not what your press release says: http://www.google.com/press/pressrel/applied.html

What was the idea of an intern? The self-service approach to buying AdWords, IIRC. The mail-order lobster nonsense that led to the streamlining of the horribly broken logfile/MySQL system when it became popular. I may be confused -- 'intern' may be the wrong word.

But if you want an example of a 'tipping point' or a critical decision I can't think of much better than Google and their ad sales mechanism.

AdSense the product and technology (content targetting) predates the acquisition, which is why the press release is titled, "New Technologies and Engineering Team Complement Google's Content Targeted Advertising Programs". AdSense the trademark may have come from AS, but that's not very relevant.

I'm guessing that the "intern" that you are referring to is Salar: http://www.google.com/corporate/execs.html#salar He was maybe the 10th employee of Google.

OK, maybe not exactly an intern, but wasn't it some guy who would work for $.00?

Having been an intern/co-op with both a very large and couple small/medium startups. My experience and interaction with student interns (mostly from public universities), have led me to believe you must pay your interns. Most students in the current economic climate, particularly those attending college for the first time in there family, simply cannot afford an unpaid internship.

Sorry, inside joke.


(Note this is the same paul who asked for more details on the intern, and who came up with adsense.)

Adwords is till more important than Adsense and on a technological level ( I mean the basic core not the quality score etc etc.... ) it's pretty simple. All Google needed was traffic.

Really we're more of a small, furry steam catapult.

The man just has a way with words! :)

Agreed: money quote for the whole article.

It put me in mind of a fur-upholstered mousetrap for some reason. You know, the kind of thing David Bowie would put in his basement . . .

Essays like this one make us, YC-rejects, feel like not being part of something cool, something new and exciting and much better, while we're stuck out there dealing with "old kind of animals" and the question "why haven't they picked pikluk?" keeps creeping into my mind, and it's not a nice feeling.

I guess it's a natural state of mind of any hacker: to be at the edge, have the best tools, best equipment, use best operating systems, etc. It applies to your investors as well. I'd hate to take an offer from a rich farmer or an oil guy.

Well... enough of YC for today, back to work.

I launched a start-up two months ago, and I can't agree more with Paul: it has become ridiculously inexpensive to do so. I considered chasing some VC funding, but then realized that all I need is a good idea and some time to focus on it; the VC's wouldn't have helped me with either one. As a matter of fact, even owning your own computing resources is unnecessary: check-out Amazon's cloud computing web services (our bill: <$100 / mth)!

How's that related to you costs? The primary expense has always been the cost of talent and "cost of sales". Employees time and marketing/advertising. Paul assumes that programmers will work for free (or for very little) because they're founders, but doesn't address the other big one. Well, he saves a ton of money on free YC-backed PR, but even his model breaks down if you need more than 2-4 programmers to deliver even a prototype, or if your idea/business depend heavily on graphics designers or rely on complex distribution channels (even within the web).

In fact if you way back, there was another time when a couple of guys in a garage could do it all. Gates and Allen did it. Jobs and Woz did it. In history of personal computing there was always one or two guys who did it first without bunch of money: nearly every piece of traditional desktop application has that guy. Equipment and infrastructure costs have never been prohibitive since the invention of a PC.

As web applications grow the history will repeat itself: instead of two guys building it you'll need 20, just like it did with desktop software and games. There are only brief windows of opportunity for a "little guy" and they only come some major breakthrough in technology comes along.

tx: "The primary expense has always been the cost of talent and "cost of sales". Employees time and marketing/advertising." The point I am making: it is not so any more! How much dev time or marketing or technology insight went into any of these, for example: digg fbook myspace flickr techcrunch? And yet they´re worth billions of $.

The shortest description of Y Combinator I can think of is a "Venture Expediter"

I don't think YC's goal is to get startups closer to VC, or even to expedite their journey anywhere.

The point is, YC is really smart money in real small amounts. If you need more money or don't need so much smarts behind it, you go elsewhere on the funding spectrum.

Our goal is definitely to get startups that could benefit from VC closer to it. 9 of 59 startups prior to this winter have raised money from VC funds so far.

More generally our goal is to get startups closer to later stage investors, whether angels or VCs. Pretty near 100% of startups are looking for at least some additional investment.

I did not intend the term to reference venture as in venture capital, but a venture regarding a hazardous attempt. Perhaps "Startup Expediter" is less misleading to those who see the word venture not in its original sense, but as related to capital.

YCombinator is a new kind of animal, in that it offers a lot less money and a lot more help. In the abstract, I have seen another local company in Ottawa (www.taraspan.com) do the similar kinds of things.

People often say that the combination of team, market opportunity, and technology is what it takes. One typical cause for failure of great teams is that they are pointed at the wrong markets. The other usual cause is that the "great team" really isn't. I believe that your model, by encouranging early alphas, and by giving guidance serves to honestly vet the team and the market.

I think you guys are doing great work because you create new deal flows with a fraction of the money. That, in turn will reduce VC's risks, and lower their rewards. I'm going to guess that if you guys feed companies into VC deal flows, VCs will start looking more like banks and less like venture investors.

It seems like maybe traditional incubators are closer than VCs to competing in the same niche as YC. Is there any reason why it would be misleading to look at YC as an innovation in startup incubation -- namely to move the model a little bit closer to VC in terms of the independence of the founders?

I didn't consider old-style incubators because as far as I know there aren't any left. At least, I can't think of any startups that came out of one.

What about PlugAndPlay Tech Center? They have an office in Sunnyvale that seems successful.

I'm not sure exactly what they do, but I think it's more like office space especially tailored for startups.

From the article: Google has such momentum now that it would be hard for anyone to stop them.

Within 48 hours of this being published, Google anounces layoffs ( http://news.ycombinator.com/item?id=134967 ) and a new search engine from Sequoia is covered by TechCrunch ( http://news.ycombinator.com/item?id=134291 ). In addition, the share price has fallen from US$747 to US$439 and there has been speculation by television pundits of it falling to US$350 or less ( http://news.ycombinator.com/item?id=133966 ).

So, here's a question:

Who's the competition? How did readers who didn't go through Y-Combinator get off of the ground? How'd you first get in contact with angel investors? Or incubators or seed funding or whatever...

As much startup rhetoric as seems to be kicking around this site and others, there seems to be a gap between "Go YC!" and "We just did our A-Round..."

We've been scrambling to get together as many contacts in the ramp up to quitting our jobs and there are some interesting leads, but before we start playing the find-funding-or-die game it seems prudent to have as many leads as possible.

Startup funding is NOT easy. There are several reasons why it’s so difficult: supply, demand, availability of information, fees and experience. There’s a post on my blog that explains these reasons at: http://www.AngelBlog.net/Startup_Fundings_Are_Not_Easy.html. I hope this post and the other information on AngelBlog helps you get funded. Basil

A subversive thought: as it becomes cheaper & cheaper to build start-ups, prices would fall too. Granted, start-ups are not interchangeable commodities, but given that so many are being created, that ought to impact pricing (aka valuations). Asymptotically, this could lead to a start-up being valued "at cost" (or below it in a serious downturn).

As I said, just a subversive thought. I am sure it doesn't apply to any of us here ;-)

I think this sentence doesn't really make sense:

"As you work your way forward in the venture funding process, the ratio of help to money increases, because earlier stage companies have different needs."

Isn't one of the points of the essay the fact that, as a company progresses, the amount of help from a VC decreases relative to the amount of money received?

By forward I meant earlier. Several people have misunderstood this; maybe I should rephrase it.

I think you are doing a great thing by writing such essays. We are a Bangalore India based startup, and I have been reading your essays for the past couple of years (from before we started our Internet company). Keep it up!

When I read this I also thought about the differences in the physics of the 'very big' and the 'very small'.

Though, I prefer the cogency of your analogy. Good read.

Please consider that the era of cheap energy is over (www.theoildrum.com). And the cheap energy is one of the main inputs into economy (including startups).

Maybe I'm dumb. I don't understand why anyone would give up spit for such a small amount of money. That early and the money offered is so small. Forget about the % and the stock and all that. From the amounts I read about I could do contract design work for a couple months and earn that much. Yikes. I mean, even if one of, say, two founders took a 6 mo contract working somewhere, and slso pounded code late at night, and the other founder all day and night, the two could do it all. In fact, that's exactly what happened here. And it provided still other advantages. Nor do I see how you can make anything happen for such a small amount of money. You can't even buy some software tools, a fax machine, let alone a CPA to spit out one tax return or a single patent application. Even a phone line and broadband is >$100/mo. Takeout food and heat, that's all you're going to get. Who needs that kind of money? I say just work your asses off 24/7 like we did, then you're not wasting time begging people to listen to your idea, either. These days even with a demo their eyes just glaze over. Investors don't have a clue. Just make it work and start selling them. That's what we did.

Either that or you didn't read the essay. Its whole point is that money is not the important ingredient in early stage investing.

Yeah, I read the article. Maybe it said something you didn't want it to say.

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